1933 ACT FILE NO.
1940 ACT FILE NO. 811-09141
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. / /
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 1 /X/
(CHECK APPROPRIATE BOX OR BOXES)
Eaton Vance Municipal Income Trust
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
24 Federal Street, Boston, Massachusetts 02110
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(617) 482-8260
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
ALAN R. DYNNER
24 FEDERAL STREET, BOSTON, MASSACHUSETTS 02110
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(NAME AND ADDRESS OF AGENT FOR SERVICE)
-------------
COPY:
MARK P. GOSHKO, ESQ.
KIRKPATRICK & LOCKHART LLP
ONE INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02110
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of this Registration Statement.
If any securities being registered on this form will be offered on a delayed
or continuous basis in reliance on Rule 415 under the Securities Act of 1933,
other than securities offered in connection with a dividend reinvestment plan,
check the following box. / /
It is proposed that this filing will become effective (check appropriate
box):
/X/ when declared effective pursuant to Section 8(c)
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- ------------------------------------------------- -------------- ------------------- ---------------------- -------------
Amount Proposed Maximum Proposed Maximum Amount of
Title Of Securities Being Offering Price Aggregate Registration
Being Registered Registered Per Unit(1) Offering Price(1) Fee(1)
- ------------------------------------------------- -------------- ------------------- ---------------------- -------------
<S> <C> <C> <C> <C>
Auction Preferred Shares 40 $25,000 $1,000,000 $278
- ------------------------------------------------- -------------- ------------------- ---------------------- -------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
<TABLE>
<CAPTION>
EATON VANCE MUNICIPAL INCOME TRUST
AUCTION PREFERRED SHARES
Cross Reference Sheet
Items Required by Form N-2
--------------------------
Part a
Item No. Item Caption Prospectus Caption
- -------- ------------ ------------------
<S> <C> <C>
1..................... Outside Front Cover Front Cover Page
2..................... Inside Front and Outside Back Cover Page Front and Back Cover Page; Underwriting
3..................... Fee Table and Synopsis Not Applicable
4..................... Financial Highlights Not Applicable
5..................... Plan of Distribution Underwriting
6..................... Selling Shareholders Not Applicable
7..................... Use of Proceeds Use of Proceeds
8..................... General Description of the Registrant Prospectus Summary; Management of the
...................... Trust; The Trust; Investment
Objective, Policies and Risks; Description
of Capital Structure
9..................... Management Management of the Trust; Shareholder Servicing
Agent, Custodian and Transfer Agent
10...................... Capital Stock, Long-Term Debt, Description of APS; Distributions and Taxes;
...................... and Other Securities Certain Provisions of the Declaration of Trust;
Description of Common Shares
11...................... Defaults and Arrears on Senior Not Applicable
Securities
12...................... Legal Proceedings Not Applicable
13...................... Table of Contents of the Table of Contents of the
Statement of Additional Statement of Additional
Information Information
Part B Statement of
Item No. Item Caption Additional Information Caption
- -------- ------------ ------------------------------
14...................... Cover Page Cover Page
15...................... Table of Contents Table of Contents
16...................... General Information and History Not Applicable
17...................... Investment Objective and Additional Investment Information and
Policies Restrictions
18...................... Management Trustees and Officers;
Investment Advisory and
Other Services
19...................... Control Persons and Principal Other Information
Holders of Securities
20...................... Investment Advisory and Other Investment Advisory and Other
Services Services
21...................... Brokerage Allocation and Other Portfolio Trading
Practices
22...................... Tax Status Taxes
23...................... Financial Statements Financial Statements
</TABLE>
<PAGE>
Subject To Completion -- ________, 1999
$____________
EATON VANCE MUNICIPAL INCOME TRUST
Auction Preferred Shares ("APS")
_________ Shares
Liquidation Preference $25,000 Per Share
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Eaton Vance Municipal Income Trust (the "Trust") is a newly organized
closed-end fund. The Trust's investment objective is to provide current income
exempt from regular federal income tax. This income will be earned by investing
primarily in investment grade municipal securities. The Trust may also invest a
portion of its assets in higher risk, higher yielding municipal securities of
lesser quality. There is no assurance that the Trust will achieve its investment
objective. See "Investment Objective, Policies and Risks" beginning at page ___.
The Trust's investment adviser is Eaton Vance Management ("Eaton Vance" or the
"Adviser"). Eaton Vance manages 45 different municipal bond funds with combined
assets of about $8 billion.
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The Broker-Dealers (as defined herein) may maintain a secondary trading
market in the APS outside of Auctions; however, they have no obligation to do
so, and there can be no assurance that a secondary market for the APS will
develop or, if it does develop, that it will provide holders with a liquid
trading market (I.E., trading will depend on the presence of willing buyers and
sellers and the trading price is subject to variables to be determined at the
time of the trade by the Broker-Dealers). The APS will not be registered on any
stock exchange or on any automated quotation system. An increase in the level of
interest rates, particularly during any Long Term Dividend Period, likely will
have an adverse effect on the secondary market price of the APS, and a selling
shareholder may sell APS between Auctions at a price per share of less than
$25,000. -------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Price to Public Sales Load (2) Proceeds to Trust (1)(3)
--------------- -------------- ------------------------
Per Share $25,000 $ $
TOTAL $ $ $
- ----------
(1) Plus accumulated dividends, if any, from the Date of Original Issue.
(2) The Trust and the Adviser have agreed to indemnify the Underwriter against
certain liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(3) Offering expenses payable by the Trust, estimated at $ , will be reimbursed
by the Underwriter. See "Underwriting."
-------------
The shares of APS are offered by the Underwriter, subject to prior sale,
when, as and if issued by the Trust and accepted by the Underwriter, subject to
approval of certain legal matters by counsel for the Underwriter and certain
other conditions. The Underwriter reserves the right to withdraw, cancel or
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modify such offer and to reject orders in whole or in part. It is expected that
one certificate for each series of the APS will be delivered to the nominee of
The Depository Trust Company on or about _______, 1999.
THE DATE OF THIS PROSPECTUS IS _______, 1999.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
ii
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(CONTINUED FROM THE PREVIOUS PAGE)
Dividends on the Auction Preferred Shares (the "APS") of the Trust offered
hereby will be cumulative from the Date of Original Issue and payable commencing
on _______, 1999 (an "Initial Dividend Payment Date") and, generally, on each
succeeding __________, subject to certain exceptions.
The cash dividend rate (the "Applicable Rate") on the APS for the Initial
Dividend Period ending _______, 1999 will be ____% per annum. The Applicable
Rate on the APS for each Subsequent Dividend Period will be determined pursuant
to periodic auctions conducted in accordance with the procedures described
herein and in detail in Appendix D to the Statement of Additional Information
(an "Auction"). Except as otherwise provided herein, each Subsequent Dividend
Period for the APS will be a 7-Day Dividend Period; provided, however, that
prior to any Auction, the Trust may elect, subject to certain limitations
described herein, upon giving notice to holders thereof, a Special Dividend
Period. See "Description of APS--Dividends."
The Applicable Rate on the APS for each Subsequent Dividend Period will be
reset on the basis of Bids, Hold Orders and Sell Orders placed by Existing
Holders and Potential Holders in the Auction conducted on the Business Day next
preceding the commencement of such Dividend Period. The Applicable Rate that
results from an Auction for any Dividend Period will not be greater than the
Maximum Applicable Rate (as defined herein). See "Description of APS--The
Auction--Orders by Beneficial Owners, Potential Beneficial Owners, Existing
Holders and Potential Holders."
The Trust currently is required to allocate net capital gains and other
taxable income, if any, proportionately among its Common Shares and the APS. The
Trust will give notice of the amount of any taxable income to be included in a
dividend on shares of APS in the related Auction, as described herein, or, in
limited circumstances, include such income in a dividend on the APS without
giving advance notice thereof if it increases the dividend by an additional
amount to offset substantially the tax effect thereof. The amount of taxable
income allocable to the APS will depend upon the amount of such income realized
by the Trust and other factors but generally is not expected to be significant.
See "Taxes."
Each prospective purchaser should review carefully the detailed
information regarding the Auction Procedures which appears in this Prospectus
and the Statement of Additional Information, including the Appendices, and
should note that (i) an Order constitutes an irrevocable commitment to hold,
purchase or sell APS based upon the results of the related Auction, (ii) the
Auctions will be conducted through telephone communications, (iii) settlement
for purchases and sales will be on the Business Day following the Auction and
(iv) ownership of APS will be maintained in book-entry form by or through the
Securities Depository. In certain circumstances, holders of APS may be unable to
sell their APS in an Auction and thus may lack liquidity of investment. The APS
only may be transferred pursuant to a Bid or a Sell Order placed in an Auction
through a Broker-Dealer to the Auction Agent or in the secondary market, if any.
The APS are redeemable, in whole or in part, at the option of the Trust,
on any Dividend Payment Date (except during the Initial Dividend Period or a
Non-Call Period) at the Optional Redemption Price per share and will be subject
to mandatory redemption on dates fixed by the Board of Trustees, under certain
circumstances, at the Mandatory Redemption Price per share.
If the Trust fails to pay on any Dividend Payment Date (or within the
applicable grace period) the full amount of any dividend or the redemption price
of the APS called for redemption, the Applicable Rate will not be based on the
results of an Auction but instead will be equal to the Non- Payment Period Rate
until such failure to pay is cured. See "Description of
APS--Dividends--Non-Payment Period; Late Charge."
This Prospectus sets forth concisely information you should know before
investing in the APS. Please read and retain this Prospectus for future
reference. A Preliminary Statement of Additional Information dated _________,
1999, has been filed with the Securities and Exchange Commission ("SEC") and can
be obtained without charge by calling 1-800-225-6265 or by writing to the Trust.
A table of contents to the Statement of Additional Information is located at
page ___ of this Prospectus. This Prospectus incorporates by reference the
entire Statement of Additional Information. The Statement of Additional
Information is available along with other Trust-related materials at the SEC's
iii
<PAGE>
Internet web site (http://www.sec.gov). The Trust's address is 24 Federal
Street, Boston, Massachusetts 02110 and its telephone number is 1-800-225-6265.
The APS do not represent a deposit or obligation of, and are not
guaranteed or endorsed by, any bank or other insured depository institution, and
are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
NEITHER THE TRUST NOR THE UNDERWRITER HAVE AUTHORIZED ANY OTHER PERSON TO
PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR
INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. NEITHER THE TRUST NOR THE
UNDERWRITERS ARE MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION
WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION
APPEARING IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON THE FRONT COVER ONLY.
TABLE OF CONTENTS
PAGE
Prospectus Summary...........................................................1
The Trust....................................................................8
Use Of Proceeds..............................................................9
Capitalization...............................................................9
Portfolio Composition.......................................................10
Investment Objective, Policies And Risks....................................10
Description Of APS..........................................................21
Management Of The Trust.....................................................41
Taxes.......................................................................42
Description Of Capital Structure............................................44
Certain Provisions Of The Declaration Of Trust..............................46
Underwriting................................................................47
Shareholder Servicing Agent, Custodian And Transfer Agent...................47
Legal Opinions..............................................................47
Experts.....................................................................48
Additional Information......................................................48
Glossary....................................................................50
iv
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information included elsewhere in this Prospectus. Certain of the
capitalized terms used herein are defined in the Glossary that appears at the
end of this Prospectus.
- --------------------------------------------------------------------------------
THE TRUST..............Eaton Vance Municipal Income Trust, Inc. (the "Trust")
is a recently organized closed-end fund. The Trust was
organized as a Massachusetts business trust on December
10, 1998, and has registered under the Investment
Company Act of 1940, as amended (the "1940 Act"). The
Trust's principal office is located at 24 Federal
Street, Boston, MA 02110, and its telephone number is
1-800-225-6265.
The Trust commenced operations on January __, 1999 upon
the closing of an initial public offering of shares of
its Common Shares. The proceeds of such offering were
approximately $______ after the payment of organizational
and offering expenses. In connection with the initial
public offering of the Trust's Common Shares, the
underwriter was granted an option to purchase up to an
additional shares to cover over-allotments. See "The
Trust."
INVESTMENT OBJECTIVE The Trust's investment objective is to provide current
AND POLICIES......... income exempt from regular federal income tax. Securities
will be purchased and sold in an effort to maintain a
competitive yield on the Common Shares and to enhance
return based upon the relative value of the securities
available in the marketplace. Investments are based on
Eaton Vance Management's ("Eaton Vance" or the "Adviser")
research and ongoing credit analysis, the underlying
materials for which are generally not available to
individual investors. An investment in the shares of
Auction Preferred Shares (the "APS") of the Trust may not
be appropriate for all investors, and there is no
assurance that the Trust will achieve its investment
objective
During normal market conditions substantially all of the
Trust's total assets (at least 80%) will be invested in
debt obligations issued by or on behalf of states,
territories and possessions of the United States, and the
District of Columbia and their political subdivisions,
agencies or instrumentalities, the interest on which is
exempt from regular federal income tax ("Municipal
Obligations"). At least 65% of the Trust's total assets
normally will be invested in Municipal Obligations rated
at least investment grade at the time of investment
(which are those rated Baa or higher by Moody's Investors
Service, Inc. ("Moody's") or BBB or higher by either
Standard & Poor's Ratings Group ("S&P") or by FitchIBCA
("Fitch")), or, if unrated, determined by Eaton Vance to
be of at least investment grade quality. From time to
time, the Trust may hold a significant number of
Municipal Obligations not rated by a nationally
recognized statistical rating organization ("Rating
Agency"). When the Trust invests in unrated Municipal
Obligations it may be more dependent on Eaton Vance's
research capabilities than when it invests in rated
Municipal Obligations.
The Trust may invest up to 35% of its total assets in
Municipal Obligations rated below investment grade (but
not, with respect to more than 30% of the Trust's total
assets, lower than B by all Rating Agencies rating the
obligation) and unrated Municipal Obligations considered
to be of comparable quality by Eaton Vance. Investment in
Municipal Obligations of below investment grade quality
involves special risks as compared with investment in
higher grade Municipal Obligations. These risks include
greater sensitivity to a general economic downturn,
greater market price volatility and less secondary market
trading. Securities rated below investment grade are
commonly known as "junk bonds." Such securities are
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regarded, on balance, as predominantly speculative with
respect to the issuer's ability to pay interest and repay
principal owed.
The Trust may invest to a significant extent in residual
interest municipal bonds known as inverse floaters.
Compared to similar fixed rate municipal bonds, the value
of these bonds will fluctuate to a greater extent in
response to changes in prevailing long-term interest
rates. Moreover, the income earned on residual interest
municipal bonds will fluctuate in response to changes in
prevailing short-term interest rates. Thus, when such
bonds are held by the Trust, an increase in short- or
long-term market interest rates will adversely affect the
income received from such bonds. To the extent the Trust
has preferred shares outstanding, including the APS, an
increase in short-term rates would also result in an
increased cost of leverage, which would adversely affect
the Trust's income available for distribution. Although
the Trust is not limited with respect to its investment
in residual interest municipal bonds, the Trust does not
intend initially to invest more than 10% of its total
assets in such bonds.
The Trust may purchase and sell various kinds of
financial futures contracts and related options,
including futures contracts and related options based on
various debt securities and securities indices, to seek
to hedge against changes in interest rates, as a
substitute for the purchase of securities or for other
risk management purposes.
Interest income from certain types of municipal
obligations may be a tax preference item for purposes of
the federal alternative minimum tax (the "AMT") for
individual investors. Distributions to corporate
investors of certain interest income may also be
indirectly subject to the AMT. THE APS MAY NOT BE
SUITABLE FOR INVESTORS SUBJECT TO THE AMT.
INVESTMENT ADVISER Eaton Vance, a wholly-owned subsidiary of Eaton Vance
AND ADMINISTRATOR..... Corp., is the Trust's investment adviser and
administrator. The Adviser manages 3 national municipal
funds, 32 single state municipal funds, 10 limited
maturity municipal funds and 1 money market municipal
fund. See "Investment Advisory and Management
Arrangements."
THE OFFERING.......... The Trust is offering an aggregate of _____ shares of APS
at a purchase price of $25,000 per share plus accumulated
dividends, if any, from the Date of Original Issue. The
APS are being offered by ___________________ or the
"Underwriter as lead representative"). See
"Underwriting."
The APS will be Preferred Shares of the Trust that
entitle their holders to receive cash dividends at a rate
per annum that may vary for the successive Dividend
Periods for such shares. In general, except as described
below, each Dividend Period for the APS subsequent to the
Initial Dividend Period will be seven days in length. The
Applicable Rate for a particular Dividend Period will be
determined by an Auction conducted on the Business Day
next preceding the start of such Dividend Period.
Through their Broker-Dealers, Beneficial Owners and
Potential Beneficial Owners of APS may participate in
Auctions therefor, although, except in the case of a
Special Dividend Period, Beneficial Owners desiring to
continue to hold all of their APS regardless of the
Applicable Rate resulting from Auctions need not
participate. For an explanation of Auctions and the
method of determining the Applicable Rate, see
"Description of APS--The Auction."
2
<PAGE>
Except as described herein, investors in APS will not
receive certificates representing ownership of their
shares. Ownership of APS will be maintained in book-entry
form by the Securities Depository or its nominee for the
account of the investor's Agent Member. The investor's
Agent Member, in turn, will maintain records of such
investor's beneficial ownership of APS. Accordingly,
references herein to an investor's investment in or
purchase, sale or ownership of APS are to purchases,
sales or ownership of those shares by Beneficial Owners.
After the Initial Dividend Period, each Subsequent
Dividend period for the APS will generally consist of
seven days (a "7-day Dividend Period"); provided,
however, that prior to any Auction, the Trust may elect,
subject to certain limitations described herein, upon
giving notice to holders thereof, a Special Dividend
Period. A Special Dividend Period is a Dividend Period
consisting of a specified number of days (other than
seven), evenly divisible by seven and not fewer than
seven nor more than 364 (a "Short Term Dividend Period")
or a Dividend Period consisting of a specified period of
one whole year or more but not greater than five years (a
"Long Term Dividend Period"). Dividends on the APS
offered hereby are cumulative from the Date of Original
Issue and are payable when, as and if declared by the
Board of Trustees of the Trust, out of funds legally
available therefor, commencing on the Initial Dividend
Payment Date and, in the case of Dividend Periods that
are not Special Dividend Periods, dividends will be
payable generally on each succeeding _____________,
subject to certain exceptions.
Dividends for the APS will be paid through the Securities
Depository (the Depository Trust Company or a successor
securities depository) on each Dividend Payment Date. The
Securities Depository's normal procedures provide for it
to distribute dividends in same-day funds to Agent
Members, who are in turn expected to distribute such
dividends to the person for whom they are acting as agent
in accordance with the instructions of such person. See
"Description of APS -- Dividends."
For each Subsequent Dividend Period, the cash dividend
rate on the APS will be the Applicable Rate that Bankers
Trust Corporation ("Bankers Trust" or the "Auction
Agent") or any successor) advises the Trust has resulted
from an Auction. See "Description of APS -- Dividends."
The first Auction for the APS is scheduled to be held on
the ending date for the Initial Dividend Period as set
forth above.
The Amended By-Laws provide that until the Trust gives a
Request for Special Dividend Period and the related
Notice of Special Dividend Period, only 7-Day Dividend
Periods will be applicable to the APS. While the Trust
does not currently intend to give a Request for Special
Dividend Period with respect to the APS, it may so elect
in the future subject to, and on, the conditions
discussed under "Description of the APS -- Dividends --
Notification of Dividend Period."
A Special Dividend Period will not be effective for the
APS unless Sufficient Clearing Bids exist at the Auction
in respect of such Special Dividend Period. If Sufficient
Clearing Bids do not exist at such Auction for the APS,
the Dividend Period commencing on the Business Day
succeeding such Auction will be a 7-Day Dividend Period,
and the holders of the APS of outstanding prior to such
Auction will be required to continue to hold such shares
for such Dividend Period. In addition, the Trust may not
give a Notice of Special Dividend Period with respect to
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the APS, or if the Trust has given a Notice of Special
Dividend Period for the APS, the Trust will be required
to give a Notice of Revocation in respect thereof if (i)
either the 1940 Act APS Asset Coverage is not satisfied
or the Trust fails to maintain S&P Eligible Assets with
an aggregate Discounted Value at least equal to the APS
Basic Maintenance Amount, in each case on each of the two
Valuation Dates immediately preceding the Business Day
prior to the related Auction Date for the APS, (ii)
sufficient funds for the payment of dividends payable on
the immediately succeeding Dividend Payment Date have not
been irrevocably deposited with the Auction Agent by the
close of business on the third Business Day preceding the
related Auction Date, or (iii) the Broker-Dealers have
given the Trust notice that it is not advisable to hold
an Auction in respect of a Special Dividend Period. In
such event, the next succeeding Dividend Period will be a
7-Day Dividend Period.
ADVANCE NOTICE OF Dividends paid by the Trust, to the extent paid from
ALLOCATION OF TAXABLE tax-exempt income earned on Municipal Obligations, will
INCOME; INCLUSION OF be exempt from Federal income taxes, subject to the
TAXABLE INCOME IN possible application of the federal alternative minimum
DIVIDENDS............. tax. However, the Trust is required to allocate net
capital gains and other income subject to regular Federal
income taxes, if any, proportionately among the Trust's
Common Shares and APS in accordance with the current
position of the Internal Revenue Service described
herein. The Trust will notify the Auction Agent of the
amount of any net capital gains or other taxable income
to be included in any dividend on the APS prior to the
Auction establishing the Applicable Rate for such
dividend. The Auction Agent in turn will notify each
Broker-Dealer whenever it receives any such notice from
the Trust, and each Broker-Dealer will notify its
Beneficial Owners and Potential Beneficial Owners, as
provided in its Broker-Dealer Agreement. In limited
circumstances, the Trust also may include such income in
a dividend on the APS without giving advance notice
thereof if it increases the dividend by an additional
amount to offset the tax effect thereof. The amount of
taxable income allocable to the APS will depend upon the
amount of such income realized by the Trust and other
factors, but generally is not expected to be significant.
See "Taxes" and "Description of APS -- The Auction --
Auction Date; Advance Notice of Allocation of Taxable
Income; Inclusion of Taxable Income in Dividends."
ADDITIONAL If the Trust retroactively allocates any net capital
DIVIDENDS........ gains or other income subject to regular Federal income
taxes to the APS without having given advance notice
thereof as described above, which may only happen when
such allocation is made as a result of the redemption of
all or a portion of the outstanding APS or the
liquidation of the Trust, the Trust will make certain
payments to holders of the APS to which such allocation
was made to offset substantially the tax effect thereof.
In no other instances will the Trust be required to make
payments to holders of the APS to offset the tax effect
of any reallocation of net capital gains or other taxable
income. See "Description of APS--Dividends--Additional
Dividends" and "Taxes."
DETERMINATION OF Except during a Non-Payment Period, the Applicable Rate
MAXIMUM APPLICABLE for any Dividend Period for the APS will not be more
RATES................. than the Maximum Applicable Rate applicable to such
shares. The Maximum Applicable Rate for the APS will
depend on the credit rating assigned to such shares and
on the duration of the Dividend Period. The Maximum
Applicable Rate will be the Applicable Percentage of the
Reference Rate. The Reference Rate is (i) with respect to
any Dividend Period or any Short Term Dividend Period
having 28 or fewer days, the higher of the applicable
"AA" Composite Commercial Paper Rate and the Taxable
Equivalent of the Short-Term Municipal Obligation Rate,
(ii) with respect to any Short Term Dividend Period
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<PAGE>
having more than 28 but fewer than 183 days, the
applicable "AA" Composite Commercial Paper Rate, (iii)
with respect to any Short Term Dividend Period having 183
or more but fewer than 364 days, the applicable U.S.
Treasury Bill Rate and (iv) with respect to any Long Term
Dividend Period, the applicable U.S. Treasury Note Rate.
The Applicable Percentage will be determined based on (i)
the credit rating assigned on such date to the APS by S&P
(or, if S&P shall not make such rating available, the
equivalent of such rating by a Substitute Rating Agency)
and (ii) whether the Trust has provided notification to
the Auction Agent prior to the Auction establishing the
Applicable Rate for any dividend that net capital gains
or other taxable income will be included in such dividend
on the shares of APS as follows:
<TABLE>
<CAPTION>
Applicable Applicable
Percentage of Percentage of
S&P Credit Ratings Reference Rate of Reference Rate
No Notification of Notification
<S> <C> <C>
AA- or higher 110% 150%
A- to A+ 125% 160%
BBB- to BBB+ 150% 250%
Below BBB- 200% 275%
</TABLE>
There is no minimum Applicable Rate in respect of any
Dividend Period.
The Applicable Rate for any Dividend Period commencing
during any Non-Payment Period, and the rate used to
calculate the late charge described under "Description of
APS--Dividends--Non- Payment Period; Late Charge,"
initially will be 200% of the Reference Rate (or 275% of
such rate if the Trust has provided notification to the
Auction Agent prior to the Auction establishing the
Applicable Rate for any dividend that net capital gains
or other taxable income will be included in such dividend
on APS).
AUCTION PROCEDURES.... Unless otherwise permitted by the Trust, Beneficial
Owners and Potential Beneficial Owners of APS may only
participate in Auctions through their Broker-Dealers.
Broker-Dealers will submit the Orders of their respective
customers who are Beneficial Owners and Potential
Beneficial Owners to the Auction Agent, designating
themselves as Existing Holders in respect of shares
subject to Orders submitted or deemed submitted to them
by Beneficial Owners and as Potential Holders in respect
of shares subject to Orders submitted to them by
Potential Beneficial Owners. On or prior to each Auction
Date for the APS (the Business Day next preceding the
first day of each Dividend Period), each Beneficial Owner
may submit Orders to its Broker-Dealer as follows:
o Hold Order--indicating its desire to hold the APS
without regard to the Applicable Rate for the next
Dividend Period for such shares.
o Bid--indicating its desire to hold the APS, provided
that the Applicable Rate for the next Dividend Period
for such shares is not less than the rate per annum
specified in such Bid.
o Sell Order--indicating its desire to sell the APS
without regard to the Applicable Rate for the next
Dividend Period for such shares.
A Beneficial Owner may submit different types of Orders
to its Broker-Dealer with respect to the APS then held by
such Beneficial Owner, provided that the total number of
shares of the APS covered by such Orders does not exceed
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the number of APS held by such Beneficial Owner. If,
however, a Beneficial Owner offers through its
Broker-Dealer to purchase additional shares of APS in
such Auction, such Beneficial Owner, for purposes of such
offer to purchase additional shares, will be treated as a
Potential Beneficial Owner as described below. Bids by
Beneficial Owners through their Broker-Dealers with rates
per annum higher than the Maximum Applicable Rate will be
treated as Sell Orders. A Hold Order (in the case of an
Auction relating to a Dividend Period which is not a
Special Dividend Period) and a Sell Order (in the case of
an Auction relating to a Special Dividend Period) shall
be deemed to have been submitted on behalf of a
Beneficial Owner if an Order with respect to the APS then
held by such Beneficial Owner is not submitted on behalf
of such Beneficial Owner for any reason, including the
failure of a Broker-Dealer to submit such Beneficial
Owner's Order to the Auction Agent.
Potential Beneficial Owners of APS may submit Bids
through their Broker-Dealers in which they offer to
purchase APS, provided that the Applicable Rate for the
next Dividend Period for such shares is not less than the
rate per annum specified in such Bid. A Bid by a
Potential Beneficial Owner with a rate per annum higher
than the Maximum Applicable Rate will not be considered.
Neither the Trust nor the Auction Agent will be
responsible for a Broker-Dealer's failure to comply with
any of the foregoing.
A Broker-Dealer also may hold APS for its own account as
a Beneficial Owner. A Broker-Dealer thus may submit
Orders to the Auction Agent as a Beneficial Owner or a
Potential Beneficial Owner and therefore participate in
an Auction as an Existing Holder or Potential Holder on
behalf of both itself and its customers. An Order placed
with the Auction Agent by a Broker-Dealer as an Existing
Holder or a Potential Holder as or on behalf of a
Beneficial Owner or a Potential Beneficial Owner, as the
case may be, will be treated in the same manner as an
Order placed with a Broker-Dealer by a Beneficial Owner
or a Potential Beneficial Owner. Similarly, any failure
by a Broker-Dealer to submit to the Auction Agent an
Order in respect of any APS held by it or its customers
who are Beneficial Owners will be treated in the same
manner as a Beneficial Owner's failure to submit to its
Broker-Dealer an Order in respect of APS held by it, as
described above. Inasmuch as a Broker-Dealer participates
in an Auction as an Existing Holder or a Potential Holder
only to represent the interests of a Beneficial Owner or
Potential Beneficial Owner, whether it be a customer or
itself, all discussion herein relating to the
consequences of an Auction for Existing Holders and
Potential Holders also applies to the underlying
beneficial ownership interests represented thereby.
If Sufficient Clearing Bids exist in an Auction (that is,
in general, the number of APS subject to Bids by
Potential Holders with rates equal to or lower than the
Maximum Applicable Rate is at least equal to the number
of APS subject to Sell Orders by Existing Holders), the
Applicable Rate will be the lowest rate per annum
specified in the Submitted Bids which, taking into
account such rate per annum and all lower rates per annum
bid by Existing Holders and Potential Holders, would
result in Existing Holders and Potential Holders owning
all of the APS available for purchase in the Auction. If
Sufficient Clearing Bids do not exist, the Dividend
Period next following the Auction automatically will be a
7-Day Dividend Period and the Applicable Rate will be the
Maximum Applicable Rate, and in such event, Existing
Holders that have submitted Sell Orders will not be able
to sell in the Auction all, and may not be able to sell
any, APS subject to such Sell Orders. Thus, in certain
circumstances, Existing Holders and, thus, the Beneficial
Owners they represent may not have liquidity of
investment. If all Existing Holders submit (or are deemed
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to have submitted) Hold Orders in an Auction, the
Dividend Period next following the Auction automatically
shall be the same length as the immediately preceding
Dividend Period, and the Applicable Rate will be 40% of
the Reference Rate (as defined under "Determination of
Maximum Applicable Rates" above) in effect on the date of
the Auction (or 60% of such rate if the Trust has
provided notification to the Auction Agent prior to the
Auction establishing the Applicable Rate for any dividend
that net capital gains or other taxable income will be
included in such dividend on APS).
The Auction Procedures include a pro rata allocation of
shares for purchase and sale, which may result in an
Existing Holder selling or holding, or a Potential Holder
purchasing, a number of APS that is less than the number
of APS specified in its Order. To the extent the
allocation has this result, a Broker-Dealer will be
required to make appropriate pro rata allocations among
its customers and itself.
A Sell Order by an Existing Holder will constitute an
irrevocable offer to sell the APS subject thereto, and a
Bid placed by an Existing Holder also will constitute an
irrevocable offer to sell the APS subject thereto if the
rate per annum specified in the Bid is higher than the
Applicable Rate determined in the Auction, in each case
at a price per share equal to $25,000. A Bid placed by a
Potential Holder will constitute an irrevocable offer to
purchase the APS subject thereto if the rate per annum
specified in such Bid is less than or equal to the
Applicable Rate determined in the Auction. Settlement of
purchases and sales will be made on the next Business Day
(also a Dividend Payment Date) after the Auction Date
through the Securities Depository. Purchasers will make
payment through their Agent Members in same-day funds to
the Securities Depository against delivery by book-entry
to their Agent Members. The Securities Depository will
make payment to the sellers' Agent Members in accordance
with the Securities Depository's normal procedures, which
now provide for payment in same-day funds. See
"Description of APS--The Auction."
ASSET MAINTENANCE..... Under the Amended By-Laws, the Trust must maintain (i)
S&P Eligible Assets having in the aggregate a Discounted
Value at least equal to the APS Basic Maintenance Amount
and (ii) 1940 Act APS Asset Coverage of at least 200%.
See "Description of APS--Asset Maintenance."
The Trust estimates that, based on the composition of its
portfolio at _________, 1999, 1940 Act APS Asset Coverage
with respect to shares of APS would be approximately ___%
immediately after the issuance of the APS offered hereby
in an amount representing approximately __% of the
Trust's capital.
The Discount Factors and guidelines for calculating the
Discounted Value of the Trust's portfolio for purposes of
determining whether the APS Basic Maintenance Amount has
been satisfied have been established by S&P in connection
with the Trust's receipt of ratings on the APS on their
Date of Original Issue of AAA from S&P. See "Investment
Objective and Policies--Rating Agency Guidelines."
MANDATORY REDEMPTION.. If the APS Basic Maintenance Amount or the 1940 Act APS
Asset Coverage is not maintained or restored as specified
herein, the APS will be subject to mandatory redemption,
out of funds legally available therefor, at the Mandatory
Redemption Price of $25,000 per share plus an amount
equal to dividends thereon (whether or not earned or
declared) accumulated but unpaid to the date fixed for
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redemption. In addition, holders of APS may be entitled
to receive Additional Dividends in the event of
redemption of such APS to the extent provided herein. See
"Description of APS--Dividends--Additional Dividends."
Any such redemption will be limited to the minimum number
of APS necessary to restore the APS Basic Maintenance
Amount or the 1940 Act APS Asset Coverage, as the case
may be. The Trust's ability to make such a mandatory
redemption may be restricted by the provisions of the
Investment Company Act of 1940, as amended (the "1940
Act"). See "Description of APS--Redemption--Mandatory
Redemption."
OPTIONAL REDEMPTION... The APS are redeemable at the option of the Trust, as a
whole or in part, on any Dividend Payment Date (except
during the Initial Dividend Period or a Non-Call
Period) at the Optional Redemption Price of $25,000 per
share, plus an amount equal to dividends thereon
(whether or not earned or declared) accumulated but
unpaid to the date fixed for redemption plus the
premium, if any, resulting from the designation of a
Premium Call Period. See "Description of
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APS--Redemption--Optional Redemption." In addition,
holders of APS may be entitled to receive Additional
Dividends in the event of redemption of such APS to the
extent provided herein. See "Description of
APS--Dividends--Additional Dividends."
LIQUIDATION The liquidation preference of the APS will be $25,000
Preference... per share, plus an amount equal to accumulated but
unpaid dividends (whether or not earned or declared). See
"Description of APS--Liquidation Rights." In addition,
holders of APS may be entitled to receive Additional
Dividends in the event of the liquidation of the Trust as
provided herein. See "Description of APS--Dividends--
Additional Dividends."
RATINGS.............. It is a condition to their issuance that the APS be
issued with a rating of AAA from S&P. See "Investment
Objective and Policies--Rating Agency Guidelines."
VOTING RIGHTS........ The 1940 Act requires that the holders of APS and any
other Preferred Shares, voting as a separate class,
have the right to elect at least two trustees at all
times and to elect a majority of the trustees at any
time when two years' dividends on the APS or any other
Preferred Shares are unpaid. The holders of APS and any
other Preferred Shares will vote as a separate class on
certain other matters as required under the Trust's
Agreement and Declaration of Trust ("Declaration of
Trust") and the 1940 Act. See "Description of
APS--Voting Rights" and "Description of Capital
Stock--Certain Provisions of the Declaration of Trust."
THE TRUST
Eaton Vance Municipal Income Trust (the "Trust") is a recently organized
closed-end fund. The Trust was organized as a Massachusetts business trust on
December 10, 1998, and has registered under the Investment Company Act of 1940,
as amended (the "1940 Act"). The Trust's principal office is located at 24
Federal Street, Boston, MA 02110, and its telephone number is 1-800-225-6265.
The Trust commenced operations on January __, 1999 upon the closing of an
initial public offering of shares of its Common Shares. The proceeds of such
offering were approximately $______ after the payment of organizational and
offering expenses. In connection with the initial public offering of the Trust's
Common Shares, the underwriter was granted an option to purchase up to an
additional shares to cover over-allotments.
Certain of the capitalized term used in this Prospectus are defined in the
Glossary that appears at the end of this Prospectus.
USE OF PROCEEDS
[THE ESTIMATED NET PROCEEDS OF THIS OFFERING WILL BE $__________ AFTER THE
PAYMENT OF OFFERING EXPENSES ](estimated to be $__________ ) and the sales load
and the payment to the Trust by the Underwriter to cover certain expenses. See
"Underwriting."
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The net proceeds of the offering will be invested in accordance with the
Trust's investment objective and policies during a period estimated not to
exceed three months from the offer and sale of such APS depending on market
conditions and the availability of appropriate securities. Pending such
investment, it is anticipated that the proceeds will be invested in short-term
tax-exempt securities. See "Investment Objective and Policies."
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Trust
as of __________, 1999 and as adjusted to give effect to the issuance of the APS
offered hereby.
As
Actual Adjusted
Shareholders' equity:
Preferred Shares, par value $.10 per share (no shares
issued; _____ shares of APS authorized, as
adjusted, at $25,000 per share liquidation
preference) -- $
Common Shares, par value, $.10 per share ( shares
issued and outstanding) $
Capital in excess of par value attributable to Common
Stock
Undistributed investment income -- net
Unrealized appreciation on investments--net ________ _________
Net assets $ $
======== =========
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PORTFOLIO COMPOSITION
As of ______________, 1999, approximately ___ % of the market value of the
Trust's portfolio was invested in long-term Municipal Obligations and
approximately % of the market value of the Trust's portfolio was invested in
short-term Municipal Obligations. The following table sets forth certain
information with respect to the composition of the Trust's investment portfolio
as of ____________, 1999.
NUMBER OF VALUE
S&P* MOODY'S* ISSUES (IN THOUSANDS) PERCENT
AAA Aaa $ %
AA Aa1, Aa
A A
BBB Baa1
NR+ NR+
--------- -------- ------
Total
========= ========
- -----
* Ratings: Using the higher of S&P's or Moody's ratings on the Trust's
Municipal Obligations. See "Schedule of Investments." S&P rating categories
may be modified further by a plus (+) or minus (-) in AA, A, BBB, BB, B and C
ratings. Moody's rating categories may be modified further by a 1, 2, or 3 in
Aa, A, Baa, Ba and B ratings.
+ Securities that are not rated by S&P or Moody's. Such bonds may be rated by
nationally recognized statistical rating organizations other than S&P or
Moody's, or may not be rated by any such organization. With respect to the
percentage of the Trust's assets invested in such securities, the Adviser
believes that ____% are of comparable quality to obligations rated and __%
are of comparable quality to obligations rated ____. This determination is
based on the Adviser's own internal evaluation and does not necessarily
reflect how such securities would be rated by S&P or Moody's if either were
to rate the securities.
INVESTMENT OBJECTIVE, POLICIES AND RISKS
INVESTMENT OBJECTIVE
The Trust's investment objective is to provide current income exempt from
regular federal income tax. This income will be earned by investing primarily in
investment grade Municipal Obligations. Securities will be purchased and sold in
an effort to maintain a competitive yield on the Common Shares and to enhance
return based upon the relative value of the securities available in the
marketplace. Investments are based on Eaton Vance's research and ongoing credit
analysis, the underlying materials for which are generally not available to
individual investors.
Eaton Vance seeks to find Municipal Obligations of high quality that have
been undervalued in the marketplace. Eaton Vance's research specialists examine
credit histories, revenue sources, total debt histories, capital structures and
other data. This research capability is important because many obligations in
which the Trust will invest will not be rated or listed on a national securities
exchange, and the amount of public information available about such securities
will be limited. The Trust intends to emphasize the research that is critical to
discovering value while avoiding undue credit risk. The Trust will attempt to
enhance performance opportunities by seeking to remain fully invested.
INVESTMENT POLICIES - GENERAL COMPOSITION OF THE TRUST
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During normal market conditions, substantially all of the Trust's total
assets (at least 80%) will be invested in debt obligations issued by or on
behalf of states, territories and possessions of the United States, and the
District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from regular federal income
tax ("Municipal Obligations"). At least 65% of the Trust's total assets will
normally be invested in Municipal Obligations rated at least investment grade at
the time of investment (which are those rated Baa or higher by Moody's or BBB or
higher by either S&P or by Fitch), or, if unrated, determined by Eaton Vance to
be of at least investment grade quality. From time to time, the Trust may hold a
significant amount of Municipal Obligations not rated by a nationally recognized
statistical rating organization ("Rating Agency"). When the Trust invests in
unrated Municipal Obligations, it may be more dependent on Eaton Vance's
research capacities than when it invests in rated Municipal Obligations.
The Trust may invest up to 35% of its total assets in Municipal
Obligations rated below investment grade (but not, with respect to more than 30%
of the Trust's total assets, lower than B by all Rating Agencies rating the
obligation) and unrated Municipal Obligations considered to be of comparable
quality by Eaton Vance. No such securities will be in default at the time of
purchase. Investment in Municipal Obligations of below investment grade quality
involves special risks as compared with investment in higher grade Municipal
Obligations. These risks include greater sensitivity to a general economic
downturn, greater market price volatility and less secondary market trading.
Securities rated below investment grade are commonly known as "junk bonds." Such
securities are regarded, on balance, as predominantly speculative with respect
to the issuer's ability to pay interest and repay principal owed. See "-
Additional Risk Considerations." For a description of municipal obligation
ratings, see the Appendix A to the Statement of Additional Information.
The foregoing credit quality policies apply only at the time a security is
purchased, and the Trust is not required to dispose of a security in the event
that a Rating Agency downgrades its assessment of the credit characteristics of
a particular issue. In determining whether to retain or sell such a security,
Eaton Vance may consider such factors as Eaton Vance's assessment of the credit
quality of the issuer of such security, the price at which such security could
be sold and the rating, if any, assigned to such security by other Rating
Agencies.
Municipal Obligations include bonds, notes and commercial paper issued by
a municipality for a wide variety of both public and private purposes, the
interest on which is, in the opinion of issuer's counsel (or on the basis of
other reliable authority), exempt from regular federal income tax. Public
purpose municipal bonds include general obligation and revenue bonds. General
obligation bonds are backed by the taxing power of the issuing municipality.
Revenue bonds are backed by the revenues of a project or facility, or from the
proceeds of a specific revenue source. Some revenue bonds are payable solely or
partly from funds which are subject to annual appropriations by a state's
legislature. Municipal notes include bond anticipation, tax anticipation and
revenue anticipation notes. Bond, tax and revenue anticipation notes are
short-term obligations that will be retired with the proceeds of an anticipated
bond issue, tax revenue or facility revenue, respectively.
Some of the securities in which the Trust invests may include so-called
"zero-coupon" bonds, whose values are subject to greater fluctuation in response
to changes in market interest rates than bonds that pay interest currently.
Zero-coupon bonds are issued at a significant discount from face value and pay
interest only at maturity rather than at intervals during the life of the
security. The Trust is required to take into account income from zero-coupon
bonds on a current basis, even though it does not receive that income currently
in cash, and the Trust is required to distribute substantially all of its income
for each taxable year. Thus, the Trust may have to sell other investments to
obtain cash needed to make income distributions.
The Trust may invest in residual interest municipal bonds whose interest
rates bear an inverse relationship to the interest rate on another security or
the value of an index ("inverse floaters"). An investment in inverse floaters
may involve greater risk than an investment in a fixed rate bond. Because
changes in the interest rate on the other security or index inversely affect the
residual interest paid on the inverse floater, the value of an inverse floater
is generally more volatile than that of a fixed rate bond. Inverse floaters have
interest rate adjustment formulas which generally reduce or, in the extreme,
eliminate the interest paid to the Trust when short-term interest rates rise,
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<PAGE>
and increase the interest paid to the Trust when short-term interest rates fall.
Inverse floaters have varying degrees of liquidity, and the market for these
securities is relatively new and volatile. These securities tend to underperform
the market for fixed rate bonds in a rising interest rate environment, but tend
to outperform the market for fixed rate bonds when interest rates decline.
Shifts in long-term interest rates may, however, alter this tendency. Although
volatile, inverse floaters typically offer the potential for yields exceeding
the yields available on fixed rate bonds with comparable credit quality, coupon,
call provisions and maturity. These securities usually permit the investor to
convert the floating rate to a fixed rate (normally adjusted downward), and this
optional conversion feature may provide a partial hedge against rising rates if
exercised at an opportune time. Although the Trust is not limited with respect
to its investment in residual interest municipal bonds, the Trust does not
intend initially to invest more than 10% of its assets in such bonds.
The Trust may purchase municipal 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. Although the insurance feature reduces certain financial risks, the
premiums for insurance and the higher market price paid for insured obligations
may reduce the Trust's current yield. Insurance generally will be obtained from
insurers with a claims-paying ability rated Aaa by Moody's or AAA by S&P or
Fitch. The insurance feature does not guarantee the market value of the insured
obligations or the Trust's net asset value.
The Trust has adopted certain fundamental investment restrictions set
forth in the Statement of Additional Information which may not be changed
without a Shareholder vote. Except for such restrictions and the 80% requirement
set forth above, the investment objective and policies of the Trust may be
changed by the Board of Trustees without Shareholder action.
ADDITIONAL INVESTMENT PRACTICES
WHEN-ISSUED SECURITIES. The Trust may purchase securities on a
"when-issued" basis, which means that payment and delivery occur on a future
settlement date. The price and yield of such securities are generally fixed on
the date of commitment to purchase. However, the market value of the securities
may fluctuate prior to delivery and upon delivery the securities may be worth
more or less than the Trust agreed to pay for them. The Trust may be required to
maintain a segregated account of liquid assets equal to outstanding purchase
commitments. The Trust may also purchase instruments that give the Trust the
option to purchase a municipal obligation when and if issued.
FUTURES TRANSACTIONS. The Trust may purchase and sell various kinds of
financial futures contracts and options thereon to seek to hedge against changes
in interest rates or as a substitute for the purchase of securities. For
example, futures contracts can be used to reduce the additional long-term
interest rate risk the Trust bears by holding residual interest municipal bonds.
Futures contracts may be based on various debt securities and securities indices
(such as the Municipal Obligation Index traded on the Chicago Board of Trade).
Such transactions involve a risk of loss or depreciation due to unanticipated
adverse changes in securities prices, which may exceed the Trust's initial
investment in these contracts. The Trust will only purchase or sell futures
contracts or related options in compliance with the rules of the Commodity
Futures Trading Commission. These transactions involve transaction costs. There
can be no assurance that the Eaton Vance's use of futures will be advantageous
to the Trust. Distributions by the Trust of any gains realized on the Trust's
transactions in futures and options on futures will be taxable. The rating
agency guidelines with respect to the APS limits the use of these transactions.
See "Investment Objective, Policies and Risks -- Rating Agency Guidelines."
INVESTMENT COMPANY SECURITIES. The Trust may purchase common shares of
closed-end investment companies that have a similar investment objective and
policies to the Trust. In addition to providing tax-exempt income, such
securities may provide capital appreciation. Such investments, which may also be
leveraged and subject to the same risks as the Trust, will not exceed 10% of
total assets, and no such company will be affiliated with Eaton Vance. These
companies bear fees and expenses that the Trust will incur indirectly.
ADDITIONAL RISK CONSIDERATIONS
INTEREST RATE AND MARKET RISK. The prices of Municipal Obligations tend to
fall as interest rates rise. Securities that have longer maturities tend to
fluctuate more in price in response to changes in market interest rates. This
risk is usually greater among Municipal Obligations with longer maturities or
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<PAGE>
durations and when residual interest municipal bonds are held by the Trust.
Although the Trust has no policy governing the maturities or durations of its
investments, the Trust expects that it will invest in a portfolio of longer term
securities. This means that the Trust will be subject to greater market risk
(other things being equal) than a fund investing solely in shorter-term
securities. Market risk is often greater among certain types of income
securities, such as zero-coupon bonds, which do not make regular interest
payments. As interest rates change, these bonds often fluctuate in price more
than higher quality bonds that make regular interest payments. Because the Trust
may invest in these types of income securities, it may be subject to greater
market risk than a fund that invests only in current interest paying securities.
The Trust may invest to a significant extent in residual interest
municipal bonds known as inverse floaters. Compared to similar fixed rate
municipal bonds, the value of these bonds will fluctuate to a greater extent in
response to changes in prevailing long-term interest rates. Moreover, the income
earned on residual interest municipal bonds will fluctuate in response to
changes in prevailing short-term interest rates. Thus, when such bonds are held
by the Trust, an increase in short- or long-term market interest rates will
adversely affect the income received from such bonds or the net asset value of
Trust shares.
INCOME RISK. The income investors receive from the Trust is based
primarily on the interest it earns from its investments, which can vary widely
over the short and long-term. If interest rates drop, investors' income from the
Trust over time could drop as well if the Trust purchases securities with lower
interest coupons. This risk is magnified when prevailing short-term interest
rates increase and the Trust holds residual interest municipal bonds.
CALL RISK. If interest rates fall, it is possible that issuers of callable
bonds with high interest coupons will "call" (or prepay) their bonds before
their maturity date. If a call were exercised by the issuer during a period of
declining interest rates, the Trust is likely to replace such called security
with a lower yielding security.
CREDIT RISK. Municipal debt obligations are subject to the risk of
non-payment of scheduled interest and/or principal. Such non-payment would
result in a reduction of income to the Trust and a reduction in the value of the
security experiencing non-payment. Securities rated below investment grade or
unrated securities of comparable quality ("lower quality securities") are
subject to the risk of an issuer's inability to meet principal and interest
payments on the obligations ("credit risk") and may also be subject to price
volatility due to such factors as interest rate sensitivity, market perception
of the creditworthiness of the issuer and general market liquidity ("market
risk"). The prices of lower quality securities are also more likely to react to
real or perceived developments affecting market and credit risk than are prices
of investment grade quality securities ("higher quality securities"), which
react primarily to movements in the general level of interest rates. The
investments in the Trust's portfolio will have speculative characteristics.
As indicated above, the Trust may invest up to 35% of its total assets in
Municipal Obligations rated below investment grade (but not, with respect to
more than 30% of its total assets, lower than B by all Rating Agencies rating
the obligation) and comparable unrated obligations. Such obligations are
commonly called "junk bonds" and will have speculative characteristics in
varying degrees. While such obligations may have some quality and protective
characteristics, these characteristics can be expected to be offset or
outweighed by uncertainties or major risk exposures to adverse conditions. Eaton
Vance seeks to minimize the risks of investing in below investment grade
securities through professional investment analysis, attention to current
developments in interest rates and economic conditions, and industry and
geographic diversification. When the Trust invests in lower rated or unrated
Municipal Obligations, the achievement of the Trust's goals is more dependent on
the Eaton Vance's ability than would be the case if the Trust were investing in
Municipal Obligations in the higher rating categories. In evaluating the credit
quality of a particular issue, whether rated or unrated, Eaton Vance will
normally take into consideration, among other things, the financial resources of
the issuer (or, as appropriate, of the underlying source of funds for debt
service), its sensitivity to economic conditions and trends, any operating
history of and the community support for the facility financed by the issue, the
ability of the issuer's management and regulatory matters. Eaton Vance will
attempt to reduce the risks of investing in the lowest investment grade, below
investment grade and comparable unrated obligations through active portfolio
management, credit analysis and attention to current developments and trends in
the economy and the financial markets.
Increases in interest rates and changes in the economy may adversely
affect the ability of issuers of lower grade municipal securities to pay
interest and to repay principal, to meet projected financial goals and to obtain
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<PAGE>
additional financing. In the event that an issuer of securities held by the
Trust experiences difficulties in the timely payment of principal or interest
and such issuer seeks to restructure the terms of its borrowings, the Trust may
incur additional expenses and may determine to invest additional assets with
respect to such issuer or the project or projects to which the Trust's portfolio
securities relate. Further, the Trust may incur additional expenses to the
extent that it is required to seek recovery upon a default in the payment of
interest or the repayment of principal on its portfolio holdings, and the Trust
may be unable to obtain full recovery thereof.
To the extent that there is no established retail market for some of the
lower grade municipal securities in which the Trust may invest, trading in such
securities may be relatively inactive. The Adviser is responsible for
determining the net asset value of the Trust, subject to the supervision of the
Board of Trustees of the Trust. During periods of reduced market liquidity and
in the absence of readily available market quotations for lower grade municipal
securities held in the Trust's portfolio, the ability of the Adviser to value
the Trust's securities becomes more difficult and the Adviser's use of judgment
may play a greater role in the valuation of the Trust's securities due to the
reduced availability of reliable objective data. The effects of adverse
publicity and investor perceptions may be more pronounced for securities for
which no established retail market exists as compared with the effects on
securities for which such a market does exist. Further, the Trust may have more
difficulty selling such securities in a timely manner and at their stated value
than would be the case for securities for which an established retail market
does exist
Municipal Obligations held by the Trust that are of below investment grade
quality but which, subsequent to the assignment of such rating, are backed by
escrow accounts containing U.S. Government obligations may be determined by
Eaton Vance to be of investment grade quality for purposes of the Trust's
investment policies. The Trust may retain in its portfolio an obligation that
declines in quality, including defaulted obligations, if such retention is
considered desirable by Eaton Vance. In the case of a defaulted obligation, the
Trust may incur additional expense seeking recovery of its investment.
Changes in the credit quality of the issuers of Municipal Obligations held
by the Trust will affect the principal value of (and possibly the income earned
on) such obligations. In addition, the value of such securities are affected by
changes in general economic conditions and business conditions affecting the
relevant economic sectors. Changes by Rating Agencies in their ratings of a
security and in the ability of the issuer to make payments of principal and
interest may also affect the value of the Trust's investments. The amount of
information about the financial condition of an issuer of Municipal Obligations
may not be as extensive as that made available by corporations whose securities
are publicly traded.
The Trust may invest in municipal leases, and participations in municipal
leases. The obligation of the issuer to meet its obligations under such leases
is often subject to the appropriation by the appropriate legislative body, on an
annual or other basis, of funds for the payment of the obligations. Investments
in municipal leases are thus subject to the risk that the legislative body will
not make the necessary appropriation and the issuer will not otherwise be
willing or able to meet its obligation.
CONCENTRATION. The Trust may invest 25% or more of its total assets in
Municipal Obligations of issuers located in the same state (or U.S. territory)
or in Municipal Obligations in the same economic sector, including without
limitation the following: lease rental obligations of state and local
authorities; obligations dependent on annual appropriations by a state's
legislature for payment; obligations of state and local housing finance
authorities, municipal utilities systems or public housing authorities;
obligations of hospitals or life care facilities; or industrial development or
pollution control bonds issued for electric utility systems, steel companies,
paper companies or other purposes. This may make the Trust more susceptible to
adverse economic, political, or regulatory occurrences affecting a particular
state or economic sector. For example, health care related issuers are
susceptible to Medicaid reimbursement policies, and national and state health
care legislation.
LIQUIDITY RISK. At times, a substantial portion of the Trust's assets may
be invested in securities as to which the Trust, by itself or together with
other accounts managed by Eaton Vance and its affiliates, holds a major portion
of all of such securities. Under adverse market or economic conditions or in the
event of adverse changes in the financial condition of the issuer, the Trust
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could find it more difficult to sell such securities when Eaton Vance believes
it advisable to do so or may be able to sell such securities only at prices
lower than if such securities were more widely held. In such circumstances, it
may also be more difficult to determine the fair value of such securities for
purposes of computing the Trust's net asset value.
The secondary market for some Municipal Obligations (including issues
which are privately placed with the Trust) is less liquid than that for taxable
debt obligations or other more widely traded Municipal Obligations. These
include residual interest municipal bonds. No established resale market exists
for certain of the Municipal Obligations in which the Trust may invest. The
market for obligations rated below investment grade is also likely to be less
liquid than the market for higher rated obligations. As a result, the Trust may
be unable to dispose of these Municipal Obligations at times when it would
otherwise wish to do so at the prices at which they are valued.
A secondary market may be subject to irregular trading activity, wide
bid/ask spreads and extended trade settlement periods. The Trust has no
limitation on the amount of its assets which may be invested in securities which
are not readily marketable or are subject to restrictions on resale. The risks
associated with illiquidity are particularly acute in situations where the
Trust's operations require cash, such as if the Trust tenders for its Common
Shares, and may result in the Trust borrowing to meet short-term cash
requirements.
NON-DIVERSIFICATION. The Trust has registered as a "non-diversified"
investment company under the 1940 Act so that, subject to its investment
restrictions and applicable federal income tax diversification requirements,
with respect to 50% of its total assets, it will be able to invest more than 5%
(but not more than 25%) of the value of its total assets in the obligations of
any single issuer. To the extent the Trust invests a relatively high percentage
of its assets in obligations of a limited number of issuers, the Trust will be
more susceptible than a more widely diversified investment company to any single
corporate, economic, political or regulatory occurrence.
YEAR 2000 COMPLIANCE. The Trust could be adversely affected if the
computer systems used by the Adviser and other service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. This is commonly known as the "Year 2000 Problem." Eaton Vance is
taking steps that it believes are reasonably designed to address the Year 2000
Problem with respect to computer systems that it uses and to obtain reasonable
assurances that comparable steps are being taken by the Trust's other major
service providers. At this time, there can be no assurance that these steps will
be sufficient to avoid any adverse impact to the Trust.
In addition, it is possible that the markets for municipal securities in
which the Trust invests may be detrimentally affected by computer failures
throughout the financial services industry beginning on or before January 1,
2000. Improperly functioning trading systems may result in settlement problems
and liquidity issues. In addition, corporate and governmental data processing
errors may result in production problems for individual issuers and overall
economic uncertainties. Earnings of individual issuers will be affected by
remediation costs, which may be substantial and may be reported inconsistently
in financial statements. Accordingly, the Trust's investments may be adversely
affected.
RATING AGENCY GUIDELINES
The Trust intends that, so long as APS are outstanding, the composition of
its portfolio will reflect guidelines established by S&P in connection with the
Trust's receipt of a rating for such shares on or prior to their Date of
Original Issue of at least AAA from S&P. S&P, which is a Rating Agency, issues
ratings for various securities reflecting the perceived creditworthiness of such
securities. The guidelines described below have been developed by S&P in
connection with issuances of asset-backed and similar securities, including debt
obligations and variable rate Preferred Shares, generally on a case-by-case
basis through discussions with the issuers of these securities. The guidelines
are designed to ensure that assets underlying outstanding debt or Preferred
Shares will be varied sufficiently and will be of sufficient quality and amount
to justify investment grade ratings. The guidelines do not have the force of law
but have been adopted by the Trust in order to satisfy current requirements
necessary for S&P to issue the above-described ratings for shares of APS, which
ratings generally are relied upon by institutional investors in purchasing such
securities. The guidelines provide a set of tests for portfolio composition and
asset coverage that supplement (and in some cases are more restrictive than) the
applicable requirements under the 1940 Act. See "Description of APS--Asset
Maintenance."
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The Trust intends to maintain a Discounted Value for its portfolio at
least equal to the APS Basic Maintenance Amount. S&P has established separate
guidelines for determining Discounted Value. To the extent any particular
portfolio holding does not satisfy the applicable rating agency's guidelines,
all or a portion of such holding's value will not be included in the calculation
of Discounted Value. The S&P guidelines do not impose any limitations on the
percentage of Trust assets that may be invested in holdings not eligible for
inclusion in the calculation of the Discounted Value of the Trust's portfolio.
Upon any failure to maintain the required Discounted Value, the Trust will
seek to alter the composition of its portfolio to retain a Discounted Value at
least equal to the APS Basic Maintenance Amount on or prior to the APS Basic
Maintenance Cure Date, thereby incurring additional transaction costs and
possible losses and/or gains on dispositions of portfolio securities. To the
extent any such failure is not cured in a timely manner, the APS will be subject
to mandatory redemption. See "Description of APS--Asset Maintenance" and
"Description of APS--Redemption." The APS Basic Maintenance Amount includes the
sum of (i) the aggregate liquidation value of APS then outstanding and (ii)
certain accrued and projected payment obligations of the Trust. See "Description
of APS--Asset Maintenance."
The Trust may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by S&P. Failure to adopt any such
modifications, however, may result in a change in the ratings described above or
a withdrawal of ratings altogether. In addition, any rating agency providing a
rating for the shares of APS, at any time, may change or withdraw any such
rating. As set forth in the Amended By-Laws, the Trust's Board of Trustees
("Board of Trustees"), without shareholder approval, may modify certain
definitions or restrictions that have been adopted by the Trust pursuant to the
rating agency guidelines, provided the Board of Trustees has obtained written
confirmation from S&P that any such change would not impair the ratings then
assigned by S&P to the APS.
As described by S&P, a Preferred Shares rating is an assessment of the
capacity and willingness of an issuer to pay Preferred Shares obligations. The
ratings on the APS are not recommendations to purchase, hold or sell APS,
inasmuch as the ratings do not comment as to market price or suitability for a
particular investor, nor do the rating agency guidelines described above address
the likelihood that a holder of APS will be able to sell such shares in an
Auction. The ratings are based on current information furnished to S&P by the
Trust and the Adviser and information obtained from other sources. The ratings
may be changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information. The Common Shares have not been rated by a
Rating Agency.
S&P AAA RATING GUIDELINES. The Discounted Value of the Trust's S&P
Eligible Assets is calculated on each Valuation Date. See "Description of
APS--Asset Maintenance--APS Basic Maintenance Amount." S&P Eligible Assets
include cash, Receivables for Municipal Obligations Sold (as defined below) and
Municipal Obligations eligible for consideration under S&P's current guidelines.
For purposes of calculating the Discounted Value of the Trust's portfolio under
current S&P guidelines, the fair market value of Municipal Obligations eligible
for consideration under such guidelines must be discounted by the applicable S&P
Discount Factor set forth in the table below. The Discounted Value of a
Municipal Obligation eligible for consideration under S&P guidelines is the fair
market value thereof divided by the S&P Discount Factor. The S&P Discount Factor
used to discount a particular Municipal Obligation will be determined by
reference to (a) (i) the rating by S&P on such Municipal Obligation or (ii) in
the event the Municipal Obligation is insured under a Policy and the terms of
the Policy permit the Trust, at its option, to obtain other permanent insurance
guaranteeing the timely payment of interest on such Municipal Obligation and
principal thereof to maturity, the S&P insurance claims-paying ability rating of
the issuer of the Policy or (iii) in the event the Municipal Obligation is
insured under an insurance policy which guarantees the timely payment of
interest on such Municipal Obligation and principal thereof to maturity, the S&P
insurance claims-paying ability rating of the issuer of the insurance policy and
(b) the S&P Exposure Period. The S&P Exposure Period is the maximum period of
time following a Valuation Date, including the Valuation Date and the APS Basic
Maintenance Cure Date, that the Trust has to cure any failure to maintain, as of
such Valuation Date, a Discounted Value for its portfolio at least equal to the
APS Basic Maintenance Amount.
S&P Discount Factors applicable to Municipal Obligations for a range of
S&P Exposure Periods are set forth below:
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S&P DISCOUNT FACTORS RATING
CATEGORY
EXPOSURE PERIOD AAA AA A BB
40 Business Days 190% 195% 210% 250%
22 Business Days 170 175 190 230
10 Business Days 155 160 175 215
7 Business Days 150 155 170 210
3 Business Days 130 135 150 190
Since the S&P Exposure Period currently applicable to the Trust is seven
Business Days, the S&P Discount Factors currently applicable to Municipal
Obligations eligible for consideration under S&P guidelines will be determined
by reference to the factors set forth opposite the exposure period line entitled
"7 Business Days." Notwithstanding the foregoing, (i) the S&P Discount Factor
for short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated A-1+ or SP-1+ by S&P and mature or have a demand feature
exercisable in 30 days or less, or 125% if such Municipal Obligations are not
rated by S&P but are rated VMIG-1, P-1 or MIG-1 by Moody's; provided, however,
such short-term Municipal Obligations rated by Moody's but not rated by S&P
having a demand feature exercisable in 30 days or less must be backed by a
letter of credit, liquidity facility or guarantee from a bank or other financial
institution having a short-term rating of at least A-1+ from S&P; and further
provided that such short-term Municipal Obligations rated by Moody's but not
rated by S&P may comprise no more than 50% of short-term Municipal Obligations
that qualify as S&P Eligible Assets and (ii) no S&P Discount Factor will be
applied to cash or to Receivables for Municipal Obligations Sold. "Receivables
for Municipal Obligations Sold," for purposes of calculating S&P Eligible Assets
as of any Valuation Date, means the book value of receivables for Municipal
Obligations Sold as of or prior to such Valuation Date if such receivables are
due within five Business Days of such Valuation Date. For purposes of the
foregoing, Anticipation Notes rated SP-1+ or, if not rated by S&P, rated VMIG-1
by Moody's, which do not mature or have a demand feature exercisable in 30 days
and which do not have a long-term rating, shall be considered to be short-term
Municipal Obligations.
The S&P guidelines require certain minimum issue size and geographical
diversification and impose other requirements for purposes of determining S&P
Eligible Assets. In order to be considered S&P Eligible Assets, Municipal
Obligations must:
(i) be interest bearing and pay interest at least semi-annually;
(ii) be payable with respect to principal and interest in U.S. dollars;
(iii) be publicly rated BBB or higher by S&P or, except in the case of
revenue anticipation notes that are grant anticipation notes or bond
anticipation notes, which must be rated by S&P to be included in S&P Eligible
Assets, if not rated by S&P but rated by Moody's, be rated at least A by Moody's
(provided that such Moody's-rated Municipal Obligations will be included in S&P
Eligible Assets only to the extent the fair market value of such Municipal
Obligations does not exceed 50% of the aggregate fair market value of the S&P
Eligible Assets. For purposes of determining the S&P Discount Factors applicable
to any such Moody's-rated Municipal Obligations, such Municipal Obligations will
be deemed to have an S&P rating that is one full rating category lower than its
Moody's rating);
(iv) not be subject to a covered call or covered put option written by the
Trust;
(v) not be part of a private placement of Municipal Obligations; and
(vi) be part of an issue with an original issue size of at least $20
million or, if of an issue with an original issue size below $20 million (but in
no event below $10 million), be issued by an issuer with a total of at least $50
million of securities outstanding.
Notwithstanding the foregoing:
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(i) Municipal Obligations of any one issuer or guarantor (excluding bond
insurers) will be considered S&P Eligible Assets only to the extent the fair
market value of such obligations does not exceed 10% of the aggregate fair
market value of the S&P Eligible Assets, provided that 2% is added to the
applicable S&P Discount Factor for every 1% by which the fair market value of
such Municipal Obligations exceeds 5% of the aggregate fair market value of the
S&P Eligible Assets; and
(ii) Municipal Obligations issued by issuers in any one state or territory
will be considered S&P Eligible Assets only to the extent the fair market value
of such Municipal Obligations does not exceed 20% of the aggregate fair market
value of S&P Eligible Assets.
The Trust may include Municipal Obligations as S&P Eligible Assets
pursuant to guidelines and restrictions to be established by S&P, provided that
S&P advises the Trust in writing that such action will not adversely affect its
then-current rating on the APS.
As discussed herein, the Trust may engage in options or futures
transactions. For so long as any shares of APS are rated by S&P, the Trust will
not purchase or sell financial futures contracts, write, purchase or sell
options on financial futures contracts or write put options (except covered put
options) or call options (except covered call options) on portfolio securities
unless it receives written confirmation from S&P that engaging in such
transactions will not impair the ratings then assigned to the APS by S&P, except
that the Trust may purchase or sell financial futures contracts based on the
Bond Buyer Municipal Bond Index (the "Municipal Index") or United States
Treasury Bonds or Notes ("Treasury Bonds") and write, purchase or sell put and
call options on such contracts (collectively "S&P Hedging Transactions"),
subject to the following limitations:
(i) the Trust will not engage in any S&P Hedging Transaction based on the
Municipal Index (other than transactions that terminate a financial futures
contract or option held by the Trust by the Trust's taking an opposite position
thereto ("Closing Transactions")), that would cause the Trust at the time of
such transaction to own or have sold the least of (A) more than 1,000
outstanding financial futures contracts based on the Municipal Index, (B)
outstanding financial futures contracts based on the Municipal Index exceeding
in number 25% of the quotient of the fair market value of the Trust's total
assets divided by $1,000 or (C) outstanding financial futures contracts based on
the Municipal Index exceeding in number 10% of the average number of daily
traded financial futures contracts based on the Municipal Index in the 30 days
preceding the time of effecting such transaction as reported by The Wall Street
Journal;
(ii) the Trust will not engage in any S&P Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) that would cause the Trust at
the time of such transaction to own or have sold the lesser of (A) outstanding
financial futures contracts based on Treasury Bonds and on the Municipal Index
exceeding in number 25% of the quotient of the fair market value of the Trust's
total assets divided by $100,000 ($200,000 in the case of the two-year United
States Treasury Note) or (B) outstanding financial futures contracts based on
Treasury Bonds exceeding in number 10% of the average number of daily traded
financial futures contracts based on Treasury Bonds in the 30 days preceding the
time of effecting such transaction as reported by The Wall Street Journal; (iii)
the Trust will engage in Closing Transactions to close out any outstanding
financial futures contract that the Trust owns or has sold or any outstanding
option thereon owned by the Trust in the event (A) the Trust does not have S&P
Eligible Assets with an aggregate Discounted Value equal to or greater than the
APS Basic Maintenance Amount on two consecutive Valuation Dates and (B) the
Trust is required to pay Variation Margin on the second such Valuation Date;
(iii) the Trust will engage in a Closing Transaction to close out any
outstanding financial futures contract or option thereon in the month prior to
the delivery month under the terms of such financial futures contract or option
thereon unless the Trust holds the securities deliverable under such terms; and
(iv) when the Trust writes a financial futures contract or an option
thereon, it will either maintain an amount of cash, cash equivalents or high
grade (rated A or better by S&P) fixed-income securities in a segregated account
with the Trust's custodian, so that the amount so segregated plus the amount of
Initial Margin and Variation Margin held in the account of or on behalf of the
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Trust's broker with respect to such financial futures contract or option equals
the fair market value of the financial futures contract or option, or, in the
event the Trust writes a financial futures contract or option thereon that
requires delivery of an underlying security, it shall hold such underlying
security in its portfolio.
For purposes of determining whether the Trust has S&P Eligible Assets with
a Discounted Value that equals or exceeds the APS Basic Maintenance Amount, the
Discounted Value of cash or securities held for the payment of Initial Margin or
Variation Margin shall be zero and the aggregate Discounted Value of S&P
Eligible Assets shall be reduced by an amount equal to (i) 30% of the aggregate
settlement value, as marked to market, of any outstanding financial futures
contracts based on the Municipal Index that are owned by the Trust plus (ii) 25%
of the aggregate settlement value, as marked to market, of any outstanding
financial futures contracts based on Treasury Bonds which contracts are owned by
the Trust.
For so long as the APS are rated by S&P, the Trust, unless it has received
written confirmation from S&P that such action would not impair the ratings then
assigned to the APS by S&P will not (i) borrow money except for the purpose of
clearing transactions in portfolio securities (which borrowings under any
circumstances shall be limited to the lesser of $10 million and an amount equal
to 5% of the fair market value of the Trust's assets at the time of such
borrowings and which borrowings shall be repaid within 60 days and not be
extended or renewed and shall not cause the aggregate Discounted Value of S&P
Eligible Assets to be less than the APS Basic Maintenance Amount), (ii) engage
in short sales of securities, (iii) lend any securities, (iv) issue any class or
series of stock ranking prior to or on a parity with the APS with respect to the
payment of dividends or the distribution of assets upon dissolution, liquidation
or winding up of the Trust, (v) reissue any APS previously purchased or redeemed
by the Trust, (vi) merge or consolidate into or with any other corporation or
entity, (vii) change the Trust's pricing service or (vii) engage in reverse
repurchase agreements.
For so long as any shares of APS are rated by S&P, the Trust will not
purchase or sell financial futures contracts, write, purchase or sell options on
financial futures contracts or write put options (except covered put options) or
call options (except covered call options) on portfolio securities unless it
receives written confirmation from S&P that engaging in such transactions will
not impair the ratings then assigned to the APS by S&P, except that the Trust
may engage in S&P Hedging Transactions subject to the limitations described
herein. See "Investment Objective and Policies--Rating Agency Guidelines" and
"--Options and Futures Transactions."
RISKS OF INVESTING IN APS
There are a number of specific factors investors in the APS should consider.
o The credit ratings of the APS could be reduced while an investor holds the
APS.
o Neither Broker-Dealers nor the Trust are obligated to purchase the APS in
an Auction or otherwise nor is the Trust required to redeem the APS in the
event of a failed Auction.
o If in an Auction for the APS Sufficient Clearing Bids do not exist, the
Applicable Rate will be the Maximum Applicable Rate, and in such event,
Beneficial Owners that have submitted Sell Orders will not be able to sell
in the Auction all, and may not be able to sell any, the APS subject to
such Sell Orders. Thus, under certain circumstances, Beneficial Owners may
not have liquidity of investment.
The Broker-Dealers may maintain a secondary trading market in the APS
outside of Auctions; however, they have no obligation to do so and there can be
no assurance that a secondary market for the APS will develop or, if it does
develop, that it will provide holders with a liquid trading market (I.E.,
trading will depend on the presence of willing buyers and sellers and the
trading price is subject to variables to be determined at the time of the trade
by the Broker-Dealers). The APS will not be registered on any stock exchange or
on any automated quotation system. An increase in the level of interest rates,
particularly during any Long Term Dividend Period, likely will have an adverse
effect on the secondary market price of the APS, and a selling shareholder may
sell APS between Auctions at a price per share of less than $25,000.
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The Trust's Amended By-Laws includes provisions that could have the effect
of limiting the ability of other entities or persons to acquire control of the
Trust or to change the composition of its Board of Trustees and could have the
effect of depriving holders of Common Shares of an opportunity to sell their
shares at a premium over prevailing market prices by discouraging a third party
from seeking to obtain control of the Trust. See "Description of Capital Stock--
Certain Provisions of the Declaration of Trust."
DESCRIPTION OF APS
The APS will be Preferred Shares that entitle their holders to receive
dividends when, as and if declared by the Board of Trustees, out of funds
legally available therefor, at a rate per annum that may vary for the successive
Dividend Periods for each such series. After the Initial Dividend Period, each
Subsequent Dividend Period for the APS generally will be a 7-Day Dividend
Period; provided, however, that prior to any Auction, the Trust may elect,
subject to certain limitations described herein, upon giving notice to holders
thereof, a Special Dividend Period. The Applicable Rate for a particular
Dividend Period will be determined by an Auction conducted on the Business Day
before the start of such Dividend Period. Beneficial Owners and Potential
Beneficial Owners of the APS may participate in Auctions therefor, although,
except in the case of a Special Dividend Period, Beneficial Owners desiring to
continue to hold all of their APS regardless of the Applicable Rate resulting
from Auctions need not participate. For an explanation of Auctions and the
method of determining the Applicable Rate, see "Description of APS--The
Auction."
Except as otherwise required by law or unless there is no Securities
Depository, all outstanding APS will be represented by one or more certificates
registered in the name of the nominee of the Securities Depository (initially
expected to be Investors Bank & Trust Company ("IBT"), and no person acquiring
APS will be entitled to receive a certificate representing such shares. See
Appendix C (Auction Procedures). As a result, the nominee of the Securities
Depository is expected to be the sole holder of record of the APS. Accordingly,
each purchaser of APS must rely on (i) the procedures of the Securities
Depository and, if such purchaser is not a member of the Securities Depository,
such purchaser's Agent Member, to receive dividends, distributions and notices
and to exercise voting rights (if and when applicable) and (ii) the records of
the Securities Depository and, if such purchaser is not a member of the
Securities Depository, such purchaser's Agent Member, to evidence its beneficial
ownership of the APS.
When issued and sold, the APS will have a liquidation preference of
$25,000 per share plus an amount equal to accumulated but unpaid dividends
(whether or not earned or declared) and will be fully paid and non-assessable.
See "Description of APS--Liquidation Rights." The APS will not be convertible
into shares of Common Shares or other capital stock of the Trust, and the
holders thereof will have no preemptive rights. The APS will not be subject to
any sinking fund but will be subject to redemption at the option of the Trust at
the Optional Redemption Price on any Dividend Payment Date for such series
(except during the Initial Dividend Period and during a Non-Call Period) and, in
certain circumstances, will be subject to mandatory redemption by the Trust at
the Mandatory Redemption Price stated herein. See "Description of APS--
Redemption."
In addition to serving as the Auction Agent in connection with the Auction
Procedures described below, Bankers Trust Corporation ("Bankers Trust") will be
the transfer agent, registrar, dividend disbursing agent and redemption agent
for the APS. The Auction Agent, however, will serve merely as the agent of the
Trust, acting in accordance with the Trust's instructions, and will not be
responsible for any evaluation or verification of any matters certified to it.
Except in an Auction, the Trust will have the right (to the extent
permitted by applicable law) to purchase or otherwise acquire any APS so long as
the Trust is current in the payment of dividends on APS and on any other shares
of beneficial interest of the Trust ranking on a parity with the APS with
respect to the payment of dividends or upon liquidation.
The following is a brief description of the terms of the APS. This
description does not purport to be complete and is subject to and qualified in
its entirety by reference to the Trust's Declaration of Trust and Amended
By-Laws, including the provisions thereof establishing the APS. The Trust's
Declaration of Trust and the form of Amended By-Laws establishing the terms of
the APS have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
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THE AUCTION
GENERAL. Holders of the APS will be entitled to receive cumulative cash
dividends on their shares when, as and if declared by the Board of Trustees of
the Trust, out of the funds legally available therefor, on the Initial Dividend
Payment Date with respect to the Initial Dividend Period and, thereafter, on
each Dividend Payment Date with respect to a Subsequent Dividend Period
(generally a period of seven days subject to certain exceptions set forth under
"Description of APS--Dividends--General") at the rate per annum equal to the
Applicable Rate for each such Dividend Period.
The provisions of the Amended By-Laws establishing the terms of the APS
offered hereby will provide that the Applicable Rate for each Dividend Period
after the Initial Dividend Period therefor will be equal to the rate per annum
that the Auction Agent advises has resulted on the Business Day preceding the
first day of such Dividend Period due to implementation of the auction
procedures set forth in the Amended By-Laws (the "Auction Procedures") in which
persons determine to hold or offer to purchase or sell the APS. The Auction
Procedures are attached as Appendix D to the Statement of Additional
Information. Each periodic operation of such procedures with respect to the APS
is referred to hereinafter as an "Auction." If, however, the Trust should fail
to pay or duly provide for the full amount of any dividend on or the redemption
price of the APS called for redemption, the Applicable Rate for the APS will be
determined as set forth under "Description of APS--Dividends--Determination of
Dividend Rate."
AUCTION AGENT AGREEMENT. The Trust will enter into an agreement (the
"Auction Agent Agreement") with Bankers Trust (together with any successor bank
or trust company or other entity entering into a similar agreement with this
Trust, the "Auction Agent"), which provides, among other things, that the
Auction Agent will follow the Auction Procedures for the purpose of determining
the Applicable Rate for the APS. The Trust will pay the Auction Agent
compensation for its services under the Auction Agent Agreement.
The Auction Agent will act as agent for the Trust in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered or omitted, or for any
error of judgment made, by it in the performance of its duties under the Auction
Agent Agreement, and will not be liable for any error of judgment made in good
faith unless the Auction Agent shall have been negligent in ascertaining the
pertinent facts. Pursuant to the Auction Agent Agreement, the Trust is required
to indemnify the Auction Agent for certain losses and liabilities incurred by
the Auction Agent without negligence or bad faith on its part in connection with
the performance of its duties under such agreement.
The Auction Agent may terminate the Auction Agent Agreement upon notice to
the Trust, which termination may be no earlier than 60 days following delivery
of such notice. If the Auction Agent resigns, the Trust will use its best
efforts to enter into an agreement with a successor Auction Agent containing
substantially the same terms and conditions as the Auction Agent Agreement. The
Trust may terminate the Auction Agent Agreement, provided that prior to such
termination the Trust shall have entered into such an agreement with respect
thereto with a successor Auction Agent.
BROKER-DEALER AGREEMENTS. The Auctions require the participation of one or
more broker-dealers. The Auction Agent will enter into agreements with
______________ and may enter into similar agreements (collectively, the
"Broker-Dealer Agreements") with one or more other broker-dealers (collectively,
the "Broker-Dealers") selected by the Trust, which provide for the participation
of such Broker-Dealers in Auctions. A Broker-Dealer Agreement may be terminated
by the Auction Agent or a Broker-Dealer on five days' notice to the other party,
provided that the Broker-Dealer Agreement with ___________ may not be terminated
without the prior written consent of the Trust, which consent may not be
unreasonably withheld.
SECURITIES DEPOSITORY. The Depository Trust Company initially will act as
the Securities Depository for the Agent Members with respect to the APS. One or
more registered certificates for all of the shares of each series of APS
initially will be registered in the name of IBT, as nominee of the Securities
Depository. The certificate will bear a legend to the effect that such
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certificate is issued subject to the provisions restricting transfers of the APS
of the series to which it relates contained in the Amended By-Laws. IBT
initially will be the holder of record of all shares of APS, and Beneficial
Owners will not be entitled to receive certificates representing their ownership
interest in such shares. See Appendix D (Auction Procedures) to the Statement of
Additional Information. The Securities Depository will maintain lists of its
participants and will maintain the positions (ownership interests) of the APS
held by each Agent Member, whether as the Beneficial Owner thereof for its own
account or as nominee for the Beneficial Owner thereof. Payments made by the
Trust to holders of APS will be duly made by making payments to the nominee of
the Securities Depository.
AUCTION PROCEDURES. The following is a brief summary of the procedures to
be used in conducting Auctions. This summary is qualified by reference to the
Auction procedures set forth in Appendix C to the Statement of Additional
Information. The Settlement Procedures to be used with respect to Auctions are
set forth in Appendix B to the Statement of Additional Information.
AUCTION DATE; ADVANCE NOTICE OF ALLOCATION OF TAXABLE INCOME; INCLUSION OF
TAXABLE INCOME IN DIVIDENDS. An Auction to determine the Applicable Rate for the
APS offered hereby for each Dividend Period for such shares (other than the
Initial Dividend Period therefor) will be held on the first Business Day (as
hereinafter defined) preceding the first day of such Dividend Period, which
first day is also the Dividend Payment Date for the preceding Dividend Period
(the date of each Auction being referred to herein as an "Auction Date").
"Business Day" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in The
City of New York are authorized or obligated by law to close. Auctions for the
APS for Dividend Periods after the Initial Dividend Period normally will be held
every ___ after the preceding Dividend Payment Date, and each subsequent
Dividend Period normally will begin on the following ________ (also a Dividend
Payment Date). The Auction Date and the first day of the related Dividend Period
(both of which must be Business Days) need not be consecutive calendar days. For
example, in most cases, if the ____ that normally would be an Auction Date for
the APS is not a Business Day, then such Auction Date will be the preceding ___
and the first day of the related Dividend Period will continue to be the
following _____. See "Description of APS--Dividends" for information concerning
the circumstances under which a Dividend Payment Date may fall on a date other
than the days specified above, which may affect the Auction Date.
Except as noted below, whenever the Trust intends to include any net
capital gains or other income subject to regular Federal income taxes in any
dividend on the APS, the Trust will notify the Auction Agent of the amount to be
so included at least five Business Days prior to the Auction Date on which the
Applicable Rate for such dividend is to be established. Whenever the Auction
Agent receives such notice from the Trust, in turn it will notify each
Broker-Dealer, who, on or prior to such Auction Date, in accordance with its
Broker-Dealer Agreement, will notify its customers who are Beneficial Owners and
Potential Beneficial Owners believed to be interested in submitting an Order in
the Auction to be held on such Auction Date. The Trust also may include such
income in a dividend on the APS without giving advance notice thereof if it
increases the dividend by an additional amount calculated as if such income were
a Retroactive Taxable Allocation and the additional amount were an Additional
Dividend; provided that the Trust will notify the Auction Agent of the
additional amounts to be included in such dividend at least five Business Days
prior to the applicable Dividend Payment Date. See "Description of APS--
Dividends--Additional Dividends."
Orders by Beneficial Owners, Potential Beneficial Owners, Existing
Holders and Potential Holders. On or prior to each Auction Date:
(a) each Beneficial Owner may submit to its Broker-Dealer by telephone a:
(i) Hold Order--indicating the number of outstanding APS, if any,
that such Beneficial Owner desires to continue to hold without regard to
the Applicable Rate for the next Dividend Period for such shares;
(ii) Bid--indicating the number of outstanding APS, if any, that
such Beneficial Owner desires to continue to hold, provided that the
Applicable Rate for the next Dividend Period for such shares is not less
than the rate per annum then specified by such Beneficial Owner; and/or
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(iii) Sell Order--indicating the number of outstanding APS, if any,
that such Beneficial Owner offers to sell without regard to the Applicable
Rate for the next Dividend Period for such shares; and
(b) Broker-Dealers will contact customers who are Potential Beneficial
Owners of APS to determine whether such Potential Beneficial Owners desire to
submit Bids indicating the number of APS which they offer to purchase provided
that the Applicable Rate for the next Dividend Period for such shares is not
less than the rates per annum specified in such Bids.
The communication by a Beneficial Owner or Potential Beneficial Owner to a
Broker-Dealer and the communication by a Broker-Dealer, whether or not acting
for its own account, to the Auction Agent of the foregoing information is
hereinafter referred to as an "Order" and collectively as "Orders." A Beneficial
Owner or a Potential Beneficial Owner placing an Order, including a
Broker-Dealer acting in such capacity for its own account, is hereinafter
referred to as a "Bidder" and collectively as "Bidders." Any Order submitted by
a Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or by a
Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any
Auction Date shall be irrevocable.
In an Auction, a Beneficial Owner may submit different types of Orders
with respect to APS then held by such Beneficial Owner, as well as Bids for
additional APS. For information concerning the priority given to different types
of Orders placed by Beneficial Owners, see "Submission of Orders by
Broker-Dealers to Auction Agent" below.
The Maximum Applicable Rate for the APS will be the Applicable Percentage
of the Reference Rate. The Auction Agent will round each applicable Maximum
Applicable Rate to the nearest one-thousandth (0.001) of one percent per annum,
with any such number ending in five ten-thousandths of one percent being rounded
upwards to the nearest one-thousandth (0.001) of one percent. The Auction Agent
will not round the applicable Reference Rate as part of its calculation of the
Maximum Applicable Rate.
The Maximum Applicable Rate for the APS will depend on the credit rating
or ratings assigned to such shares. The Applicable Percentage will be determined
based on (i) the credit rating assigned on such date to such shares by S&P (or
if S&P shall not make such rating available, the equivalent of such rating by a
Substitute Rating Agency), and (ii) whether the Trust has provided notification
to the Auction Agent prior to the Auction establishing the Applicable Rate for
any dividend that net capital gains or other taxable income will be included in
such dividend on the APS as follows:
APPLICABLE
PERCENTAGE OF APPLICABLE
S&P CREDIT RATINGS REFERENCE RATE PERCENTAGE OF
-- NOTIFICATION REFERENCE RATE
--NOTIFICATION
AA- or higher 110% 150%
A- to A+ 125% 160%
BBB- to BBB+ 150% 250%
Below BBB- 200% 275%
There is no minimum Applicable Rate in respect of any Dividend Period.
The Trust will take all reasonable action necessary to enable S&P to
provide a rating for the APS. If S&P shall not make such a rating available, the
Underwriter or its affiliates and successors, after consultation with the Trust,
will select another Rating Agency (a "Substitute Rating Agency") to act as a
Substitute Rating Agency.
Any Bid by a Beneficial Owner specifying a rate per annum higher than the
Maximum Applicable Rate will be treated as a Sell Order, and any Bid by a
Potential Beneficial Owner specifying a rate per annum higher than the Maximum
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Applicable Rate will not be considered. See "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" and "Acceptance and
Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares."
Neither the Trust nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing. A Broker-Dealer also may
hold APS in its own account as a Beneficial Owner. A Broker-Dealer thus may
submit Orders to the Auction Agent as a Beneficial Owner or a Potential
Beneficial Owner and therefore participate in an Auction as an Existing Holder
or Potential Holder on behalf of both itself and its customers. Any Order placed
with the Auction Agent by a Broker-Dealer as or on behalf of a Beneficial Owner
or a Potential Beneficial Owner will be treated in the same manner as an Order
placed with a Broker-Dealer by a Beneficial Owner or a Potential Beneficial
Owner. Similarly, any failure by a Broker-Dealer to submit to the Auction Agent
an Order in respect of any APS held by it or its customers who are Beneficial
Owners will be treated in the same manner as a Beneficial Owner's failure to
submit to its Broker-Dealer an Order in respect of APS held by it, as described
in the next paragraph. Inasmuch as a Broker-Dealer participates in an Auction as
an Existing Holder or a Potential Holder only to represent the interests of a
Beneficial Owner or Potential Beneficial Owner, whether it be its customers or
itself, all discussion herein relating to the consequences of an Auction for
Existing Holders and Potential Holders also applies to the underlying beneficial
ownership interests represented thereby. For information concerning the priority
given to different types of Orders placed by Existing Holders, see "Submission
of Orders by Broker-Dealers to Auction Agent." Each purchase or sale in an
Auction will be settled on the Business Day next succeeding the Auction Date at
a price per share equal to $25,000. See "Notification of Results; Settlement."
If one or more Orders covering in the aggregate all of the outstanding APS
held by a Beneficial Owner are not submitted to the Auction Agent prior to the
Submission Deadline, either because a Broker-Dealer failed to contact such
Beneficial Owner or otherwise, the Auction Agent shall deem a Hold Order (in the
case of an Auction relating to a Dividend Period which is not Special Dividend
Period) and a Sell Order (in the case of an Auction relating to a Special
Dividend Period) to have been submitted on behalf of such Beneficial Owner
covering the number of outstanding the APS held by such Beneficial Owner and not
subject to Orders submitted to the Auction Agent.
If all of the outstanding APS are subject to Submitted Hold Orders, the
Dividend Period next succeeding the Auction automatically shall be the same
length as the immediately preceding Dividend Period, and the Applicable Rate for
the next Dividend Period for all the APS will be 40% of the Reference Rate on
the date of the applicable Auction (or 60% of such rate if the Trust has
provided notification to the Auction Agent prior to the Auction establishing the
Applicable Rate for any dividend that net capital gains or other taxable income
will be included in such dividend on the APS).
For the purposes of an Auction, the APS for which the Trust shall have
given notice of redemption and deposited moneys therefor with the Auction Agent
in trust or segregated in an account at the Trust's custodian bank for the
benefit of the Auction Agent, as set forth under "Description of APS--
Redemption," will not be considered as outstanding and will not be included in
such Auction. Pursuant to the Amended By-Laws of the Trust, the Trust will be
prohibited from reissuing and its affiliates (other than the Underwriter) will
be prohibited from transferring (other than to the Trust) any APS they may
acquire. Neither the Trust nor any affiliate of the Trust (other than the
Underwriter) may submit an Order in any Auction, except that an affiliate of the
Trust that is a Broker-Dealer may submit an Order.
SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT. Prior to 1:00
p.m., New York City time, on each Auction Date, or such other time on the
Auction Date as may be specified by the Auction Agent (the "Submission
Deadline"), each Broker-Dealer will submit to the Auction Agent in writing all
Orders obtained by it for the Auction to be conducted on such Auction Date,
designating itself (unless otherwise permitted by the Trust) as the Existing
Holder or Potential Holder in respect of the APS subject to such Orders. Any
Order submitted by a Beneficial Owner or a Potential Beneficial Owner to its
Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to the
Submission Deadline on any Auction Date, shall be irrevocable.
If the rate per annum specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent will round such
rate per annum up to the next highest one-thousandth (.001) of 1%. If one or
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more Orders of an Existing Holder are submitted to the Auction Agent and such
Orders cover in the aggregate more than the number of outstanding shares of APS
held by such Existing Holder, such Orders will be considered valid in the
following order of priority:
(i) any Hold Order will be considered valid up to and including the number
of outstanding APS held by such Existing Holder, provided that if more than one
Hold Order is submitted by such Existing Holder and the number of APS subject to
such Hold Orders exceeds the number of outstanding APS held by such Existing
Holder, the number of APS subject to each of such Hold Orders will be reduced
pro rata so that such Hold Orders, in the aggregate, will cover exactly the
number of outstanding APS held by such Existing Holder;
(ii) any Bids will be considered valid, in the ascending order of their
respective rates per annum if more than one Bid is submitted by such Existing
Holder, up to and including the excess of the number of outstanding APS held by
such Existing Holder over the number of outstanding APS subject to any Hold
Order referred to in clause (i) above (and if more than one Bid submitted by
such Existing Holder specifies the same rate per annum and together they cover
more than the remaining number of shares that can be the subject of valid Bids
after application of clause (i) above and of the foregoing portion of this
clause (ii) to any Bid or Bids specifying a lower rate or rates per annum, the
number of shares subject to each of such Bids will be reduced pro rata so that
such Bids, in the aggregate, cover exactly such remaining number of outstanding
shares); and the number of outstanding shares, if any, subject to Bids not valid
under this clause (ii) shall be treated as the subject of a Bid by a Potential
Holder; and
(iii) any Sell Order will be considered valid up to and including the
excess of the number of outstanding APS held by such Existing Holder over the
sum of the number of APS subject to Hold Orders referred to in clause (i) above
and the number of APS subject to valid Bids by such Existing Holder referred to
in clause (ii) above; provided that, if more than one Sell Order is submitted by
any Existing Holder and the number of APS subject to such Sell Orders is greater
than such excess, the number of APS subject to each of such Sell Orders will be
reduced pro rata so that such Sell Orders, in the aggregate, will cover exactly
the number of APS equal to such excess.
If more than one Bid of any Potential Holder is submitted in any Auction,
each Bid submitted in such Auction will be considered a separate Bid with the
rate per annum and number of APS therein specified.
DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE
RATE. Not earlier than the Submission Deadline for each Auction, the Auction
Agent will assemble all Orders submitted or deemed submitted to it by the
Broker-Dealers (each such "Hold Order," "Bid" or "Sell Order" as submitted or
deemed submitted by a Broker-Dealer hereinafter being referred to as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order") and will determine the excess of the
number of outstanding APS over the number of outstanding APS subject to
Submitted Hold Orders (such excess being referred to as the "Available APS") and
whether Sufficient Clearing Bids have been made in such Auction. Sufficient
Clearing Bids will have been made if the number of outstanding APS that are the
subject of Submitted Bids of Potential Holders with rates per annum not higher
than the Maximum Applicable Rate equals or exceeds the number of outstanding
shares that are the subject of Submitted Sell Orders (including the number of
shares subject to Bids of Existing Holders specifying rates per annum higher
than the Maximum Applicable Rate). If Sufficient Clearing Bids have been made,
the Auction Agent will determine the lowest rate per annum specified in the
Submitted Bids (the "Winning Bid Rate") which would result in the number of
shares subject to Submitted Bids specifying such rate per annum or a lower rate
per annum being at least equal to the Available APS. If Sufficient Clearing Bids
have been made, the Winning Bid Rate will be the Applicable Rate for the next
Dividend Period for the APS then outstanding. If Sufficient Clearing Bids have
not been made (other than because all outstanding APS are the subject of
Submitted Hold Orders), the Dividend Period next following the Auction
automatically will be a 7-Day Dividend Period, and the Applicable Rate for such
Dividend Period will be equal to the Maximum Applicable Rate.
If Sufficient Clearing Bids have not been made, Beneficial Owners that
have Submitted Sell Orders will not be able to sell in the Auction all, and may
not be able to sell any, the APS subject to such Submitted Sell Orders. See
"Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares." Thus, under some circumstances, Beneficial Owners may not
have liquidity of investment.
ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES. Based on the determinations described under "Determination
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of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate" and subject
to the discretion of the Auction Agent to round as described below, Submitted
Bids and Submitted Sell Orders will be accepted or rejected in the order of
priority set forth in the Auction Procedures with the result that Existing
Holders and Potential Holders of APS will sell, continue to hold and/or purchase
APS as set forth below. Existing Holders that submit or are deemed to have
submitted Hold Orders will continue to hold the APS subject to such Hold Orders.
If Sufficient Clearing Bids have been made:
(a) each Existing Holder that placed a Submitted Bid specifying a
rate per annum higher than the Winning Bid Rate or a Submitted Sell Order
will sell the outstanding APS subject to such Submitted Bid or Submitted
Sell Order;
(b) each Existing Holder that placed a Submitted Bid specifying a
rate per annum lower than the Winning Bid Rate will continue to hold the
outstanding APS subject to such Submitted Bid;
(c) each Potential Holder that placed a Submitted Bid specifying a
rate per annum lower than the Winning Bid Rate will purchase the number of
APS subject to such Submitted Bid;
(d) each Existing Holder that placed a Submitted Bid specifying a
rate per annum equal to the Winning Bid Rate will continue to hold the
outstanding shares of APS subject to such Submitted Bids, unless the
number of outstanding APS subject to all such Submitted Bids of Existing
Holders is greater than the excess of the Available APS over the number of
APS accounted for in clauses (b) and (c) above, in which event each
Existing Holder with such a Submitted Bid will sell a number of
outstanding APS determined on a pro rata basis based on the number of
outstanding APS subject to all such Submitted Bids of such Existing
Holders; and
(e) each Potential Holder that placed a Submitted Bid specifying a
rate per annum equal to the Winning Bid Rate will purchase any Available
APS not accounted for in clause (b), (c) or (d) above on a pro rata basis
based on the APS subject to all such Submitted Bids of Potential Holders.
If Sufficient Clearing Bids have not been made (other than because all
outstanding APS are the subject of Submitted Hold Orders):
(a) each Existing Holder that placed a Submitted Bid specifying a
rate per annum equal to or lower than the Maximum Applicable Rate will
continue to hold the outstanding APS subject to such Submitted Bid;
(b) each Potential Holder that placed a Submitted Bid specifying a
rate per annum equal to or lower than the Maximum Applicable Rate will
purchase the number of APS subject to such Submitted Bid; and
(c) each Existing Holder that placed a Submitted Bid specifying a
rate per annum higher than the Maximum Applicable Rate or a Submitted Sell
Order will sell a number of outstanding APS determined on a pro rata basis
based on the outstanding APS subject to all such Submitted Bids and
Submitted Sell Orders. If as a result of the Auction Procedures described
above any Existing Holder would be entitled or required to sell, or any
Potential Holder would be entitled or required to purchase, a fraction of
APS, the Auction Agent, in such manner as, in its sole discretion, it
shall determine, will round up or down the number of APS being sold or
purchased on such Auction Date so that each share sold or purchased by
each Existing Holder or Potential Holder will be a whole APS. If any
Potential Holder would be entitled or required to purchase less than a
whole APS, the Auction Agent, in such manner as, in its sole discretion,
it shall determine, will allocate APS for purchase among Potential Holders
so that only whole APS are purchased by any such Potential Holder, even if
such allocation results in one or more of such Potential Holders not
purchasing any APS.
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NOTIFICATION OF RESULTS; SETTLEMENT. The Auction Agent will advise each
Broker-Dealer who submitted a Bid or Sell Order in an Auction whether such Bid
or Sell Order was accepted or rejected in whole or in part and of the Applicable
Rate for the next Dividend Period for the related APS by telephone at
approximately 3:00 p.m., New York City time, on the Auction Date for such
Auction. Each such Broker-Dealer that submitted an Order for the account of a
customer then will advise such customer whether such Bid or Sell Order was
accepted or rejected, will confirm purchases and sales with each customer
purchasing or selling APS as a result of the Auction and will advise each
customer purchasing or selling APS to give instructions to its Agent Member of
the Securities Depository to pay the purchase price against delivery of such
shares or to deliver such shares against payment therefor as appropriate. If a
customer selling APS as a result of an Auction shall fail to instruct its Agent
Member to deliver such shares, the Broker-Dealer that submitted such customer's
Bid or Sell Order will instruct such Agent Member to deliver such shares against
payment therefor. Each Broker-Dealer that submitted a Hold Order in an Auction
on behalf of a customer also will advise such customer of the Applicable Rate
for the next Dividend Period for the APS. The Auction Agent will record each
transfer of APS on the record book of Existing Holders to be maintained by the
Auction Agent.
In accordance with the Securities Depository's normal procedures, on the
day after each Auction Date, the transactions described above will be executed
through the Securities Depository, and the accounts of the respective Agent
Members at the Securities Depository will be debited and credited as necessary
to effect the purchases and sales of APS as determined in such Auction.
Purchasers will make payment through their Agent Members in same-day funds to
the Securities Depository against delivery through their Agent Members; the
Securities Depository will make payment in accordance with its normal
procedures, which now provide for payment in same-day funds. If the procedures
of the Securities Depository applicable to APS shall be changed to provide for
payment in next-day funds, then purchasers may be required to make payment in
next-day funds. If the certificates for the APS are not held by the Securities
Depository or its nominee, payment will be made in same-day funds to the Auction
Agent against delivery of such certificates.
If any Existing Holder selling APS in an Auction fails to deliver such
shares, the Broker-Dealer of any person that was to have purchased APS in such
Auction may deliver to such person a number of whole APS that is less than the
number of shares that otherwise was to be purchased by such person. In such
event, the number of APS to be so delivered will be determined by such
Broker-Dealer. Delivery of such lesser number of shares will constitute good
delivery. Each Broker-Dealer Agreement also will provide that neither the Trust
nor the Auction Agent will have responsibility or liability with respect to the
failure of a Potential Beneficial Owner, Beneficial Owner or their respective
Agent Members to deliver APS or to pay for APS purchased or sold pursuant to an
Auction or otherwise.
BROKER-DEALERS
The Auction Agent after each Auction will pay a service charge from funds
provided by the Trust to each Broker-Dealer on the basis of the purchase price
of APS placed by such Broker-Dealer at such Auction. The service charge (i) for
any 7-Day Dividend Period shall be payable at the annual rate of 0.25% of the
purchase price of the APS placed by such Broker-Dealer in any such Auction and
(ii) for any Special Dividend Period shall be determined by mutual consent of
the Trust and any such Broker-Dealer or Broker-Dealers and shall be based upon a
selling concession that would be applicable to an underwriting of fixed or
variable rate preferred shares with a similar final maturity or variable rate
dividend period, respectively, at the commencement of the Dividend Period with
respect to such Auction. For the purposes of the preceding sentence, the APS
will be placed by a Broker-Dealer if such shares were (i) the subject of Hold
Orders deemed to have been made by Beneficial Owners that were acquired by such
Beneficial Owners through such Broker-Dealer or (ii) the subject of the
following Orders submitted by such Broker-Dealer: (A) a Submitted Bid of a
Beneficial Owner that resulted in such Beneficial Owner continuing to hold such
shares as a result of the Auction, (B) a Submitted Bid of a Potential Beneficial
Owner that resulted in such Potential Beneficial Owner purchasing such shares as
a result of the Auction or (C) a Submitted Hold Order.
The Broker-Dealer Agreements provide that a Broker-Dealer may submit
Orders in Auctions for its own account, unless the Trust notifies all
Broker-Dealers that they no longer may do so; provided that Broker-Dealers may
continue to submit Hold Orders and Sell Orders. If a Broker-Dealer submits an
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Order for its own account in any Auction of APS, it may have knowledge of Orders
placed through it in that Auction and therefore have an advantage over other
Bidders, but such Broker-Dealer would not have knowledge of Orders submitted by
other Broker-Dealers in that Auction.
The Broker-Dealers may maintain a secondary trading market in the APS
outside of Auctions; however, they have no obligation to do so and there can be
no assurance that a secondary market for the APS will develop or, if it does
develop, that it will provide holders with a liquid trading market (I.E.,
trading will depend on the presence of willing buyers and sellers and the
trading price is subject to variables to be determined at the time of the trade
by the Broker-Dealers). The APS will not be registered on any stock exchange or
on any automated quotation system. An increase in the level of interest rates,
particularly during any Long-Term Dividend Period, likely will have an adverse
effect on the secondary market price of the APS, and a selling shareholder may
sell APS between Auctions at a price per share of less than $25,000.
DIVIDENDS
GENERAL. The holders of the APS will be entitled to receive, when, as and
if declared by the Board of Trustees, out of funds legally available therefor,
cumulative cash dividends on their shares, at the Applicable Rate determined as
set forth below under "Determination of Dividend Rate," payable on the dates set
forth below. Dividends on the APS so declared and payable shall be paid (i) in
preference to and in priority over any dividends so declared and payable on the
Common Shares, and (ii) to the extent permitted under the Code and to the extent
available, out of net tax-exempt income earned on the Trust's investments. To
the extent permitted under the Code, dividends on APS, to the extent that they
are derived from Municipal Obligations, will be exempt from Federal income
taxes, subject to possible application of the alternative minimum tax. See
"Taxes."
Dividends on the APS will accumulate from the date on which the Trust
originally issues the APS (the "Date of Original Issue") and will be payable on
the APS on the dates described below. Dividends on the APS with respect to the
Initial Dividend Period shall be payable on the Initial Dividend Payment Date.
Following the Initial Dividend Payment Date, dividends on the APS will be
payable, at the option of the Trust, either (i) with respect to any 7-Day
Dividend Period and any Short Term Dividend Period of 35 or fewer days, on the
day next succeeding the last day thereof or (ii) with respect to any Short Term
Dividend Period of more than 35 days and with respect to any Long Term Dividend
Period, monthly on the first Business Day of each calendar month during such
Short Term Dividend Period or Long Term Dividend Period and on the day next
succeeding the last day thereof (each such date referred to in clause (i) or
(ii) being referred to herein as a "Normal Dividend Payment Date"), except that
if such Normal Dividend Payment Date is not a Business Day, the Dividend Payment
Date shall be the first Business Day next succeeding such Normal Dividend
Payment Date. Although any particular Dividend Payment Date may not occur on the
originally scheduled date because of the exceptions discussed above, the next
succeeding Dividend Payment Date, subject to such exceptions, will occur on the
next following originally scheduled date. If for any reason a Dividend Payment
Date cannot be fixed as described above, then the Board of Trustees shall fix
the Dividend Payment Date. The Board of Trustees by resolution prior to
authorization of a dividend by the Board of Trustees may change a Dividend
Payment Date if such change does not adversely affect the contract rights of the
holders of shares of APS set forth in the Charter. The Initial Dividend Period,
7-Day Dividend Periods and Special Dividend Periods are hereinafter sometimes
referred to as "Dividend Periods." Each dividend payment date determined as
provided above is hereinafter referred to as a "Dividend Payment Date."
Prior to each Dividend Payment Date, the Trust is required to deposit with
the Auction Agent sufficient funds for the payment of declared dividends. The
Trust does not intend to establish any reserves for the payment of dividends.
Each dividend will be paid to the record holder of the APS, which holder
is expected to be the nominee of the Securities Depository. See "Description of
APS--The Auction--Securities Depository." The Securities Depository will credit
the accounts of the Agent Members of the Existing Holders in accordance with the
Securities Depository's normal procedures which provide for payment in same-day
funds. The Agent Member of an Existing Holder will be responsible for holding or
disbursing such payments on the applicable Dividend Payment Date to such
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Existing Holder in accordance with the instructions of such Existing Holder.
Dividends in arrears for any past Dividend Period may be declared and paid at
any time, without reference to any regular Dividend Payment Date, to the nominee
of the Securities Depository. Any dividend payment made on the APS first shall
be credited against the earliest declared but unpaid dividends accumulated with
respect to such shares.
Holders of the APS will not be entitled to any dividends, whether payable
in cash, property or stock, in excess of full cumulative dividends except as
described under "Additional Dividends" and "Non-Payment Period; Late Charge"
below. No interest will be payable in respect of any dividend payment or
payments on the APS which may be in arrears.
The amount of cash dividends per share of APS payable (if declared) on the
Initial Dividend Payment Date, each 7-Day Dividend Period and each Dividend
Payment Date of each Short Term Dividend Period shall be computed by multiplying
the Applicable Rate for such Dividend Period by a fraction, the numerator of
which will be the number of days in such Dividend Period or part thereof that
such share was outstanding and for which dividends are payable on such Dividend
Payment Date and the denominator of which will be 365, multiplying the amount so
obtained by $25,000, and rounding the amount so obtained to the nearest cent.
During any Long Term Dividend Period, the amount of cash dividends per share of
APS payable (if declared) on any Dividend Payment Date shall be computed by
multiplying the Applicable Rate for such Dividend Period by a fraction, the
numerator of which will be such number of days in such part of such Dividend
Period that such share was outstanding and for which dividends are payable on
such Dividend Payment Date and the denominator of which will be 360, multiplying
the amount so obtained by $25,000, and rounding the amount so obtained to the
nearest cent.
NOTIFICATION OF DIVIDEND PERIOD. With respect to each Dividend Period that
is a Special Dividend Period, the Trust, at its sole option and to the extent
permitted by law, by telephonic and written notice (a "Request for Special
Dividend Period") to the Auction Agent and to each Broker-Dealer, may request
that the next succeeding Dividend Period for the APS will be a number of days
(other than seven), evenly divisible by seven, and not fewer than seven nor more
than 364 in the case of a Short Term Dividend Period or one whole year or more
but not greater than five years in the case of a Long Term Dividend Period,
specified in such notice, provided that the Trust may not give a Request for
Special Dividend Period (and any such request shall be null and void) unless,
for any Auction occurring after the initial Auction, Sufficient Clearing Bids
were made in the last occurring Auction and unless full cumulative dividends,
any amounts due with respect to redemptions, and any Additional Dividends
payable prior to such date have been paid in full. Such Request for Special
Dividend Period, in the case of a Short Term Dividend Period, shall be given on
or prior to the second Business Day but not more than seven Business Days prior
to an Auction Date for the APS and, in the case of a Long Term Dividend Period,
shall be given on or prior to the second Business Day but not more than 28 days
prior to an Auction Date for the APS. Upon receiving such Request for Special
Dividend Period, the Broker-Dealers jointly shall determine whether, given the
factors set forth below, it is advisable that the Trust issue a Notice of
Special Dividend Period as contemplated by such Request for Special Dividend
Period and the Optional Redemption Price of the APS during such Special Dividend
Period and the Specific Redemption Provisions and shall give the Trust and the
Auction Agent written notice (a "Response") of such determination by no later
than the second Business Day prior to such Auction Date. In making such
determination, the Broker-Dealers will consider (i) existing short-term and
long-term market rates and indices of such short-term and long-term rates, (ii)
existing market supply and demand for short-term and long-term securities, (iii)
existing yield curves for short-term and long-term securities comparable to the
APS, (iv) industry and financial conditions which may affect the APS, (v) the
investment objective of the Trust and (vi) the Dividend Periods and dividend
rates at which current and potential beneficial holders of the APS would remain
or become beneficial holders.
If the Broker-Dealers shall not give the Trust and the Auction Agent a
Response by such second Business Day or if the Response states that given the
factors set forth above it is not advisable that the Trust give a Notice of
Special Dividend Period for the APS, the Trust may not give a Notice of Special
Dividend Period in respect of such Request for Special Dividend Period. In the
event the Response indicates that it is advisable that the Trust give a Notice
of Special Dividend Period for the APS, the Trust, by no later than the second
Business Day prior to such Auction Date, may give a notice (a "Notice of Special
Dividend Period") to the Auction Agent, the Securities Depository and each
Broker-Dealer, which notice will specify (i) the duration of the Special
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Dividend Period, (ii) the Optional Redemption Price as specified in the related
Response and (iii) the Specific Redemption Provisions, if any, as specified in
the related Response. The Trust also shall provide a copy of such Notice of
Special Dividend Period to S&P. The Trust shall not give a Notice of Special
Dividend Period, and, if such Notice of Special Dividend Period shall have been
given already, shall give telephonic and written notice of its revocation (a
"Notice of Revocation") to the Auction Agent, each Broker-Dealer, and the
Securities Depository on or prior to the Business Day prior to the relevant
Auction Date if (x) either the 1940 Act APS Asset Coverage is not satisfied or
the Trust shall fail to maintain S&P Eligible Assets with an aggregate
Discounted Value at least equal to the APS Basic Maintenance Amount, on each of
the two Valuation Dates immediately preceding the Business Day prior to the
relevant Auction Date on an actual basis and on a pro forma basis giving effect
to the proposed Special Dividend Period (using as a pro forma dividend rate with
respect to such Special Dividend Period the dividend rate which the
Broker-Dealers shall advise the Trust is an approximately equal rate for
securities similar to the APS with an equal dividend period), (y) sufficient
funds for the payment of dividends payable on the immediately succeeding
Dividend Payment Date have not been irrevocably deposited with the Auction Agent
by the close of business on the third Business Day preceding the related Auction
Date or (z) the Broker-Dealers jointly advise the Trust that, after
consideration of the factors listed above, they have concluded that it is
advisable to give a Notice of Revocation. The Trust also shall provide a copy of
such Notice of Revocation to S&P. If the Trust is prohibited from giving a
Notice of Special Dividend Period as a result of the factors enumerated in
clause (x), (y) or (z) above or if the Trust gives a Notice of Revocation with
respect to a Notice of Special Dividend Period, the next succeeding Dividend
Period for that series will be a 7-Day Dividend Period. In addition, in the
event Sufficient Clearing Bids are not made in any Auction or an Auction is not
held for any reason, the next succeeding Dividend Period will be a 7-Day
Dividend Period, and the Trust may not again give a Notice of Special Dividend
Period (and any such attempted notice shall be null and void) until Sufficient
Clearing Bids have been made in an Auction with respect to a 7-Day Dividend
Period.
DETERMINATION OF DIVIDEND RATE. The dividend rate on the APS during the
period from and including the Date of Original Issue for the APS to but
excluding the Initial Dividend Payment Date for the APS (the "Initial Dividend
Period") will be the rate per annum set forth on the inside cover page hereof.
Commencing on the Initial Dividend Payment Date for the APS, the Applicable Rate
on the APS for each Subsequent Dividend Period, which Subsequent Dividend Period
shall be a period commencing on and including a Dividend Payment Date and ending
on and including the calendar day prior to the next Dividend Payment Date (or
last Dividend Payment Date in a Dividend Period if there is more than one
Dividend Payment Date), shall be equal to the rate per annum that results from
the Auction with respect to such Subsequent Dividend Period. The Initial
Dividend Period and Subsequent Dividend Period for the APS is referred to herein
as a "Dividend Period." Cash dividends shall be calculated as set forth above
under "Dividends--General."
NON-PAYMENT PERIOD; LATE CHARGE. A Non-Payment Period will commence if the
Trust fails to (i) declare, prior to the close of business on the second
Business Day preceding any Dividend Payment Date, for payment on or (to the
extent permitted as described below) within three Business Days after such
Dividend Payment Date to the persons who held such shares as of 12:00 noon, New
York City time, on the Business Day preceding such Dividend Payment Date, the
full amount of any dividend on the APS payable on such Dividend Payment Date or
(ii) deposit, irrevocably in trust, in same-day funds, with the Auction Agent by
12:00 noon, New York 40 City time, (A) on such Dividend Payment Date the full
amount of any cash dividend on such shares (if declared) payable on such
Dividend Payment Date or (B) on any redemption date for the APS called for
redemption, the Mandatory Redemption Price per share of such APS or, in the case
of an optional redemption, the Optional Redemption Price per share. Such
Non-Payment Period will consist of the period commencing on and including the
aforementioned Dividend Payment Date or redemption date, as the case may be, and
ending on and including the Business Day on which, by 12:00 noon, New York City
time, all unpaid cash dividends and unpaid redemption prices shall have been so
deposited or otherwise shall have been made available to the applicable holders
in same-day funds, provided that a Non-Payment Period for the APS will not end
unless the Trust shall have given at least five days' but no more than 30 days'
written notice of such deposit or availability to the Auction Agent, the
Securities Depository and all holders of the APS of such series. Notwithstanding
the foregoing, the failure by the Trust to deposit funds as provided for by
clauses (ii) (A) or (ii) (B) above within three Business Days after any Dividend
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Payment Date or redemption date, as the case may be, in each case to the extent
contemplated below, shall not constitute a "Non-Payment Period." The Applicable
Rate for each Dividend Period for the APS of any series, commencing during a
Non-Payment Period, will be equal to the Non-Payment Period Rate; and each
Dividend Period commencing after the first day of, and during, a Non-Payment
Period shall be a 7-Day Dividend Period. Any dividend on the APS due on any
Dividend Payment Date for such shares (if, prior to the close of business on the
second Business Day preceding such Dividend Payment Date, the Trust has declared
such dividend payable on such Dividend Payment Date to the persons who held such
shares as of 12:00 noon, New York City time, on the Business Day preceding such
Dividend Payment Date) or redemption price with respect to such shares not paid
to such persons when due may be paid to such persons in the same form of funds
by 12:00 noon, New York City time, on any of the first three Business Days after
such Dividend Payment Date or due date, as the case may be, provided that such
amount is accompanied by a late charge calculated for such period of non-payment
at the Non-Payment Period Rate applied to the amount of such non-payment based
on the actual number of days comprising such period divided by 365. In the case
of a willful failure of the Trust to pay a dividend on a Dividend Payment Date
or to redeem any APS on the date set for such redemption, the preceding sentence
shall not apply and the Applicable Rate for the Dividend Period commencing
during the Non-Payment Period resulting from such failure shall be the
Non-Payment Period Rate. For the purposes of the foregoing, payment to a person
in same-day funds on any Business Day at any time will be considered equivalent
to payment to that person in New York Clearing House (next-day) funds at the
same time on the preceding Business Day, and any payment made after 12:00 noon,
New York City time, on any Business Day shall be considered to have been made
instead in the same form of funds and to the same person before 12:00 noon, New
York City time, on the next Business Day. The Non-Payment Period Rate initially
will be 200% of the applicable Reference Rate (or 275% of such rate if the Trust
has provided notification to the Auction Agent prior to the Auction establishing
the Applicable Rate for any dividend that net capital gains or other taxable
income will be included in such dividend on the APS), provided that the Board of
Trustees of the Trust shall have the authority to adjust, modify, alter or
change from time to time the initial Non-Payment Period Rate if the Board of
Trustees of the Trust determines and S&P (or any Substitute Rating Agency in
lieu of S&P in the event such party shall not rate the APS) advises the Trust in
writing that such adjustment, modification, alteration or change will not
adversely affect its then-current rating on the APS.
RESTRICTIONS ON DIVIDENDS AND OTHER PAYMENTS. Under the 1940 Act, the
Trust may not declare dividends or make other distributions on Common Shares or
purchase any such shares if, at the time of the declaration, distribution or
purchase, as applicable (and after giving effect thereto), asset coverage (as
defined in the 1940 Act) with respect to the outstanding APS would be less than
200% (or such other percentage as in the future may be required by law). The
Trust estimates that, based on the composition of its portfolio at _____, 1999,
asset coverage with respect to the APS would be approximately ____% immediately
after the issuance of the APS offered hereby. Under the Code, the Trust, among
other things, must distribute at least 90% of its investment company taxable
income each year in order to maintain its qualification for tax treatment as a
regulated investment company. The foregoing limitations on dividends,
distributions and purchases in certain circumstances may impair the Trust's
ability to maintain such qualification. See "Taxes."
Upon any failure to pay dividends on the APS for two years or more, the
holders of the APS will acquire certain additional voting rights. See "Voting
Rights" below. Such rights shall be the exclusive remedy of the holders of APS
upon any failure to pay dividends on shares of the Trust.
For so long as any APS are outstanding, the Trust will not declare, pay or
set apart for payment any dividend or other distribution (other than a dividend
or distribution paid in shares of, or options, warrants or rights to subscribe
for or purchase, Common Shares or other stock, if any, ranking junior to the APS
as to dividends or upon liquidation) in respect of Common Shares or any other
stock of the Trust ranking junior to or on a parity with the APS as to dividends
or upon liquidation, or call for redemption, redeem, purchase or otherwise
acquire for consideration any shares of Common Shares or any other such junior
stock (except by conversion into or exchange for stock of the Trust ranking
junior to APS as to dividends and upon liquidation) or any such parity stock
(except by conversion into or exchange for stock of the Trust ranking junior to
or on a parity with APS as to dividends and upon liquidation), unless (A)
immediately after such transaction, the Trust would have S&P Eligible Assets
with an aggregate Discounted Value equal to or greater than the APS Basic
Maintenance Amount, and the 1940 Act APS Asset Coverage (see "Asset Maintenance"
and "Redemption" below) would be satisfied, (B) full cumulative dividends on the
APS due on or prior to the date of the transaction have been declared and paid
or shall have been declared and sufficient funds for the payment thereof
deposited with the Auction Agent, (C) any Additional Dividend required to be
paid on or before the date of such declaration or payment has been paid and (D)
the Trust has redeemed the full number of APS required to be redeemed by any
provision for mandatory redemption contained in the Amended By-Laws.
ADDITIONAL DIVIDENDS. If the Trust retroactively allocates any net capital
gains or other income subject to regular Federal income taxes to the APS without
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having given advance notice thereof to the Auction Agent as described above
under "The Auction--Auction Date; Advance Notice of Allocation of Taxable
Income; Inclusion of Taxable Income in Dividends," which may only happen when
such allocation is made as a result of the redemption of all or a portion of the
outstanding APS or the liquidation of the Trust (the amount of such allocation
referred to herein as a "Retroactive Taxable Allocation"), the Trust, within 90
days (and generally within 60 days) after the end of the Trust's fiscal year for
which a Retroactive Taxable Allocation is made, will provide notice thereof to
the Auction Agent and to each holder of shares (initially IBT as nominee of the
Securities Depository) during such fiscal year at such holder's address as the
same appears or last appeared on the stock books of the Trust. The Trust, within
30 days after such notice is given to the Auction Agent, will pay to the Auction
Agent (who then will distribute to such holders of the APS), out of funds
legally available therefor, an amount equal to the aggregate Additional Dividend
(as defined below) with respect to all Retroactive Taxable Allocations made to
such holders during the fiscal year in question. See "Taxes."
An "Additional Dividend" means payment to a present or former holder of
the APS of an amount which, when taken together with the aggregate amount of
Retroactive Taxable Allocations made to such holder with respect to the fiscal
year in question, would cause such holder's dividends in dollars (after Federal
income tax consequences) from the aggregate of both the Retroactive Taxable
Allocations and the Additional Dividend to be equal to the dollar amount of the
dividends which would have been received by such holder if the amount of the
aggregate Retroactive Taxable Allocations had been excludable from the gross
income of such holder. Such Additional Dividend shall be calculated (i) without
consideration being given to the time value of money; (ii) assuming that no
holder of APS is subject to the Federal alternative minimum tax with respect to
dividends received from the Trust; and (iii) assuming that each Retroactive
Taxable Allocation would be taxable in the hands of each holder of APS at the
greater of: (a) the maximum marginal regular Federal individual income tax rate
applicable to ordinary income or capital gains depending on the taxable
character of the distribution (including any surtax); or (b) the maximum regular
Federal corporate income tax rate applicable to ordinary income or capital gains
depending on the taxable character of the distribution (disregarding in both (a)
and (b) the effect of any state and local taxes and the phase out of, or
provision limiting, personal exemptions, itemized deductions, or the benefit of
lower tax brackets). Although the Trust generally intends to designate any
Additional Dividend as an exempt-interest dividend to the extent permitted by
applicable law, it is possible that all or a portion of any Additional Dividend
will be taxable to the recipient thereof. See "Taxes--Tax Treatment of
Additional Dividends." The Trust will not pay a further Additional Dividend with
respect to any taxable portion of an Additional Dividend.
If the Trust does not give advance notice of the amount of taxable income
to be included in a dividend on the APS in the related Auction, as described
above under "The Auction--Auction Date; Advance Notice of Allocation of Taxable
Income; Inclusion of Taxable Income in Dividends," the Trust may include such
taxable income in a dividend on the APS if it increases the dividend by an
additional amount calculated as if such income were a Retroactive Taxable
Allocation and the additional amount were an Additional Dividend and notifies
the Auction Agent of such inclusion at least five days prior to the applicable
Dividend Payment Date.
ASSET MAINTENANCE
The Trust will be required to satisfy two separate asset maintenance
requirements under the terms of the Amended By-Laws. These requirements are
summarized below.
1940 ACT APS ASSET COVERAGE. The Trust will be required under the Amended
By-Laws to maintain, with respect to the APS, as of the last Business Day of
each month in which any APS are outstanding, asset coverage of at least 200%
with respect to senior securities which are beneficial interests in the Trust,
including the APS (or such other asset coverage as in the future may be
specified in or under the 1940 Act as the minimum asset coverage for senior
securities which are beneficial interests of a closed-end investment company as
a condition of paying dividends on its common stock) ("1940 Act APS Asset
Coverage"). If the Trust fails to maintain 1940 Act APS Asset Coverage and such
failure is not cured as of the last Business Day of the following month (the
"1940 Act Cure Date"), the Trust will be required in certain circumstances to
redeem certain of the APS. See "Redemption" below.
The 1940 Act APS Asset Coverage immediately following the issuance of APS
offered hereby [AFTER GIVING EFFECT TO THE DEDUCTION OF THE SALES LOAD AND
OFFERING EXPENSES FOR THE APS] will be computed as follows:
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Value of Trust assets less
liabilities not constituting senior
securities
- ----------------------- = $----------- = %
Senior securities representing $
indebtedness plus liquidation value
of the shares of APS
APS BASIC MAINTENANCE AMOUNT. So long as the APS are outstanding, the
Trust will be required under the Amended By-Laws to maintain as of each Business
Day (a "Valuation Date") S&P Eligible Assets and having in the aggregate a
Discounted Value at least equal to the APS Basic Maintenance Amount. If the
Trust fails to meet such requirement as of any Valuation Date and such failure
is not cured on or before the sixth Business Day after such Valuation Date (the
"APS Basic Maintenance Cure Date"), the Trust will be required in certain
circumstances to redeem certain of the APS. Upon any failure to maintain the
required Discounted Value, the Trust will use its best efforts to alter the
composition of its portfolio to retain a Discounted Value at least equal to the
APS Basic Maintenance Amount on or prior to the APS Basic Maintenance Cure Date.
See "Redemption."
The APS Basic Maintenance Amount as of any Valuation Date is defined as
the dollar amount equal to (i) the sum of (A) the product of the number of APS
outstanding on such Valuation Date multiplied by the sum of $25,000 and any
applicable redemption premium attributable to the designation of a Premium Call
Period; (B) the aggregate amount of cash dividends (whether or not earned or
declared) that will have accumulated for each APS outstanding to (but not
including) the end of the current Dividend Period that follows such Valuation
Date in the event the then-current Dividend Period will end within 49 calendar
days of such Valuation Date or through the 49th day after such Valuation Date in
the event the then-current Dividend Period for the APS will not end within 49
calendar days of such Valuation Date; (C) in the event the then-current Dividend
Period will end within 49 calendar days of such Valuation Date, the aggregate
amount of cash dividends that would accumulate at the Maximum Applicable Rate
applicable to a Dividend Period of 28 or fewer days on any APS outstanding from
the end of such Dividend Period through the 49th day after such Valuation Date,
multiplied by the S&P Volatility Factor determined from time to time by S&P
(except that if such Valuation Date occurs during a Non-Payment Period, the cash
dividend for purposes of calculation would accumulate at the then-current
Non-Payment Period Rate); (D) the amount of anticipated Trust expenses for the
90 days subsequent to such Valuation Date (including any premiums payable with
respect to a Policy); (E) the amount of the Trust's Maximum Potential Additional
Dividend Liability as of such Valuation Date; and (F) any current liabilities as
of such Valuation Date to the extent not reflected in any of (i) (A) through (i)
(E) (including, without limitation, and immediately upon determination, any
amounts due and payable by the Trust pursuant to repurchase agreements, any
amounts payable for Municipal Obligations purchased as of such Valuation Date)
less (ii) either (A) the Discounted Value of any Trust assets, or (B) the face
value of any of the Trust's assets if such assets mature prior to or on the date
of redemption of the APS or payment of a liability and are either securities
issued or guaranteed by the United States Government or Deposit Securities, in
both cases irrevocably deposited by the Trust for the payment of the amount
needed to redeem the APS subject to redemption or to satisfy any of (i) (B)
through (i) (F). For purposes of the foregoing, "Maximum Potential Additional
Dividend Liability," as of any Valuation Date, means the aggregate amount of
Additional Dividends that would be due if the Trust were to make Retroactive
Taxable Allocations, with respect to any fiscal year, estimated based upon
dividends paid and the amount of undistributed realized net capital gains and
other taxable income earned by the Trust, as of the end of the calendar month
immediately preceding such Valuation Date and assuming such Additional Dividends
are fully taxable.
The Discount Factors and guidelines for determining the market value of
the Trust's portfolio holdings have been based on criteria established in
connection with rating the APS. These factors include, but are not limited to,
the sensitivity of the market value of the relevant asset to changes in interest
rates, the liquidity and depth of the market for the relevant asset, the credit
quality of the relevant asset (for example, the lower the rating of a debt
obligation, the higher the related discount factor) and the frequency with which
the relevant asset is marked to market. In no event shall the Discounted Value
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of any asset of the Trust exceed its unpaid principal balance or face amount as
of the date of calculation. The Discount Factor relating to any asset of the
Trust and the APS Basic Maintenance Amount, the assets eligible for inclusion in
the calculation of the Discounted Value of the Trust's portfolio and certain
definitions and methods of calculation relating thereto may be changed from time
to time by the Trust, without shareholder approval, but only in the event the
Trust receives written confirmation from S&P, and any Substitute Rating Agency
that any such changes would not impair the ratings then assigned to the APS by
S&P or any Substitute Rating Agency.
On or before the third Business Day after a Valuation Date on which the
Trust fails to maintain S&P Eligible Assets with an aggregate Discounted Value
equal to or greater than the APS Basic Maintenance Amount, the Trust is required
to deliver to the Auction Agent and S&P a report with respect to the calculation
of the APS Basic Maintenance Amount and the value of its portfolio holdings as
of the date of such failure (an "APS Basic Maintenance Report"). Additionally,
on or before the third Business Day after the first day of a Special Dividend
Period, the Trust will deliver an APS Basic Maintenance Report to S&P and the
Auction Agent. The Trust also will deliver an APS Basic Maintenance Report as of
the last Business Day of the last month of each fiscal quarter of the Trust on
or before the third Business Day after such day. Within ten Business Days after
delivery of such report relating to the last Business Day of the last month of
each fiscal quarter of the Trust, the Trust will deliver a letter prepared by
the Trust's independent accountants regarding the accuracy of the calculations
made by the Trust in its most recent APS Basic Maintenance Report. Also, on or
before 5:00 p.m., New York City time, on the first Business Day after shares of
Common Shares are repurchased by the Trust, the Trust will complete and deliver
to S&P an APS Basic Maintenance Report as of the close of business on such date
that Common Shares is repurchased. If any such letter prepared by the Trust's
independent accountants shows that an error was made in the most recent APS
Basic Maintenance Report, the calculation or determination made by the Trust's
independent accountants will be conclusive and binding on the Trust.
REDEMPTION
OPTIONAL REDEMPTION. To the extent permitted under the 1940 Act and under
Massachusetts law, upon giving a Notice of Redemption, as provided below, the
Trust, at its option, may redeem the APS, in whole or in part, out of funds
legally available therefor, at the Optional Redemption Price per share on any
Dividend Payment Date; provided that no APS may be redeemed at the option of the
Trust during (a) the Initial Dividend Period with respect to the APS or (b) a
Non-Call Period to which such share is subject. "Optional Redemption Price"
means $25,000 per share of APS plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) to the date fixed for redemption
plus any applicable redemption premium, if any, attributable to the designation
of a Premium Call Period. In addition, holders of APS may be entitled to receive
Additional Dividends in the event of redemption of such APS to the extent
provided herein. See "Description of APS--Dividends--Additional Dividends." The
Trust has the authority to redeem the APS for any reason and may redeem all or
part of the outstanding APS if it anticipates that the Trust's leveraged capital
structure will result in a lower rate of return to holders of Common Shares for
any significant period of time than that obtainable if the Common Shares were
unleveraged.
MANDATORY REDEMPTION. The Trust will be required to redeem, out of funds
legally available therefor, at the Mandatory Redemption Price per share, the APS
to the extent permitted under the 1940 Act and Massachusetts law, on a date
fixed by the Board of Trustees, if the Trust fails to maintain S&P Eligible
Assets with an aggregate Discounted Value equal to or greater than the APS Basic
Maintenance Amount or to satisfy the 1940 Act APS Asset Coverage and such
failure is not cured on or before the APS Basic Maintenance Cure Date or the
1940 Act Cure Date (herein collectively referred to as a "Cure Date"), as the
case may be. "Mandatory Redemption Price" of APS means $25,000 per share plus an
amount equal to accumulated but unpaid dividends (whether or not earned or
declared) to the date fixed for redemption. In addition, holders of APS may be
entitled to receive Additional Dividends in the event of redemption of such APS
to the extent provided herein. See "Description of APS--Dividends--Additional
Dividends." The number of APS to be redeemed will be equal to the lesser of (a)
the minimum number of APS the redemption of which, if deemed to have occurred
immediately prior to the opening of business on the Cure Date, together with all
other shares of the Preferred Shares subject to redemption or retirement, would
result in the Trust having S&P Eligible Assets each with an aggregate Discounted
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Value equal to or greater than the APS Basic Maintenance Amount or satisfaction
of the 1940 Act APS Asset Coverage, as the case may be, on such Cure Date
(provided that, if there is no such minimum number of shares the redemption of
which would have such result, all shares of APS then outstanding will be
redeemed), and (b) the maximum number of APS, together with all other shares of
Preferred Shares subject to redemption or retirement, that can be redeemed out
of funds expected to be legally available therefor on such redemption date. In
determining the number of APS required to be redeemed in accordance with the
foregoing, the Trust shall allocate the number required to be redeemed which
would result in the Trust having S&P Eligible Assets with an aggregate
Discounted Value equal to or greater than the APS Basic Maintenance Amount or
satisfaction of the 1940 Act APS Asset Coverage, as the case may be, pro rata
among shares of APS and other Preferred Shares subject to redemption pursuant to
provisions similar to those set forth below; provided that, shares of APS which
may not be redeemed at the option of the Trust due to the designation of a
Non-Call Period applicable to such shares (A) will be subject to mandatory
redemption only to the extent that other shares are not available to satisfy the
number of shares required to be redeemed and (B) will be selected for redemption
in an ascending order of outstanding number of days in the Non-Call Period (with
shares with the lowest number of days to be redeemed first) and by lot in the
event of shares having an equal number of days in such Non-Call Period. The
Trust is required to effect such a mandatory redemption not later than 35 days
after such Cure Date, except that if the Trust does not have funds legally
available for the redemption of all of the required number of shares of APS
which are subject to mandatory redemption or the Trust otherwise is unable to
effect such redemption on or prior to 35 days after such Cure Date, the Trust
will redeem those APS which it was unable to redeem on the earliest practicable
date on which it is able to effect such redemption.
GENERAL. If the APS are to be redeemed, a notice of redemption will be
mailed to each record holder of such APS (initially IBT as nominee of the
Securities Depository) and to the Auction Agent not less than 17 nor more than
30 days prior to the date fixed for the redemption thereof. Each notice of
redemption will include a statement setting forth: (i) the redemption date, (ii)
the aggregate number of APS to be redeemed, (iii) the redemption price, (iv) the
place or places where APS are to be surrendered for payment of the redemption
price, (v) a statement that dividends on the shares to be redeemed will cease to
accumulate on such redemption date (except that holders may be entitled to
Additional Dividends) and (vi) the provision of the Amended By-Laws pursuant to
which such shares are being redeemed. The notice also will be published in The
Wall Street Journal. No defect in the notice of redemption or in the mailing or
publication thereof will affect the validity of the redemption proceedings,
except as required by applicable law.
In the event that less than all of the outstanding APS are to be redeemed,
the shares to be redeemed will be selected by lot or such other method as the
Trust shall deem fair and equitable, and the results thereof will be
communicated to the Auction Agent. The Auction Agent will give notice to the
Securities Depository, whose nominee will be the record holder of all APS, and
the Securities Depository will determine the number of shares to be redeemed
from the account of the Agent Member of each Existing Holder. Each Agent Member
will determine the number of shares to be redeemed from the account of each
Existing Holder for which it acts as agent. An Agent Member may select for
redemption shares from the accounts of some Existing Holders without selecting
for redemption any shares from the accounts of other Existing Holders.
Notwithstanding the foregoing, if neither the Securities Depository nor its
nominee is the record holder of all of the APS series, the particular shares to
be redeemed shall be selected by the Trust by lot or by such other method as the
Trust shall deem fair and equitable.
If the Trust gives notice of redemption, and concurrently or thereafter
deposits in trust with the Auction Agent, or segregates in an account at the
Trust's custodian bank for the benefit of the Auction Agent, Deposit Securities
(with a right of substitution) having an aggregate Discounted Value (utilizing
an S&P Exposure Period of 22 Business Days) equal to the redemption payment for
the APS as to which notice of redemption has been given, with irrevocable
instructions and authority to pay the redemption price to the record holders
thereof, then upon the date of such deposit or, if no such deposit is made, upon
such date fixed for redemption (unless the Trust shall default in making payment
of the redemption price), all rights of the holders of such shares called for
redemption will cease and terminate, except the right of such holders to receive
the redemption price thereof and any Additional Dividends, but without interest,
and such shares no longer will be deemed to be outstanding. The Trust will be
entitled to receive, from time to time, the interest, if any, earned on such
Deposit Securities deposited with the Auction Agent, and the holders of any
shares so redeemed will have no claim to any such interest. Any funds so
deposited which are unclaimed at the end of one year from such redemption date
will be repaid, upon demand, to the Trust, after which the holders of the APS of
such series so called for redemption may look only to the Trust for payment
thereof.
So long as any APS are held of record by the nominee of the Securities
Depository (initially _____________), the redemption price for such shares will
be paid on the redemption date to the nominee of the Securities Depository. The
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Securities Depository's normal procedures now provide for it to distribute the
amount of the redemption price to Agent Members who, in turn, are expected to
distribute such funds to the persons for whom they are acting as agent.
Notwithstanding the provisions for redemption described above, no APS
shall be subject to optional redemption (i) unless all dividends in arrears on
the outstanding APS, and all capital stock of the Trust ranking on a parity with
the APS with respect to the payment of dividends or upon liquidation, have been
or are being contemporaneously paid or declared and set aside for payment and
(ii) if redemption thereof would result in the Trust's failure to maintain S&P
Eligible Assets with an aggregate Discounted Value equal to or greater than the
APS Basic Maintenance Amount.
LIQUIDATION RIGHTS
Upon any liquidation, dissolution or winding up of the Trust, whether
voluntary or involuntary, the holders of APS will be entitled to receive, out of
the assets of the Trust available for distribution to shareholders, before any
distribution or payment is made upon any Common Shares or any other shares of
beneficial interest of the Trust ranking junior in right of payment upon
liquidation of APS, $25,000 per share together with the amount of any dividends
accumulated but unpaid (whether or not earned or declared) thereon to the date
of distribution, and after such payment the holders of APS will be entitled to
no other payments except for any Additional Dividends. If such assets of the
Trust shall be insufficient to make the full liquidation payment on outstanding
APS and liquidation payments on any other outstanding class or series of
Preferred Shares of the Trust ranking on a parity with the APS as to payment
upon liquidation, then such assets will be distributed among the holders of APS
and the holders of shares of such other class or series ratably in proportion to
the respective preferential amounts to which they are entitled. After payment of
the full amount of liquidation distribution to which they are entitled, the
holders of APS will not be entitled to any further participation in any
distribution of assets by the Trust except for any Additional Dividends. A
consolidation, merger or share exchange of the Trust with or into any other
entity or entities or a sale, whether for cash, shares of stock, securities or
properties, of all or substantially all or any part of the assets of the Trust
shall not be deemed or construed to be a liquidation, dissolution or winding up
of the Trust.
VOTING RIGHTS
Except as otherwise indicated in this Prospectus and except as otherwise
required by applicable law, holders of APS will be entitled to one vote per
share on each matter submitted to a vote of shareholders and will vote together
with holders of Common Shares and other Preferred Shares as a single class.
In connection with the election of the Trust's trustees, holders of the
APS and any other Preferred Shares, voting as a separate class, shall be
entitled at all times to elect two of the Trust's trustees, and the remaining
trustees will be elected by holders of Common Shares and APS and any other
Preferred Shares, voting together as a single class. In addition, if at any time
dividends on outstanding APS shall be unpaid in an amount equal to at least two
full years' dividends thereon or if at any time holders of any shares of
Preferred Shares are entitled, together with the holders of APS, to elect a
majority of the trustees of the Trust under the 1940 Act, then the number of
trustees constituting the Board of Trustees automatically shall be increased by
the smallest number that, when added to the two trustees elected exclusively by
the holders of APS and any other Preferred Shares as described above, would
constitute a majority of the Board of Trustees as so increased by such smallest
number, and at a special meeting of shareholders which will be called and held
as soon as practicable, and at all subsequent meetings at which trustees are to
be elected, the holders of the APS and any other Preferred Shares, voting as a
separate class, will be entitled to elect the smallest number of additional
trustees that, together with the two trustees which such holders in any event
will be entitled to elect, constitutes a majority of the total number of
trustees of the Trust as so increased. The terms of office of the persons who
are trustees at the time of that election will continue. If the Trust thereafter
shall pay, or declare and set apart for payment in full, all dividends payable
on all outstanding APS and any other Preferred Shares for all past Dividend
Periods, the additional voting rights of the holders of APS and any other
Preferred Shares as described above shall cease, and the terms of office of all
of the additional trustees elected by the holders of APS and any other Preferred
Shares (but not of the trustees with respect to whose election the holders of
Common Shares were entitled to vote or the two trustees the holders of APS and
any other Preferred Shares have the right to elect in any event) will terminate
automatically.
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The affirmative vote of a majority of the votes entitled to be cast by
holders of outstanding APS and any other Preferred Shares, voting as a separate
class, will be required to (i) authorize, create or issue any class or series of
stock ranking prior to the APS or any other series of Preferred Shares with
respect to the payment of dividends or the distribution of assets on
liquidation; provided, however, that no vote is required to authorize the
issuance of another class of Preferred Shares which are substantially identical
in all respects to the APS or (ii) amend, alter or repeal the provisions of the
Declaration of Trust or the Amended By-Laws, whether by merger, consolidation or
otherwise, so as to adversely affect any of the contract rights expressly set
forth in the Declaration of Trust or the Amended By-Laws of holders of APS or
any other Preferred Shares. To the extent permitted under the 1940 Act, in the
event shares of more than one series of APS are outstanding, the Trust shall not
approve any of the actions set forth in clause (i) or (ii) which adversely
affects the contract rights expressly set forth in the Declaration of Trust of a
holder of shares of a series of APS differently than those of a holder of shares
of any other series of APS without the affirmative vote of at least a majority
of votes entitled to be cast by holders of the shares of APS of each series
adversely affected and outstanding at such time (each such adversely affected
series voting separately as a class). The Board of Trustees, however, without
shareholder approval, may amend, alter or repeal any or all of the various
rating agency guidelines described herein in the event the Trust receives
confirmation from the rating agencies that any such amendment, alteration or
repeal would not impair the ratings then assigned to the APS. Unless a higher
percentage is provided for under "Description of Capital Stock--Certain
Provisions in the Declaration of Trust," the affirmative vote of a majority of
the votes entitled to be cast by holders of outstanding APS and any other
Preferred Shares, voting as a separate class, will be required to approve any
plan of reorganization (including bankruptcy proceedings) adversely affecting
such shares or any action requiring a vote of security holders under Section
13(a) of the 1940 Act including, among other things, changes in the Trust's
investment objective or changes in the investment restrictions described as
fundamental policies under "Investment Objective and Policies." The class vote
of holders of shares of APS and any other Preferred Shares described above in
each case will be in addition to a separate vote of the requisite percentage of
Common Shares and APS and any other Preferred Shares, voting together as a
single class, necessary to authorize the action in question.
The foregoing voting provisions will not apply to the APS if, at or prior
to the time when the act with respect to which such vote otherwise would be
required shall be effected, such shares shall have been (i) redeemed or (ii)
called for redemption and sufficient funds shall have been deposited in trust to
effect such redemption.
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MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The management of the Trust, including general supervision of the duties
performed by the Adviser under the Advisory Agreement, is the responsibility of
the Trust's Board of Trustees under the laws of The Commonwealth of
Massachusetts.
THE ADVISER
Eaton Vance Management acts as the Trust's investment adviser under an
Investment Advisory Agreement ("Advisory Agreement"). The Adviser's principal
office is located at 24 Federal Street, Boston, MA 02110. Eaton Vance, its
affiliates and predecessor companies have been managing assets of individuals
and institutions since 1924 and of investment companies since 1931. Eaton Vance
(or its affiliates) currently serves as the investment adviser to investment
companies and various individual and institutional clients with combined assets
under management of over $31 billion, of which approximately $28 billion is in
investment companies. Eaton Vance is a wholly-owned subsidiary of Eaton Vance
Corp., a publicly held holding company which through its subsidiaries and
affiliates engages primarily in investment management, administration and
marketing activities.
Eaton Vance employs 24 personnel in its municipal bond department,
including six portfolio managers, two traders and eleven credit analysts. Eaton
Vance was one of the first advisory firms to manage a registered municipal bond
investment company, and has done so continuously since 1978. Eaton Vance
currently manages 3 national municipal investment companies, 33 single state
municipal investment companies, 10 limited maturity municipal investment
companies and 1 money market municipal investment company, with assets of about
$8 billion.
Under the general supervision of the Trust's Board of Trustees, the
Adviser will carry out the investment and reinvestment of the assets of the
Trust, will furnish continuously an investment program with respect to the
Trust, will determine which securities should be purchased, sold or exchanged,
and will implement such determinations. The Adviser will furnish to the Trust
investment advice and office facilities, equipment and personnel for servicing
the investments of the Trust. The Adviser will compensate all Trustees and
officers of the Trust who are members of the Adviser's organization and who
render investment services to the Trust, and will also compensate all other
Adviser personnel who provide research and investment services to the Trust. In
return for these services, facilities and payments, the Trust has agreed to pay
the Adviser as compensation under the Advisory Agreement a fee in the amount of
.70% of the average weekly gross assets of the Trust. Gross assets of the Trust
shall be calculated by deducting accrued liabilities of the Trust not including
the amount of any Preferred Shares outstanding.
Thomas M. Metzold is the portfolio manager of the Trust and is responsible
for day-to-day management of the Trust's investments. Mr. Metzold has been an
employee of Eaton Vance since 1987 and a Vice President of Eaton Vance since
1991. Mr. Metzold, a Chartered Financial Analyst, is a member of the Boston
Security Analysts Society, the Association for Investment Management & Research,
the Boston Municipal Analysts Forum, and the National Federation of Municipal
Analysts. He currently manages four municipal bond investment companies with
combined assets of over $2.8 billion.
The Trust and the Adviser have adopted Codes of Ethics relating to
personal securities transactions. The Codes permit Adviser personnel to invest
in securities (including securities that may be purchased or held by the Trust)
for their own accounts, subject to certain pre-clearance, reporting and other
restrictions and procedures contained in such Codes.
The Trust has engaged Eaton Vance to act as its administrator under an
Administration Agreement (the "Administration Agreement"). Under the
Administration Agreement, Eaton Vance is responsible for managing the business
affairs of the Trust, subject to the supervision of the Trust's Board of
Trustees. Eaton Vance will furnish to the Trust all office facilities, equipment
and personnel for administering the affairs of the Trust. Eaton Vance's
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administrative services include recordkeeping, preparation and filing of
documents required to comply with federal and state securities laws, supervising
the activities of the Trust's custodian and transfer agent, providing assistance
in connection with the Trustees' and shareholders' meetings, providing service
in connection with any repurchase offers and other administrative services
necessary to conduct the Trust's business. In return for these services,
facilities and payments, the Trust is authorized to pay Eaton Vance as
compensation under the Administration Agreement a fee in the amount of .20% of
the average weekly gross assets of the Trust.
Eaton Vance has agreed to bear all ordinary and organizational expenses of
the Trust that exceed 5% of average weekly net assets (taking into account the
deduction of any Preferred Shares and related expenses) for the first year of
operations. In return for this arrangement, the Trust will reimburse Eaton Vance
over the first year of operations for organizational expenses of the Trust borne
by Eaton Vance at the onset of operations.
TAXES
GENERAL
The Trust intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). As long as it so qualifies, in any taxable
year in which it distributes at least 90% of its taxable net income and 90% of
its tax-exempt net income (see below), the Trust (but not its shareholders) will
not be subject to Federal income tax to the extent that it distributes its net
investment income and net realized capital gains. The Trust intends to
distribute substantially all of such income.
The Internal Revenue Service (the "IRS"), in a revenue ruling, held that
certain auction rate Preferred Shares would be treated as stock for Federal
income tax purposes. The terms of the APS are substantially similar, but not
identical, to the auction rate Preferred Shares discussed in the revenue ruling,
and in the opinion of Kirkpatrick & Lockhart LLP, counsel to the Trust, the APS
will constitute stock of the Trust and distributions with respect to APS (other
than distributions in redemption of APS subject to Section 302(b) of the Code)
will constitute dividends to the extent of the Trust's current and accumulated
earnings and profits as calculated for Federal income tax purposes.
Nevertheless, it is possible that the IRS might take a contrary position,
asserting, for example, that the APS constitute debt of the Trust. If this
position were upheld, the discussion of the treatment of distributions below
would not apply. Instead, distributions by the Trust to holders of APS would
constitute interest, whether or not they exceeded the earnings and profits of
the Trust, would be included in full in the income of the recipient and would be
taxed as ordinary income. Counsel believes that such a position, if asserted by
the IRS, would be unlikely to prevail.
Each dividend distribution ordinarily will constitute income exempt from
regular federal income tax. Distributions of interest on certain Municipal
Obligations, however, are a tax preference item under the federal alternative
minimum tax. Moreover, distributions of any taxable net investment income and
net short-term capital gain are taxable as ordinary income. Finally,
distributions of the Trust's net capital gain ("capital gain dividends"), if
any, are taxable to shareholders as long-term capital gains, regardless of the
length of time shares have been held by shareholders. Distributions, if any, in
excess of the Trust's earnings and profits will first reduce the adjusted tax
basis of a holder's shares and, after that basis has been reduced to zero, will
constitute capital gains to the Shareholder (assuming the Shares are held as a
capital asset).
The Trust will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The IRS has taken
the position in a revenue ruling that if a RIC has more than one class of
shares, it may designate distributions made to each class in any year as
consisting of no more than such class's proportionate share of particular types
of income, including exempt interest and net long-term capital gains (as well as
the new categories of capital gains referred to above). A class's proportionate
share of a particular type of income is determined according to the percentage
of total dividends paid by the RIC during such year that was paid to such class.
Thus, the Trust is required to allocate a portion of its net capital gains and
other taxable income to each series of Preferred Shares. The Trust generally
will notify the Auction Agent of the amount of any net capital gains and other
taxable income to be included in any dividend on the APS prior to the Auction
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establishing the Applicable Rate for such dividend. Except for the portion of
any dividend that it informs the Auction Agent will be treated as capital gains
or other taxable income, the Trust anticipates that the dividends paid on the
APS will constitute exempt-interest dividends. The amount of net capital gains
and ordinary income allocable to the APS (the "taxable distribution") will
depend upon the amount of such gains and income realized by the Trust and the
total dividends paid by the Trust on its Common Shares and the APS during a
taxable year, but the taxable distribution generally is not expected to be
significant. In the opinion of Kirkpatrick & Lockhart LLP, counsel to the Trust,
under current law the manner in which the Trust intends to allocate items of
tax-exempt income, net capital gains, and other taxable income, if any, among
the Trust's Common Shares and the APS will be respected for Federal income tax
purposes. However, the tax treatment of Additional Dividends may affect the
Trust's calculation of each class' allocable share of capital gains and other
taxable income. See "Tax Treatment of Additional Dividends." In addition, there
is currently no direct guidance from the IRS or other sources specifically
addressing whether the Trust's method for allocating tax-exempt income, net
capital gains, and other taxable income among Common Shares and the APS will be
respected for Federal income tax purposes, and it is possible that the IRS could
disagree with counsel's opinion and attempt to reallocate the Trust's net
capital gains or other taxable income. In the event of a reallocation, some of
the dividends identified by the Trust as exempt-interest dividends to holders of
APS may be recharacterized as additional capital gains or other taxable income.
In the event of such recharacterization, the Trust would not be required to make
payments to such shareholders to offset the tax effect of such reallocation. In
addition, a reallocation may cause the Trust to be liable for income tax and
excise tax on any reallocated taxable income. Kirkpatrick & Lockhart LLP has
advised the Trust that, in its opinion, if the IRS were to challenge in court
the Trust's allocations of income and gain, the IRS would be unlikely to
prevail. A holder should be aware, however, that the opinion of Kirkpatrick &
Lockhart LLP represents only its best legal judgment and is not binding on the
IRS or the courts.
If at any time when shares of APS are outstanding the Trust does not meet
the asset coverage requirements of the 1940 Act, the Trust will be required to
suspend distributions to holders of Common Shares until the asset coverage is
restored. See "Description of APS--Restrictions on Dividends and Other
Payments." This may prevent the Trust from distributing at least 90% of its net
income, and may, therefore, jeopardize the Trust's qualification for taxation as
a RIC. Upon any failure to meet the asset coverage requirements of the 1940 Act,
the Trust, in its sole discretion, may redeem shares of APS in order to maintain
or restore the requisite asset coverage and avoid the adverse consequences to
the Trust and its shareholders of failing to qualify as a RIC. See "Description
of APS--Redemption." There can be no assurance, however, that any such action
would achieve such objectives.
As noted above, the Trust must distribute annually at least 90% of its net
taxable and tax-exempt interest income. A distribution will only be counted for
this purpose if it qualifies for the dividends paid deduction under the Code.
Some types of Preferred Shares that the Trust currently contemplates issuing may
raise an issue as to whether distributions on such Preferred Shares are
"preferential" under the Code and therefore not eligible for the dividends paid
deduction. The Trust intends to issue Preferred Shares that counsel advises will
not result in the payment of a preferential dividend and may seek a private
letter ruling from the IRS to that effect. If the Trust ultimately relies solely
on a legal opinion when it issues such Preferred Shares, there is no assurance
that the IRS would agree that dividends on the Preferred Shares are not
preferential. If the IRS successfully disallowed the dividends paid deduction
for dividends on the Preferred Shares, the Trust could lose the benefit of the
special treatment afforded RICs under the Code. In this case, dividends on the
Common Shares would not be exempt from Federal income taxes. Additionally, the
Trust would be subject to the alternative minimum tax.
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TAX TREATMENT OF ADDITIONAL DIVIDENDS
If the Trust makes a Retroactive Taxable Allocation, it will pay
Additional Dividends to holders of APS who are subject to the Retroactive
Taxable Allocation. See "Description of APS--Dividends--Additional Dividends."
The Federal income tax consequences of Additional Dividends under existing law
are uncertain. The Trust intends to treat a holder as receiving a dividend
distribution in the amount of any Additional Dividend only as and when such
Additional Dividend is paid. An Additional Dividend generally will be designated
by the Trust as an exempt-interest divided except as otherwise required by
applicable law. However, the IRS may assert that all or part of an Additional
Dividend is a taxable dividend either in the taxable year for which the
Retroactive Taxable Allocation is made or in the taxable year in which the
Additional Dividend is paid.
---------------------------
The foregoing briefly summarizes some of the important federal income tax
consequences of investing in the APS, reflects the federal tax law, as of the
date of this Prospectus, and does not address special tax rules applicable to
certain types of investors, such as corporate and foreign investors. There may
be other federal, state or local tax considerations applicable to a particular
investor, including state alternative minimum tax. Investors should consult
their tax advisers.
DESCRIPTION OF CAPITAL STRUCTURE
The Trust is an unincorporated business trust established under the laws
of the Commonwealth of Massachusetts by an Agreement and Declaration of Trust
dated December 10, 1998 (the "Declaration of Trust"). The Declaration of Trust
provides that the Trustees of the Trust may authorize separate classes of shares
of beneficial interest. The Trustees have authorized an unlimited number of
shares of beneficial interest stock, par value $.01 per share, all of which
shares were initially classified as Common Shares. The Declaration of Trust also
authorizes the issuance of an unlimited number of shares of beneficial interest
with preference rights, including Preferred Shares, having a par value of $0.01
per share, in one or more series, with rights as determined by the Board of
Trustees, by action of the Board of Trustees without the approval of the
Shareholders. For a description of the APS, see "Description of APS." The
following table shows the amount of (i) shares authorized, (ii) shares held by
the Trust for its own account and (iii) shares outstanding, for each class of
authorized securities of the Trust as of _____________, 1999.
AMOUNT
OUTSTANDING
AMOUNT HELD BY (EXCLUSIVE OF
TRUST FOR ITS AMOUNT HELD BY
TITLE OF CLASS AMOUNT OWN ACCOUNT TRUST FOR ITS
AUTHORIZED OWN ACCOUNT)
Common Shares Unlimited -0-
Auction Preferred Shares Unlimited -0- -0-
COMMON SHARES
Holders of Common Shares are entitled to share equally in dividends
declared by the Board of Trustees payable to holders of Common Shares and in the
net assets of the Trust available for distribution to holders of Common Shares
after payment of the preferential amounts payable to holders of any outstanding
Preferred Shares. Neither holders of Common Shares nor holders of Preferred
Shares have preemptive or conversion rights and shares of Common Shares are not
redeemable. Upon liquidation of the Trust, after paying or adequately providing
for the payment of all liabilities of the Trust and the liquidation preference
with respect to any outstanding preferred shares, and upon receipt of such
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releases, indemnities and refunding agreements as they deem necessary for their
protection, the Trustees may distribute the remaining assets of the Trust among
the holders of the Shares. The Declaration of Trust provides that Shareholders
are not liable for any liabilities of the Trust, requires inclusion of a clause
to that effect in every agreement entered into by the Trust and indemnifies
shareholders against any such liability. Although shareholders of an
unincorporated business trust established under Massachusetts law, in certain
limited circumstances, may be held personally liable for the obligations of the
Trust as though they were general partners, the provisions of the Declaration of
Trust described in the foregoing sentence make the likelihood of such personal
liability remote.
Holders of Common Shares are entitled to one vote for each share held and
will vote with the holders of any outstanding APS or other Preferred Shares on
each matter submitted to a vote of holders of Common Shares, except as described
under "Description of APS--Voting Rights."
Shareholders are entitled to one vote for each share held. The shares of
Common Shares, APS and any other Preferred Shares do not have cumulative voting
rights, which means that the holders of more than 50% of the shares of Common
Shares, APS and any other Preferred Shares voting for the election of Trustees
can elect all of the Trustees standing for election by such holders, and, in
such event, the holders of the remaining shares of Common Shares, APS and any
other Preferred Shares will not be able to elect any of such Trustees.
So long as any shares of APS or any other Preferred Shares are
outstanding, holders of Common Shares will not be entitled to receive any
dividends of or other distributions from the Trust, unless at the time of such
declaration, (i) all accrued dividends on preferred shares or accrued interest
on borrowings has been paid and (2) the value of the Trust's total assets
(determined after deducting the amount of such dividend or other distribution),
less all liabilities and indebtedness of the Trust not represented by senior
securities, is at least 300% of the aggregate amount of such securities
representing indebtedness and at least 200% of the aggregate amount of
securities representing indebtedness plus the aggregate liquidation value of the
outstanding preferred shares (expected to equal the aggregate original purchase
price of the outstanding preferred shares plus redemption premium, if any,
together with any accrued and unpaid dividends thereon, whether or not earned or
declared and on a cumulative basis). In addition to the requirements of the 1940
Act, the Trust is required to comply with other asset coverage requirements as a
condition of the Trust obtaining a rating of the preferred shares from a Rating
Agency. These requirements include an asset coverage test more stringent than
under the 1940 Act. See "Description of APS--Restrictions on Dividends and Other
Payments."
The Trust will send unaudited reports at least semi-annually and audited
financial statements annually to all of its shareholders.
The shares of Common Shares commenced trading on the NYSE on _______ ,
1999. At ___ , 1999, the net asset value per share of Common Shares was $_____,
and the closing price per share of Common Shares on the NYSE was $_____.
PREFERRED SHARES
Under the Amended By-Laws, the Trust is authorized to issue an aggregate
of ______ APS. See "Description of APS." Under the 1940 Act, the Trust is
permitted to have outstanding more than one series of Preferred Shares as long
as no single series has priority over another series as to the distribution of
assets of the Trust or the payment of dividends. Neither holders of Common
Shares nor holders of Preferred Shares have preemptive rights to purchase any
shares of APS or any other Preferred Shares that might be issued. It is
anticipated that the net asset value per share of the APS will equal its
original purchase price per share plus accumulated dividends per share.
CERTAIN PROVISIONS OF THE DECLARATION OF TRUST
ANTI-TAKEOVER PROVISIONS IN THE DECLARATION OF TRUST. The Declaration of
Trust includes provisions that could have the effect of limiting the ability of
other entities or persons to acquire control of the Trust or to change the
composition of its Board of Trustees, and could have the effect of depriving
Shareholders of an opportunity to sell their Shares at a premium over prevailing
market prices by discouraging a third party from seeking to obtain control of
the Trust. These provisions may have the effect of discouraging attempts to
acquire control of the Trust, which attempts could have the effect of increasing
the expenses of the Trust and interfering with the normal operation of the
Trust. The Board of Trustees is divided into three classes, with the term of one
class expiring at each annual meeting of Shareholders. At each annual meeting,
one class of Trustees is elected to a three-year term. This provision could
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delay for up to two years the replacement of a majority of the Board of
Trustees. A Trustee may be removed from office only for cause by a written
instrument signed by the remaining Trustees or by a vote of the holders of at
least two-thirds of the class of Shares of the Trust that elected such Trustee
and is entitled to vote on the matter.
In addition, the Declaration of Trust requires the favorable vote of the
holders of at least 75% of the outstanding shares of each class of the Trust,
voting as a class, then entitled to vote to approve, adopt or authorize certain
transactions with 5%-or-greater holders of a class of shares and their
associates, unless the Board of Trustees shall by resolution have approved a
memorandum of understanding with such holders, in which case normal voting
requirements would be in effect. For purposes of these provisions, a
5%-or-greater holder of a class of shares (a "Principal Shareholder") refers to
any person who, whether directly or indirectly and whether alone or together
with its affiliates and associates, beneficially owns 5% or more of the
outstanding shares of any class of beneficial interest of the Trust. The
transactions subject to these special approval requirements are: (i) the merger
or consolidation of the Trust or any subsidiary of the Trust with or into any
Principal Shareholder; (ii) the issuance of any securities of the Trust to any
Principal Shareholder for cash; (iii) the sale, lease or exchange of all or any
substantial part of the assets of the Trust to any Principal Shareholder (except
assets having an aggregate fair market value of less than $1,000,000,
aggregating for the purpose of such computation all assets sold, leased or
exchanged in any series of similar transactions within a twelve-month period);
or (iv) the sale, lease or exchange to the Trust or any subsidiary thereof, in
exchange for securities of the Trust, of any assets of any Principal Shareholder
(except assets having an aggregate fair market value of less than $1,000,000,
aggregating for the purposes of such computation all assets sold, leased or
exchanged in any series of similar transactions within a twelve-month period).
The Board of Trustees has determined that provisions with respect to the
Board and the 75% voting requirements described above, which voting requirements
are greater than the minimum requirements under Massachusetts law or the 1940
Act, are in the best interest of Shareholders generally. Reference should be
made to the Declaration of Trust on file with the SEC for the full text of these
provisions.
CONVERSION TO OPEN-END FUND. The Trust may be converted to an open-end
investment company at any time if approved by the lesser of (i) 2/3 or more of
the Trust's then outstanding Common Shares and Preferred Shares (if any), each
voting separately as a class, or (ii) more than 50% of the then outstanding
Shares and Preferred Shares (if any), voting separately as a class if such
conversion is recommended by at least 75% of the Trustees then in office. If
approved in the foregoing manner, conversion of the Trust could not occur until
90 days after the Shareholders' meeting at which such conversion was approved
and would also require at least 30 days' prior notice to all Shareholders. The
composition of the Trust's portfolio likely would prohibit the Trust from
complying with regulations of the SEC applicable to open-end investment
companies. Accordingly, conversion likely would require significant changes in
the Trust's investment policies and liquidation of a substantial portion of its
relatively illiquid portfolio. Conversion of the Trust to an open-end investment
company also would require the redemption of any outstanding Preferred Shares
and could require the repayment of borrowings. The Board of Trustees believes,
however, that the closed-end structure is desirable, given the Trust's
investment objective and policies. Investors should assume, therefore, that it
is unlikely that the Board of Trustees would vote to convert the Trust to an
open-end investment company.
UNDERWRITING
The underwriter, ____________________ (the "Underwriter"), as lead
representative has agreed, subject to the terms and conditions of the
Underwriting Agreement with the Trust and Eaton Vance (the "Underwriting
Agreement"), to purchase from the Trust the number of Shares set forth below.
The Underwriter is committed to purchase all of such Shares if any are
purchased.
Number of Shares
----------------
________________________...................
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The Underwriter has advised the Trust that it proposes initially to offer
the APS to the public at the public offering price set forth on the cover page
of this Prospectus, and to certain dealers at such price less a concession not
in excess of $__ per share. The Underwriter may allow, and such dealers may
reallow, a discount not in excess of $__ per share to other dealers. After the
initial public offering, the public offering price, concession and discount may
be changed. The sales load of $__ per share is equal to __% of the initial
public offering price. Investors must pay for any APS purchased in the initial
public offering on or before ______, 1999.
The Underwriter has agreed to pay the Trust an amount to cover expenses
incurred in connection with the issuance and sale of the APS offered hereby
(estimated to be $ ) and other expenses.
The Underwriter will act in Auctions as a Broker-Dealer as set forth under
"Description of APS--The Auction--General--Broker-Dealer Agreements" and will be
entitled to fees for services as a Broker-Dealer as set forth under "Description
of APS--Broker-Dealers." The Underwriter also may provide information to be used
in ascertaining the Reference Rate.
The Trust anticipates that the Underwriter from time to time may act as a
broker in connection with the execution of the Trust's portfolio transactions.
The Trust has obtained an exemptive order permitting it to engage in certain
principal transactions with the Underwriter involving high quality, short- term,
tax-exempt securities, subject to certain conditions. See "Investment
Restrictions" and "Portfolio Transactions."
The Trust and the Adviser have agreed to indemnify the Underwriter against
certain liabilities including liabilities under the Securities Act of 1933, as
amended.
As described below under "shareholder Servicing Agent, Custodian and
Transfer Agency," PaineWebber Incorporated will provide shareholder services to
the Trust pursuant to a Shareholder Servicing Agreement with Eaton Vance. Eaton
Vance will pay a monthly fee for such services on an annual basis equal to .10%
of the average weekly net assets of the Trust.
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SHAREHOLDER SERVICING AGENT, CUSTODIAN AND TRANSFER AGENT
Pursuant to a Shareholder Servicing Agreement between PaineWebber
Incorporated (the "Shareholder Servicing Agent") and Eaton Vance, the
Shareholder Servicing Agent will (i) undertake to make public information
pertaining to the Trust on an ongoing basis and to communicate holders of Common
Shares and prospective investors in Common Shares the Trust's features and
benefits (including periodic seminars or conference calls, responses to
questions from current or prospective shareholders and specific shareholder
contact where appropriate); (ii) make available to investors and prospective
investors in Common Shares market price, net asset value, yield and other
information regarding the Trust, if reasonably obtainable, for the purpose of
maintaining the visibility of the Trust in the investor community; (iii) at the
request of Eaton Vance, provide certain economic research and statistical
information and reports, if reasonably obtainable, on behalf of the Trust, and
consult with representatives and Trustees of the Trust in connection therewith.
For these services, Eaton Vance will pay the Shareholder Servicing Agent a fee
equal on an annual basis to .10% of the Trust's average weekly net assets,
payable in arrears at the end of each calendar month. Under the terms of the
Shareholder Servicing Agreement, the Shareholder Servicing Agent is relieved
from liability to Eaton Vance for any act or omission in the course of its
performances under the Shareholder Servicing Agreement in the absence of gross
negligence or willful misconduct by the Shareholder Servicing Agent. The
Shareholder Servicing Agreement will continue for an initial term of two years
and thereafter for successive one-year periods unless terminated by either party
upon 60 days written notice.
Investors Bank & Trust Company, 200 Clarendon Street, Boston, MA 02116 is
the custodian of the Trust and will maintain custody of the securities and cash
of the Trust. IBT maintains the Trust's general ledger and computes net asset
value per share at least weekly. IBT also attends to details in connection with
the sale, exchange, substitution, transfer and other dealings with the Trust's
investments, and receives and disburses all funds. IBT also assists in
preparation of shareholder reports and the electronic filing of such reports
with the SEC.
First Data Investor Services Group, P.O. Box 5123, Westborough, MA
01581-5123 is the transfer agent and dividend disbursing agent of the Trust.
LEGAL OPINIONS
It is expected that certain legal matters in connection with the APS
offered hereby will be passed upon for the Trust by Kirkpatrick & Lockhart LLP,
and for the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP and its
affiliated entities.
EXPERTS
The statement of assets, liabilities and capital of the Trust as of
_____________, 1999 included in this Prospectus and the Registration Statement
has been audited by _______________, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and is included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing. The selection of independent auditors is subject to ratification by
shareholders of the Trust.
ADDITIONAL INFORMATION
The Trust is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance therewith is required to
file reports, proxy statements and other information with the Commission. Any
such reports, proxy statements and other information can be inspected and copied
at the public reference facilities of the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
regional offices of the Commission: Regional Office, at Seven World Trade
Center, 61 Suite 1300, New York, New York 10048; Pacific Regional Office, at
5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036; and Midwest
Regional Office, at Northwestern Atrium Center, 500 West Madison Street, Suite
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1400, Chicago, Illinois 60661-2511. Copies of such materials can be obtained
from the public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site
at http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Trust, that file
electronically with the Commission. Reports, proxy statements and other
information concerning the Trust can also be inspected at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005.
Additional information regarding the Trust and the APS is contained in the
Registration Statement on Form N-2, including amendments, exhibits and schedules
thereto, relating to such shares filed by the Trust with the Commission in
Washington, D.C. This Prospectus does not contain all of the information set
forth in the Registration Statement, including any amendments, exhibits and
schedules thereto. For further information with respect to the Trust and the
shares offered hereby, reference is made to the Registration Statement.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement may be
inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part thereof may be obtained from the Commission
upon the payment of certain fees prescribed by the Commission.
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TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
Additional Investment Information and Restrictions......................B-2
Trustees and Officers...................................................B-8
Investment Advisory and Other Services..................................B-11
Portfolio Trading.......................................................B-12
Taxes...................................................................B-14
Other Information.......................................................B-17
Auditors................................................................B-18
Independent Auditors Report.............................................B-19
Financial Statements....................................................B-20
Appendix A: Ratings of Municipal Bonds..................................B-22
Appendix B: Tax Equivalent Yield Table..................................B-30
Appendix C: Settlement Procedures.......................................B-31
Appendix D: Auction Procedures..........................................B-34
TRUSTEES OF THE TRUST
JESSICA M. BIBLIOWICZ
President and Chief Operating Officer of John A. Levin & Co.
DONALD R. DWIGHT
President of Dwight Partners, Inc.
JAMES B. HAWKES
Chairman, President and Chief Executive Officer of Eaton Vance Corp.
SAMUEL L. HAYES, III
Jacob H. Schiff Professor of Investment Banking Emeritus, Harvard University
Graduate School of Business Administration
NORTON H. REAMER
Chairman and Chief Executive Officer of United Asset Management Corporation
LYNN A. STOUT
Professor of Law, Georgetown University Law Center
JACK L. TREYNOR
Investment Adviser and Consultant
* Trustees to be elected by holders of Preferred Shares
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GLOSSARY
" "AA" (AA) Composite Commercial Paper Rate," on any Valuation Date, means (i)
the Interest Equivalent of the rate on commercial paper placed on behalf of
issuers whose corporate bonds are rated "AA" by S&P or "Aa" by Moody's or the
equivalent of such rating by another nationally recognized statistical rating
organization, as such rate is made available on a discount basis or otherwise by
the Federal Reserve Bank of New York for the Business Day immediately preceding
such date, or (ii) in the event that the Federal Reserve Bank of New York does
not make available such a rate, then the arithmetic average of the Interest
Equivalent of the rate on commercial paper placed on behalf of such issuers, as
quoted on a discount basis or otherwise by [MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED] or its successors that are Commercial Paper Dealers, to the
Auction Agent for the close of business on the Business Day immediately
preceding such date. If one of the Commercial Paper Dealers does not quote a
rate required to determine the "AA" Composite Commercial Paper Rate, the "AA"
Composite Commercial Paper Rate will be determined on the basis of the quotation
or quotations furnished by any Substitute Commercial Paper Dealer or Substitute
Commercial Paper Dealers selected by the Trust to provide such rate or rates not
being supplied by the Commercial Paper Dealer. If the number of Dividend Period
days shall be (i) 7 or more but fewer than 49 days, such rate shall be the
Interest Equivalent of the 30-day rate on such commercial paper; (ii) 49 or more
but fewer than 70 days, such rate shall be the Interest Equivalent of the 60-day
rate on such commercial paper; (iii) 70 or more days but fewer than 85 days,
such rate shall be the arithmetic average of the Interest Equivalent of the
60-day and 90-day rates on such commercial paper; (iv) 85 or more days but fewer
than 99 days, such rate shall be the Interest Equivalent of the 90-day rate on
such commercial paper; (v) 99 or more days but fewer than 120 days, such rate
shall be the arithmetic average of the Interest Equivalent of the 90-day and
120-day rates on such commercial paper; (vi) 120 or more days but fewer than 141
days, such rate shall be the Interest Equivalent of the 120-day rate on such
commercial paper; (vii) 141 or more days but fewer than 162 days, such rate
shall be the arithmetic average of the Interest Equivalent of the 120-day and
180-day rates on such commercial paper; and (viii) 162 or more days but fewer
than 183 days, such rate shall be the Interest Equivalent of the 180-day rate on
such commercial paper.
"Additional Dividend" has the meaning set forth on page of this Prospectus.
"Adviser" means Eaton Vance Management.
"Agent Member" means the member of the Securities Depository that will act on
behalf of a Beneficial Owner of one or more shares of APS or on behalf of a
Potential Beneficial Owner.
"APS" means the Auction Market Preferred Shares with a par value of $.01 per
share and a liquidation preference of $25,000 per share plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared), of
the Trust.
"APS Basic Maintenance Amount" has the meaning set forth on page __ of this
Prospectus.
"APS Basic Maintenance Cure Date" has the meaning set forth on page __ of this
Prospectus.
"APS Basic Maintenance Report" has the meaning set forth on page __ of this
Prospectus.
"Anticipation Notes" means the following Municipal Obligations: revenue
anticipation notes, tax anticipation notes, tax and revenue anticipation notes,
grant anticipation notes and bond anticipation notes.
"Applicable Percentage" has the meaning set forth on page ___of this Prospectus.
"Applicable Rate" means the rate per annum at which cash dividends are payable
on shares of APS for any Dividend Period.
"Amended By-Laws" means the By-laws of the Trust as amended January __, 1999,
specifying the powers, preferences and rights of the shares of APS.
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"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means Bankers Trust Corporation unless and until another
commercial bank, trust company or other financial institution appointed by a
resolution of the Board of Trustees of the Trust or a duly authorized committee
thereof enters into an agreement with the Trust to follow the Auction Procedures
for the purpose of determining the Applicable Rate and to act as transfer agent,
registrar, dividend disbursing agent and redemption agent for the APS.
"Auction Agent Agreement" means the agreement entered into between the Trust and
the Auction Agent which provides, among other things, that the Auction Agent
will follow the Auction Procedures for the purpose of determining the Applicable
Rate.
"Auction Date" has the meaning set forth on page ___ of this Prospectus.
"Auction Procedures" means the procedures for conducting Auctions set forth in
Appendix C to this Prospectus.
"Available APS" has the meaning specified in Paragraph 10(d)(i) of the
Auction Procedures.
"Beneficial Owner" means a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or if applicable, the Auction Agent) as a holder
of shares of APS or a Broker-Dealer that holds APS for its own account.
"Bid" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"Bidder" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"Board of Trustees" or "Board" means the Board of Trustees of the Trust.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law to
perform the functions required of a Broker-Dealer in the Auction Procedures,
that has been selected by the Trust and has entered into a Broker-Dealer
Agreement with the Auction Agent that remains effective.
"Broker-Dealer Agreement" means an agreement entered into between the Auction
Agent and a Broker-Dealer, including ________________________, pursuant to which
such Broker-Dealer agrees to follow the Auction Procedures.
"Business Day" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in The
City of New York are authorized or obligated by law to close.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means _________________________ and such other
commercial paper dealer or dealers as the Trust from time to time may appoint
or, in lieu thereof, their respective affiliates and successors.
"Common Shares" means the Common Shares, par value $.01 per share, of the Trust.
"Date of Original Issue" means, with respect to each APS, the date on which such
share first is issued by the Trust.
"Declaration of Trust" means the Agreement and Declaration of Trust of the Trust
dated December 10, 1998.
"Deposit Securities" means cash and Municipal Obligations rated at least A2
(having a remaining maturity of 12 months or less), P-1, VMIG-1 or MIG-1 by
Moody's or A (having a remaining maturity of 12 months or less), A-1+ or SP-1+
by S&P.
"Discount Factor" means a S&P Discount Factor.
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"Discounted Value" of any asset of the Trust means with respect to an S&P
Eligible Asset, the quotient of the market value thereof divided by the
applicable S&P Discount Factor.
"Dividend Payment Date" has the meaning set forth on page of this Prospectus.
"Dividend Periods" has the meaning set forth on page of this Prospectus.
"DTC" means The Depository Trust Company.
"Eligible Assets" means S&P Eligible Assets.
"Existing Holder" means a Broker-Dealer or any such other person as may be
permitted by the Trust that is listed as the holder of record of APS in the
records of the Auction Agent.
"Fitch" means Fitch IBCA or its successors.
"Hold Order" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
IBT means Investors Bank & Trust Company, the nominee of DTC, and in whose name
the shares of APS initially will be registered.
"Initial Dividend Payment Date" has the meaning set forth on page ____ of this
Prospectus.
"Initial Dividend Period" means, with respect to the APS, the period from and
including the Date of Original Issue to but excluding the Initial Dividend
Payment Date of the APS.
"Initial Margin" means the amount of cash or securities deposited with a broker
as a margin payment at the time of purchase or sale of a financial futures
contract.
"Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing security.
"IRS" means the United States Internal Revenue Service.
"Long Term Dividend Period" has the meaning set forth on page ___ of this
Prospectus.
"Mandatory Redemption Price" has the meaning set forth on page ___ of this
Prospectus.
"Marginal Tax Rate" means the maximum marginal regular Federal individual income
tax rate applicable to ordinary income or the maximum marginal regular Federal
corporate income tax rate, whichever is greater.
"Maximum Applicable Rate" has the meaning specified under "Description of
APS--The Auction--Orders by Beneficial Owners, Potential Beneficial Owners,
Existing Holders and Potential Holders" in the Prospectus.
"Maximum Potential Additional Dividend Liability" has the meaning set forth on
page __ of this Prospectus.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Municipal Obligations" has the meaning set forth on page ___ of this
Prospectus.
"Municipal Index" has the meaning set forth on page ___ of this Prospectus.
"1940 Act" means the Investment Company Act of 1940, as amended from time to
time.
"1940 Act APS Asset Coverage" has the meaning set forth on page ___ of this
Prospectus.
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"1940 Act Cure Date" has the meaning set forth on page ___ of this Prospectus.
"Non-Call Period" has the meaning set forth under "Specific Redemption
Provisions" below.
"Non-Payment Period" has the meaning set forth on page ___ of this Prospectus.
"Non-Payment Period Rate" has the meaning set forth on page ___ of this
Prospectus.
"Notice of Revocation" has the meaning set forth on page ___ of this Prospectus.
"Notice of Special Dividend Period" has the meaning set forth on page ___ of
this Prospectus.
"Optional Redemption Price" has the meaning set forth on page ___ of this
Prospectus.
"Order" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of shares of APS but that wishes to
purchase such shares, or that is a Beneficial Owner that wishes to purchase
additional shares of APS.
"Potential Holder" means any Broker-Dealer or any such other person as may be
permitted by the Trust, including any Existing Holder, who may be interested in
acquiring shares of APS (or, in the case of an Existing Holder, additional
shares of APS).
"Preferred Shares" means Preferred Shares of beneficial interest, par value $.01
per share, of the Trust.
"Premium Call Period" has the meaning set forth under "Specific Redemption
Provisions" below.
"Receivables For Municipal Obligations Sold," has the meaning set forth on page
___ of this Prospectus.
"Reference Rate" means: (i) with respect to a Dividend Period or a Short Term
Dividend Period having 28 or fewer days, the higher of the applicable "AA"
Composite Commercial Paper Rate and the Taxable Equivalent of the Short Term
Municipal Bond Rate, (ii) with respect to any Short Term Dividend Period, having
more than 28 but fewer than 183 days, the applicable "AA" Composite Commercial
Paper Rate, (iii) with respect to any Short Term Dividend Period having 183 or
more but fewer than 364 days, the applicable U.S. Treasury Bill Rate and (iv)
with respect to any Long Term Dividend Period, the applicable U.S.
Treasury Note Rate.
"Request for Special Dividend Period" has the meaning set forth on page __ of
this Prospectus.
"Response" has the meaning set forth on page ___ of this Prospectus.
"Retroactive Taxable Allocation" has the meaning set forth on page ___ of this
Prospectus.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies, Inc., or
its successors.
"S&P Discount Factor" has the meaning set forth on page ___ of this Prospectus.
"S&P Eligible Assets" has the meaning set forth on page ___ of this Prospectus.
"S&P Exposure Period" means the maximum period of time following a Valuation
Date, including the Valuation Date and the APS Basic Maintenance Cure Date, that
the Trust has under the Amended By-Laws to cure any failure to maintain, as of
such Valuation Date, a Discounted Value for its portfolio at least equal to the
APS Basic Maintenance Amount.
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"S&P Hedging Transactions" has the meaning set forth on page ___ of this
Prospectus.
"S&P Volatility Factor" means 277% or such other potential dividend rate
increase factor as S&P advises the Trust in writing is applicable.
"Securities Depository" means The Depository Trust Company and its successors
and assigns or any successor securities depository selected by the Trust that
agrees to follow the procedures required to be followed by such securities
depository in connection with the APS.
"Sell Order" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"7-Day Dividend Period" means a Dividend Period consisting of seven days.
"Short Term Dividend Period" has the meaning set forth on page ___ of this
Prospectus.
"Special Dividend Period" has the meaning set forth on page ___ of this
Prospectus.
"Specific Redemption Provisions" means, with respect to a Special Dividend
Period, either, or any combination of, (i) a period (a "Non-Call Period")
determined by the Board of Trustees of the Trust, after consultation with the
Auction Agent and the Broker-Dealers, during which the shares of APS subject to
such Dividend Period shall not be subject to redemption at the option of the
Trust and (ii) a period (a "Premium Call Period"), consisting of a number of
whole years and determined by the Board of Trustees of the Trust, after
consultation with the Auction Agent and the Broker-Dealers, during each year of
which the shares of APS subject to such Dividend Period shall be redeemable at
the Trust's option at a price per share equal to $25,000 plus accumulated but
unpaid dividends plus a premium expressed as a percentage of $25,000, as
determined by the Board of Trustees of the Trust after consultation with the
Auction Agent and the Broker-Dealers.
"Submission Deadline" has the meaning specified in Subsection 10(a)(x) of the
Auction Procedures.
"Submitted Bid" has the meaning specified in Subsection 10(d)(i) of the Auction
Procedures.
"Submitted Hold Order" has the meaning specified in Subsection 10(d)(i) of the
Auction Procedures.
"Submitted Order" has the meaning specified in Subsection 10(d)(i) of the
Auction Procedures.
"Submitted Sell Order" has the meaning specified in Subsection 10(d)(i) of the
Auction Procedures.
"Subsequent Dividend Period" means each Dividend Period after the Initial
Dividend Period.
"Substitute Rating Agency" and "Substitute Rating Agencies" shall mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations, respectively, selected by
_________________________, or its respective affiliates and successors, after
consultation with the Trust, to act as a substitute rating agency or substitute
rating agencies, as the case may be, to determine the credit ratings of the APS.
"Sufficient Clearing Bids" has the meaning specified in Subsection 10(d)(i) of
the Auction Procedures.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date means 90%
of the quotient of (A) the per annum rate expressed on an interest equivalent
basis equal to the Kenny S&P 30 day High Grade Index (the "Kenny Index"), or any
successor index made available for the Business Day immediately preceding such
date but in any event not later than 8:30 A.M., New York City time, on such date
by Kenny Information Systems Inc. or any successor thereto, based upon 30-day
yield evaluations at par of bonds the interest on which is excludable for
regular Federal income tax purposes under the Code of "high grade" component
issuers selected by Kenny Information Systems Inc. or any such successor from
53
<PAGE>
time to time in its discretion, which component issuers shall include, without
limitation, issuers of general obligation bonds but shall exclude any bonds the
interest on which constitutes an item of tax preference under Section 57(a) (5)
of the Code, or successor provisions, for purposes of the "alternative minimum
tax," divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal);
provided, however, that if the Kenny Index is not made so available by 8:30
A.M., New York City time, on such date by Kenny Information Systems Inc. or any
successor, the Taxable Equivalent of the Short-Term Municipal Bond Rate shall
mean the quotient of (A) the per annum rate expressed on an interest equivalent
basis equal to the most recent Kenny Index so made available for any preceding
Business Day, divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a
decimal). The Trust may not utilize a successor index to the Kenny Index unless
S&P provides the Trust with written confirmation that the use of such successor
index will not adversely affect the then-current S&P rating of the APS.
"Treasury Bonds" has the meaning set forth on page of this Prospectus.
"Trust" means Eaton Vance Municipal Income Trust, a Massachusetts business that
that is the issuer of the APS.
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent of the
rate on the actively traded Treasury Bill with a maturity most nearly comparable
to the length of the related Dividend Period, as such rate is made available on
a discount basis or otherwise by the Federal Reserve Bank of New York in its
Composite 3:30 P.M. Quotations for U.S. Government Securities report for such
Business Day, or (ii) if such yield as so calculated is not available, the
Alternate Treasury Bill Rate on such date. "Alternate Treasury Bill Rate" on any
date means the Interest Equivalent of the yield as calculated by reference to
the arithmetic average of the bid price quotations of the actively traded
Treasury Bill with a maturity most nearly comparable to the length of the
related Dividend Period, as determined by bid price quotations as of any time on
the Business Day immediately preceding such date, obtained from at least three
recognized primary U.S. Government securities dealers selected by the Auction
Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated by
reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Note Rate on such date. "Alternate Treasury Note Rate" on
any date means the yield as calculated by reference to the arithmetic average of
the bid price quotations of the actively traded, current coupon Treasury Note
with a maturity most nearly comparable to the length of the related Dividend
Period, as determined by the bid price quotations as of any time on the Business
Day immediately preceding such date, obtained from at least three recognized
primary U.S. Government securities dealers selected by the Auction Agent.
"Valuation Date" has the meaning set forth on page ___ of this Prospectus.
"Variation Margin" means, in connection with an outstanding financial futures
contract owned or sold by the Trust, the amount of cash or securities paid to or
received from a broker (subsequent to the Initial Margin payment) from time to
time as the price of such financial futures contract fluctuates.
"Winning Bid Rate" has the meaning specified in Subsection 10(d)(i) of the
Auction Procedures.
54
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EATON VANCE MUNICIPAL INCOME TRUST
AUCTION PREFERRED SHARES
__________________ SHARES
LIQUIDATION REFERENCE $25,000 PER SHARE
---------------
PROSPECTUS
---------------
________________________
__________________, 1999
55
<PAGE>
SUBJECT TO COMPLETION -_______________, 1999
STATEMENT OF
ADDITIONAL INFORMATION
EATON VANCE MUNICIPAL INCOME TRUST
24 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
(800) 225-6265
TABLE OF CONTENTS
Page
----
Additional Investment Information and Restrictions...................B-2
Trustees and Officers................................................B-8
Investment Advisory and Other Services...............................B-11
Portfolio Trading....................................................B-12
Taxes................................................................B-14
Other Information....................................................B-17
Auditors.............................................................B-18
Independent Auditors Report..........................................B-19
Financial Statements.................................................B-20
Appendix A: Ratings of Municipal Bonds...............................B-22
Appendix B: Tax Equivalent Yield Table...............................B-30
Appendix C: Settlement Procedures....................................B-31
Appendix D: Auction Procedures.......................................B-34
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY THE PROSPECTUS OF EATON VANCE MUNICIPAL INCOME TRUST (THE
"TRUST") DATED _________, 1999 AS SUPPLEMENTED FROM TIME TO TIME, WHICH IS
INCORPORATED HEREIN BY REFERENCE. THIS STATEMENT OF ADDITIONAL INFORMATION
SHOULD BE READ IN CONJUNCTION WITH SUCH PROSPECTUS, A COPY OF WHICH MAY BE
OBTAINED WITHOUT CHARGE BY CONTACTING YOUR FINANCIAL INTERMEDIARY OR CALLING THE
TRUST AT 1-800-225-6265.
<PAGE>
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION, WHICH IS NOT A PROSPECTUS, IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Capitalized terms used in this Statement of Additional Information and not
otherwise defined have the meanings given them in the Trust's Prospectus.
ADDITIONAL INVESTMENT INFORMATION AND RESTRICTIONS
MUNICIPAL OBLIGATIONS. Municipal Obligations are issued to obtain funds
for various public and private purposes. Municipal Obligations include long-term
obligations, which are often called municipal bonds, as well as tax-exempt
commercial paper, project notes and municipal notes such as tax, revenue and
bond anticipation notes of short maturity, generally less than three years.
Market rates of interest available with respect to Municipal Obligations may be
lower than those available with respect to taxable securities, although such
differences may be partially or wholly offset by the effects of federal income
tax on income derived from such taxable securities. While most municipal bonds
pay a fixed rate of interest semi-annually in cash, some bonds pay no periodic
cash interest but instead make a single payment at maturity representing both
principal and interest. Municipal Obligations may be issued or subsequently
offered with interest coupons materially greater or less than those then
prevailing, with price adjustments reflecting such deviation.
In general, there are three categories of Municipal Obligations the
interest on which is exempt from federal income tax and is not a tax preference
item for purposes of the AMT: (i) certain "public purpose" obligations (whenever
issued), which include obligations issued directly by state and local
governments or their agencies to fulfill essential governmental functions; (ii)
certain obligations issued before August 8, 1986 for the benefit of
non-governmental persons or entities; and (iii) certain "private activity bonds"
issued after August 7, 1986 which include "qualified Section 501(c)(3) bonds" or
refundings of certain obligations included in the second category. Interest on
certain "private activity bonds" issued after August 7, 1986 is exempt from
regular federal income tax, but is treated as a tax preference item that could
subject the recipient to or increase the recipient's liability for the AMT. For
corporate shareholders, the Trust's distributions derived from interest on all
Municipal Obligations (whenever issued) is included in "adjusted current
earnings" for purposes of the AMT as applied to corporations (to the extent not
already included in alternative minimum taxable income as income attributable to
private activity bonds). In assessing the federal income tax treatment of
interest on any such obligation, the Trust will rely on an opinion of the
issuer's counsel (when available) obtained by the issuer or other reliable
authority and will not undertake any independent verification thereof.
The two principal classifications of municipal bonds are "general
obligation" and "revenue" bonds. Issuers of general obligation bonds include
states, counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects including the
construction or improvement of schools, highways and roads, water and sewer
systems and a variety of other public purposes. The basic security of general
obligation bonds is the issuer's pledge of its faith, credit, and taxing power
for the payment of principal and interest. The taxes that can be levied for the
payment of debt service may be limited or unlimited as to rate and amount.
Revenue bonds are generally secured by the net revenues derived from a
particular facility or group of facilities or, in some cases, from the proceeds
of a special excise or other specific revenue source. Revenue bonds have been
issued to fund a wide variety of capital projects including: electric, gas,
water, sewer and solid waste disposal systems; highways, bridges and tunnels;
port, airport and parking facilities; transportation systems; housing
facilities, colleges and universities and hospitals. Although the principal
security behind these bonds varies widely, many provide additional security in
the form of a debt service reserve fund whose monies may be used to make
principal and interest payments on the issuer's obligations. Housing finance
authorities have a wide range of security including partially or fully insured,
rent subsidized and/or collateralized mortgages, and/or the net revenues from
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housing or other public projects. In addition to a debt service reserve fund,
some authorities provide further security in the form of a state's ability
(without legal obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are normally secured by annual lease rental payments from the
state or locality to the authority sufficient to cover debt service on the
authority's obligations. Such payments are usually subject to annual
appropriations by the state or locality. Industrial development and pollution
control bonds, although nominally issued by municipal authorities, are in most
cases revenue bonds and are generally not secured by the taxing power of the
municipality, but are usually secured by the revenues derived by the authority
from payments of the industrial user or users. The Trust may on occasion acquire
revenue bonds which carry warrants or similar rights covering equity securities.
Such warrants or rights may be held indefinitely, but if exercised, the Trust
anticipates that it would, under normal circumstances, dispose of any equity
securities so acquired within a reasonable period of time.
The obligations of any person or entity to pay the principal of and
interest on a Municipal Obligation are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Act, and laws, if any, which may be enacted by
Congress or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations. There is also the possibility that as a result of litigation or
other conditions the power or ability of any person or entity to pay when due
principal of and interest on a Municipal Obligation may be materially affected.
There have been recent instances of defaults and bankruptcies involving
Municipal Obligations which were not foreseen by the financial and investment
communities. The Trust will take whatever action it considers appropriate in the
event of anticipated financial difficulties, default or bankruptcy of either the
issuer of any Municipal Obligation or of the underlying source of funds for debt
service. Such action may include retaining the services of various persons or
firms (including affiliates of the Adviser) to evaluate or protect any real
estate, facilities or other assets securing any such obligation or acquired by
the Trust as a result of any such event, and the Trust may also manage (or
engage other persons to manage) or otherwise deal with any real estate,
facilities or other assets so acquired. The Trust anticipates that real estate
consulting and management services may be required with respect to properties
securing various Municipal Obligations in its portfolio or subsequently acquired
by the Trust. The Trust will incur additional expenditures in taking protective
action with respect to portfolio obligations in default and assets securing such
obligations. To enforce its rights in the event of a default in the payment of
interest or repayment of principal, or both, the Trust may take possession of
and manage the assets or have a receiver appointed to collect and disburse
pledged revenues securing the issuer's obligations on such securities, which may
increase the operating expenses and adversely affect the net asset value of the
Trust. Any income derived from the ownership of operation of such assets may not
be tax-exempt. In addition, the Trust's intention to qualify as a "regulated
investment company" ("RIC") under the Code may limit the extent to which the
Trust may exercise its rights by taking possession of such assets, because as a
regulated investment company, the Trust is subject to certain limitations on its
investments and on the nature of its income.
The yields on Municipal Obligations are dependent on a variety of factors,
including purposes of issue and source of funds for repayment, general money
market conditions, general conditions of the municipal bond market, size of a
particular offering, maturity of the obligation and rating of the issue. The
ratings of Moody's, S&P and Fitch represent their opinions as to the quality of
the Municipal Obligations which they undertake to rate. It should be emphasized,
however, that ratings are based on judgment and are not absolute standards of
quality. Consequently, Municipal Obligations with the same maturity, coupon and
rating may have different yields while obligations of the same maturity and
coupon with different ratings may have the same yield. In addition, the market
price of Municipal Obligations will normally fluctuate with changes in interest
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rates, and therefore the net asset value of the Trust will be affected by such
changes.
STATE CONCENTRATION. The Trust may invest 25% or more of its total assets
in Municipal Obligations of issuers located in the same state. When the Trust
does so, it will be sensitive to factors affecting that state, such as changes
in the economy, decreases in tax collection or the tax base, legislation which
limits taxes and changes in issuer credit ratings.
ECONOMIC SECTOR CONCENTRATION. The Trust may invest 25% or more of its
total assets in Municipal Obligations of issuers in the same economic sector.
There could be economic, business or political developments which might affect
all Municipal Obligations in a particular economic sector. In particular,
investments in the industrial revenue bonds listed above might involve (without
limitation) the following risks.
Hospital bond ratings are often based on feasibility studies which contain
projections of expenses, revenues and occupancy levels. Among the influences
affecting a hospital's gross receipts and net income available to service its
debt are demand for hospital services, the ability of the hospital to provide
the services required, management capabilities, economic developments in the
service area, efforts by insurers and government agencies to limit rates and
expenses, confidence in the hospital, service area economic developments,
competition, availability and expense of malpractice insurance, Medicaid and
Medicare funding and possible federal legislation limiting the rates of increase
of hospital charges.
Electric utilities face problems in financing large construction programs
in an inflationary period, cost increases and delay occasioned by safety and
environmental considerations (particularly with respect to nuclear facilities),
difficulty in obtaining fuel at reasonable prices and in achieving timely and
adequate rate relief from regulatory commissions, effects of energy conservation
and limitations on the capacity of the capital market to absorb utility debt.
Bonds to finance life care facilities are normally secured only by the
revenues of each facility and not by state or local government tax payments,
they are subject to a wide variety of risks. Primarily, the projects must
maintain adequate occupancy levels to be able to provide revenues sufficient to
meet debt service payments. Moreover, since a portion of housing, medical care
and other services may be financed by an initial deposit, it is important that
the facility maintain adequate financial reserves to secure estimated actuarial
liabilities. The ability of management to accurately forecast inflationary cost
pressures is an important factor in this process. The facilities may also be
affected adversely by regulatory cost restrictions applied to health care
delivery in general, particularly state regulations or changes in Medicare and
Medicaid payments or qualifications, or restrictions imposed by medical
insurance companies. They may also face competition from alternative health care
or conventional housing facilities in the private or public sector.
MUNICIPAL LEASES. The Trust may invest in municipal leases and
participations therein, which arrangements frequently involve special risks.
Municipal leases are obligations in the form of a lease or installment purchase
arrangement which is issued by state or local governments to acquire equipment
and facilities. Interest income from such obligations is generally exempt from
local and state taxes in the state of issuance. "Participations" in such leases
are undivided interests in a portion of the total obligation. Participations
entitle their holders to receive a pro rata share of all payments under the
lease. The obligation of the issuer to meet its obligations under such leases is
often subject to the appropriation by the appropriate legislative body, on an
annual or other basis, of funds for the payment of the obligations. Investments
in municipal leases are thus subject to the risk that the legislative body will
not make the necessary appropriation and the issuer will not otherwise be
B-4
<PAGE>
willing or able to meet its obligation. Certain municipal lease obligations are
illiquid.
WHEN-ISSUED SECURITIES. New issues of Municipal Obligations are sometimes
offered on a "when-issued" basis, that is, delivery and payment for the
securities normally take place within a specified number of days after the date
of the Trust's commitment and are subject to certain conditions such as the
issuance of satisfactory legal opinions. The Trust may also purchase securities
on a when-issued basis pursuant to refunding contracts in connection with the
refinancing of an issuer's outstanding indebtedness. Refunding contracts
generally require the issuer to sell and the Trust to buy such securities on a
settlement date that could be several months or several years in the future. The
Trust may also purchase instruments that give the Trust the option to purchase a
Municipal Obligation when and if issued.
The Trust will make commitments to purchase when-issued securities only
with the intention of actually acquiring the securities, but may sell such
securities before the settlement date if it is deemed advisable as a matter of
investment strategy. The payment obligation and the interest rate that will be
received on the securities are fixed at the time the Trust enters into the
purchase commitment. When the Trust commits to purchase a security on a
when-issued basis it records the transaction and reflects the value of the
security in determining its net asset value. Securities purchased on a
when-issued basis and the securities held by the Trust are subject to changes in
value based upon the perception of the creditworthiness of the issuer and
changes in the level of interest rates (I.E. appreciation when interest rates
decline and depreciation when interest rates rise). Therefore, to the extent
that the Trust remains substantially fully invested at the same time that it has
purchased securities on a when-issued basis, there will be greater fluctuations
in the Trust's net asset value than if it set aside cash to pay for when-issued
securities.
REDEMPTION, DEMAND AND PUT FEATURES AND PUT OPTIONS. Issuers of Municipal
Obligations reserve the right to call (redeem) the bond. If an issuer redeems
securities held by the Trust during a time of declining interest rates, the
Trust may not be able to reinvest the proceeds in securities providing the same
investment return as the securities redeemed. Also, some bonds may have "put" or
"demand" features that allow early redemption by the bondholder. Longer term
fixed-rate bonds may give the holder a right to request redemption at certain
times (often annually after the lapse of an intermediate term). These bonds are
more defensive than conventional long term bonds because they may protect to
some degree against a rise in interest rates.
LIQUIDITY AND PROTECTIVE PUT OPTIONS. The Trust may also enter into a
separate agreement with the seller of a security or some other person granting
the Trust the right to put the security to the seller thereof or the other
person at an agreed upon price. Such agreements are subject to the risk of
default by the other party, although the Trust intends to limit this type of
transaction to institutions (such as banks or securities dealers) which the
Adviser believes present minimal credit risks. The Trust would engage in this
type of transaction to facilitate portfolio liquidity or (if the seller so
agrees) to hedge against rising interest rates. There is no assurance that this
kind of put option will be available to the Trust or that selling institutions
will be willing to permit the Trust to exercise a put to hedge against rising
interest rates. The Trust does not expect to assign any value to any separate
put option which may be acquired to facilitate portfolio liquidity, inasmuch as
the value (if any) of the put will be reflected in the value assigned to the
associated security; any put acquired for hedging purposes would be valued in
good faith under methods or procedures established by the Trustees of the Trust
after consideration of all relevant factors, including its expiration date, the
price volatility of the associated security, the difference between the market
price of the associated security and the exercise price of the put, the
creditworthiness of the issuer of the put and the market prices of comparable
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put options. Interest income generated by certain bonds having put or demand
features may be taxable.
ILLIQUID OBLIGATIONS. At times, a substantial portion of the Trust's
assets may be invested in securities as to which the Trust, by itself or
together with other accounts managed by the Adviser and its affiliates, holds a
major portion or all of such securities. Under adverse market or economic
conditions or in the event of adverse changes in the financial condition of the
issuer, the Trust could find it more difficult to sell such securities when the
Adviser believes it advisable to do so or may be able to sell such securities
only at prices lower than if such securities were more widely held. Under such
circumstances, it may also be more difficult to determine the fair value of such
securities for purposes of computing the Trust's net asset value.
The secondary market for some Municipal Obligations issued within a state
(including issues which are privately placed with the Trust) is less liquid than
that for taxable debt obligations or other more widely traded Municipal
Obligations. No established resale market exists for certain of the Municipal
Obligations in which the Trust may invest. The market for obligations rated
below investment grade is also likely to be less liquid than the market for
higher rated obligations. As a result, the Trust may be unable to dispose of
these Municipal Obligations at times when it would otherwise wish to do so at
the prices at which they are valued.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. A change in the level
of interest rates may affect the value of the securities held by the Trust (or
of securities that the Trust expects to purchase). To hedge against changes in
rates or as a substitute for the purchase of securities, the Trust may enter
into (i) futures contracts for the purchase or sale of debt securities and (ii)
futures contracts on securities indices. All futures contracts entered into by
the Trust are traded on exchanges or boards of trade that are licensed and
regulated by the Commodity Futures Trading Commission ("CFTC") and must be
executed through a futures commission merchant or brokerage firm which is a
member of the relevant exchange. The Trust may purchase and write call and put
options on futures contracts which are traded on a United States or foreign
exchange or board of trade. The Trust will be required, in connection with
transactions in futures contracts and the writing of options on futures, to make
margin deposits, which will be held by the Trust's custodian for the benefit of
the futures commission merchant through whom the Trust engages in such futures
and options transactions.
Some futures contracts and options thereon may become illiquid under
adverse market conditions. In addition, during periods of market volatility, a
commodity exchange may suspend or limit transactions in an exchange-traded
instrument, which may make the instrument temporarily illiquid and difficult to
price. Commodity exchanges may also establish daily limits on the amount that
the price of a futures contract or futures option can vary from the previous
day's settlement price. Once the daily limit is reached, no trades may be made
that day at a price beyond the limit. This may prevent the Trust from closing
out positions and limiting its losses.
The Trust will engage in futures and related options transactions for bona
fide hedging purposes or non-hedging purposes as defined in or permitted by CFTC
regulations. The Trust will determine that the price fluctuations in the futures
contracts and options on futures used for hedging purposes are substantially
related to price fluctuations in securities held by the Trust or which it
expects to purchase. The Trust will engage in transactions in futures and
related options contracts only to the extent such transactions are consistent
with the requirements of the Code for maintaining its qualification as a RIC for
federal income tax purposes.
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INVESTMENT RESTRICTIONS. The following investment restrictions of the
Trust are designated as fundamental policies and as such cannot be changed
without the approval of the holders of a majority of the Trust's outstanding
voting securities, which as used in this Statement of Additional Information
means the lesser of (a) 67% of the shares of the Trust present or represented by
proxy at a meeting if the holders of more than 50% of the outstanding shares are
present or represented at the meeting or (b) more than 50% of outstanding shares
of the Trust. As a matter of fundamental policy the Trust may not:
(1) Borrow money, except as permitted by the 1940 Act;
(2) Issue senior securities, as defined in the 1940 Act, other than
(i) preferred shares which immediately after issuance will have asset
coverage of at least 200%, (ii) indebtedness which immediately after
issuance will have asset coverage of at least 300%, or (iii) the
borrowings permitted by investment restriction (1) above;
(3) Purchase securities on margin (but the Trust may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities). The purchase of investment assets with the proceeds
of a permitted borrowing or securities offering will not be deemed to be
the purchase of securities on margin;
(4) Underwrite securities issued by other persons, except insofar as
it may technically be deemed to be an underwriter under the Securities Act
of 1933 in selling or disposing of a portfolio investment;
(5) Make loans to other persons, except by (a) the acquisition of
loan interests, debt securities and other obligations in which the Trust
is authorized to invest in accordance with its investment objective and
policies, (b) entering into repurchase agreements, and (c) lending its
portfolio securities;
(6) Purchase or sell real estate, although it may purchase and sell
securities which are secured by interests in real estate and securities of
issuers which invest or deal in real estate. The Trust reserves the
freedom of action to hold and to sell real estate acquired as a result of
the ownership of securities; or
(7) Purchase or sell physical commodities or contracts for the
purchase or sale of physical commodities. Physical commodities do not
include futures contracts with respect to securities, securities indices
or other financial instruments.
(8) Invest more than 25% of its total assets in securities of
issuers in any one industry.*
*Securities of the U.S. Government, its agencies, or
instrumentalities, and securities, including Municipal Obligations, backed
by the credit of a governmental entity are not considered to represent
industries. However, Municipal Obligations backed only by the assets and
revenues of non-governmental users may for this purpose be deemed to be
issued by such non-governmental users. Thus, the 25% limitation would
apply to such obligations. As discussed previously in this section and in
the Prospectus, it is nonetheless possible that the Fund may invest more
than 25% of its total assets in a broader economic sector of the market
for Municipal Obligations, such as revenue obligations of hospitals and
other health care facilities or electrical utility revenue obligations.
The Fund reserves the right to invest more than 25% of its assets in
industrial development bonds and private activity securities.
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For purposes of the Trust's investment restrictions, the determination of
the "issuer" of a Municipal Obligation which is not a general obligation bond
will be made by the Adviser on the basis of the characteristics of the
obligation and other relevant factors, the most significant of which is the
source of funds committed to meeting interest and principal payments of such
obligation.
The Trust has adopted the following nonfundamental investment policy which
may be changed by the Trustees without approval of the Trust's shareholders. As
a matter of nonfundamental policy, the Trust may not make short sales of
securities or maintain a short position, unless at all times when a short
position is open it either owns an equal amount of such securities or owns
securities convertible into or exchangeable, without payment of any further
consideration, for securities of the same issue as, and equal in amount to, the
securities sold short.
Upon Board of Trustee approval the Trust may invest more than 10% of its
total assets in one or more other management investment companies (or may invest
in affiliated investment companies) to the extent permitted by the 1940 Act and
rules thereunder.
Whenever an investment policy or investment restriction set forth in the
Prospectus or this Statement of Additional Information states a maximum
percentage of assets that may be invested in any security or other asset or
describes a policy regarding quality standards, such percentage limitation or
standard shall be determined immediately after and as a result of the Trust's
acquisition of such security or asset. Accordingly, any later increase or
decrease resulting from a change in values, assets or other circumstances will
not compel the Trust to dispose of such security or other asset. Notwithstanding
the foregoing, the Trust must always be in compliance with the borrowing
policies set forth above.
TRUSTEES AND OFFICERS
The Trust's Trustees and officers are listed below. Except as indicated,
each individual has held the office shown or other offices in the same company
for the last five years. Unless otherwise noted, the business address of each
Trustee and officer is 24 Federal Street, Boston, Massachusetts 02110. Those
Trustees who are "interested persons" of the Trust as defined in the 1940 Act by
virtue of their affiliation with Eaton Vance, BMR, EVC or EV, are indicated by
an asterisk(*).
JESSICA M. BIBLIOWICZ (38), TRUSTEE (1)
President and Chief Operating Officer of John A. Levin & Co. (a registered
investment advisor) (since July 1997) and a Director of Baker, Fentress &
Company which owns John A. Levin & Co. (since July 1997). Executive Vice
President of Smith Barney Mutual Funds (from July 1994 to June 1997). Elected
Trustee October 30, 1998. Trustee of various investment companies managed by
Eaton Vance or BMR since October 30, 1998.
Address: One Rockefeller Plaza, New York, New York 10020
DONALD R. DWIGHT (67), TRUSTEE (1)
President of Dwight Partners, Inc. (a corporate relations and communications
company). Trustee of various investment companies managed by Eaton Vance or BMR.
Address: Clover Mill Lane, Lyme, New Hampshire 03768
JAMES B. HAWKES (57), VICE PRESIDENT AND TRUSTEE* (2)
Chairman, President and Chief Executive Officer of Eaton Vance, BMR and their
corporate parent and trustee (EVC and EV). Director of EVC and EV. Trustee and
officer of various investment companies managed by Eaton Vance or BMR.
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SAMUEL L. HAYES, III (63), TRUSTEE (2)
Jacob H. Schiff Professor of Investment Banking Emeritus, Harvard University
Graduate School of Business Administration. Trustee of Kobrick-Cendant
Investment Trust (mutual funds). Trustee of various investment companies managed
by Eaton Vance or BMR. Address: 345 Nahatan Road, Westwood, Massachusetts 02090
NORTON H. REAMER (63), TRUSTEE (3)
Chairman of the Board and Chief Executive Officer, United Asset Management
Corporation (a holding company owning institutional investment management
firms); Chairman, President and Director of UAM Funds (mutual funds). Trustee of
various investment companies managed by Eaton Vance or BMR.
Address: One International Place, Boston, Massachusetts 02110
LYNN A. STOUT (41), TRUSTEE (3)
Professor of Law, Georgetown University Law Center. Elected Trustee October 30,
1998. Trustee of various investment companies managed by Eaton Vance or BMR
since October 30, 1998.
Address: 600 New Jersey, NW, Washington, DC 20001.
JACK L. TREYNOR (68), TRUSTEE (3)
Investment Adviser and Consultant. Trustee of various investment companies
managed by Eaton Vance or BMR.
Address: 504 Via Almar, Palos Verdes Estates, California 90274
THOMAS J. FETTER (55), PRESIDENT
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
ROBERT B. MACINTOSH (41), VICE PRESIDENT
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
THOMAS M. METZOLD (39), VICE PRESIDENT
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
JAMES L. O'CONNOR (53), TREASURER
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
ALAN R. DYNNER (58), SECRETARY
Vice President and Chief Legal Officer of Eaton Vance, BMR, EVC and EV since
November 1, 1996. Previously, he was a Partner of the law firm of Kirkpatrick &
Lockhart LLP, New York and Washington, D.C., and was Executive Vice President of
Neuberger & Berman Management, Inc., a mutual fund management company. Officer
of various investment companies managed by Eaton Vance or BMR.
JANET E. SANDERS (62), ASSISTANT TREASURER AND ASSISTANT SECRETARY
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
A. JOHN MURPHY (35), ASSISTANT SECRETARY
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
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ERIC G. WOODBURY (41), ASSISTANT SECRETARY
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
- ----------
(1) Class I Trustee whose term expires in 1999.
(2) Class II Trustee whose termexpires in 2000.
(3) Class III Trustee whose term expires in 2001.
Messrs. Hayes (Chairman), Reamer and Thorndike are members of the Special
Committee of the Board of Trustees of the Trust. The purpose of the Special
Committee is to consider, evaluate and make recommendations to the full Board of
Trustees concerning (i) all contractual arrangements with service providers to
the Trust, including investment advisory, administrative, transfer agency,
custodial and fund accounting and distribution services, and (ii) all other
matters in which Eaton Vance or its affiliates has any actual or potential
conflict of interest with the Trust or its shareholders.
The Nominating Committee of the Board of Trustees of the Trust is
comprised of four Trustees who are not "interested persons" as that term is
defined under the 1940 Act ("noninterested Trustees"). The Committee has
four-year staggered terms, with one member rotating off the Committee to be
replaced by another noninterested Trustee. The purpose of the Committee is to
recommend to the Board nominees for the position of noninterested Trustee and to
assure that at least a majority of the Board of Trustees is independent of Eaton
Vance and its affiliates.
Messrs. Treynor (Chairman) and Dwight are members of the Audit Committee
of the Board of Trustees of the Trust. The Audit Committee's functions include
making recommendations to the Trustees regarding the selection of the
independent certified public accountants, and reviewing matters relative to
trading and brokerage policies and practices, accounting and auditing practices
and procedures, accounting records, internal accounting controls, and the
functions performed by the custodian, transfer agent and dividend disbursing
agent of the Trust.
Trustees of the Trust who are not affiliated with the Adviser may elect to
defer receipt of all or a percentage of their annual fees in accordance with the
terms of a Trustees Deferred Compensation Plan (the "Trustees' Plan"). Under the
Trustees' Plan, an eligible Trustee may elect to have his deferred fees invested
by the Trust in the shares of one or more funds in the Eaton Vance Family of
Funds, and the amount paid to the Trustees under the Trustees' Plan will be
determined based upon the performance of such investments. Deferral of Trustees'
fees in accordance with the Trustees' Plan will have a negligible effect on the
Trust's assets, liabilities, and net income per share, and will not obligate the
Trust to retain the services of any Trustee or obligate the Trust to pay any
particular level of compensation to the Trustee. The Trust does not have a
retirement plan for its Trustees.
The fees and expenses of the noninterested Trustees of the Trust are paid
by the Trust. (The Trustees of the Trust who are members of the Eaton Vance
organization receive no compensation from the Trust.) During the year ended
December 31, 1997, the noninterested Trustees of the Trust earned the
compensation set forth below in their capacities as Trustees from the funds in
the Eaton Vance fund complex(1). It is estimated that the noninterested Trustees
will receive from the Trust the amounts set forth below for the fiscal year
ending November 30, 1999.
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Estimated Total Compensation
Compensation From Trust and
Name From Trust Fund Complex
- ---- ---------- ------------
Jessica M. Bibliowicz...................... $385 N/A
Donald R. Dwight........................... 385 $145,000(2)
Samuel L. Hayes, III....................... 381 153,700(3)
Norton H. Reamer........................... 374 145,000
Lynn A. Stout.............................. 385 N/A
Jack L. Treynor............................ 422 150,000
(1) As of January 1, 1999 the Eaton Vance fund complex consists of 143
registered investment companies or series thereof.
(2) Includes $45,000 of deferred compensation.
(3) Includes $38,438 of deferred compensation.
INVESTMENT ADVISORY AND OTHER SERVICES
Eaton Vance, its affiliates and its predecessor companies have been
managing assets of individuals and institutions since 1924 and of investment
companies since 1931. They maintain a large staff of experienced fixed-income
and equity investment professionals to service the needs of their clients. The
fixed-income division focuses on all kinds of taxable investment-grade and
high-yield securities, tax-exempt investment-grade and high-yield securities,
and U.S. Government securities. The equity division covers stocks ranging from
blue chip to emerging growth companies. Eaton Vance and its affiliates act as
adviser to a family of mutual funds, and individual and various institutional
accounts, including corporations, hospitals, retirement plans, universities,
foundations and trusts.
The Trust will be responsible for all of its costs and expenses not
expressly stated to be payable by Eaton Vance under the Advisory Agreement or
Administration Agreement. Such costs and expenses to be borne by the Trust
include, without limitation: custody and transfer agency fees and expenses,
including those incurred for determining net asset value and keeping accounting
books and records; expenses of pricing and valuation services; the cost of share
certificates; membership dues in investment company organizations; expenses of
acquiring, holding and disposing of securities and other investments; fees and
expenses of registering under the securities laws, stock exchange listing fees
and governmental fees; rating agency fees and preferred share remarketing
expenses; expenses of reports to shareholders, proxy statements and other
expenses of shareholders' meetings; insurance premiums; printing and mailing
expenses; interest, taxes and corporate fees; legal and accounting expenses;
compensation and expenses of Trustees not affiliated with Eaton Vance; expenses
of conducting repurchase offers for the purpose of repurchasing Trust shares;
and investment advisory and administration fees. The Trust will also bear
expenses incurred in connection with any litigation in which the Trust is a
party and any legal obligation to indemnify its officers and Trustees with
respect thereto, to the extent not covered by insurance.
The Advisory Agreement with the Adviser continues in effect to February
28, 2000 and from year to year so long as such continuance is approved at least
annually (i) by the vote of a majority of the noninterested Trustees of the
Trust or of the Adviser cast in person at a meeting specifically called for the
purpose of voting on such approval and (ii) by the Board of Trustees of the
Trust or by vote of a majority of the outstanding interests of the Trust. The
Trust's Administration Agreement continues in effect from year to year so long
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as such continuance is approved at least annually by the vote of a majority of
the Trust's Trustees. Each agreement may be terminated at any time without
penalty on sixty (60) days' written notice by the Trustees of the Trust or Eaton
Vance, as applicable, or by vote of the majority of the outstanding shares of
the Trust. Each agreement will terminate automatically in the event of its
assignment. Each agreement provides that, in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of its obligations or duties
to the Trust under such agreements on the part of Eaton Vance, Eaton Vance shall
not be liable to the Trust for any loss incurred, to the extent not covered by
insurance.
BMR and Eaton Vance are business trusts organized under Massachusetts law.
Eaton Vance, Inc. ("EV") serves as trustee of BMR and Eaton Vance. BMR, Eaton
Vance and EV are wholly-owned subsidiaries of Eaton Vance Corporation ("EVC"), a
Maryland corporation and publicly-held holding company. EVC through its
subsidiaries and affiliates engages primarily in investment management,
administration and marketing activities. The Directors of EVC are James B.
Hawkes, Benjamin A. Rowland, Jr., John G.L. Cabot, John M. Nelson, Vincent M.
O'Reilly and Ralph Z. Sorenson. All of the issued and outstanding shares of
Eaton Vance are owned by EVC. All of the issued and outstanding shares of BMR
are owned by Eaton Vance. All shares of the outstanding Voting Common Stock of
EVC are deposited in a Voting Trust, the Voting Trustees of which are Messrs.
Hawkes, Rowland, and Alan R. Dynner, Thomas E. Faust, Jr., Thomas J. Fetter,
Duncan Richardson, William M. Steul and Wharton P. Whitaker. The Voting Trustees
have unrestricted voting rights for the election of Directors of EVC. All of the
outstanding voting trust receipts issued under said Voting Trust are owned by
certain of the officers of BMR and Eaton Vance who are also officers, or
officers and Directors of EVC and EV. As indicated under "Trustees and
Officers", all of the officers of the Trust (as well as Mr. Hawkes who is also a
Trustee) hold positions in the Eaton Vance organization.
EVC and its affiliates and their officers and employees from time to time
have transactions with various banks, including the custodian of the Trust, IBT.
It is Eaton Vance's opinion that the terms and conditions of such transactions
were not and will not be influenced by existing or potential custodial or other
relationships between the Trust and such banks.
PORTFOLIO TRADING
Decisions concerning the execution of portfolio security transactions,
including the selection of the market and the executing firm, are made by the
Adviser. The Adviser is also responsible for the execution of transactions for
all other accounts managed by it. The Adviser places the portfolio security
transactions of the Trust and of all other accounts managed by it for execution
with many firms. The Adviser uses its best efforts to obtain execution of
portfolio security transactions at prices which are advantageous to the Trust
and at reasonably competitive spreads or (when a disclosed commission is being
charged) at reasonably competitive commission rates. In seeking such execution,
the Adviser will use its best judgment in evaluating the terms of a transaction,
and will give consideration to various relevant factors, including without
limitation the full range and quality of the executing firm's services, the
value of the brokerage and research services provided, the responsiveness of the
firm to the Adviser, the size and type of the transaction, the nature and
character of the market for the security, the confidentiality, speed and
certainty of effective execution required for the transaction, the general
execution and operational capabilities of the executing firm, the reputation,
reliability, experience and financial condition of the firm, the value and
quality of the services rendered by the firm in this and other transactions, and
the reasonableness of the spread or commission, if any. Municipal Obligations,
including state obligations, purchased and sold by the Trust are generally
traded in the over-the-counter market on a net basis (i.e., without commission)
through broker-dealers and banks acting for their own account rather than as
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<PAGE>
brokers, or otherwise involve transactions directly with the issuer of such
obligations. Such firms attempt to profit from such transactions by buying at
the bid price and selling at the higher asked price of the market for such
obligations, and the difference between the bid and asked price is customarily
referred to as the spread. The Trust may also purchase Municipal Obligations
from underwriters, and dealers in fixed price offerings, the cost of which may
include undisclosed fees and concessions to the underwriters. On occasion it may
be necessary or appropriate to purchase or sell a security through a broker on
an agency basis, in which case the Trust will incur a brokerage commission.
Although spreads or commissions on portfolio security transactions will, in the
judgment of the Adviser, be reasonable in relation to the value of the services
provided, spreads or commissions exceeding those which another firm might charge
may be paid to firms who were selected to execute transactions on behalf of the
Trust and the Adviser's other clients for providing brokerage and research
services to the Adviser.
As authorized in Section 28(e) of the Securities Exchange Act of 1934, a
broker or dealer who executes a portfolio transaction on behalf of the Trust may
receive a commission which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction if the
Adviser determines in good faith that such compensation was reasonable in
relation to the value of the brokerage and research services provided. This
determination may be made on the basis of that particular transaction or on the
basis of overall responsibilities which the Adviser and its affiliates have for
accounts over which they exercise investment discretion. In making any such
determination, the Adviser will not attempt to place a specific dollar value on
the brokerage and research services provided or to determine what portion of the
commission should be related to such services. Brokerage and research services
may include advice as to the value of securities, the advisability of investing
in, purchasing, or selling securities, and the availability of securities or
purchasers or sellers of securities; furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts; effecting securities transactions and
performing functions incidental thereto (such as clearance and settlement); and
the "Research Services" referred to in the next paragraph.
It is a common practice of the investment advisory industry and of the
Advisers of investment companies, institutions and other investors to receive
research, analytical, statistical and quotation services, data, information and
other services, products and materials which assist such advisers in the
performance of their investment responsibilities ("Research Services") from
broker-dealer firms which execute portfolio transactions for the clients of such
advisers and from third parties with which such broker-dealers have
arrangements. Consistent with this practice, the Adviser receives Research
Services from many broker-dealer firms with which the Adviser places the Trust's
transactions and from third parties with which these broker-dealers have
arrangements. These Research Services include such matters as general economic,
political, business and market information, industry and company reviews,
evaluations of securities and portfolio strategies and transactions, proxy
voting data and analysis services, technical analysis of various aspects of the
securities market, recommendations as to the purchase and sale of securities and
other portfolio transactions, financial, industry and trade publications, news
and information services, pricing and quotation equipment and services, and
research oriented computer hardware, software, data bases and services. Any
particular Research Service obtained through a broker-dealer may be used by the
Adviser in connection with client accounts other than those accounts which pay
commissions to such broker-dealer. Any such Research Service may be broadly
useful and of value to the Adviser in rendering investment advisory services to
all or a significant portion of its clients, or may be relevant and useful for
the management of only one client's account or of a few clients' accounts, or
may be useful for the management of merely a segment of certain clients'
accounts, regardless of whether any such account or accounts paid commissions to
the broker-dealer through which such Research Service was obtained. The advisory
fee paid by the Trust is not reduced because the Adviser receives such Research
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Services. The Adviser evaluates the nature and quality of the various Research
Services obtained through broker-dealer firms and attempts to allocate
sufficient portfolio security transactions to such firms to ensure the continued
receipt of Research Services which the Adviser believes are useful or of value
to it in rendering investment advisory services to its clients.
The Trust and the Adviser may also receive Research Services from
underwriters and dealers in fixed-price offerings, which Research Services are
reviewed and evaluated by the Adviser in connection with its investment
responsibilities. The investment companies sponsored by the Adviser or BMR may
allocate trades in such offerings to acquire information relating to the
performance, fees and expenses of such companies and other mutual funds, which
information is used by the Trustees of such companies to fulfill their
responsibility to oversee the quality of the services provided by various
entities, including the Adviser, to such companies. Such companies may also pay
cash for such information.
Subject to the requirement that the Adviser shall use its best efforts to
seek and execute portfolio security transactions at advantageous prices and at
reasonably competitive spreads or commission rates, the Adviser is authorized to
consider as a factor in the selection of any broker-dealer firm with whom
portfolio orders may be placed the fact that such firm has sold or is selling
shares of the Trust or of other investment companies sponsored by the Adviser.
This policy is not inconsistent with a rule of the National Association of
Securities Dealers, Inc. ("NASD"), which rule provides that no firm which is a
member of the NASD shall favor or disfavor the distribution of shares of any
particular investment company or group of investment companies on the basis of
brokerage commissions received or expected by such firm from any source.
Municipal Obligations considered as investments for the Trust may also be
appropriate for other investment accounts managed by the Adviser or its
affiliates. Whenever decisions are made to buy or sell securities by the Trust
and one or more of such other accounts simultaneously, the Adviser will allocate
the security transactions (including "hot" issues) in a manner which it believes
to be equitable under the circumstances. As a result of such allocations, there
may be instances where the Trust will not participate in a transaction that is
allocated among other accounts. If an aggregated order cannot be filled
completely, allocations will generally be made on a pro rata basis. An order may
not be allocated on a pro rata basis where, for example: (i) consideration is
given to portfolio managers who have been instrumental in developing or
negotiating a particular investment; (ii) consideration is given to an account
with specialized investment policies that coincide with the particulars of a
specific investment; (iii) pro rata allocation would result in odd-lot or de
minimis amounts being allocated to a portfolio or other client; or (iv) where
the Adviser reasonably determines that departure from a pro rata allocation is
advisable. While these aggregation and allocation policies could have a
detrimental effect on the price or amount of the securities available to the
Trust from time to time, it is the opinion of the Trustees of the Trust that the
benefits from the Adviser's organization outweigh any disadvantage that may
arise from exposure to simultaneous transactions.
TAXES
The Trust has elected to be, and intends to qualify for treatment each
year, as a RIC under the Code. Accordingly, the Trust intends to satisfy certain
requirements relating to sources of its income and diversification of its assets
and to distribute substantially all of its net investment income (including
tax-exempt income) and net capital gains in accordance with the timing
requirements imposed by the Code, so as to maintain its RIC status. By doing so,
the Trust will avoid any federal income tax on any income and gains it
distributes to its shareholders. If the Trust failed to qualify as a RIC for any
taxable year, it would be taxed on the full amount of its taxable income for
that year without being able to deduct the distributions it makes to its
shareholders and the shareholders would treat all distributions, including those
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that otherwise would qualify as "exempt-interest dividends" (described below),
as dividends (that is, ordinary income) to the extent of the Trusts' earnings
and profits.
To avoid incurring a federal excise tax obligation, the Trust must
distribute (or be deemed to have distributed) each calendar year (i) at least
98% of its ordinary income (not including tax-exempt income) for that year, (ii)
at least 98% of its capital gain net income (which is the excess of its realized
capital gains over its realized capital losses), generally computed on the basis
of the one-year period ending on November 30 of that year, after reduction by
any available capital loss carryforwards and (iii) 100% of certain other
amounts. Under current law, provided that the Trust qualifies as a RIC, it
should not be liable for any income, corporate excise or franchise tax in the
Commonwealth of Massachusetts.
The Trust's investment in zero coupon and certain other securities will
cause it to realize income prior to the receipt of cash payments with respect to
these securities. The Trust may be required to liquidate securities that it
might otherwise have continued to hold in order to generate cash to enable it to
distribute that income to Trust shareholders and thereby remain qualified for
treatment as a RIC and avoid imposition of the excise tax described above.
Investments in lower-rated or unrated securities may present special tax
issues for the Trust to the extent that the issuers of these securities default
on their obligations pertaining thereto. The federal tax law is not entirely
clear regarding the consequences of the Trust's taking certain positions in
connection with ownership of distressed securities. For example, there is
uncertainty regarding: (i) when the Trust may or must cease to accrue interest,
original issue discount, or market discount on these securities; (ii) when and
to what extent deductions may be taken for bad debts or worthless securities;
(iii) how payments received on obligations in default should be allocated
between principal and income; and (iv) whether exchanges of debt obligations in
a workout context are taxable.
Distributions by the Trust of net tax-exempt interest income that are
properly designated as "exempt-interest dividends" may be treated by
shareholders as interest excludable from gross income under Section 103(a) of
the Code. For the Trust to be able to pay exempt-interest dividends, the Trust
must, and intends to, satisfy the requirement that, at the close of each quarter
of its taxable year, at least 50% of the value of its total assets consists of
obligations the interest on which is exempt from regular federal income tax
under Code Section 103(a). The portion of exempt-interest dividends attributable
to interest on certain Municipal Obligations is treated as a tax preference item
for purposes of the AMT. Shareholders are required to report tax-exempt interest
dividends on their federal income tax returns.
The Trust will designate distributions made to holders of Common Shares
and to holders of those preferred shares, including the APS, in accordance with
each class's proportionate share of each item of Trust income (such as
tax-exempt interest, net capital gains and other taxable income).
A portion of exempt-interest dividends paid by the Trust will not be
tax-exempt to any shareholder who is a "substantial user" of the facilities
financed by tax-exempt obligations held by the Trust or "related persons" of
such substantial users.
Any recognized gain or other income attributable to market discount on
long-term tax-exempt Municipal Obligations (i.e., obligations with a term of
more than one year) other than, in general, at their original issue, is taxable
as ordinary income. Such an obligation is generally treated as acquired at a
market discount if purchased after its original issue at a price less than (i)
the stated principal amount payable at maturity, in the case of an obligation
that does not have original issue discount, or (ii) in the case of an obligation
that does have original issue discount, the sum of the issue price and any
original issue discount that accrued before the obligation was purchased,
subject to a de minimis exclusion.
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From time to time proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on certain types of Municipal Obligations, and it can be expected that
similar proposals may be introduced in the future. If any such proposals were
enacted, the availability of Municipal Obligations for investment by the Trust
and the value of the securities it held may be affected.
The Trust may realize some capital gains (and/or losses) as a result of
market transactions, including sales of portfolio securities and rights to
when-issued securities and options and futures transactions. The Trust may also
realize taxable income from certain short-term taxable obligations, securities
loans, a portion of discount with respect to certain stripped Municipal
Obligations or their stripped coupons, and certain realized gains or income
attributable to accrued market discount. Any distributions by the Trust of those
capital gains or taxable income would be taxable to its shareholders. However,
it is expected that such amounts, if any, would normally be insubstantial in
relation to the tax-exempt interest earned by the Trust. Certain distributions
declared in October, November or December and paid the following January may be
taxed to shareholders as if received on December 31 of the year in which they
are declared.
The Trust's transactions in options and futures contracts will be subject
to special tax rules that may affect the amount, timing and character of Trust
distributions to shareholders. For example, certain positions held by the Trust
on the last business day of each taxable year will be "marked to market" (i.e.,
treated as if closed out on that day), and any resulting gain or loss (in
addition to gain or loss from actual dispositions of such positions) will
generally be treated as 60% long-term and 40% short-term capital gain or loss.
Certain positions held by the Trust that substantially diminish the Trust's risk
of loss with respect to other positions in its portfolio may constitute
"straddles," which are subject to tax rules that may cause deferral of Trust
losses, adjustments in the holding period of portfolio securities, and
conversion of short-term capital losses into long-term capital losses. The Trust
may have to limit its activities in options and futures contracts in order to
enable it to maintain its RIC status.
Any loss realized upon the sale or exchange of the APS held by a
Shareholder for six months or less will be disallowed to the extent the
shareholder has received exempt-interest dividends with respect to those shares,
and any such loss that exceeds the disallowed amount will be treated as a
long-term capital loss to the extent of any distribution of net capital gain
with respect to those shares. In addition, a loss realized on a sale of the APS
will be disallowed to the extent the shareholder acquires other APS within the
period beginning 30 days before the sale and ending 30 days after the sale.
Taxable dividends (including capital gain dividends) payable by the Trust
to individuals and certain other non-corporate shareholders who have not
provided the Trust with their correct taxpayer identification number ("TIN") and
certain certifications required by the Internal Revenue Service ("IRS"), as well
as shareholders with respect to whom the Trust has received certain
notifications from the IRS are subject to "backup" withholding of federal income
tax at a rate of 31%. An individual's TIN is generally his or her social
security number.
The Trust is not appropriate for non-U.S. investors or as a retirement
plan investment.
STATE AND LOCAL TAXES. The exemption of interest income for federal income
tax purposes does not necessarily result in exemption under the income or other
tax laws of any state or local taxing authority. Shareholders of the Trust may
be exempt from state and local taxes on distributions of tax-exempt interest
income derived from obligations of the state and/or municipalities of the state
in which they are resident, but taxable generally on income derived from
obligations of other jurisdictions. The Trust will report annually to
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shareholders the percentages representing the proportionate ratio of its net
tax-exempt income earned in each state.
The foregoing discussion does not address the special tax rules applicable
to certain classes of investors, such as insurance companies and financial
institutions. Shareholders should consult their own tax advisers with respect to
special tax rules that may apply in their particular situations, as well as the
state or local tax consequences of investing in the Trust.
OTHER INFORMATION
The Trust is an organization of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law, Shareholders of such a
trust may, in certain circumstances, be held personally liable as partners for
the obligations of the trust. The Declaration of Trust contains an express
disclaimer of Shareholder liability in connection with the Trust property or the
acts, obligations or affairs of the Trust. The Declaration of Trust also
provides for indemnification out of the Trust property of any Shareholder held
personally liable for the claims and liabilities to which a Shareholder may
become subject by reason of being or having been a Shareholder. Thus, the risk
of a Shareholder incurring financial loss on account of Shareholder liability is
limited to circumstances in which the Trust itself is unable to meet its
obligations. The Trust believes the risk of any Shareholder of APS incurring any
liability for the obligations of the Trust is remote.
The Declaration of Trust provides that the Trustees will not be liable for
errors of judgment or mistakes of fact or law; but nothing in the Declaration of
Trust protects a Trustee against any liability to the Trust or its shareholders
to which he would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office. Voting rights are not cumulative, which means that the
holders of more than 50% of the shares voting for the election of Trustees can
elect 100% of the Trustees and, in such event, the holders of the remaining less
than 50% of the shares voting on the matter will not be able to elect any
Trustees.
The Declaration of Trust provides that no person shall serve as a Trustee
if shareholders holding two-thirds of the outstanding shares have removed him
from that office either by a written declaration filed with the Trust's
custodian or by votes cast at a meeting called for that purpose. The Declaration
of Trust further provides that the Trustees of the Trust shall promptly call a
meeting of the shareholders for the purpose of voting upon a question of removal
of any such Trustee or Trustees when requested in writing so to do by the record
holders of not less than 10 per centum of the outstanding shares.
The Trust's Prospectus and this Statement of Additional Information do not
contain all of the information set forth in the Registration Statement that the
Fund has filed with the SEC. The complete Registration Statement may be obtained
from the SEC upon payment of the fee prescribed by its Rules and Regulations.
B-17
<PAGE>
AUDITORS
, Boston, Massachusetts, are the independent
accountants for the Trust, providing audit services, tax return preparation, and
assistance and consultation with respect to the preparation of filings with the
SEC.
B-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholder of
Eaton Vance Municipal Income Trust:
We have audited the accompanying statement of assets and liabilities of
Eaton Vance Municipal Income Trust (the "Fund") as of , 1999
and the related statement of operations for the _______ period ended
, 1999. These financial statements are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements referred to above presents
fairly, in all material respects, the financial position of Eaton Vance
Municipal Income Trust as of , 1999, and the results of its operations for the
stated period, in conformity with generally accepted accounting principles.
Boston, Massachusetts
, 1999
B-19
<PAGE>
EATON VANCE MUNICIPAL INCOME TRUST
STATEMENT OF ASSETS AND LIABILITIES
, 1999
ASSETS:
Cash.................................................. $
Deferred initial offering expenses....................
Total assets.......................................... $________
LIABILITIES:
Initial offering expenses accrued..................... $________
Total liabilities..................................... $________
Net assets applicable to ____________ common shares of
beneficial interest issued and outstanding................. $
========
NET ASSET VALUE AND OFFERING PRICE PER SHARE............... $ 15.00
========
NOTE TO FINANCIAL STATEMENT
Eaton Vance Municipal Income Trust was formed under an Agreement and
Declaration of Trust dated December 10, 1998 and has been inactive since that
date except for matters relating to its organization and registration as an
investment company under the Investment Company Act of 1940 and the sale
of shares of its beneficial interest to Eaton Vance Management,
the Fund's administrator. The initial offering expenses, including federal and
state registration and qualification fees, will be deducted from net proceeds,
and will not exceed $0.03 per share, as Eaton Vance Management or an affiliate
will pay any such expenses in excess of $0.03 per share. The initial offering
expenses reflected above assume the initial sale of shares.
B-20
<PAGE>
EATON VANCE MASSACHUSETTS MUNICIPAL INCOME TRUST
STATEMENT OF OPERATIONS
FOR THE ___________, 199
INCOME: $
EXPENSES:
Organization expenses $
Total Expenses $
Preliminary reduction of expenses $
Net expenses $
Net investment loss $
NOTE OF FINANCIAL STATEMENT
Eaton Vance Management, the Trust's administrator, has agreed to bear all
ordinary and organizational expenses of the Trust that exceed 5% of average
weekly net assets (taking into account the deduction of any preferred shares and
related expenses) for the first fiscal year of operations. In return for this
arrangement, the Trust will reimburse Eaton Vance over the first year of
operations for organizational expenses of the Trust borne by the administrator
at the onset of operations.
B-21
<PAGE>
APPENDIX A
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.
("MOODY'S") MUNICIPAL BOND RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the Trustamentally strong position
of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long- term risks appear
somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payment and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Note: Those bonds in the Aa, A, Baa, Ba and B categories which Moody's
believes possess the strongest credit attributes within those categories are
designated by the symbols Aa1, A1, Baa1, Ba1 and B1.
Short-term Notes: The four ratings of Moody's for short-term notes are MIG
1/VMIG1, MIG 2/VMIG2, MIG 3/VMIG3 and MIG 4/VMIG4; MIG 1/VMIG1 denotes "best
quality . . . strong protection by established cash flows"; MIG 2/VMIG2 denotes
"high quality" with ample margins of protection; MIG 3/VMIG3 notes are of
"favorable quality . . . but . . . lacking the undeniable strength of the
B-22
<PAGE>
preceding grades"; MIG 4/VMIG4 notes are of "adequate quality . . . [p]rotection
commonly regarded as required of an investment security is present . . . there
is specific risk."
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment ability of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
ability for repayment of short-term promissory obligations. Prime-1 repayment
ability will often be evidenced by the following characteristics: leading market
positions in well established industries; high rates of return on Trusts
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed financial
charges and high internal cash generation; and well established access to a
range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
ability for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES, INC.
("STANDARD & POOR'S"), MUNICIPAL DEBT RATINGS
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program. It
takes into consideration the creditworthiness of guarantors, insurers or other
forms of credit enhancement on the obligation.
The issue credit rating is not a recommendation to purchase, sell or hold
a financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the obligors or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
B-23
<PAGE>
I. Likelihood of payment-capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with
the terms of obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
AA Debt rated "AA" differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A Debt rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in
higher-rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB Debt rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its
financial commitment to the obligation.
BB Debt rated "BB," "B," "CCC," "CC" and "C" is regarded as having
B significant speculative characteristics. "BB" indicates the
CCC least degree of speculation and "C" the highest degree of
CC speculation. While such bonds will likely have some quality and
C protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
D Debt rated "D" is in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard
& Poor's believes that such payments will be made during such grace
period. The "D" rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's Commercial Paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from "A-1" for the
highest-quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
B-24
<PAGE>
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3 Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period.
A Commercial Paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
DESCRIPTION OF STANDARD & POOR'S SHORT-TERM ISSUED CREDIT RATINGS
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
--Amortization schedule--the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
--Source of payment--the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue determined
to possess a very strong capacity to pay debt service is given a
plus "+" designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 Speculative capacity to pay principal and interest.
B-25
<PAGE>
DESCRIPTION OF FITCH IBCA, INC. ("FITCH") INVESTMENT GRADE BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided
by insurance policies or financial guarantees unless otherwise indicated.
Bonds carrying the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments, short-
term debt of these issuers is generally rated "F-1+."
A Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with
higher ratings.
BBB Bonds considered to be investment grade and of satisfactory-credit
quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse impact
on these bonds, and therefore impair timely payment. The likelihood
that the ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
B-26
<PAGE>
NR Indicates that Fitch does not rate the specific issue.
Conditional A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
Suspended A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to
furnish proper and timely information.
FitchAlert Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the
likely direction of such change. These are designated as "Positive,"
indicating a potential upgrade, "Negative," for potential downgrade,
or "Evolving," where ratings may be raised or lowered. FitchAlert is
relatively short-term, and should be resolved within 12 months.
Ratings Outlook: An outlook is used to describe the most likely direction
of any rating change over the intermediate term. It is described as "Positive"
or "Negative." The absence of a designation indicates a stable outlook.
DESCRIPTION OF FITCH'S SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can
be identified which could assist the obligor in satisfying its debt
service requirements.
B Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
B-27
<PAGE>
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 Bonds are in default on interest and/or principal payments. Such bonds
DD are extremely speculative and should be valued on the basis of
their D 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 (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD," "DD," or "D" categories.
DESCRIPTION OF FITCH'S SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+."
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as for issues assigned "F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate;
however, near-term adverse changes could cause these securities to be
rated below in investment grade.
F-S Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D Default. Issues assigned this rating are in actual or imminent payment
default.
LOC The symbol "LOC" indicates that the rating is based on a letter of credit
issued by a commercial bank.
B-28
<PAGE>
APPENDIX B
TAX EQUIVALENT YIELD TABLE
The table below gives the approximate yield a taxable security must earn
at various income brackets to produce after-tax yields equivalent to those of
tax-exempt bonds yielding from 4% to 6% under the regular federal income tax law
and tax rates applicable to individuals for 1998.
<TABLE>
<CAPTION>
Combined Tax Exempt Yield Of:
Single Return Joint Return Federal and 4.75% 5.00% 5.25% 5.50% 5.75% MA State
- ------------------ ------------- ------------------------------------------------
(Taxable Income*) Tax Bracket is Equivalent to a Fully Taxable Yield Of:
- ----------------------------------------------------- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Up to $25,350 Up to $42,350 20.06% 5.94% 6.25% 6.57% 6.88% 7.19%
$25,351 - $61,400 $42,351 - $102,300 32.28 7.01 7.38 7.75 8.12 8.49
$61,401 - $128,100 $102,301 - $155,950 35.11 7.32 7.70 8.09 8.48 8.86
$128,101 - $278,450 $155,951 - $278,450 39.81 7.89 8.31 8.72 9.14 9.55
Over $278,450 Over $278,450 43.19 8.36 8.80 9.24 9.68 10.12
</TABLE>
*NET AMOUNT SUBJECT TO FEDERAL AND MASSACHUSETTS PERSONAL INCOME TAX AFTER
DEDUCTIONS AND EXEMPTIONS.
The above indicated federal income tax brackets do not take into account
the effect of a reduction in the deductibility of itemized deductions for
individual taxpayers with adjusted gross income in excess of $124,500. The tax
brackets also do not show the effects of phaseout of personal exemptions for
single filers with adjusted gross income in excess of $124,500 and joint filers
with adjusted gross income in excess of $186,800. The effective tax brackets and
equivalent taxable yields of those taxpayers will be higher than those indicated
above.
Yields shown are for illustration purposes only and are not meant to
represent the Trust's actual yield. No assurance can be given that the Trust
will achieve any specific tax-exempt yield. While it is expected that the Trust
will invest principally in obligations the interest from which is exempt from
the regular federal income tax, other income received by the Trust may be
taxable. The table does not take into account state or local taxes, if any,
payable on Trust distributions. It should also be noted that the interest earned
on certain "private activity bonds", while exempt from the regular federal
income tax, is treated as a tax preference item which could subject the
recipient to the AMT. The illustrations assume that the AMT is not applicable
and do not take into account any tax credits that may be available.
The information set forth above is as of the date of this Statement of
Additional Information. Subsequent tax law changes could result in prospective
or retroactive changes in the tax brackets, tax rates, and tax-equivalent yields
set forth above. Investors should consult their tax adviser for additional
information.
B-29
<PAGE>
APPENDIX C
SETTLEMENT PROCEDURES
The following summary of Settlement Procedures sets forth the procedures
expected to be followed in connection with the settlement of each Auction and
will be incorporated by reference in the Auction Agent Agreement and each
Broker-Dealer Agreement. Nothing contained in this Appendix B constitutes a
representation by the Trust that in each Auction each party referred to herein
actually will perform the procedures described herein to be performed by such
party. Capitalized terms used herein shall have the respective meanings
specified in the glossary of this Prospectus or Appendix C hereto, as the case
may be.
(a) On each Auction Date, the Auction Agent shall notify by telephone or
through the Auction Agent's Processing System the Broker-Dealers that
participated in the Auction held on such Auction Date and submitted an Order on
behalf of any Beneficial Owner or Potential Beneficial Owner of:
(i) the Applicable Rate fixed for the next succeeding Dividend Period;
(ii) whether Sufficient Clearing Bids existed for the determination of
the Applicable Rate;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted a
Bid or a Sell Order on behalf of a Beneficial Owner, the number of shares,
if any, of APS to be sold by such Beneficial Owner;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a Bid
on behalf of a Potential Beneficial Owner, the number of shares, if any,
of APS to be purchased by such Potential Beneficial Owner;
(v) if the aggregate number of shares of APS to be sold by all
Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid or a
Sell Order exceeds the aggregate number of shares of APS to be purchased
by all Potential Beneficial Owners on whose behalf such Broker-Dealer
submitted a Bid, the name or names of one or more Buyer's Broker-Dealers
(and the name of the Agent Member, if any, of each such Buyer's Broker-
Dealer) acting for one or more purchasers of such excess number of shares
of APS and the number of such shares to be purchased from one or more
Beneficial Owners on whose behalf such Broker-Dealer acted by one or more
Potential Beneficial Owners on whose behalf each of such Buyer's
Broker-Dealers acted;
(vi) if the aggregate number of shares of APS to be purchased by all
Potential Beneficial Owners on whose behalf such Broker-Dealer submitted a
Bid exceeds the aggregate number of shares of APS to be sold by all
Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid or a
Sell Order, the name or names of one or more Seller's Broker-Dealers (and
the name of the Agent Member, if any, of each such Seller's Broker-Dealer)
acting for one or more sellers of such excess number of shares of APS and
the number of such shares to be sold to one or more Potential Beneficial
Owners on whose behalf such Broker-Dealer acted by one or more Beneficial
Owners on whose behalf each of such Seller's Broker-Dealers acted; and
(vii) the Auction Date of the next succeeding Auction with respect to
the APS.
B-30
<PAGE>
(b) On each Auction Date, each Broker-Dealer that submitted an Order
on behalf of any Beneficial Owner or Potential Beneficial Owner shall:
(i) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer,
instruct each Potential Beneficial Owner on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or in part, to
instruct such Potential Beneficial Owner's Agent Member to pay to such
Broker-Dealer (or its Agent Member) through the Securities Depository the
amount necessary to purchase the number of shares of APS to be purchased
pursuant to such Bid against receipt of such shares and advise such
Potential Beneficial Owner of the Applicable Rate for the next succeeding
Dividend Period;
(ii) in the case of a Broker-Dealer that is a Seller's Broker-Dealer,
instruct each Beneficial Owner on whose behalf such Broker-Dealer
submitted a Sell Order that was accepted, in whole or in part, or a Bid
that was accepted, in whole or in part, to instruct such Beneficial
Owner's Agent Member to deliver to such Broker-Dealer (or its Agent
Member) through the Securities Depository the number of shares of APS to
be sold pursuant to such Order against payment therefor and advise any
such Beneficial Owner that will continue to hold shares of APS of the
Applicable Rate for the next succeeding Dividend Period;
(iii) advise each Beneficial Owner on whose behalf such Broker-Dealer
submitted a Hold Order of the Applicable Rate for the next succeeding
Dividend Period;
(iv) advise each Beneficial Owner on whose behalf such Broker-Dealer
submitted an Order of the Auction Date for the next succeeding Auction;
and
(v) advise each Potential Beneficial Owner on whose behalf such
Broker- Dealer submitted a Bid that was accepted, in whole or in part, of
the Auction Date for the next succeeding Auction.
(c) On the basis of the information provided to it pursuant to (a)
above, each Broker-Dealer that submitted a Bid or a Sell Order on behalf
of a Potential Beneficial Owner or a Beneficial Owner shall, in such
manner and at such time or times as in its sole discretion it may
determine, allocate any Trusts received by it pursuant to (b) (i) above
and any shares of APS received by it pursuant to (b) (ii) above among the
Potential Beneficial Owners, if any, on whose behalf such Broker-Dealer
submitted Bids, the Beneficial Owners, if any, on whose behalf such
Broker-Dealer submitted Bids that were accepted or Sell Orders, and any
Broker-Dealer or Broker-Dealers identified to it by the Auction Agent
pursuant to (a) (v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Beneficial Owner and Beneficial Owner shall
instruct its Agent Member as provided in (b) (i) or (ii) above, as the
case may be;
(ii) each Seller's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through
the Securities Depository to the Agent Member of the Beneficial Owner
delivering shares to such Broker-Dealer pursuant to (b)(ii) above the
amount necessary to purchase such shares against receipt of such shares,
and (B) deliver such shares through the Securities Depository to a Buyer's
Broker-Dealer (or its Agent Member) identified to such Seller's Broker-
Dealer pursuant to (a)(v) above against payment therefor; and
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(iii) each Buyer's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through
the Securities Depository to a Seller's Broker-Dealer (or its Agent
Member) identified pursuant to (a) (vi) above the amount necessary to
purchase the shares to be purchased pursuant to (b)(i) above against
receipt of such shares, and (B) deliver such shares through the Securities
Depository to the Agent Member of the purchaser thereof against payment
therefor.
(e) On the day after the Auction Date: (i) each Bidder's Agent Member
referred to in (d)
(i) above shall instruct the Securities Depository to execute the
transactions described in (b) (i) or (ii) above, and the Securities
Depository shall execute such transactions;
(ii) each Seller's Broker-Dealer or its Agent Member shall instruct
the Securities Depository to execute the transactions described in (d)(ii)
above, and the Securities Depository shall execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Agent Member shall instruct
the Securities Depository to execute the transactions described in (d)
(iii) above, and the Securities Depository shall execute such
transactions.
(f) If a Beneficial Owner selling shares of APS in an Auction fails to
deliver such shares (by authorized book-entry), a Broker-Dealer may deliver to
the Potential Beneficial Owner on behalf of which it submitted a Bid that was
accepted a number of whole shares of APS that is less than the number of shares
that otherwise was to be purchased by such Potential Beneficial Owner. In such
event, the number of shares of APS to be so delivered shall be determined solely
by such Broker-Dealer. Delivery of such lesser number of shares shall constitute
good delivery. Notwithstanding the foregoing terms of this paragraph (f), any
delivery or non-delivery of shares which shall represent any departure from the
results of an Auction, as determined by the Auction Agent, shall be of no effect
unless and until the Auction Agent shall have been notified of such delivery or
non-delivery in accordance with the provisions of the Auction Agent Agreement
and the Broker-Dealer Agreements.
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APPENDIX D
AUCTION PROCEDURES
The following procedures will be set forth in provisions of the Amended
By-Laws relating to the APS, and will be incorporated by reference in the
Auction Agent Agreement and each Broker-Dealer Agreement. The terms not defined
below are defined in the forepart of this Prospectus. Nothing contained in this
Appendix C constitutes a representation by the Trust that in each Auction each
party referred to herein actually will perform the procedures described herein
to be performed by such party.
PARAGRAPH 10(A) CERTAIN DEFINITIONS.
As used in this Paragraph 10, the following terms shall have the following
meanings, unless the context otherwise requires:
(i) "APS" shall mean the shares of APS being auctioned pursuant to this
Paragraph 10.
(ii) "Auction Date" shall mean the first Business Day preceding the first
day of a Dividend Period.
(iii) "Available APS" shall have the meaning specified in Paragraph
10(d)(i) below.
(iv) "Bid" shall have the meaning specified in Paragraph 10(b)(i) below.
(v) "Bidder" shall have the meaning specified in Paragraph 10(b)(i) below.
(vi) "Hold Order" shall have the meaning specified in Paragraph 10(b)(i)
below.
(vii) "Maximum Applicable Rate" for any Dividend Period will be the
Applicable Percentage of the Reference Rate. The Applicable Percentage will be
determined based on (i) the credit rating assigned on such date to such shares
by S&P (or if S&P shall not make such rating available, the equivalent of such
rating by a Substitute Rating Agency), and (ii) whether the Trust has provided
modification to the Auction Agent prior to the Auction establishing the
Applicable Rate for any dividend that net capital gains or other taxable income
will be included in such dividend on APS as follows:
Applicable
Percentage of Applicable
Credit Ratings Reference Rate Percentage of
S&P No Reference Rate
-------------- Notification Notification
------------ ------------
AA- or Higher 110% 150%
A- to A+ 125% 160%
BBB- to BBB+ 150% 250%
Below BBB- 200% 275%
The Trust shall take all reasonable action necessary to enable S&P to
provide a rating for the APS. If S&P shall not make such a rating available,
_________________________ or its affiliates and successors, after consultation
with the Trust, shall select a nationally recognized statistical rating
organization to act as a Substitute Rating Agency.
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(viii) "Order" shall have the meaning specified in Paragraph 10(b)(i)
below.
(ix) "Sell Order" shall have the meaning specified in Paragraph 10(b)(i)
below.
(x) "Submission Deadline" shall mean 1:00 p.m., New York City time, on any
Auction Date or such other time on any Auction Date as may be specified by the
Auction Agent from time to time as the time by which each Broker-Dealer must
submit to the Auction Agent in writing all Orders obtained by it for the Auction
to be conducted on such Auction Date.
(xi) "Submitted Bid" shall have the meaning specified in Paragraph
10(d)(i) below.
(xii) "Submitted Hold Order" shall have the meaning specified in Paragraph
10(d)(i) below.
(xiii) "Submitted Order" shall have the meaning specified in Paragraph
10(d)(i) below.
(xiv) "Submitted Sell Order" shall have the meaning specified in Paragraph
10(d)(i) below.
(xv) "Sufficient Clearing Bids" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xvi) "Winning Bid Rate" shall have the meaning specified in Paragraph
10(d)(i) below.
PARAGRAPH 10(B) ORDERS BY BENEFICIAL OWNERS, POTENTIAL BENEFICIAL OWNERS,
EXISTING HOLDERS AND POTENTIAL HOLDERS.
(i) Unless otherwise permitted by the Trust, Beneficial Owners and
Potential Beneficial Owners may only participate in Auctions through their
Broker-Dealers. Broker-Dealers will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves as Existing Holders in respect of shares
subject to Orders submitted or deemed submitted to them by Beneficial Owners and
as Potential Holders in respect of shares subject to Orders submitted to them by
Potential Beneficial Owners. A Broker-Dealer may also hold APS in its own
account as a Beneficial Owner. A Broker-Dealer may thus submit Orders to the
Auction Agent as a Beneficial Owner or a Potential Beneficial Owner and
therefore participate in an Auction as an Existing Holder or Potential Holder on
behalf of both itself and its customers. On or prior to the Submission Deadline
on each Auction Date:
(A) each Beneficial Owner may submit to its Broker-Dealer information as
to:
(1) the number of outstanding APS, if any, held by such Beneficial Owner
which such Beneficial Owner desires to continue to hold without regard to the
Applicable Rate for the next succeeding Dividend Period;
(2) the number of outstanding APS, if any, held by such Beneficial Owner
which such Beneficial Owner desires to continue to hold, provided that the
Applicable Rate for the next succeeding Dividend Period shall not be less than
the rate per annum specified by such Beneficial Owner, and/or
(3) the number of outstanding APS, if any, held by such Beneficial Owner
which such Beneficial Owner offers to sell without regard to the Applicable Rate
for the next succeeding Dividend Period; and
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(B) each Broker-Dealer, using a list of Potential Beneficial Owners that
shall be maintained in good faith for the purpose of conducting a competitive
Auction, shall contact Potential Beneficial Owners, including Persons that are
not Beneficial Owners, on such list to determine the number of outstanding APS,
if any, which each such Potential Beneficial Owner offers to purchase, provided
that the Applicable Rate for the next succeeding Dividend Period shall not be
less than the rate per annum specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or the communication by a
Broker-Dealer acting for its own account to the Auction Agent, of information
referred to in clause (A) or (B) of this Paragraph 10(b)(i) is hereinafter
referred to as an "Order" and each Beneficial Owner and each Potential
Beneficial Owner placing an Order, including a Broker-Dealer acting in such
capacity for its own account, is hereinafter referred to as a "Bidder"; an Order
containing the information referred to in clause (A)(1) of this Paragraph
10(b)(i) is hereinafter referred to as a "Hold Order"; an Order containing the
information referred to in clause (A)(2) or (B) of this Paragraph 10(b)(i) is
hereinafter referred to as a "Bid"; and an Order containing the information
referred to in clause (A)(3) of this Paragraph 10(b)(i) is hereinafter referred
to as a "Sell Order." Inasmuch as a Broker-Dealer participates in an Auction as
an Existing Holder or a Potential Holder only to represent the interests of a
Beneficial Owner or Potential Beneficial Owner, whether it be its customers or
itself, all discussion herein relating to the consequences of an Auction for
Existing Holders and Potential Holders also applies to the underlying beneficial
ownership interests represented.
(ii) (A) A Bid by an Existing Holder shall constitute an irrevocable offer
to sell:
(1) the number of outstanding APS specified in such Bid if the Applicable
Rate determined on such Auction Date shall be less than the rate per annum
specified in such Bid; or
(2) such number or a lesser number of outstanding APS to be determined as
set forth in Paragraph 10(e)(i)(D) if the Applicable Rate determined on such
Auction Date shall be equal to the rate per annum specified therein; or
(3) a lesser number of outstanding APS to be determined as set forth in
Paragraph 10(e)(ii)(C) if such specified rate per annum shall be higher than the
Maximum Applicable Rate and Sufficient Clearing Bids do not exist.
(B) A Sell Order by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of outstanding APS specified in such Sell Order, or
(2) such number or a lesser number of outstanding APS to be determined as
set forth in Paragraph 10(e)(ii)(C) if Sufficient Clearing Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable offer to
purchase:
(1) the number of outstanding APS specified in such Bid if the Applicable
Rate determined on such Auction Date shall be higher than the rate per annum
specified in such Bid; or
(2) such number or a lesser number of outstanding APS to be determined as
set forth in Paragraph 10(e)(i)(E) if the Applicable Rate determined on such
Auction Date shall be equal to the rate per annum specified therein.
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PARAGRAPH 10(C) SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.
(i) Each Broker-Dealer shall submit in writing or through the Auction
Agent's Auction Processing System to the Auction Agent prior to the Submission
Deadline on each Auction Date all Orders obtained by such Broker-Dealer,
designating itself (unless otherwise permitted by the Trust) as an Existing
Holder in respect of shares subject to Orders submitted or deemed submitted to
it by Beneficial Owners and as a Potential Holder in respect of shares subject
to Orders submitted to it by Potential Beneficial Owners, and specifying with
respect to each Order:
(A) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Trust);
(B) the aggregate number of outstanding APS that are the subject of such
Order;
(C) to the extent that such Bidder is an Existing Holder
(1) the number of outstanding APS, if any, subject to any Hold Order
placed by such Existing Holder;
(2) the number of outstanding APS, if any, subject to any Bid placed by
such Existing Holder and the rate per annum specified in such Bid; and
(3) the number of outstanding APS, if any, subject to any Sell Order
placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate per annum
specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent shall round such
rate up to the next highest one-thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the outstanding APS held by an
Existing Holder are not submitted to the Auction Agent prior to the Submission
Deadline, the Auction Agent shall deem a Hold Order (in the case of an Auction
relating to a Dividend Period which is not a Special Dividend Period) and a Sell
Order (in the case of an Auction relating to a Special Dividend Period) to have
been submitted on behalf of such Existing Holder covering the number of
outstanding APS held by such Existing Holder and not subject to Orders submitted
to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering in the
aggregate more than the number of outstanding APS held by such Existing Holder
are submitted to the Auction Agent, such Orders shall be considered valid as
follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder shall be
considered valid up to and including the number of outstanding APS held by such
Existing Holder; provided that if more than one Hold Order is submitted on
behalf of such Existing Holder and the number of APS subject to such Hold Orders
exceeds the number of outstanding APS held by such Existing Holder, the number
of APS subject to each of such Hold Orders shall be reduced pro rata so that
such Hold Orders, in the aggregate, cover exactly the number of outstanding APS
held by such Existing Holder;
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(B) any Bids submitted on behalf of such Existing Holder shall be
considered valid, in the ascending order of their respective rates per annum if
more than one Bid is submitted on behalf of such Existing Holder, up to and
including the excess of the number of outstanding APS held by such Existing
Holder over the number of shares of APS subject to any Hold Order referred to in
Paragraph 10(c)(iv)(A) above (and if more than one Bid submitted on behalf of
such Existing Holder specifies the same rate per annum and together they cover
more than the remaining number of shares that can be the subject of valid Bids
after application of Paragraph 10(c)(iv)(A) above and of the foregoing portion
of this Paragraph 10(c)(iv)(B) to any Bid or Bids specifying a lower rate or
rates per annum, the number of shares subject to each of such Bids shall be
reduced pro rata so that such Bids, in the aggregate, cover exactly such
remaining number of shares); and the number of shares, if any, subject to Bids
not valid under this Paragraph 10(c)(iv)(B) shall be treated as the subject of a
Bid by a Potential Holder; and
(C) any Sell Order shall be considered valid up to and including the
excess of the number of outstanding APS held by such Existing Holder over the
number of APS subject to Hold Orders referred to in Paragraph 10(c)(iv)(A) and
Bids referred to in Paragraph 10(c)(iv)(B); provided that if more than one Sell
Order is submitted on behalf of any Existing Holder and the number of APS
subject to such Sell Orders is greater than such excess, the number of APS
subject to each of such Sell Orders shall be reduced pro rata so that such Sell
Orders, in the aggregate, cover exactly the number of APS equal to such excess.
(v) If more than one Bid is submitted on behalf of any Potential Holder,
each Bid submitted shall be a separate Bid with the rate per annum and number of
APS therein specified.
(vi) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date shall be irrevocable.
PARAGRAPH 10(D) DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND
APPLICABLE RATE.
(i) Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent shall assemble all Orders submitted or deemed submitted to it by
the Broker-Dealers (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as
a "Submitted Order") and shall determine:
(A) the excess of the total number of outstanding APS over the number of
outstanding APS that are the subject of Submitted Hold Orders (such excess being
hereinafter referred to as the "Available APS");
(B) from the Submitted Orders whether the number of outstanding APS that
are the subject of Submitted Bids by Potential Holders specifying one or more
rates per annum equal to or lower than the Maximum Applicable Rate exceeds or is
equal to the sum of:
(1) the number of outstanding APS that are the subject of Submitted Bids
by Existing Holders specifying one or more rates per annum higher than the
Maximum Applicable Rate, and
(2) the number of outstanding APS that are subject to Submitted Sell
Orders (if such excess or such equality exists (other than because the number of
outstanding APS in clauses (1) and (2) above are each zero because all of the
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outstanding APS are the subject of Submitted Hold Orders), such Submitted Bids
by Potential Holders hereinafter being referred to collectively as "Sufficient
Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate per annum specified
in the Submitted Bids (the "Winning Bid Rate") that if:
(1) each Submitted Bid from Existing Holders specifying the Winning Bid
Rate and all other submitted Bids from Existing Holders specifying lower rates
per annum were rejected, thus entitling such Existing Holders to continue to
hold the shares of APS that are the subject of such Submitted Bids, and
(2) each Submitted Bid from Potential Holders specifying the Winning Bid
Rate and all other Submitted Bids from Potential Holders specifying lower rates
per annum were accepted, thus entitling the Potential Holders to purchase the
APS that are the subject of such Submitted Bids, would result in the number of
shares subject to all Submitted Bids specifying the Winning Bid Rate or a lower
rate per annum being at least equal to the Available APS.
(ii) Promptly after the Auction Agent has made the determinations pursuant
to Paragraph 10(d)(i), the Auction Agent shall advise the Trust of the Maximum
Applicable Rate and, based on such determinations, the Applicable Rate for the
next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for the
next succeeding Dividend Period shall be equal to the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than because all of
the outstanding APS are the subject of Submitted Hold Orders), that the
Applicable Rate for the next succeeding Dividend Period shall be equal to the
Maximum Applicable Rate; or
(C) if all of the outstanding APS are the subject of Submitted Hold
Orders, that the Dividend Period next succeeding the Auction automatically shall
be the same length as the immediately preceding Dividend Period and the
Applicable Rate for the next succeeding Dividend Period shall be equal to 59% of
the Reference Rate (or 90% of such rate if the Trust has provided notification
to the Auction Agent prior to the Auction establishing the Applicable Rate for
any dividend that net capital gains or other taxable income will be included in
such dividend on APS) on the date of the Auction.
PARAGRAPH 10(E) ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL
ORDERS AND ALLOCATION OF SHARES.
Based on the determinations made pursuant to Paragraph 10(d)(i), the
Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the
Auction Agent shall take such other action as set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the provisions
of Paragraph 10(e)(iii) and Paragraph 10(e)(iv), Submitted Bids and Submitted
Sell Orders shall be accepted or rejected in the following order of priority and
all other Submitted
Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted and
the Submitted Bid of each of the Existing Holders specifying any rate per annum
that is higher than the Winning Bid Rate shall be accepted, thus requiring each
such Existing Holder to sell the outstanding shares of APS that are the subject
of such Submitted Sell Order or Submitted Bid;
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(B) the Submitted Bid of each of the Existing Holder specifying any rate
per annum that is lower than the Winning Bid Rate shall be rejected, thus
entitling each such Existing Holder to continue to hold the outstanding APS that
are the subject of such Submitted Bid;
(C) the Submitted Bid of each of the Potential Holders specifying any rate
per annum that is lower than the Winning Bid Rate shall be accepted;
(D) the Submitted Bid of each of the Existing Holders specifying a rate
per annum that is equal to the Winning Bid Rate shall be rejected, thus
entitling each such Existing Holder to continue to hold the outstanding APS that
are the subject of such Submitted Bid, unless the number of outstanding shares
of APS subject to all such Submitted Bids shall be greater than the number of
outstanding APS ("Remaining Shares") equal to the excess of the Available APS
over the number of outstanding APS subject to Submitted Bids described in
Paragraph 10(e)(i)(B) and Paragraph 10(e)(i)(C), in which event the Submitted
Bids of each such Existing Holder shall be accepted, and each such Existing
Holder shall be required to sell outstanding shares of APS, but only in an
amount equal to the difference between (1) the number of outstanding APS then
held by such Existing Holder subject to such Submitted Bid and (2) the number of
APS obtained by multiplying (x) the number of Remaining Shares by (y) a fraction
the numerator of which shall be the number of outstanding APS held by such
Existing Holder subject to such Submitted Bid and the denominator of which shall
be the sum of the numbers of outstanding APS subject to such Submitted Bids made
by all such Existing Holders that specified a rate per annum equal to the
Winning Bid Rate; and
(E) the Submitted Bid of each of the Potential Holders specifying a rate
per annum that is equal to the Winning Bid Rate shall be accepted but only in an
amount equal to the number of outstanding APS obtained by multiplying (x) the
difference between the Available APS and the number of outstanding APS subject
to Submitted Bids described in Paragraph 10(e)(i)(B), Paragraph 10(e)(i)(C) and
Paragraph 10(e)(i)(D) by (y) a fraction the numerator of which shall be the
number of outstanding APS subject to such Submitted Bid and the denominator of
which shall be the sum of the number of outstanding APS subject to such
Submitted Bids made by all such Potential Holders that specified rates per annum
equal to the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than because
all of the outstanding APS are subject to Submitted Hold Orders), subject to the
provisions of Paragraph 10(e)(iii), Submitted Orders shall be accepted or
rejected as follows in the following order of priority and all other Submitted
Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate per
annum that is equal to or lower than the Maximum Applicable Rate shall be
rejected, thus entitling such Existing Holder to continue to hold the
outstanding APS that are the subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate per
annum that is equal to or lower than the Maximum Applicable Rate shall be
accepted, thus requiring such Potential Holder to purchase the outstanding APS
that are the subject of such Submitted Bid; and
(C) the Submitted Bids of each Existing Holder specifying any rate per
annum that is higher than the Maximum Applicable Rate shall be accepted and the
Submitted Sell Orders of each Existing Holder shall be accepted, in both cases
only in an amount equal to the difference between (1) the number of outstanding
APS then held by such Existing Holder subject to such Submitted Bid or Submitted
Sell Order and (2) the number of APS obtained by multiplying (x) the difference
between the Available APS and the aggregate number of outstanding APS subject to
Submitted Bids described in Paragraph 10(e)(ii)(A) and Paragraph 10(e)(ii)(B) by
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(y) a fraction the numerator of which shall be the number of outstanding APS
held by such Existing Holder subject to such Submitted Bid or Submitted Sell
Order and the denominator of which shall be the number of outstanding APS
subject to all such Submitted Bids and Submitted Sell Orders.
(iii) If, as a result of the procedures described in Paragraph 10(e)(i) or
Paragraph 10(e)(ii), any Existing Holder would be entitled or required to sell,
or any Potential Holder would be entitled or required to purchase, a fraction of
a APS on any Auction Date, the Auction Agent shall, in such manner as in its
sole discretion it shall determine, round up or down the number of APS to be
purchased or sold by any Existing Holder or Potential Holder on such Auction
Date so that each outstanding APS purchased or sold by each Existing Holder or
Potential Holder on such Auction Date shall be a whole APS.
(iv) If, as a result of the procedures described in Paragraph 10(e)(i),
any Potential Holder would be entitled or required to purchase less than a whole
share of APS on any Auction Date, the Auction Agent, in such manner as in its
sole discretion it shall determine, shall allocate APS for purchase among
Potential Holders so that only whole shares of APS are purchased on such Auction
Date by any Potential Holder, even if such allocation results in one or more of
such Potential Holders not purchasing any APS on such Auction Date.
(v) Based on the results of each Auction, the Auction Agent shall
determine, with respect to each Broker-Dealer that submitted Bids or Sell Orders
on behalf of Existing Holders or Potential Holders, the aggregate number of the
outstanding APS to be purchased and the aggregate number of outstanding APS to
be sold by such Potential Holders and Existing Holders and, to the extent that
such aggregate number of outstanding shares to be purchased and such aggregate
number of outstanding shares to be sold differ, the Auction Agent shall
determine to which other Broker-Dealer or Broker-Dealers acting for one or more
purchasers such Broker-Dealer shall deliver, or from which other Broker-Dealer
or Broker-Dealers acting for one or more sellers such Broker-Dealer shall
receive, as the case may be, outstanding APS.
PARAGRAPH 10(F) MISCELLANEOUS.
The Trust may interpret the provisions of this Paragraph 10 to resolve any
inconsistency or ambiguity, remedy any formal defect or make any other change or
modification that does not substantially adversely affect the rights of
Beneficial Owners of APS. A Beneficial Owner or an Existing Holder (A) may sell,
transfer or otherwise dispose of APS only pursuant to a Bid or Sell Order in
accordance with the procedures described in this Paragraph 10 or to or through a
Broker-Dealer, provided that in the case of all transfers other than pursuant to
Auctions such Beneficial Owner or Existing Holder, its Broker-Dealer, if
applicable, or its Agent Member advises the Auction Agent of such transfer and
(B) except as otherwise required by law, shall have the ownership of the APS
held by it maintained in book entry form by the Securities Depository in the
account of its Agent Member, which in turn will maintain records of such
Beneficial Owner's beneficial ownership. Neither the Trust nor any Affiliate
(other than _________________________) shall submit an Order in any Auction. Any
Beneficial Owner that is an Affiliate (other than _________________________)
shall not sell, transfer or otherwise dispose of APS to any Person other than
the Trust. All of the outstanding APS of a Series shall be represented by a
single certificate registered in the name of the nominee of the Securities
Depository unless otherwise required by law or unless there is no Securities
Depository. If there is no Securities Depository, at the Trust's option and upon
its receipt of such documents as it deems appropriate, any APS may be registered
in the Stock Register in the name of the Beneficial Owner thereof and such
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Beneficial Owner thereupon will be entitled to receive certificates therefor and
required to deliver certificates thereof or upon transfer or exchange thereof.
<PAGE>
EATON VANCE MASSACHUSETTS MUNICIPAL INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
_________________, 1998
INVESTMENT ADVISER AND ADMINISTRATOR
Eaton Vance Management
24 Federal Street
Boston, MA 02110
CUSTODIAN
Investors Bank & Trust Company
200 Clarendon Street
Boston, MA 02116
TRANSFER AGENT
First Data Investor Services Group
P.O. Box 5123
Westborough, MA 01581-5123
(800) 262-1122
INDEPENDENT ACCOUNTANTS
________________________________
________________________________
Boston, MA _____________________
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PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) FINANCIAL STATEMENTS:
INCLUDED IN PART A: Not Applicable
INCLUDED IN PART B: Not Applicable
(2) EXHIBITS:
(a) Agreement and Declaration of Trust dated December 10, 1998 is
incorporated herein by reference to the Trust's Initial Registration
Statement on Form N-2 (File Nos. 333-68719 and 811-09141) filed with
the Securities and Exchange Commission (the "Commission") on December
11, 1998 (the "Initial Common Shares Registration Statement").
(b) By-Laws are incorporated herein by reference to the Trust's Initial
Common Shares Registration Statement.
(1) Form of Amendment No. 1 to the By-Laws filed herewith.
(c) Not applicable
(d) (1) Form of Specimen Certificate of Auction Preferred Shares of
Beneficial Interest to be filed by amendment.
(2) Form of Specimen Certificate of Common Shares of Beneficial
Interest is incorporated herein by reference to the Initial
Common Shares Registration Statement.
(e) Form of Dividend Reinvestment Plan is incorporated herein by
reference to the Initial Common Shares Registration Statement.
(f) Not applicable
(g) (1) Form of Investment Advisory Agreement with respect to Auction
Preferred Shares to be filed by amendment.
(2) Form of Investment Advisory Agreement with respect to Common
Shares to be filed by amendment.
(h) (1) Form of Purchase Agreement for Auction Preferred Shares to be
filed by amendment.
(2) Form of Underwriting Agreement for Common Shares to be filed by
amendment.
(3) Form of Master Agreement Among Underwriters to be filed by
amendment. (4) Form of Master Selected Dealers to be filed by
amendment.
(i) The Securities and Exchange Commission has granted the Registrant an
exemptive order that permits the Registrant to enter into deferred
compensation arrangements with its independent Trustees. See in the
Matter of Capital Exchange Fund, Inc., Release No. IC-20671 (November
1, 1994).
(j) Custodian Agreement to be filed by amendment.
(k) (1) Form of Transfer Agency and Services Agreement is incorporated
herein by reference to the Initial Common Shares Registration
Statement.
C-1
<PAGE>
(2) Form of Auction Agent Agreement between the Registrant and
Bankers Trust Co. to be filed by amendment.
(3) Form of Broker-Dealer Agreement to be filed by amendment.
(4) Form of Letter of Representations to be filed by amendment.
(5) Form of Administration Agreement is incorporated herein by
reference to the Initial Common Shares Registration Statement.
(6) Form of Shareholder Servicing Agreement to be filed by
amendment.
(l) Opinion and Consent of Counsel to be filed by amendment.
(m) Not applicable
(n) (1) Consent of Standard & Poor's to be filed by amendment.
(2) Consent of Independent Auditors' to be filed by amendment.
(o) Not applicable
(p) Letter Agreement with Eaton Vance Management to be filed by
amendment.
(q) Not applicable
(r) Financial Data Schedule to be filed by amendment.
(s) Power of Attorney to be filed by amendment.
ITEM 25. MARKETING ARRANGEMENTS
See the Underwriting Agreement to be filed as Exhibit (h).
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the approximate expenses incurred in
connection with the offerings of Registrant (some of which will be borne by the
Investment Adviser):
<TABLE>
<CAPTION>
<S> <C>
Registration fees.............................................. $ 22,240
National Association of Securities Dealers, Inc. Fees.......... $ 8,500
Printing (other than stock certificates)....................... $ 30,000
Engraving and printing stock certificates...................... $ 10,000
Legal fees and expenses........................................ $ 10,000
--------
Total........................................................ $ 80,740
========
</TABLE>
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
None.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
(1) (2)
Title of Class Number of Record Holders
Auction Preferred Shares of beneficial interest, 0
par value $.01 per share as of
January 15, 1999
Common Shares of beneficial interest, 0
par value $.01 per share as of
January 15, 1999
C-2
<PAGE>
ITEM 29. INDEMNIFICATION
The Registrant's By-Laws and Form of Amendment No. 1 filed herein and the
Underwriting Agreement to be filed contain provisions limiting the liability,
and providing for indemnification, of the Trustees and officers under certain
circumstances.
Registrant's Trustees and officers are insured under a standard investment
company errors and omissions insurance policy covering loss incurred by reason
of negligent errors and omissions committed in their capacities as such.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
Registrant and the Adviser and any underwriter to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in such Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a trustee, officer, or
controlling person or the Registrant and the Underwriters in connection with the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such trustee, officer or controlling person or the Distributor in
connection with the Common Shares being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in such Act and
will be governed by the final adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
Reference is made to: (i) the information set forth under the caption
"Investment Advisory and Other Services" in the Statement of Additional
Information; (ii) the Eaton Vance Corp. 10-K filed under the Securities Exchange
Act of 1934 (File No. 1-8100); and (iii) the Form ADV of Eaton Vance Management
(File No. 801-15930) filed with the Commission, all of which are incorporated
herein by reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
All applicable accounts, books and documents required to be maintained by
the Registrant by Section 31(a) of the Investment Company Act of 1940 and the
Rules promulgated thereunder are in the possession and custody of the
Registrant's custodian, Investors Bank & Trust Company, 200 Clarendon Street,
Boston, MA 02116, and its transfer agent, First Data Investor Services Group,
4400 Computer Drive, Westborough, MA 01581-5120, with the exception of certain
corporate documents and portfolio trading documents which are in the possession
and custody of Eaton Vance Management, 24 Federal Street, Boston, MA 02110.
Registrant is informed that all applicable accounts, books and documents
required to be maintained by registered investment advisers are in the custody
and possession of Eaton Vance Management.
C-3
<PAGE>
ITEM 32. MANAGEMENT SERVICES
None.
ITEM 33. UNDERTAKINGS
(1) Registrant undertakes to suspend offering of its Auction Preferred
Shares until it amends its prospectus if (a) subsequent to the effective
date of its Registration Statement, the net asset value declines more
than 10 percent from its net asset value as of the effective date of the
Registration Statement, or (b) the net asset value increases to an
amount greater than its net proceeds as stated in the prospectus.
(2) Not applicable
(3) Not applicable
(4) Not applicable
(5) (a) For purpose of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant pursuant to Rule 497(h)
under the Securities Act of 1933, shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be initial bona fide offering thereof.
(6) The registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of
receipt of a written or oral request, its Statement of Additional
Information.
C-4
<PAGE>
NOTICE
A copy of the Agreement and Declaration of Trust of Eaton Vance Municipal Income
Trust is on file with the Secretary of State of the Commonwealth of
Massachusetts and notice is hereby given that this instrument is executed on
behalf of the Registrant by an officer of the Registrant as an officer and not
individually and that the obligations of or arising out of this instrument are
not binding upon any of the Trustees, officers or shareholders individually, but
are binding only upon the assets and property of the Registrant.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Boston and Commonwealth of Massachusetts, on the 15th
day of January, 1999.
EATON VANCE MUNICIPAL INCOME TRUST
By: /s/ Thomas J. Fetter
--------------------------------
Thomas J. Fetter, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
President (Principal Executive
/s/ Thomas J. Fetter Officer) January 15, 1999
- -----------------------------
Thomas J. Fetter
Treasurer (Principal
/s/ James L. O'Connor Financial and Accounting January 15, 1999
- ----------------------------- Officer)
James L. O'Connor
/s/ James B. Hawkes Vice President and Trustee January 15, 1999
- -----------------------------
James B. Hawkes
/s/ Donald R. Dwight Trustee January 15, 1999
- -----------------------------
Donald R. Dwight
/s/ Norton H. Reamer Trustee January 15, 1999
- -----------------------------
Norton H. Reamer
/s/ Jack L. Treynor Trustee January 15, 1999
- -----------------------------
Jack L. Treynor
</TABLE>
C-6
<PAGE>
EXHIBIT INDEX
Exhibits Description Page
- -------- ----------- ----
(a) Form of Amendment No. 1 to By-Laws
C-7
<PAGE>
EATON VANCE MUNICIPAL INCOME TRUST
Amendment No. 1 to By-laws - Statement
creating one series of
Auction Preferred Shares
WHEREAS, Section 5.1 of Article VI of the Agreement and Declaration of
Trust dated December 10, 1998 of Eaton Vance Municipal Income Trust (the
"Declaration of Trust"), a copy of which is on file in the office of the
Secretary of State of The Commonwealth of Massachusetts, provides that the
Trustees may, without shareholder approval, authorize one or more classes of
shares (which classes may be divided into two or more series), shares of each
such class or series having such preferences, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption, as the Trustees may determine and as shall be set forth in the
By-laws; and
WHEREAS, pursuant to authority expressly vested in the Trustees of the
Trust by Section 5.1 of Article VI of the Declaration of Trust, the Trustees
have authorized, in addition to that Trust's common shares, a class of _____
preferred shares, without par value, liquidation preference $50,000 per share
plus accumulated but unpaid dividends thereon, if any (whether or not earned or
declared), plus the premium, if any, resulting from the designation of a Premium
Call Period, designated Auction Preferred Shares, Series A;
NOW, THEREFORE, the By-laws of Eaton Vance Municipal Income Trust are
hereby amended as follows:
1. ARTICLES VII through XIII shall be redesignated as ARTICLES VIII
through XIV and all affected cross references therein hereby are
amended accordingly.
2. A new ARTICLE VII shall be added as follows:
<PAGE>
ARTICLE VII
STATEMENT CRATING A SERIES OF AUCTION PREFERRED SHARES
DESIGNATION
Auction Preferred Shares: An unlimited number of shares of beneficial
interest of Preferred Shares, par value $.01 per share, liquidation preference
$25,000 per share plus an amount equal to accumulated but unpaid dividends
(whether or not earned or declared) thereon, is hereby designated "Auction
Preferred Shares, Series A." Each share of Auction Preferred Shares, Series A
(sometimes referred to herein as "Series A APS") may be issued on a date to be
determined by the Board of Trustees of the Trust or pursuant to their delegated
authority; have an Initial Dividend Rate and an Initial Dividend Payment Date as
shall be determined in advance of the issuance thereof by the Board of Trustee
of the Trust or pursuant to their delegated authority; and have such other
preferences, voting powers, limitations as to dividends, qualifications and
terms and conditions of redemption as are set forth in these Amended By-Laws.
The Auction Preferred Shares shall constitute a separate series of Preferred
Shares of the Trust, and each share of Auction Preferred Shares shall be
identical.
1. DEFINITIONS. (a) Unless the context or use indicates another or
different meaning or intent, in these Amended By-Laws the following terms
have the following meanings, whether used in the singular or plural:
"`AA' Composite Commercial Paper Rate," on any date of determination,
means (i) the Interest Equivalent of the rate on commercial paper placed on
behalf of issuers whose corporate bonds are rated "AA" by S&P or "Aa" by Moody's
or the equivalent of such rating by another nationally recognized rating agency,
as such rate is made available on a discount basis or otherwise by the Federal
Reserve Bank of New York for the Business Day immediately preceding such date,
or (ii) in the event that the Federal Reserve Bank of New York does not make
available such a rate, then the arithmetic average of the Interest Equivalent of
the rate on commercial paper placed on behalf of such issuers, as quoted on a
discount basis or otherwise by Merrill Lynch, Pierce, Fenner & Smith
Incorporated or its successors that are Commercial Paper Dealers, to the Auction
Agent for the close of business on the Business Day immediately preceding such
date. If one of the Commercial Paper Dealers does not quote a rate required to
determine the "AA" Composite Commercial Paper Rate, the "AA" Composite
Commercial Paper Rate will be determined on the basis of the quotation or
quotations furnished by any Substitute Commercial Paper Dealer or Substitute
Commercial Paper Dealers selected by the Trust to provide such rate or rates not
being supplied by the Commercial Paper Dealer. If the number of Dividend Period
days shall be (i) 7 or more but fewer than 49 days, such rate shall be the
Interest Equivalent of the 30-day rate on such commercial paper; (ii) 49 or more
but fewer than 70 days, such rate shall be the Interest Equivalent of the 60-day
rate on such commercial paper; (iii) 70 or more days but fewer than 85 days,
such rate shall be the arithmetic average of the Interest Equivalent on the
60-day and 90-day rates on such commercial paper; (iv) 85 or more days but fewer
than 99 days, such rate shall be the Interest Equivalent of the 90-day rate on
such commercial paper; (v) 99 or more days but fewer than 120 days, such rate
shall be the arithmetic average of the Interest Equivalent of the 90-day and
120-day rates on such commercial paper; (vi) 120 or more days but fewer than 141
days, such rate shall be the Interest Equivalent of the 120-day rate on such
commercial paper; (vii) 141 or more days but fewer than 162 days, such rate
shall be the arithmetic average of the Interest Equivalent of the 120-day and
180-day rates on such commercial paper; and (viii) 162 or more days but fewer
than 183 days, such rate shall be the Interest Equivalent of the 180-day rate on
such commercial paper.
"Accountant's Confirmation" has the meaning set forth in paragraph 7(c)
of these Amended By-Laws.
"Additional Dividend" has the meaning set forth in paragraph 2(e) of
these Amended By-Laws.
"Adviser" means the Trust's investment adviser which initially shall be
Eaton Vance Management.
"Affiliate" means any Person, other than PaineWebber Incorporated or its
successors, known to the Auction Agent to be controlled by, in control of, or
under common control with, the Trust.
2
<PAGE>
"Agent Member" means a member of the Securities Depository that will act
on behalf of a Beneficial Owner of one or more shares of APS or a Potential
Beneficial Owner.
"APS" means, as the case may be, the Auction Preferred Shares.
"APS Basic Maintenance Amount," as of any Valuation Date, means the dollar
amount equal to (i) the sum of (A) the product of the number of shares of APS
and Other APS Outstanding on such Valuation Date multiplied by the sum of (a)
$25,000 and (b) any applicable redemption premium attributable to the
designation of a Premium Call Period; (B) the aggregate amount of cash dividends
(whether or not earned or declared) that will have accumulated for each share of
APS and Other APS Outstanding, in each case, to (but not including) the end of
the current Dividend Period for each series of APS that follows such Valuation
Date in the event the then current Dividend Period will end within 49 calendar
days of such Valuation Date or through the 49th day after such Valuation Date in
the event the then current Dividend Period for each series of APS will not end
within 49 calendar days of such Valuation Date; (C) in the event the then
current Dividend Period will end within 49 calendar days of such Valuation Date,
the aggregate amount of cash dividends that would accumulate at the Maximum
Applicable Rate applicable to a Dividend Period of 28 or fewer days on any
shares of APS and Other APS Outstanding from the end of such Dividend Period
through the 49th day after such Valuation Date, multiplied by the larger of the
Moody's Volatility Factor and the S&P Volatility Factor, determined from time to
time by Moody's and S&P, respectively (except that if such Valuation Date occurs
during a Non-Payment Period, the cash dividend for purposes of calculation would
accumulate at the then current Non-Payment Period Rate); (D) the amount of
anticipated expenses of the Trust for the 90 days subsequent to such Valuation
Date (including any premiums payable with respect to a Policy); (E) the amount
of the Trust's Maximum Potential Additional Dividend Liability as of such
Valuation Date; and (F) any current liabilities as of such Valuation Date to the
extent not reflected in any of (i)(A) through (i)(E) (including, without
limitation, and immediately upon determination, any amounts due and 5 payable by
the Trust pursuant to repurchase agreements and any amounts payable for
Municipal Obligations purchased as of such Valuation Date) less (ii) either (A)
the Discounted Value of any of the Trust's assets, or (B) the face value of any
of the Trust's assets if such assets mature prior to or on the date of
redemption of APS or payment of a liability and are either securities issued or
guaranteed by the United States Government or Deposit Securities, in both cases
irrevocably deposited by the Trust for the payment of the amount needed to
redeem shares of APS subject to redemption or to satisfy any of (i)(B) through
(i)(F).
"APS Basic Maintenance Cure Date," with respect to the failure by the
Trust to satisfy the APS Basic Maintenance Amount (as required by paragraph 7(a)
of these Amended By-Laws) as of a given Valuation Date, means the sixth Business
Day following such Valuation Date.
"APS Basic Maintenance Report" means a report signed by any of the
President, Treasurer, any Senior Vice President or any Vice President of the
Trust which sets forth, as of the related Valuation Date, the assets of the
Trust, the Market Value and the Discounted Value thereof (seriatim and in
aggregate), and the APS Basic Maintenance Amount.
"Anticipation Notes" shall mean the following Municipal Obligations:
revenue anticipation notes, tax anticipation notes, tax and revenue anticipation
notes, grant anticipation notes and bond anticipation notes.
"Applicable Percentage" has the meaning set forth in paragraph
10(a)(vii) of these Amended By-Laws.
"Applicable Rate" means the rate per annum at which cash dividends are
payable on the APS or Other APS, as the case may be, for any Dividend Period.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means ______________ unless and until another commercial
bank, trust company or other financial institution appointed by a resolution of
the Board of Trustees of the Trust or a duly authorized committee thereof enters
into an agreement with the Trust to follow the Auction Procedures for the
purpose of determining the Applicable Rate and to act as transfer agent,
registrar, dividend disbursing agent and redemption agent for the APS and Other
APS.
3
<PAGE>
"Auction Procedures" means the procedures for conducting Auctions set
forth in paragraph 10 of this Article VIII, Section 2 of these Amended By-Laws.
"Beneficial Owner" means a customer of a Broker-Dealer who is listed on
the records of that Broker-Dealer (or, if applicable, the Auction Agent) as a
holder of shares of APS or a Broker-Dealer that holds APS for its own account.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law
to perform the functions required of a Broker-Dealer in paragraph 10 of this
Article VIII, Section 2 of these Amended By-Laws, that has been selected by the
Trust and has entered into a Broker-Dealer Agreement with the Auction Agent that
remains effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent and
a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the
procedures specified in paragraph 10 of this Article VIII, Section 2 of these
Amended By-Laws.
"Business Day" means a day on which the New York Stock Exchange, Inc. is
open for trading and which is not a Saturday, Sunday or other day on which banks
in The City of New York are authorized or obligated by law to close.
"Declaration of Trust" means the Agreement and Declaration of Trust, as
amended and supplemented (including these Amended By-Laws), of the Trust.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means PaineWebber Incorporated and such other
commercial paper dealer or dealers as the Trust may from time to time appoint,
or, in lieu of any thereof, their respective affiliates or successors.
"Common Shares" means the shares of beneficial interest designated as
common shares, par value $.01 per share, of the Trust.
"Trust" means Eaton Vance Municipal Income Trust, a Massachusetts
business trust.
"Date of Original Issue" means, with respect to any share of APS or Other
APS, the date on which the Trust originally issues such share.
"Deposit Securities" means cash and Municipal Obligations rated at least
A2 (having a remaining maturity of 12 months or less), P-1, VMIG-1 or MIG-1 by
Moody's or A (having a remaining maturity of 12 months or less), A-1+ or SP-1+
by S&P.
"Discounted Value" means the quotient of the Market Value thereof divided
by the applicable S&P Discount Factor.
"Dividend Payment Date," with respect to APS, has the meaning set forth in
paragraph 2(b)(i) of these Amended By-Laws and, with respect to Other APS, has
the equivalent meaning.
"Dividend Period" means the Initial Dividend Period, any 7-Day Dividend
Period and any Special Dividend Period.
"Existing Holder" means a Broker-Dealer or any such other Person as may be
permitted by the Trust that is listed as the holder of record of shares of APS
in the Share Books.
"Forward Commitment" has the meaning set forth in paragraph 8(c) of this
Article VIII, Section 2 of these Amended By-Laws.
4
<PAGE>
"Holder" means a Person identified as a holder of record of shares of APS
in the Share Register.
"Independent Accountant" means a nationally recognized accountant, or firm
of accountants, that is, with respect to the Trust, an independent public
accountant or firm of independent public accountants under the Securities Act of
1933, as amended.
"Initial Dividend Payment Date" means the Initial Dividend Payment Date as
determined by the Board of Trustees of the Trust with respect to each series of
APS or Other APS, as the case may be.
"Initial Dividend Period" has the meaning set forth in paragraph 2(c)(i)
of this Article VIII, Section 2 of these Amended By-Laws and, with respect to
Other APS, has the equivalent meaning.
"Initial Dividend Rate" means the rate per annum applicable to the Initial
Dividend Period for such series of APS and, with respect to Other APS, has the
equivalent meaning.
"Initial Margin" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a futures
contract.
"Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing security.
"Long Term Dividend Period" means a Special Dividend Period consisting of
a specified period of one whole year or more but not greater than five years.
"Mandatory Redemption Price" means $25,000 per share of APS plus an amount
equal to accumulated but unpaid dividends (whether or not earned or declared) to
the date fixed for redemption and excluding Additional Dividends.
"Marginal Tax Rate" means the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate, whichever is greater.
"Market Value" of any asset of the Trust shall be the market value thereof
determined by the Pricing Service. Market Value of any asset shall include any
interest accrued thereon. The Pricing Service shall value portfolio securities
at the quoted bid prices or the mean between the quoted bid and asked price or
the yield equivalent when quotations are not readily available. Securities for
which quotations are not readily available shall be valued at fair value as
determined by the Pricing Service using methods which include consideration of:
yields or prices of municipal obligations of comparable quality, type of issue,
coupon, maturity and rating; indications as to value from dealers; and general
market conditions. The Pricing Service 10 may employ electronic data processing
techniques and/or a matrix system to determine valuations. In the event the
Pricing Service is unable to value a security, the security shall be valued at
the lower of two dealer bids obtained by the Trust from dealers who are members
of the National Association of Securities Dealers, Inc. and who make a market in
the security, at least one of which shall be in writing. Futures contracts and
options are valued at closing prices for such instruments established by the
exchange or board of trade on which they are traded, or if market quotations are
not readily available, are valued at fair value on a consistent basis using
methods determined in good faith by the Board of Trustees.
"Maximum Applicable Rate," with respect to APS, has the meaning set forth
in paragraph 10(a)(vii) of this Articles VIII, Section 2 of these Amended
By-Laws and, with respect to Other APS, has the equivalent meaning.
"Maximum Potential Additional Dividend Liability," as of any Valuation
Date, means the aggregate amount of Additional Dividends that would be due if
the Trust were to make Retroactive Taxable Allocations, with respect to any
fiscal year, estimated based upon dividends paid and the amount of undistributed
realized net capital gains and other taxable income earned by the Trust, as of
the end of the calendar month immediately preceding such Valuation Date and
assuming such Additional Dividends are fully taxable.
5
<PAGE>
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Municipal Obligations" means "Municipal Obligations" as defined in the
Trust's Registration Statement on Form N-2 (File No. 333-________) relating to
the APS on file with the Securities and Exchange Commission, as such
Registration Statement may be amended from time to time, as well as short-term
municipal obligations.
"Municipal Index" has the meaning set forth in paragraph 8(a) of this
Article VIII, Section 2 of these Amended By-Laws.
"1940 Act" means the Investment Company Act of 1940, as amended from time
to time.
"1940 Act APS Asset Coverage" means asset coverage, as defined in section
18(h) of the 1940 Act, of at least 200% with respect to all outstanding senior
securities of the Trust which are shares of beneficial interest, including all
outstanding shares of APS and Other APS (or such other asset coverage as may in
the future be specified in or under the 1940 Act as the minimum asset coverage
for senior securities which are shares of beneficial interest of a closed-end
investment company as a condition of paying dividends on its Common Shares).
"1940 Act Cure Date," with respect to the failure by the Trust to maintain
the 1940 Act APS Asset Coverage (as required by paragraph 6 of these Amended
By-Laws) as of the last Business Day of each month, means the last Business Day
of the following month.
"Non-Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions".
"Non-Payment Period" means any period commencing on and including the day
on which the Trust shall fail to (i) declare, prior to the close of business on
the second Business Day preceding any Dividend Payment Date, for payment on or
(to the extent permitted by paragraph 2(c)(i) of this Article VIII, Section 2 of
these Amended By-Laws) within three Business Days after such Dividend Payment
Date to the Holders as of 12:00 noon, New York City time, on the Business Day
preceding such Dividend Payment Date, the full amount of any dividend on shares
of APS payable on such Dividend Payment Date or (ii) deposit, irrevocably in
trust, in same-day funds, with the Auction Agent by 12:00 noon, New York City
time, (A) on such Dividend Payment Date the full amount of any cash dividend on
such shares payable (if declared) on such Dividend Payment Date or (B) on any
redemption date for any shares of APS called for redemption, the Mandatory
Redemption Price per share of such APS or, in the case of an optional
redemption, the Optional Redemption Price per share, and ending on and including
the Business Day on which, by 12:00 noon, New York City time, all unpaid cash
dividends and unpaid redemption prices shall have been so deposited or shall
have otherwise been made available to Holders in same-day funds; provided that,
a Non-Payment Period shall not end unless the Trust shall have given at least
five days' but no more than 30 days' written notice of such deposit or
availability to the Auction Agent, all Existing Holders (at their addresses
appearing in the Share Books) and the Securities Depository. Notwithstanding the
foregoing, the failure by the Trust to deposit funds as provided for by clauses
(ii)(A) or (ii)(B) above within three Business Days after any Dividend Payment
Date or redemption date, as the case may be, in each case to the extent
contemplated by paragraph 2(c)(i) of these Amended By-Laws, shall not constitute
a "Non-Payment Period."
"Non-Payment Period Rate" means, initially, 200% of the applicable
Reference Rate (or 275% of such rate if the Trust has provided notification to
the Auction Agent prior to the Auction establishing the Applicable Rate for any
dividend pursuant to paragraph 2(f) hereof that net capital gains or other
taxable income will be included in such dividend on shares of APS), provided
that the Board of Trustees of the Trust shall have the authority to adjust,
modify, alter or change from time to time the initial Non-Payment Period Rate if
the Board of Trustees of the Trust determines and S&P (and any Substitute Rating
Agency in lieu of S&P in the event such party shall not rate the APS) advise the
Trust in writing that such adjustment, modification, alteration or change will
not adversely affect its then current ratings on the APS.
"Normal Dividend Payment Date" has the meaning set forth in paragraph
2(b)(i) of Article VIII, Section 2 of these Amended By-Laws.
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"Notice of Redemption" means any notice with respect to the redemption of
shares of APS pursuant to paragraph 4 of Article VIII, Section 2 of these
Amended By-Laws.
"Notice of Revocation" has the meaning set forth in paragraph 2(c)(iii) of
Article VIII, Section 2 of these Amended By-Laws.
"Notice of Special Dividend Period" has the meaning set forth in paragraph
2(c)(iii) of Article VIII, Section 2 of these Amended By-Laws.
"Optional Redemption Price" means $25,000 per share plus an amount equal
to accumulated but unpaid dividends (whether or not earned or declared) to the
date fixed for redemption and excluding Additional Dividends plus any applicable
redemption premium attributable to the designation of a Premium Call Period.
"Other APS" means the auction rate Preferred Shares of the Trust, other than the
APS. "Outstanding" means, as of any date (i) with respect to APS, shares of APS
therefor issued by the Trust except, without duplication, (A) any shares of APS
theretofore canceled or delivered to the Auction Agent for cancellation, or
redeemed by the 18 Trust, or as to which a Notice of Redemption shall have been
given and Deposit Securities shall have been deposited in trust or segregated by
the Trust pursuant to paragraph 4(c) and (B) any shares of APS as to which the
Trust or any Affiliate thereof shall be a Beneficial Owner, provided that shares
of APS held by an Affiliate shall be deemed outstanding for purposes of
calculating the APS Basic Maintenance Amount and (ii) with respect to shares of
other Preferred Shares, has the equivalent meaning.
"Parity Shares" means the APS and each other outstanding series of
Preferred Shares the holders of which, together with the holders of the APS,
shall be entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in proportion to the
full respective preferential amounts to which they are entitled, without
preference or priority one over the other.
"Person" means and includes an individual, a partnership, a Trust, a
trust, an unincorporated association, a joint venture or other entity or a
government or any agency or political subdivision thereof.
"Policy" means an insurance policy purchased by the Trust which guarantees
the payment of principal and interest on specified Municipal Obligations during
the period in which such Municipal Obligations are owned by the Trust; provided,
however, that, as long as the APS are rated by S&P, the Trust will not obtain
any Policy unless S&P advises the Trust in writing that the purchase of such
Policy will not adversely affect its then-current rating on the APS.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of shares of APS but that wishes to
purchase such shares, or that is a Beneficial Owner that wishes to purchase
additional shares of APS.
"Potential Holder" means any Broker-Dealer or any such other Person as may
be permitted by the Trust, including any Existing Holder, who may be interested
in acquiring shares of APS (or, in the case of an Existing Holder, additional
shares of APS).
"Preferred Shares" means the preferred shares of beneficial interest, par
value $.01 per share, of the Trust, and includes APS and Other APS.
"Premium Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions".
"Pricing Service" means ____________ or any pricing service designated by
the Board of Trustees of the Trust provided the Trust obtains written assurance
from S&P that such designation will not impair the rating then assigned by S&P
to the APS.
"Quarterly Valuation Date" means the last Business Day of the last month
of each fiscal quarter of the Trust in each fiscal year of the Trust, commencing
___________, 1999.
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"Receivables for Municipal Obligations Sold" has the meaning set forth
under the definition of S&P Discount Factor.
"Reference Rate" means: (i) with respect to a Dividend Period or a Short
Term Dividend Period having 28 or fewer days, the higher of the applicable "AA"
Composite Commercial Paper Rate and the Taxable Equivalent of the Short-Term
Municipal Bond Rate, (ii) with respect to any Short Term Dividend Period having
more than 28 but fewer than 183 days, the applicable "AA" Composite Commercial
Paper Rate, (iii) with respect to any Short Term Dividend Period having 183 or
more but fewer than 364 days, the applicable U.S. Treasury Bill Rate and (iv)
with respect to any Long Term Dividend Period, the applicable U.S. Treasury Note
Rate.
"Request for Special Dividend Period" has the meaning set forth in
paragraph 2(c)(iii) of Article VIII, Section 2 of these Amended By-Laws.
"Response" has the meaning set forth in paragraph 2(c)(iii) of Article
VIII, Section 2 of these Amended By-Laws.
"Retroactive Taxable Allocation" has the meaning set forth in paragraph
2(e) of Article VIII, Section 2 of these Amended By-Laws.
"Right" has the meaning set forth in paragraph 2(e) of Article VIII,
Section 2 of these Amended By-Laws and, with respect to Other APS, has the
equivalent meaning.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., or its successors.
"S&P Discount Factor" means, for purposes of determining the Discounted
Value of any Municipal Bond which constitutes an S&P Eligible Asset, the
percentage determined by reference to (a)(i) the rating by S&P or Moody's on
such Bond or (ii) in the event the Municipal Bond is insured under a Policy and
the terms of the Policy permit the Trust, at its option, to obtain other
permanent insurance guaranteeing the timely payment of interest on such
Municipal Bond and principal thereof to maturity, the S&P insurance
claims-paying ability rating of the issuer of the Policy or (iii) in the event
the Municipal Bond is insured under an insurance policy which guarantees the
timely payment of interest on such Municipal Bond and principal thereof to
maturity, the S&P insurance claims-paying ability rating of the issuer of the
insurance policy and (b) the S&P Exposure Period, in accordance with the tables
set forth below:
Rating Category
- ------------------------------------------------------------------------------
S&P Exposure Period AAA* AA* A* BBB*
- ------------------------------------------------------------------------------
40 Business Days 190% 195% 210% 250%
22 Business Days 170% 175% 190% 230%
10 Business Days 155% 160% 175% 215%
7 Business Days 150% 155% 170% 210%
3 Business Days 130% 135% 150% 190%
- ------------------------------------------------------------------------------
* S&P rating
Notwithstanding the foregoing, (i) the S&P Discount Factor for short-term
Municipal Obligations will be 115%, so long as such Municipal Obligations are
rated A-1+ or SP-1+ by S&P and mature or have a demand feature exercisable in 30
days or less, or 125% if such Municipal Obligations are not rated by S&P but are
rated VMIG-1, P-1 or MIG-1 by Moody's; provided, however, such short-term
Municipal Obligations rated by Moody's but not rated by S&P having a demand
feature exercisable in 30 days or less must be backed by a letter of credit,
liquidity facility or guarantee from a bank or other financial institution
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having a short-term rating of at least A-1+ from S&P; and further provided that
such short-term Municipal Obligations rated by Moody's but not rated by S&P may
comprise no more than 50% of short-term Municipal Obligations that qualify as
S&P Eligible Assets and (ii) no S&P Discount Factor will be applied to cash or
to Receivables for Municipal Obligations Sold. "Receivables for Municipal
Obligations Sold," for purposes of calculating S&P Eligible Assets as of any
Valuation Date, means the book value of receivables for Municipal Obligations
sold as of or prior to such Valuation Date if such receivables are due within
five Business Days of such Valuation Date. For purposes of the foregoing,
Anticipation Notes rated SP-1+ or, if not rated by S&P, rated VMIG-1 by Moody's,
which do not mature or have a demand feature exercisable in 30 days and which do
not have a long-term rating, shall be considered to be short-term Municipal
Obligations.
"S&P Eligible Asset" means cash, Receivables for Municipal Obligations
Sold or a Municipal Bond that (i) is issued by any of the 50 states, the
territories and their subdivisions, counties, cities, towns, villages, and
school districts, agencies, such as authorities and special districts created by
the states, and certain federally sponsored agencies such as local housing
authorities (payments made on these bonds are exempt from regular federal income
taxes and are generally exempt from state and local taxes in the state of
issuance), (ii) is interest bearing and pays interest at least semi-annually;
(iii) is payable with respect to principal and interest in United States
Dollars; (iv) is publicly rated BBB or higher by S&P or, except in the case of
Anticipation Notes that are grant anticipation notes or bond anticipation notes
which must be rated by S&P to be included in S&P Eligible Assets, if not rated
by S&P but rated by Moody's, is rated at least A by Moody's (provided that such
Moody's-rated Municipal Obligations will be included in S&P Eligible Assets only
to the extent the Market Value of such Municipal Obligations does not exceed 50%
of the aggregate Market Value of the S&P Eligible Assets; and further provided
that, for purposes of determining the S&P Discount Factor applicable to any such
Moody's-rated Municipal Bond, such Municipal Bond will be deemed to have an S&P
rating which is one full rating category lower than its Moody's rating); (v) is
not subject to a covered call or covered put option written by the Trust; (vi)
is not part of a private placement of Municipal Obligations; and (vii) is part
of an issue of Municipal Obligations with an original issue size of at least $20
million or, if of an issue with an original issue size below $20 million (but in
no event below $10 million), is issued by an issuer with a total of at least $50
million of securities outstanding.
Notwithstanding the foregoing:
(1) Municipal Obligations of any one issuer or guarantor (excluding bond
insurers) will be considered S&P Eligible Assets only to the extent the Market
Value of such Municipal Obligations does not exceed 10% of the aggregate Market
Value of the S&P Eligible Assets, provided that 2% is added to the applicable
S&P Discount Factor for every 1% by which the Market Value of such Municipal
Obligations exceeds 5% of the aggregate Market Value of the S&P Eligible Assets;
and
(2) Municipal Obligations issued by issuers in any one state or territory
will be considered S&P Eligible Assets only to the extent the Market Value of
such Municipal Obligations does not exceed 20% of the aggregate Market Value of
S&P Eligible Assets.
"S&P Exposure Period" means the maximum period of time following a
Valuation Date, including the Valuation Date and the APS Basic Maintenance Cure
Date, that the Trust has under these Amended By-Laws to cure any failure to
maintain, as of such Valuation Date, the Discounted Value for its portfolio at
least equal to the APS Basic Maintenance Amount (as described in paragraph 7(a)
of Article VIII, Section 2 of these Amended By-Laws).
"S&P Hedging Transactions" has the meaning set forth in paragraph 8(a) of
Article VIII, Section 2 of these Amended By-Laws.
"S&P Volatility Factor" means 277% or such other potential dividend rate
increase factor as S&P advises the Trust in writing is applicable.
"Securities Depository" means The Depository Trust Company or any
successor company or other entities elected by the Trust as securities
depository for the shares of APS that agrees to follow the procedures required
to be followed by such securities depository in connection with the shares of
APS.
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"Service" means the United States Internal Revenue Service.
"7-Day Dividend Period" means a Dividend Period consisting of seven
days.
"Short Term Dividend Period" means a Special Dividend Period consisting of
a specified number of days (other than seven), evenly divisible by seven and not
fewer than seven nor more than 364.
"Special Dividend Period" means a Dividend Period consisting of (i) a
specified number of days (other than seven), evenly divisible by seven and not
fewer than seven nor more than 364 or (ii) a specified period of one whole year
or more but not greater than five years (in each case subject to adjustment as
provided in paragraph 2(b)(i)).
"Specific Redemption Provisions" means, with respect to a Special Dividend
Period either, or any combination of, (i) a period (a "Non-Call Period")
determined by the Board of Trustees of the Trust, after consultation with the
Auction Agent and the Broker-Dealers, during which the shares of APS subject to
such Dividend Period shall not be subject to redemption at the option of the
Trust and (ii) a period (a "Premium Call Period"), consisting of a number of
whole years and determined by the Board of Trustees of the Trust, after
consultation with the Auction Agent and the Broker-Dealers, during each year of
which the shares of APS subject to such Dividend Period shall be redeemable at
the Trust's option at a price per share equal to $25,000 plus accumulated but
unpaid dividends plus a premium expressed as a percentage of $25,000, as
determined by the Board of Trustees of the Trust after consultation with the
Auction Agent and the Broker-Dealers.
"Share Books" means the books maintained by the Auction Agent setting
forth at all times a current list, as determined by the Auction Agent, of
Existing Holders of the APS.
"Share Register" means the register of Holders maintained on behalf of the
Trust by the Auction Agent in its capacity as transfer agent and registrar for
the APS.
"Subsequent Dividend Period," with respect to APS, has the meaning set
forth in paragraph 2(c)(i) of Article VIII, Section 2 of these Amended By-Laws
and, with respect to Other APS, has the equivalent meaning.
"Substitute Commercial Paper Dealers" means such Substitute Commercial
Paper Dealer or Dealers as the Trust may from time to time appoint or, in lieu
of any thereof, their respective affiliates or successors.
"Substitute Rating Agency" and "Substitute Rating Agencies" mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations, respectively, selected by
PaineWebber Incorporated or its affiliates and successors, after consultation
with the Trust, to act as the substitute rating agency or substitute rating
agencies, as the case may be, to determine the credit ratings of the shares of
APS.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date
means 90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30 day High Grade Index (the "Kenny
Index") or any successor index, made available for the Business Day immediately
preceding such date but in any event not later than 8:30 A.M., New York City
time, on such date by Kenny Information Systems Inc. or any successor thereto,
based upon 30-day yield evaluations at par of bonds the interest on which is
excludable for regular Federal income tax purposes under the Code of "high
grade" component issuers selected by Kenny Information Systems Inc. or any such
successor from time to time in its discretion, which component issuers shall
include, without limitation, issuers of general obligation bonds but shall
exclude any bonds the interest on which constitutes an item of tax preference
under Section 57(a)(5) of the Code, or successor provisions, for purposes of the
"alternative minimum tax," divided by (B) 1.00 minus the Marginal Tax Rate
(expressed as a decimal); provided, however, that if the Kenny Index is not made
so available by 8:30 A.M., New York City time, on such date by Kenny Information
Systems Inc. or any successor, the Taxable Equivalent of the Short-Term
Municipal Bond Rate shall mean the quotient of (A) the per annum rate expressed
on an interest equivalent basis equal to the most recent Kenny Index so made
available for any preceding Business Day, divided by (B) 1.00 minus the Marginal
Tax Rate (expressed as a decimal). The Trust may not utilize a successor index
to the Kenny Index unless S&P provides the Trust with written confirmation that
the use of such successor index will not adversely affect the then-current S&P
rating of the APS.
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"Treasury Bonds" has the meaning set forth in paragraph 8(a) of Article
VIII, Section 2 of these Amended By-Laws.
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent of
the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available on a discount basis or otherwise by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Bill Rate on such date. "Alternate Treasury Bill Rate" on
any date means the Interest Equivalent of the yield as calculated by reference
to the arithmetic average of the bid price quotations of the actively traded
Treasury Bill with a maturity most nearly comparable to the length of the
related Dividend Period, as determined by bid price quotations as of any time on
the Business Day immediately preceding such date, obtained from at least three
recognized primary U.S. Government securities dealers selected by the Auction
Agent. 27 "U.S. Treasury Note Rate" on any date means (i) the yield as
calculated by reference to the bid price quotation of the actively traded,
current coupon Treasury Note with a maturity most nearly comparable to the
length of the related Dividend Period, as such bid price quotation is published
on the Business Day immediately preceding such date by the Federal Reserve Bank
of New York in its Composite 3:30 P.M. Quotations for U.S. Government Securities
report for such Business Day, or (ii) if such yield as so calculated is not
available, the Alternate Treasury Note Rate on such date. "Alternate Treasury
Note Rate" on any date means the yield as calculated by reference to the
arithmetic average of the bid price quotations of the actively traded, current
coupon Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as determined by the bid price quotations as of any
time on the Business Day immediately preceding such date, obtained from at least
three recognized primary U.S. Government securities dealers selected by the
Auction Agent.
"Valuation Date" means, for purposes of determining whether the Trust is
maintaining the APS Basic Maintenance Amount, each Business Day commencing with
the Date of Original Issue.
"Variation Margin" means, in connection with an outstanding futures
contract owned or sold by the Trust, the amount of cash or securities paid to or
received from a broker (subsequent to the Initial Margin payment) from time to
time as the price of such futures contract fluctuates.
(b) The foregoing definitions of Accountant's Confirmation, APS Basic
Maintenance Amount, APS Basic Maintenance Cure Date, APS Basic Maintenance
Report, Deposit Securities, Discounted Value, Independent Accountant, Initial
Margin, Market Value, Maximum Potential Additional Dividend Liability, S&P
Discount Factor, S&P Eligible Asset, S&P Exposure Period, S&P Hedging
Transactions, S&P Volatility Factor, Valuation Date and Variation Margin have
been determined by the Board of Trustees of the Trust in order to obtain a AAA
rating from S&P on the APS on their Date of Original Issue; and the Board of
Trustees of the Trust shall have the authority, without shareholder approval, to
amend, alter or repeal from time to time the foregoing definitions and the
restrictions and guidelines set forth thereunder if S&P or any Substitute Rating
Agency advises the Trust in writing that such amendment, alteration or repeal
will not adversely affect its then current rating on the APS.
2. DIVIDENDS. (a) The Holders shall be entitled to receive, when, as and
if declared by the Board of Trustees of the Trust, out of funds legally
available therefor, cumulative dividends each consisting of (i) cash at the
Applicable Rate, (ii) a Right to receive cash as set forth in paragraph 2(e)
below, and (iii) any additional amounts as set forth in paragraph 2(f) below,
and no more, payable on the respective dates set forth below. Dividends on the
shares of APS so declared and payable shall be paid (i) in preference to and in
priority over any dividends declared and payable on the Common Shares, and (ii)
to the extent permitted under the Code and to the extent available, out of net
tax-exempt income earned on the Trust's investments. To the extent permitted
under the Code, dividends on shares of APS will be designated as exempt-interest
dividends. For the purposes of this section, the term "net tax-exempt income"
shall exclude capital gains of the Trust.
(b) (i) Cash dividends on shares of APS shall accumulate from the Date of
Original Issue and shall be payable, when, as and if declared by the Board of
Trustees, out of funds legally available therefor, commencing on the Initial
Dividend Payment Date. Following the Initial Dividend Payment Date for the APS,
dividends on the APS will be payable, at the option of the Trust, either (i)
with respect to any 7-Day Dividend Period and any Short Term Dividend Period of
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35 or fewer days, on the day next succeeding the last day thereof, or (ii) with
respect to any Short Term Dividend Period of more than 35 days and with respect
to any Long Term Dividend Period, monthly on the first Business Day of each
calendar month during such Short Term Dividend Period or Long Term Dividend
Period and on the day next succeeding the last day thereof (each such date
referred to in clause (i) or (ii) being herein referred to as a "Normal Dividend
Payment Date"), except that if such Normal Dividend Payment Date is not a
Business Day, then the Dividend Payment Date shall be the first Business Day
next succeeding such Normal Dividend Payment Date. Although any particular
Dividend Payment Date may not occur on the originally scheduled date because of
the exception discussed above, the next succeeding Dividend Payment Date,
subject to such exception, will occur on the next following originally scheduled
date. If for any reason a Dividend Payment Date cannot be fixed as described
above, then the Board of Trustees shall fix the Dividend Payment Date. The Board
of Trustees by resolution prior to authorization of a dividend by the Board of
Trustees may change a Dividend Payment Date if such change does not adversely
affect the contract rights of the Holders of shares of APS set forth in the
Declaration of Trust. The Initial Dividend Period, 7-Day Dividend Periods and
Special Dividend Periods are hereinafter sometimes referred to as Dividend
Periods. Each dividend payment date determined as provided above is hereinafter
referred to as a "Dividend Payment Date."
(ii) Each dividend shall be paid to the Holders as they appear in the
Stock Register as of 12:00 noon, New York City time, on the Business Day
preceding the Dividend Payment Date. Dividends in arrears for any past Dividend
Period may be declared and paid at any time, without reference to any regular
Dividend Payment Date, to the Holders as they appear on the Stock Register on a
date, not exceeding 15 days prior to the payment date therefor, as may be fixed
by the Board of Trustees of the Trust. (c) (i) During the period from and
including the Date of Original Issue to but excluding the Initial Dividend
Payment Date for each series of APS (the "Initial Dividend Period"), the
Applicable Rate shall be the Initial Dividend Rate. Commencing on the Initial
Dividend Payment Date for each series of APS, the Applicable Rate for each
subsequent dividend period (hereinafter referred to as a "Subsequent Dividend
Period"), which Subsequent Dividend Period shall commence on and include a
Dividend Payment Date and shall end on and include the calendar day prior to the
next Dividend Payment Date (or last Dividend Payment Date in a Dividend Period
if there is more than one Dividend Payment Date), shall be equal to the rate per
annum that results from implementation of the Auction Procedures.
The Applicable Rate for each Dividend Period commencing during a
Non-Payment Period shall be equal to the Non-Payment Period Rate; and each
Dividend Period, commencing after the first day of, and during, a Non-Payment
Period shall be a 7-Day Dividend Period in the case of each series of APS.
Except in the case of the willful failure of the Trust to pay a dividend on a
Dividend Payment Date or to redeem any shares of APS on the date set for such
redemption, any amount of any dividend due on any Dividend Payment Date (if,
prior to the close of business on the second Business Day preceding such
Dividend Payment Date, the Trust has declared such dividend payable on such
Dividend Payment Date to the Holders of such shares of APS as of 12:00 noon, New
York City time, on the Business Day preceding such Dividend Payment Date) or
redemption price with respect to any shares of APS not paid to such Holders when
due may be paid to such Holders in the same form of funds by 12:00 noon, New
York City time, on any of the first three Business Days after such Dividend
Payment Date or due date, as the case may be, provided that, such amount is
accompanied by a late charge calculated for such period of non-payment at the
Non-Payment Period Rate applied to the amount of such non-payment based on the
actual number of days comprising such period divided by 365. In the case of a
willful failure of the Trust to pay a dividend on a Dividend Payment Date or to
redeem any shares of APS on the date set for such redemption, the preceding
sentence shall not apply and the Applicable Rate for the Dividend Period
commencing during the Non-Payment Period resulting from such failure shall be
the Non-Payment Period Rate. For the purposes of the foregoing, payment to a
person in same-day funds on any Business Day at any time shall be considered
equivalent to payment to such person in New York Clearing House (next-day) funds
at the same time on the preceding Business Day, and any payment made after 12:00
noon, New York City time, on any Business Day shall be considered to have been
made instead in the same form of funds and to the same person before 12:00 noon,
New York City time, on the next Business Day. (ii) The amount of cash dividends
per share of any series of APS payable (if declared) on the Initial Dividend
Payment Date, each 7-Day Dividend Period and each Dividend Payment Date of each
Short Term Dividend Period shall be computed by multiplying the Applicable Rate
for such Dividend Period by a fraction, the numerator of which will be the
number of days in such Dividend Period or part thereof that such share was
outstanding and the denominator of which will be 365, multiplying the amount so
obtained by $25,000, and rounding the amount so obtained to the nearest cent.
During any Long Term Dividend Period, the amount of cash dividends per share of
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APS payable (if declared) on any Dividend Payment Date shall be computed by
multiplying the Applicable Rate for such Dividend Period by a fraction, the
numerator of which will be such number of days in such part of such Dividend
Period that such share was outstanding and for which dividends are payable on
such Dividend Payment Date and the denominator of which will be 360, multiplying
the amount so obtained by $25,000, and rounding the amount so obtained to the
nearest cent.
(iii) With respect to each Dividend Period that is a Special Dividend
Period, the Trust may, at its sole option and to the extent permitted by law, by
telephonic and written notice (a "Request for Special Dividend Period") to the
Auction Agent and to each Broker-Dealer, request that the next succeeding
Dividend Period for a series of APS be a number of days (other than seven),
evenly divisible by seven and not fewer than seven nor more than 364 in the case
of a Short Term Dividend Period or one whole year or more but not greater than
five years in the case of a Long Term Dividend Period, specified in such notice,
provided that the Trust may not give a Request for Special Dividend Period of
greater than 28 days (and any such request shall be null and void) unless, for
any Auction occurring after the initial Auction, Sufficient Clearing Bids were
made in the last occurring Auction and unless full cumulative dividends, any
amounts due with respect to redemption's, and any Additional Dividends payable
prior to such date have been paid in full. Such Request for Special Dividend
Period, in the case of a Short Term Dividend Period, shall be given on or prior
to the second Business Day but not more than seven Business Days prior to an
Auction Date for a series of APS and, in the case of a Long Term Dividend
Period, shall be given on or prior to the second Business Day but not more than
28 days prior to an Auction Date for the APS. Upon receiving such Request for
Special Dividend Period, the Broker-Dealer(s) shall jointly determine whether,
given the factors set forth below, it is advisable that the Trust issue a Notice
of Special Dividend Period for the series of APS as contemplated by such Request
for Special Dividend Period and the Optional Redemption Price of the APS during
such Special Dividend Period and the Specific Redemption Provisions and shall
give the Trust and the Auction Agent written notice (a "Response") of such
determination by no later than the second Business Day prior to such Auction
Date. In making such determination the Broker-Dealer(s) will consider (1)
existing short-term and long-term market rates and indices of such short-term
and long-term rates, (2) existing market supply and demand for short-term and
long-term securities, (3) existing yield curves for short-term and long-term
securities comparable to the APS, (4) industry and financial conditions which
may affect the APS, (5) the investment objective of the Trust, and (6) the
Dividend Periods and dividend rates at which current and potential beneficial
holders of the APS would remain or become beneficial holders. If the
Broker-Dealer(s) shall not give the Trust and the Auction Agent a Response by
such second Business Day or if the Response states that given the factors set
forth above it is not advisable that the Trust give a Notice of Special Dividend
Period for the series of APS, the Trust may not give a Notice of Special
Dividend Period in respect of such Request for Special Dividend Period. In the
event the Response indicates that it is advisable that the Trust give a Notice
of Special Dividend Period for the series of APS, the Trust may by no later than
the second Business Day prior to such Auction Date give a notice (a "Notice of
Special Dividend Period") to the Auction Agent, the Securities Depository and
each Broker-Dealer which notice will specify (i) the duration of the Special
Dividend Period, (ii) the Optional Redemption Price as specified in the related
Response and (iii) the Specific Redemption Provisions, if any, as specified in
the related Response. The Trust also shall provide a copy of such Notice of
Special Dividend Period to Moody's and S&P. The Trust shall not give a Notice of
Special Dividend Period and, if the Trust has given a Notice of Special Dividend
Period, the Trust is required to give telephonic and written notice of its
revocation (a "Notice of Revocation") to the Auction Agent, each Broker-Dealer,
and the Securities Depository on or prior to the Business Day prior to the
relevant Auction Date if (x) either the 1940 Act APS Asset Coverage is not
satisfied or the Trust shall fail to maintain S&P Eligible Assets with an
aggregate Discounted Value at least equal to the APS Basic Maintenance Amount,
on each of the two Valuation Dates immediately preceding the Business Day prior
to the relevant Auction Date on an actual basis and on a pro forma basis giving
effect to the proposed Special Dividend Period (using as a pro forma dividend
rate with respect to such Special Dividend Period the dividend rate which the
Broker-Dealers shall advise the Trust is an approximately equal rate for
securities similar to the APS with an equal dividend period), (y) sufficient
funds for the payment of dividends payable on the immediately succeeding
Dividend Payment Date have not been irrevocably deposited with the Auction Agent
by the close of business on the third Business Day preceding the related Auction
Date or (z) the Broker-Dealer(s) jointly advise the Trust that after
consideration of the factors listed above they have concluded that it is
advisable to give a Notice of Revocation. The Trust also shall provide a copy of
such Notice of Revocation to S&P. If the Trust is prohibited from giving a
Notice of Special Dividend Period as a result of any of the factors enumerated
in clause (x), (y) or (z) above or if the Trust gives a Notice of Revocation
with respect to a Notice of Special Dividend Period for any series of APS, the
next succeeding Dividend Period will be a 7-Day Dividend Period. In 35 addition,
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in the event Sufficient Clearing Bids are not made in the applicable Auction or
such Auction is not held for any reason, such next succeeding Dividend Period
will be a 7-Day Dividend Period and the Trust may not again give a Notice of
Special Dividend Period for the APS (and any such attempted notice shall be null
and void) until Sufficient Clearing Bids have been made in an Auction with
respect to a 7-Day Dividend Period.
(d) (i) Holders shall not be entitled to any dividends, whether payable in
cash, property or stock, in excess of full cumulative dividends and applicable
late charges, as herein provided, on the shares of APS (except for Additional
Dividends as provided in paragraph 2(e) hereof and additional payments as
provided in paragraph 2(f) hereof). Except for the late charge payable pursuant
to paragraph 2(c)(i) hereof, no interest, or sum of money in lieu of interest,
shall be payable in respect of any dividend payment on the shares of APS that
may be in arrears.
(ii) For so long as any share of APS is Outstanding, the Trust shall not
declare, pay or set apart for payment any dividend or other distribution (other
than a dividend or distribution paid in shares of, or options, warrants or
rights to subscribe for or purchase, Common Shares or other shares of beneficial
interest, if any, ranking junior to the shares of APS as to dividends or upon
liquidation) in respect of the Common Shares or any other shares of beneficial
interest of the Trust ranking junior to or on a parity with the shares of APS as
to dividends or upon liquidation, or call for redemption, redeem, purchase or
otherwise acquire for consideration any shares of the Common Shares or any other
such junior shares (except by conversion into or exchange for shares of the
Trust ranking junior to the shares of APS as to dividends and upon liquidation)
or any other such Parity Shares (except by conversion into or exchange for stock
of the Trust ranking junior to or on a parity with the shares of APS as to
dividends and upon liquidation), unless (A) immediately after such transaction,
the Trust shall have S&P Eligible Assets with an aggregate Discounted Value
equal to or greater than the APS Basic Maintenance Amount and the Trust shall
maintain the 1940 Act APS Asset Coverage, (B) full cumulative dividends on
shares of APS and shares of Other APS due on or prior to the date of the
transaction have been declared and paid or shall have been declared and
sufficient funds for the payment thereof deposited with the Auction Agent, (C)
any Additional Dividend required to be paid under paragraph 2(e) below on or
before the date of such declaration or payment has been paid and (D) the Trust
has redeemed the full number of shares of APS required to be redeemed by any
provision for mandatory redemption contained herein.
(e) Each dividend shall consist of (i) cash at the Applicable Rate, (ii)
an uncertificated right (a "Right") to receive an Additional Dividend (as
defined below), and (iii) any additional amounts as set forth in paragraph 2(f)
below. Each Right shall thereafter be independent of the share or shares of APS
on which the dividend was paid. The Trust shall cause to be maintained a record
of each Right received by the respective Holders. A Right may not be transferred
other than by operation of law. If the Trust retroactively allocates any net
capital gains or other income subject to regular Federal income taxes to shares
of APS without having given advance notice thereof to the Auction Agent as
described in paragraph 2(f) hereof solely by reason of the fact that such
allocation is made as a result of the redemption of all or a portion of the
outstanding shares of APS or the liquidation of the Trust (the amount of such
allocation referred to herein as a "Retroactive Taxable Allocation"), the Trust
will, within 90 days (and generally within 60 days) after the end of the Trust's
fiscal year for which a Retroactive Taxable Allocation is made, provide notice
thereof to the Auction Agent and to each holder of a Right applicable to such
shares of APS (initially as nominee of The Depository Trust Company) during such
fiscal year at such holder's address as the same appears or last appeared on the
Stock Books of the Trust. The Trust will, within 30 days after such notice is
given to the Auction Agent, pay to the Auction Agent (who will then distribute
to such holders of Rights), out of funds legally available therefor, an amount
equal to the aggregate Additional Dividend with respect to all Retroactive
Taxable Allocations made to such holders during the fiscal year in question.
An "Additional Dividend" means payment to a present or former holder of
shares of APS of an amount which, when taken together with the aggregate amount
of Retroactive Taxable Allocations made to such holder with respect to the
fiscal year in question, would cause such holder's dividends in dollars (after
Federal income tax consequences) from the aggregate of both the Retroactive
Taxable Allocations and the Additional Dividend to be equal to the dollar amount
of the dividends which would have been received by such holder if the amount of
the aggregate Retroactive Taxable Allocations would have been excludable from
the gross income of such holder. Such Additional Dividend shall be calculated
(i) without consideration being given to the time value of money; (ii) assuming
that no holder of shares of APS is subject to the Federal alternative minimum
tax with respect to dividends received from the Trust; and (iii) assuming that
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each Retroactive Taxable Allocation would be taxable in the hands of each holder
of shares of APS at the greater of: (x) the maximum marginal regular Federal
individual income tax rate applicable to ordinary income or capital gains
depending on the taxable character of the distribution (including any surtax);
or (y) the maximum marginal regular Federal corporate income tax rate applicable
to ordinary income or capital gains depending on the taxable character of the
distribution (disregarding in both (x) and (y) the effect of any state or local
taxes and the phase out of, or provision limiting, personal exemptions, itemized
deductions, or the benefit of lower tax brackets).
(f) Except as provided below, whenever the Trust intends to include any
net capital gains or other income subject to regular Federal income taxes in any
dividend on shares of APS, the Trust will notify the Auction Agent of the amount
to be so included at least five Business Days prior to the Auction Date on which
the Applicable Rate for such dividend is to be established. The Trust may also
include such income in a dividend on shares of a series of APS without giving
advance notice thereof if it increases the dividend by an additional amount
calculated as if such income was a Retroactive Taxable Allocation and the
additional amount was an Additional Dividend, provided that the Trust will
notify the Auction Agent of the additional amounts to be included in such
dividend at least five Business Days prior to the applicable Dividend Payment
Date.
(g) No fractional shares of APS shall be issued.
3. LIQUIDATION RIGHTS. Upon any liquidation, dissolution or winding up of
the Trust, whether voluntary or involuntary, the Holders shall be entitled to
receive, out of the assets of the Trust available for distribution to
shareholders, before any distribution or payment is made upon any Common Shares
or any other shares of beneficial interest ranking junior in right of payment
upon liquidation to the APS, the sum of $25,000 per share plus accumulated but
unpaid dividends (whether or not earned or declared) thereon to the date of
distribution, and after such payment the Holders will be entitled to no other
payments other than Additional Dividends as provided in paragraph 2(e) hereof.
If upon any liquidation, dissolution or winding up of the Trust, the amounts
payable with respect to the APS and any other Outstanding class or series of
Preferred Shares of the Trust ranking on a parity with the APS as to payment
upon liquidation are not paid in full, the Holders and the holders of such other
class or series will share ratably in any such distribution of assets in
proportion to the respective preferential amounts to which they are entitled.
After payment of the full amount of the liquidating distribution to which they
are entitled, the Holders will not be entitled to any further participation in
any distribution of assets by the Trust except for any Additional Dividends. A
consolidation, merger or statutory share exchange of the Trust with or into any
other Trust or entity or a sale, whether for cash, shares of stock, securities
or properties, of all or substantially all or any part of the assets of the
Trust shall not be deemed or construed to be a liquidation, dissolution or
winding up of the Trust.
4. REDEMPTION. (a) Shares of APS shall be redeemable by the Trust as
provided below:
(i) To the extent permitted under the 1940 Act and Massachusetts
law, upon giving a Notice of Redemption, the Trust at its option may
redeem shares of APS, in whole or in part, out of funds legally available
therefor, at the Optional Redemption Price per share, on any Dividend
Payment Date; provided that no share of APS may be redeemed at the option
of the Trust during (A) the Initial Dividend Period with respect to a
series of shares or (B) a Non-Call Period to which such share is subject.
In addition, holders of APS which are redeemed shall be entitled to
receive Additional Dividends to the extent provided herein. The Trust may
not give a Notice of Redemption relating to an optional redemption as
described in this paragraph 4(a)(i) unless, at the time of giving such
Notice of Redemption, the Trust has available Deposit Securities with
maturity or tender dates not later than the day preceding the applicable
redemption date and having a value not less than the amount due to Holders
by reason of the redemption of their shares of APS on such redemption
date.
(ii) The Trust shall redeem, out of funds legally available
therefor, at the Mandatory Redemption Price per share, shares of APS to
the extent permitted under the 1940 Act and Massachusetts law, on a date
fixed by the Board of Trustees, if the Trust fails to maintain S&P
Eligible Assets with an aggregate Discounted Value equal to or greater
than the APS Basic Maintenance Amount as provided in paragraph 7(a) or to
satisfy the 1940 Act APS Asset Coverage as provided in paragraph 6 and
such failure is not cured on or before the APS Basic Maintenance Cure Date
or the 1940 Act Cure Date (herein collectively referred to as a "Cure
Date"), as the case may be. In addition, holders of APS so redeemed shall
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be entitled to receive Additional Dividends to the extent provided herein.
The number of shares of APS to be redeemed shall be equal to the lesser of
(i) the minimum number of shares of APS the redemption of which, if deemed
to have occurred immediately prior to the opening of business on the Cure
Date, together with all shares of other Preferred Shares subject to
redemption or retirement, would result in the Trust having S&P Eligible
Assets with an aggregate Discounted Value equal to or greater than the APS
Basic Maintenance Amount or satisfaction of the 1940 Act APS Asset
Coverage, as the case may be, on such Cure Date (provided that, if there
is no such minimum number of shares of APS and shares of other Preferred
Shares the redemption of which would have such result, all shares of APS
and shares of other Preferred Shares then Outstanding shall be redeemed),
and (ii) the maximum number of shares of APS, together with all shares of
other Preferred Shares subject to redemption or retirement, that can be
redeemed out of funds expected to be legally available therefor on such
redemption date. In determining the number of shares of APS required to be
redeemed in accordance with the foregoing, the Trust shall allocate the
number required to be redeemed which would result in the Trust having S&P
Eligible Assets with an aggregate Discounted Value equal to or greater
than the APS Basic Maintenance Amount or satisfaction of the 1940 Act APS
Asset Coverage, as the case may be, pro rata among shares of APS of all
series, Other APS and other Preferred Shares subject to redemption
pursuant to provisions similar to those contained in this paragraph
4(a)(ii); provided that, shares of APS which may not be redeemed at the
option of the Trust due to the designation of a Non-Call Period applicable
to such shares (A) will be subject to mandatory redemption only to the
extent that other shares are not available to satisfy the number of shares
required to be redeemed and (B) will be selected for redemption in an
ascending order of outstanding number of days in the Non-Call Period (with
shares with the lowest number of days to be redeemed first) and by lot in
the event of shares having an equal number of days in such Non-Call
Period. The Trust shall effect such redemption on a Business Day which is
not later than 35 days after such Cure Date, except that if the Trust does
not have funds legally available for the redemption of all of the required
number of shares of APS and shares of other Preferred Shares which are
subject to mandatory redemption or the Trust otherwise is unable to effect
such redemption on or prior to 35 days after such Cure Date, the Trust
shall redeem those shares of APS which it is unable to redeem on the
earliest practicable date on which it is able to effect such redemption
out of funds legally available therefor.
(b) Notwithstanding any other provision of this paragraph 4, no shares of
APS may be redeemed pursuant to paragraph 4(a)(i) of Article VIII, Section 2 of
these Amended By-Laws (i) unless all dividends in arrears on all remaining
outstanding shares of Parity Shares shall have been or are being
contemporaneously paid or declared and set apart for payment and (ii) if
redemption thereof would result in the Trust's failure to maintain S&P Eligible
Assets with an aggregate Discounted Value equal to or greater than the APS Basic
Maintenance Amount. In the event that less than all the outstanding shares of a
series of APS are to be redeemed and there is more than one Holder, the shares
of that series of APS to be redeemed shall be selected by lot or such other
method as the Trust shall deem fair and equitable.
(c) Whenever shares of APS are to be redeemed, the Trust, not less than 17
nor more than 30 days prior to the date fixed for redemption, shall mail a
notice ("Notice of Redemption") by first-class mail, postage prepaid, to each
Holder of shares of APS to be redeemed and to the Auction Agent. The Trust shall
cause the Notice of Redemption to also be published in the eastern and national
editions of The Wall Street Journal. The Notice of Redemption shall set forth
(i) the redemption date, (ii) the amount of the redemption price, (iii) the
aggregate number of shares of APS of such series to be redeemed, (iv) the place
or places where shares of APS of such series are to be surrendered for payment
of the redemption price, (v) a statement that dividends on the shares to be
redeemed shall cease to accumulate on such redemption date (except that holders
may be entitled to Additional Dividends) and (vi) the provision of these Amended
By-Laws pursuant to which such shares are being redeemed. No defect in the
Notice of Redemption or in the mailing or publication thereof shall affect the
validity of the redemption proceedings, except as required by applicable law.
If the Notice of Redemption shall have been given as aforesaid and,
concurrently or thereafter, the Trust shall have deposited in trust with the
Auction Agent, or segregated in an account at the Trust's custodian bank for the
benefit of the Auction Agent, Deposit Securities (with a right of substitution)
having an aggregate Discounted Value (utilizing in the case of S&P an S&P
Exposure Period of 22 Business Days) equal to the redemption payment for the
shares of APS as to which such Notice of Redemption has been given with
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irrevocable instructions and authority to pay the redemption price to the
Holders of such shares, then upon the date of such deposit or, if no such
deposit is made, then upon such date fixed for redemption (unless the Trust
shall default in making the redemption payment), all rights of the Holders of
such shares as shareholders of the Trust by reason of the ownership of such
shares will cease and terminate (except their right to receive the redemption
price in respect thereof and any Additional Dividends, but without interest),
and such shares shall no longer be deemed outstanding. The Trust shall be
entitled to receive, from time to time, from the Auction Agent the interest, if
any, on such Deposit Securities deposited with it and the Holders of any shares
so redeemed shall have no claim to any of such interest. In case the Holder of
any shares so called for redemption shall not claim the redemption payment for
his shares within one year after the date of redemption, the Auction Agent
shall, upon demand, pay over to the Trust such amount remaining on deposit and
the Auction Agent shall thereupon be relieved of all responsibility to the
Holder of such shares called for redemption and such Holder thereafter shall
look only to the Trust for the redemption payment.
5. VOTING RIGHTS. (a) General. Except as otherwise provided in the
Declaration of Trust or Amended By-Laws, each Holder of shares of APS shall be
entitled to one vote for each share held on each matter submitted to a vote of
shareholders of the Trust, and the holders of outstanding shares of Preferred
Shares, including APS, and of shares of Common Shares shall vote together as a
single class; provided that, at any meeting of the shareholders of the Trust
held for the election of trustees, the holders of outstanding shares of
Preferred Shares, including APS, shall be entitled, as a class, to the exclusion
of the holders of all other securities and classes of capital stock of the
Trust, to elect two trustees of the Trust. Subject to paragraph 5(b) hereof, the
holders of outstanding shares of capital stock of the Trust, including the
holders of outstanding shares of Preferred Shares, including APS, voting as a
single class, shall elect the balance of the trustees.
(b) Right to Elect Majority of Board of Trustees. During any period in
which any one or more of the conditions described below shall exist (such period
being referred to herein as a "Voting Period"), the number of trustees
constituting the Board of Trustees shall be automatically increased by the
smallest number that, when added to the two directors elected exclusively by the
holders of shares of Preferred Shares, would constitute a majority of the Board
of Trustees as so increased by such smallest number; and the holders of shares
of Preferred Shares shall be entitled, voting separately as one class (to the
exclusion of the holders of all other securities and classes of shares of
beneficial interest of the Trust), to elect such smallest number of additional
trustees, together with the two trustees that such holders are in any event
entitled to elect. A Voting Period shall commence:
(i) if at any time accumulated dividends (whether or not earned or
declared, and whether or not funds are then legally available in an amount
sufficient therefor) on the outstanding shares of APS equal to at least
two full years' dividends shall be due and unpaid and sufficient cash or
specified securities shall not have been deposited with the Auction Agent
for the payment of such accumulated dividends; or
(ii) if at any time holders of any other shares of Preferred Shares
are entitled to elect a majority of the trustees of the Trust under the
1940 Act. Upon the termination of a Voting Period, the voting rights
described in this paragraph 5(b) shall cease, subject always, however, to
the reverting of such voting rights in the Holders upon the further
occurrence of any of the events described in this paragraph 5(b)
(c) Right to Vote with Respect to Certain Other Matters. So long as any
shares of APS are outstanding, the Trust shall not, without the affirmative vote
of the holders of a majority of the shares of Preferred Shares Outstanding at
the time, voting separately as one class: (i) authorize, create or issue any
class or series of shares of beneficial interest ranking prior to the APS or any
other series of Preferred Shares with respect to payment of dividends or the
distribution of assets on liquidation, or (ii) amend, alter or repeal the
provisions of the Declaration of Trust, whether by
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merger, consolidation or otherwise, so as to adversely affect any of the
contract rights expressly set forth in the Declaration of Trust of holders of
shares of APS or any other Preferred Shares. To the extent permitted under the
1940 Act, in the event shares of more than one series of APS are outstanding,
the Trust shall not approve any of the actions set forth in clause (i) or (ii)
which adversely affects the contract rights expressly set forth in the
Declaration of Trust of a Holder of shares of a series of APS differently than
those of a Holder of shares of any other series of APS without the affirmative
vote of the holders of at least a majority of the shares of APS of each series
adversely affected and outstanding at such time (each such adversely affected
series voting separately as a class). The Trust shall notify S&P ten Business
Days prior to any such vote described in clause (i) or (ii). Unless a higher
percentage is provided for under the Declaration of Trust, the affirmative vote
of the holders of a majority of the outstanding shares of Preferred Shares,
including APS, voting together as a single class, will be required to approve
any plan of reorganization (including bankruptcy proceedings) adversely
affecting such shares or any action requiring a vote of security holders under
Section 13(a) of the 1940 Act. The class vote of holders of shares of Preferred
Shares, including APS, described above will in each case be in addition to a
separate vote of the requisite percentage of shares of Common Shares and shares
of Preferred Shares, including APS, voting together as a single class necessary
to authorize the action in question.
(d) Voting Procedures.
(i) As soon as practicable after the accrual of any right of the holders
of shares of Preferred Shares to elect additional trustees as described in
paragraph 5(b) above, the Trust shall call a special meeting of such holders and
instruct the Auction Agent to mail a notice of such special meeting to such
holders, such meeting to be held not less than 10 nor more than 20 days after
the date of mailing of such notice. If the Trust fails to send such notice to
the Auction Agent or if the Trust does not call such a special meeting, it may
be called by any such holder on like notice. The record date for determining the
holders entitled to notice of and to vote at such special meeting shall be the
close of business on the fifth Business Day preceding the day on which such
notice is mailed. At any such special meeting and at each meeting held during a
Voting Period, such Holders, voting together as a class (to the exclusion of the
holders of all other securities and classes of shares of beneficial interest of
the Trust), shall be entitled to elect the number of directors prescribed in
paragraph 5(b) above. At any such meeting or adjournment thereof in the absence
of a quorum, a majority of such holders present in person or by proxy shall have
the power to adjourn the meeting without notice, other than by an announcement
at the meeting, to a date not more than 120 days after the original record date.
(ii) For purposes of determining any rights of the Holders to vote on any
matter or the number of shares required to constitute a quorum, whether such
right is created by these Amended By-Laws, by the other provisions of the
Declaration of Trust, by statute or otherwise, a share of APS which is not
Outstanding shall not be counted.
(iii) The terms of office of all persons who are trustees of the Trust at
the time of a special meeting of Holders and holders of other Preferred Shares
to elect trustees shall continue, notwithstanding the election at such meeting
by the Holders and such other holders of the number of trustees that they are
entitled to elect, and the persons so elected by the Holders and such other
holders, together with the two incumbent trustees elected by the Holders and
such other holders of Preferred Shares and the remaining incumbent trustees
elected by the holders of the Common Shares and Preferred Shares, shall
constitute the duly elected trustees of the Trust.
(iv) Simultaneously with the expiration of a Voting Period, the terms
of office of the additional trustees elected by the Holders and holders of
other Preferred Shares pursuant to paragraph 5(b) above shall terminate, the
remaining trustees shall constitute the trustees of the Trust and the voting
rights of the Holders and such other holders to elect additional trustees
pursuant to paragraph 5(b) above shall cease, subject to the provisions of the
last sentence of paragraph 5(b).
(e) Exclusive Remedy. Unless otherwise required by law, the Holders of
shares of APS shall not have any rights or preferences other than those
specifically set forth herein. The Holders of shares of APS shall have no
preemptive rights or rights to cumulative voting. In the event that the Trust
fails to pay any dividends on the shares of APS, the exclusive remedy of the
Holders shall be the right to vote for trustees pursuant to the provisions of
this paragraph 5.
(f) Notification to S&P and Moody's. In the event a vote of Holders of APS
is required pursuant to the provisions of Section 13(a) of the 1940 Act, the
Trust shall, not later than ten Business Days prior to the date on which such
vote is to be taken, notify S&P that such vote is to be taken and the nature of
the action with respect to which such vote is to be taken and, not later than
ten Business Days after the date on which such vote is taken, notify S&P of the
result of such vote.
6. 1940 ACT APS ASSET COVERAGE. The Trust shall maintain, as of the last
Business Day of each month in which any share of APS is outstanding, the 1940
Act APS Asset Coverage.
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7. APS BASIC MAINTENANCE AMOUNT. (a) The Trust shall maintain, on each
Valuation Date, and shall verify to its satisfaction that it is maintaining on
such Valuation Date S&P Eligible Assets having an aggregate Discounted Value
equal to or greater than the APS Basic Maintenance Amount. Upon any failure to
maintain the required Discounted Value, the Trust will use its best efforts to
alter the composition of its portfolio to retain a Discounted Value at least
equal to the APS Basic Maintenance Amount on or prior to the APS Basic
Maintenance Cure Date.
(b) On or before 5:00 p.m., New York City time, on the third Business Day
after a Valuation Date on which the Trust fails to satisfy the APS Basic
Maintenance Amount, the Trust shall complete and deliver to the Auction Agent,
and S&P, a complete APS Basic Maintenance Report as of the date of such failure,
which will be deemed to have been delivered to the Auction Agent if the Auction
Agent receives a copy or telecopy, telex or other electronic transcription
thereof and on the same day the Trust mails to the Auction Agent for delivery on
the next Business Day the complete APS Basic Maintenance Report. The Trust will
deliver an APS Basic Maintenance Report to the Auction Agent and S&P, on or
before 5:00 p.m., New York City time, on the third Business Day after a
Valuation Date on which the Trust cures its failure to maintain S&P Eligible
Assets, with an aggregate Discounted Value equal to or greater than the APS
Basic Maintenance Amount or on which the Trust fails to maintain S&P Eligible
Assets, with an aggregate Discounted Value which exceeds the APS Basic
Maintenance Amount by 5% or more. The Trust will also deliver an APS Basic
Maintenance Report to the Auction Agent and S&P as of each Quarterly Valuation
Date on or before the third Business Day after such date. Additionally, on or
before 5:00 p.m., New York City time, on the third Business Day after the first
day of a Special Dividend Period, the Trust will deliver an APS Basic
Maintenance Report to S&P and the Auction Agent. The Trust shall also provide
S&P with an APS Basic Maintenance Report when specifically requested by S&P. A
failure by the Trust to deliver an APS Basic Maintenance Report under this
paragraph 7(b) shall be deemed to be delivery of an APS Basic Maintenance Report
indicating the Discounted Value for S&P Eligible Assets of the Trust is less
than the APS Basic Maintenance Amount, as of the relevant Valuation Date.
(c) Within ten Business Days after the date of delivery of an APS Basic
Maintenance Report in accordance with paragraph 7(b) above relating to a
Quarterly Valuation 50 Date, the Independent Accountant will confirm in writing
to the Auction Agent and S&P (i) the mathematical accuracy of the calculations
reflected in such Report (and in any other APS Basic Maintenance Report,
randomly selected by the Independent Accountant, that was delivered by the Trust
during the quarter ending on such Quarterly Valuation Date), (ii) that, in such
Report (and in such randomly selected Report), the Trust correctly determined
the assets of the Trust which constitute S&P Eligible Assets at such Quarterly
Valuation Date in accordance with these Amended By-Laws, (iii) that, in such
Report (and in such randomly selected Report), the Trust determined whether the
Trust had, at such Quarterly Valuation Date (and at the Valuation Date addressed
in such randomly selected Report) in accordance with these Amended By-Laws, S&P
Eligible Assets of an aggregate Discounted Value at least equal to the APS Basic
Maintenance Amount, (iv) with respect to the S&P ratings on Municipal
Obligations, the issuer name, issue size and coupon rate listed in such Report,
that the Independent Accountant has requested that S&P verify such information
and the Independent Accountant shall provide a listing in its letter of any
differences, (v) with respect to the Moody's ratings on Municipal Obligations,
the issuer name, issue size and coupon rate listed in such Report, that such
information has been verified by Moody's (in the event such information is not
verified by Moody's, the Independent Accountant will inquire of Moody's what
such information is, and provide a listing in its letter of any differences),
(vi) with respect to the bid or mean price (or such alternative permissible
factor used in calculating the Market Value) provided by the custodian of the
Trust's assets to the Trust for purposes of valuing securities in the Trust's
portfolio, the Independent Accountant has traced the price used in such Report
to the bid or mean price listed in such Report as provided to the Trust and
verified that such information agrees (in the event such information does not
agree, the Independent Accountant will provide a listing in its letter of such
differences) and (vii) with respect to such confirmation to Moody's, that the
Trust has satisfied the requirements of paragraph 8(b) of these Amended By-Laws
(such confirmation is herein called the "Accountant's Confirmation").
(d) Within ten Business Days after the date of delivery to the Auction
Agent and S&P of an APS Basic Maintenance Report in accordance with paragraph
7(b) above relating to any Valuation Date on which the Trust failed to maintain
S&P Eligible Assets with an aggregate Discounted Value equal to or greater than
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the APS Basic Maintenance Amount, and relating to the APS Basic Maintenance Cure
Date with respect to such failure, the Independent Accountant will provide to
the Auction Agent and S&P an Accountant's Confirmation as to such APS Basic
Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to subparagraph
(c) or (d) of this paragraph 7 shows that an error was made in the APS Basic
Maintenance Report for a particular Valuation Date for which such Accountant's
Confirmation as required to be delivered, or shows that a lower aggregate
Discounted Value for the aggregate of all S&P Eligible Assets of the Trust was
determined by the Independent Accountant, the calculation or determination made
by such Independent Accountant shall be final and conclusive and shall be
binding on the Trust, and the Trust shall accordingly amend and deliver the APS
Basic Maintenance Report to the Auction Agent and S&P promptly following receipt
by the Trust of such Accountant's Confirmation.
(f) On or before 5:00 p.m., New York City time, on the first Business Day
after the Date of Original Issue of the shares of APS, the Trust will complete
and deliver to S&P an APS Basic Maintenance Report as of the close of business
on such Date of Original Issue. Within five Business Days of such Date of
Original Issue, the Independent Accountant will confirm in writing to S&P (i)
the mathematical accuracy of the calculations reflected in such Report and (ii)
that the aggregate Discounted Value of S&P Eligible Assets reflected thereon
equals or exceeds the APS Basic Maintenance Amount reflected thereon. Also, on
or before 5:00 p.m., New York City time, on the first Business Day after shares
of Common Shares are repurchased by the Trust, the Trust will complete and
deliver to S&P an APS Basic Maintenance Report as of the close of business on
such date that Common Shares is repurchased.
8. CERTAIN OTHER RESTRICTIONS AND REQUIREMENTS.
(a) For so long as any shares of APS are rated by S&P, the Trust will not
purchase or sell futures contracts, write, purchase or sell options on futures
contracts or write put options (except covered put options) or call options
(except covered call options) on portfolio securities unless it receives written
confirmation from S&P that engaging in such transactions will not impair the
ratings then assigned to the shares of APS by S&P, except that the Trust may
purchase or sell futures contracts based on the Bond Buyer Municipal Bond Index
(the "Municipal Index") or United States Treasury Bonds or Notes ("Treasury
Bonds") and write, purchase or sell put and call options on such contracts
(collectively, "S&P Hedging Transactions"), subject to the following
limitations:
(i) the Trust will not engage in any S&P Hedging Transaction based on the
Municipal Index (other than transactions which terminate a futures contract or
option held by the Trust by the Trust's taking an opposite position thereto
("Closing Transactions")), which would cause the Trust at the time of such
transaction to own or have sold the least of (A) more than 1,000 outstanding
futures contracts based on the Municipal Index, (B) outstanding futures
contracts based on the Municipal Index exceeding in number 25% of the quotient
of the Market Value of the Trust's total assets divided by $1,000 or (C)
outstanding futures contracts based on the Municipal Index exceeding in number
10% of the average number of daily traded futures contracts based on the
Municipal Index in the 30 days preceding the time of effecting such transaction
as reported by The Wall Street Journal;
(ii) the Trust will not engage in any S&P Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) which would cause the Trust at
the time of such transaction to own or have sold the lesser of (A) outstanding
futures contracts based on Treasury Bonds and on the Municipal Index exceeding
in number 25% of the quotient of the Market Value of the Trust's total assets
divided by $100,000 ($200,000 in the case of the two-year United States Treasury
Note) or (B) outstanding futures contracts based on Treasury Bonds exceeding in
number 10% of the average number of daily traded futures contracts based on
Treasury Bonds in the 30 days preceding the time of effecting such transaction
as reported by The Wall Street Journal;-----------------------
(iii) the Trust will engage in Closing Transactions to close out any
outstanding futures contract which the Trust owns or has sold or any outstanding
option thereon owned by the Trust in the event (A) the Trust does not have S&P
Eligible Assets with an aggregate Discounted Value equal to or greater than the
APS Basic Maintenance Amount on two consecutive Valuation Dates and (B) the
Trust is required to pay Variation Margin on the second such Valuation Date;
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(iv) the Trust will engage in a Closing Transaction to close out any
outstanding futures contract or option thereon in the month prior to the
delivery month under the terms of such futures contract or option thereon unless
the Trust holds the securities deliverable under such terms; and
(v) when the Trust writes a futures contract or option thereon, it will
either maintain an amount of cash, cash equivalents or high grade (rated A or
better by S&P), fixed-income securities in a segregated account with the Trust's
custodian, so that the amount so segregated plus the amount of Initial Margin
and Variation Margin held in the account of or on behalf of the Trust's broker
with respect to such futures contract or option equals the Market Value of the
futures contract or option, or, in the event the Trust writes a futures contract
or option thereon which requires delivery of an underlying security, it shall
hold such underlying security in its portfolio.
For purposes of determining whether the Trust has S&P Eligible Assets with
a Discounted Value that equals or exceeds the APS Basic Maintenance Amount, the
Discounted Value of cash or securities held for the payment of Initial Margin or
Variation Margin shall be zero and the aggregate Discounted Value of S&P
Eligible Assets shall be reduced by an amount equal to (i) 30% of the aggregate
settlement value, as marked to market, of any outstanding futures contracts
based on the Municipal Index which are owned by the Trust plus (ii) 25% of the
aggregate settlement value, as marked to market, of any outstanding futures
contracts based on Treasury Bonds which contracts are owned by the Trust.
(d) For so long as shares of APS are rated by S&P, the Trust will not,
unless it has received written confirmation from S&P that such action would not
impair the rating then assigned to shares of APS by S&P (i) borrow money except
for the purpose of clearing transactions in portfolio securities (which
borrowings shall under any circumstances be limited to the lesser of $10 million
and an amount equal to 5% of the Market Value of the Trust's assets at the time
of such borrowings and which borrowings shall be repaid within 60 days and not
be extended or renewed and shall not cause the aggregate Discounted Value of S&P
Eligible Assets to be less than the APS Basic Maintenance Amount), (ii) engage
in short sales of securities, (iii) lend any securities, (iv) issue any class or
series of stock ranking prior to or on a parity with the APS with respect to the
payment of dividends or the distribution of assets upon dissolution, liquidation
or winding up of the Trust, (v) reissue any APS previously purchased or redeemed
by the Trust, (vi) merge or consolidate into or with any other Trust or entity,
(vii) change the Pricing Service or (viii) engage in reverse repurchase
agreements.
9. NOTICE. All notices or communications, unless otherwise specified in
the Amended By-Laws of the Trust or these Amended By-Laws, shall be sufficiently
given if in writing and delivered in person or mailed by first-class mail,
postage prepaid. Notice shall be deemed given on the earlier of the date
received or the date seven days after which such notice is mailed.
10. AUCTION PROCEDURES. (a) Certain definitions. As used in this paragraph
10, the following terms shall have the following meanings, unless the context
otherwise requires:
(i) "APS" means the shares of APS being auctioned pursuant to this
paragraph 10.
(ii) "Auction Date" means the first Business Day preceding the first day
of a Dividend Period.
(iii) "Available APS" has the meaning specified in paragraph 10(d)(i)
below.
(iv) "Bid" has the meaning specified in paragraph 10(b)(i) below.
(v) "Bidder" has the meaning specified in paragraph 10(b)(i) below.
(vi) "Hold Order" has the meaning specified in paragraph 10(b)(i) below.
(vii) "Maximum Applicable Rate" for any Dividend Period will be the
Applicable Percentage of the Reference Rate. The Applicable Percentage will be
determined based on (i) the credit rating assigned on such date to such shares
by S&P (or if S&P shall not make such rating available, the equivalent of such
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rating by a Substitute Rating Agency) and (ii) whether the Trust has provided
notification to the Auction Agent prior to the Auction establishing the
Applicable Rate for any dividend pursuant to paragraph 2(f) hereof that net
capital gains or other taxable income will be included in such dividend on
shares of APS as follows:
Percentage of Percentage of
Credit Ratings Reference Reference
Rate Rate
S&P No Notification No Notification
AA- or higher 110% 150%
A- to A+ 125% 160%
BBB- to BBB+ 200% 275%
The Trust shall take all reasonable action necessary to enable S&P to
provide a rating for the APS. If S&P shall not make such a rating available,
PaineWebber Incorporated or its affiliates and successors, after consultation
with the Trust, shall select a nationally recognized statistical rating
organization to act as a Substitute Rating Agency.
(viii) "Order" has the meaning specified in paragraph 10(b)(i) below.
(ix) "Sell Order" has the meaning specified in paragraph 10(b)(i) below.
(x) "Submission Deadline" means 1:00 P.M., New York City time, on any
Auction Date or such other time on any Auction Date as may be specified by the
Auction Agent from time to time as the time by which each Broker-Dealer must
submit to the Auction Agent in writing all Orders obtained by it for the Auction
to be conducted on such Auction Date.
(xi) "Submitted Bid" has the meaning specified in paragraph 10(d)(i)
below.
(xii) "Submitted Hold Order" has the meaning specified in paragraph
10(d)(i) below.
(xiii) "Submitted Order" has the meaning specified in paragraph 10(d)(i)
below.
(xiv) "Submitted Sell Order" has the meaning specified in paragraph
10(d)(i) below.
(xv) "Sufficient Clearing Bids" has the meaning specified in paragraph
10(d)(i) below. (xvi) "Winning Bid Rate" has the meaning specified in paragraph
10(d)(i) below.
(b) Orders by Beneficial Owners, Potential Beneficial Owners, Existing
Holders and Potential Holders.
(i) Unless otherwise permitted by the Trust, Beneficial Owners and
Potential Beneficial Owners may only participate in Auctions through their
Broker-Dealers. Broker-Dealers will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves as Existing Holders in respect of shares
subject to Orders submitted or deemed submitted to them by Beneficial Owners and
as Potential Holders in respect of shares subject to Orders submitted to them by
Potential Beneficial Owners. A Broker-Dealer may also hold shares of APS in its
own account as a Beneficial Owner. A Broker-Dealer may thus submit Orders to the
Auction Agent as a Beneficial Owner or a Potential Beneficial Owner and
therefore participate in an Auction as an Existing Holder or Potential Holder on
behalf of both itself and its customers. On or prior to the Submission Deadline
on each Auction Date:
A. each Beneficial Owner may submit to its Broker-Dealer information as to:
(1) the number of Outstanding shares, if any, of APS held by such
Beneficial Owner which such Beneficial Owner desires to continue to hold
without regard to the Applicable Rate for the next succeeding Dividend
Period;
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(2) the number of Outstanding shares, if any, of APS held by such
Beneficial Owner which such Beneficial Owner desires to continue to hold,
provided that the Applicable Rate for the next succeeding Dividend Period
shall not be less than the rate per annum specified by such Beneficial
Owner; and/or
(3) the number of Outstanding shares, if any, of APS held by such
Beneficial Owner which such Beneficial Owner offers to sell without regard
to the Applicable Rate for the next succeeding Dividend Period; and
(B) each Broker-Dealer, using a list of Potential Beneficial Owners that
shall be maintained in good faith for the purpose of conducting a competitive
Auction, shall contact Potential Beneficial Owners, including Persons that are
not Beneficial Owners, on such list to determine the number of Outstanding
shares, if any, of APS which each such Potential Beneficial Owner offers to
purchase, provided that the Applicable Rate for the next succeeding Dividend
Period shall not be less than the rate per annum specified by such Potential
Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or the communication by a
Broker-Dealer acting for its own account to the Auction Agent, of information
referred to in clause (A) or (B) of this paragraph 10(b)(i) is hereinafter
referred to as an "Order" and each Beneficial Owner and each Potential
Beneficial Owner placing an Order, including a Broker-Dealer acting in such
capacity for its own account, is hereinafter referred to as a "Bidder"; an Order
containing the information referred to in clause (A)(1) of this paragraph
10(b)(i) is hereinafter referred to as a "Hold Order"; an Order containing the
information referred to in clause (A)(2) or (B) of this paragraph 10(b)(i) is
hereinafter referred to as a "Bid"; and an Order containing the information
referred to in clause (A)(3) of this paragraph 10(b)(i) is hereinafter referred
to as a "Sell Order". Inasmuch as a Broker-Dealer participates in an Auction as
an Existing Holder or a Potential Holder only to represent the interests of a
Beneficial Owner or Potential Beneficial Owner, whether it be its customers or
itself, all discussion herein relating to the consequences of an Auction for
Existing Holders and Potential Holders also applies to the underlying beneficial
ownership interests represented.
(ii) (A) A Bid by an Existing Holder shall constitute an irrevocable offer
to sell:
(1)the number of Outstanding shares of APS specified in such Bid if the
Applicable Rate determined on such Auction Date shall be less than the
rate per annum specified in such Bid; or (1) such number or a lesser
number of Outstanding shares of APS to be determined as set forth in
paragraph 10(e)(i)(D) if the Applicable Rate determined on such Auction
Date shall be equal to the rate per annum specified therein; or
(2)a lesser number of Outstanding shares of APS to be determined as set
forth in paragraph 10(e)(ii)(C) if such specified rate per annum shall
be higher than the Maximum Applicable Rate and Sufficient Clearing Bids
do not exist.
(B) A Sell Order by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of Outstanding shares of APS specified in such Sell
Order; or
(2) such number or a lesser number of Outstanding shares of APS to
be determined as set forth in paragraph 10(e)(ii)(C) if Sufficient
Clearing Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable offer to
purchase:
(1) the number of Outstanding shares of APS specified in such Bid if
the Applicable Rate determined on such Auction Date shall be higher than
the rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding shares of APS to
be determined as set forth in paragraph 10(e)(i)(E) if the Applicable Rate
determined on such Auction Date shall be equal to the rate per annum
specified therein.
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(c) Submission of Orders by Broker-Dealers to Auction Agent
(i) Each Broker-Dealer shall submit in writing or through the
Auction Agent's Auction Processing System to the Auction Agent prior to
the Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer, designating itself (unless otherwise permitted by the
Trust) as an Existing Holder in respect of shares subject to Orders
submitted or deemed submitted to it by Beneficial Owners and as a
Potential Holder in respect of shares subject to Orders submitted to it by
Potential Beneficial Owners, and specifying with respect to each Order:
(A) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Trust);
(B) the aggregate number of Outstanding shares of APS that are the
subject of such Order;
(C) to the extent that such Bidder is an Existing Holder:
(1)the number of Outstanding shares, if any, of APS subject
to any Hold Order placed by such Existing Holder;
(2)the number of Outstanding shares, if any, of APS subject
to any Bid placed by such Existing Holder and the rate per
annum specified in such Bid; and
(3)the number of Outstanding shares, if any, of APS subject
to any Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate per
annum specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent shall round such
rate up to the next highest one-thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the Outstanding shares of APS
held by an Existing Holder are not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold Order (in the case of
an Auction relating to a Dividend Period which is not a Special Dividend Period)
and a Sell Order (in the case of an Auction relating to a Special Dividend
Period) to have been submitted on behalf of such Existing Holder covering the
number of Outstanding shares of APS held by such Existing Holder and not subject
to Orders submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering in the
aggregate more than the number of Outstanding shares of APS held by such
Existing Holder are submitted to the Auction Agent, such Order shall be
considered valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder shall
be considered valid up to and including the number of Outstanding shares
of APS held by such Existing Holder; provided that if more than one Hold
Order is submitted on behalf of such Existing Holder and the number of
shares of APS subject to such Hold Orders exceeds the number of
Outstanding shares of APS held by such Existing Holder, the number of
shares of APS subject to each of such Hold Orders shall be reduced pro
rata so that such Hold Orders, in the aggregate, will cover exactly the
number of Outstanding shares of APS held by such Existing Holder;
(B) any Bids submitted on behalf of such Existing Holder shall be
considered valid, in the ascending order of their respective rates per
annum if more than one Bid is submitted on behalf of such Existing Holder,
up to and including the excess of the number of Outstanding shares of APS
held by such Existing Holder over the number of shares of APS subject to
any Hold Order referred to in paragraph 10(c)(iv)(A) above (and if more
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than one Bid submitted on behalf of such Existing Holder specifies the
same rate per annum and together they cover more than the remaining number
of shares that can be the subject of valid Bids after application of
paragraph 10(c)(iv)(A) above and of the foregoing portion of this
paragraph 10(c)(iv)(B) to any Bid or Bids specifying a lower rate or rates
per annum, the number of shares subject to each of such Bids shall be
reduced pro rata so that such Bids, in the aggregate, cover exactly such
remaining number of shares); and the number of shares, if any, subject to
Bids not valid under this paragraph 10(c)(iv)(B) shall be treated as the
subject of a Bid by a Potential Holder; and
(C) any Sell Order shall be considered valid up to and including the
excess of the number of Outstanding shares of APS held by such Existing
Holder over the number of shares of APS subject to Hold Orders referred to
in paragraph 10(c)(iv)(A) and Bids referred to in paragraph 10(c)(iv)(B);
provided that if more than one Sell Order is submitted on behalf of any
Existing Holder and the number of shares of APS subject to such Sell
Orders is greater than such excess, the number of shares of APS subject to
each of such Sell Orders shall be reduced pro rata so that such Sell
Orders, in the aggregate, cover exactly the number of shares of APS equal
to such excess.
(v) If more than one Bid is submitted on behalf of any Potential Holder,
each Bid submitted shall be a separate Bid with the rate per annum and number of
shares of APS therein specified.
(vi) Any Order submitted by a Beneficial Owner as a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date shall be irrevocable.
(d) Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate.
(i) Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent shall assemble all Orders submitted or deemed submitted to it by
the Broker-Dealers (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order", a "Submitted Bid" or a "Submitted Sell Order", as the case may be, or as
a "Submitted Order") and shall determine:
(A) the excess of the total number of Outstanding shares of APS over
the number of Outstanding shares of APS that are the subject of Submitted
Hold Orders (such excess being hereinafter referred to as the "Available
APS");
(B) from the Submitted Orders whether the number of Outstanding
shares of APS that are the subject of Submitted Bids by Potential Holders
specifying one or more rates per annum equal to or lower than the Maximum
Applicable Rate exceeds or is equal to the sum of:
(1) the number of Outstanding shares of APS that are the subject of
Submitted Bids by Existing Holders specifying one or more rates per
annum higher than the Maximum Applicable Rate, and
(2) the number of Outstanding shares of APS that are subject to
Submitted Sell Orders (if such excess or such equality exists (other
than because the number of Outstanding shares of APS in clause (1)
above and this clause (2) are each zero because all of the
Outstanding shares of APS are the subject of Submitted Hold Orders),
such Submitted Bids by Potential Holders being hereinafter referred
to collectively as "Sufficient Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate per annum specified
in the Submitted Bids (the "Winning Bid Rate") that if:
(1) each Submitted Bid from Existing Holders specifying the Winning
Bid Rate and all other Submitted Bids from Existing Holders specifying
lower rates per annum were rejected, thus entitling such Existing Holders
to continue to hold the shares of APS that are the subject of such
Submitted Bids, and
(2) each Submitted Bid from Potential Holders specifying the Winning
Bid Rate and all other Submitted Bids from Potential Holders specifying
lower rates per annum were accepted, thus entitling the Potential Holders
to purchase the shares of APS that are the subject of such Submitted Bids,
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would result in the number of shares subject to all Submitted Bids
specifying the Winning Bid Rate or a lower rate per annum being at least
equal to the Available APS.
(ii) Promptly after the Auction Agent has made the determinations
pursuant to paragraph 10(d)(i), the Auction Agent shall advise the Trust
of the Maximum Applicable Rate and, based on such determinations, the
Applicable Rate for the next succeeding Dividend Period as follows:
(A)if Sufficient Clearing Bids exist, that the Applicable Rate for
the next succeeding Dividend Period shall be equal to the Winning
Bid Rate;
(B)if Sufficient Clearing Bids do not exist (other than because all
of the Outstanding shares of APS are the subject of Submitted
Hold Orders), that the Applicable Rate for the next succeeding
Dividend Period shall be equal to the Maximum Applicable Rate; or
(C)if all of the Outstanding shares of APS are the subject of
Submitted Hold Orders, that the Dividend Period next succeeding
the Auction shall automatically be the same length as the
immediately preceding Dividend Period and the Applicable Rate for
the next succeeding Dividend Period shall be equal to 40% of the
Reference Rate (or 60% of such rate if the Trust has provided
notification to the Auction Agent prior to the Auction
establishing the Applicable Rate for any dividend pursuant to
paragraph 2(f) hereof that net capital gains or other taxable
income will be included in such dividend on shares of APS) on the
date of the Auction.
(e) Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares. Based on the determinations made pursuant
to paragraph 10(d)(i), the Submitted Bids and Submitted Sell Orders shall
be accepted or rejected and the Auction Agent shall take such other action
as set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the provisions
of paragraph 10(e)(iii) and paragraph 10(e)(iv), Submitted Bids and Submitted
Sell Orders shall be accepted or rejected in the following order of priority and
all other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted
and the Submitted Bid of each of the Existing Holders specifying any rate
per annum that is higher than the Winning Bid Rate shall be accepted, thus
requiring each such Existing Holder to sell the Outstanding shares of APS
that are the subject of such Submitted Sell Order or Submitted Bid;
(B) the Submitted Bid of each of the Existing Holders specifying any
rate per annum that is lower than the Winning Bid Rate shall be rejected,
thus entitling each such Existing Holder to continue to hold the
Outstanding shares of APS that are the subject of such Submitted Bid;
(C) the Submitted Bid of each of the Potential Holders specifying
any rate per annum that is lower than the Winning Bid Rate shall be
accepted;
(D) the Submitted Bid of each of the Existing Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be rejected,
thus entitling each such Existing Holder to continue to hold the
Outstanding shares of APS that are the subject of such Submitted Bid,
unless the number of Outstanding shares of APS subject to all such
Submitted Bids shall be greater than the number of Outstanding shares of
APS ("Remaining Shares") equal to the excess of the Available APS over the
number of Outstanding shares of APS subject to Submitted Bids described in
paragraph 10(e)(i)(B) and paragraph 10(e)(i)(C), in which event the
Submitted Bids of each such Existing Holder shall be accepted, and each
such Existing Holder shall be required to sell Outstanding shares of APS,
but only in an amount equal to the difference between (1) the number of
Outstanding shares of APS then held by such Existing Holder subject to
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such Submitted Bid and (2) the number of shares of APS obtained by
multiplying (x) the number of Remaining Shares by (y) a fraction the
numerator of which shall be the number of Outstanding shares of APS held
by such Existing Holder subject to such Submitted Bid and the denominator
of which shall be the sum of the number of Outstanding shares of APS
subject to such Submitted Bids made by all such Existing Holders that
specified a rate per annum equal to the Winning Bid Rate; and
(E) the Submitted Bid of each of the Potential Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be accepted but
only in an amount equal to the number of Outstanding shares of APS
obtained by multiplying (x) the difference between the Available APS and
the number of Outstanding shares of APS subject to Submitted Bids
described in paragraph 10(e)(i)(B), paragraph 10(e)(i)(C) and paragraph
10(e)(i)(D) by (y) a fraction the numerator of which shall be the number
of Outstanding shares of APS subject to such Submitted Bid and the
denominator of which shall be the sum of the number of Outstanding shares
of APS subject to such 74 Submitted Bids made by all such Potential
Holders that specified rates per annum equal to the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than because
all of the Outstanding shares of APS are subject to Submitted Hold Orders),
subject to the provisions of paragraph 10(e)(iii), Submitted Orders shall be
accepted or rejected as follows in the following order of priority and all other
Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate
per annum that is equal to or lower than the Maximum Applicable Rate shall
be rejected, thus entitling such Existing Holder to continue to hold the
Outstanding shares of APS that are the subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate
per annum that is equal to or lower than the Maximum Applicable Rate shall
be accepted, thus requiring such Potential Holder to purchase the
Outstanding shares of APS that are the subject of such Submitted Bid; and
(C) the Submitted Bids of each Existing Holder specifying any rate
per annum that is higher than the Maximum Applicable Rate shall be
accepted and the Submitted Sell Orders of each Existing Holder shall be
accepted, in both cases only in an amount equal to the difference between
(1) the number of Outstanding shares of APS then held by such Existing
Holder subject to such Submitted Bid or Submitted Sell Order and (2) the
number of shares of APS obtained by multiplying (x) the difference between
the Available APS and the aggregate number of Outstanding shares of APS
subject to Submitted Bids described in paragraph 10(e)(ii)(A) and
paragraph 10(e)(ii)(B) by (y) a fraction the numerator of which shall be
the number of Outstanding shares of APS held by such Existing Holder
subject to such Submitted Bid or Submitted Sell Order and the denominator
of which shall be the number of Outstanding shares of APS subject to all
such Submitted Bids and Submitted Sell Orders.
(iii) If, as a result of the procedures described in paragraph 10(e)(i) or
paragraph 10(e)(ii), any Existing Holder would be entitled or required to sell,
or any Potential Holder would be entitled or required to purchase, a fraction of
a share of APS on any Auction Date, the Auction Agent shall, in such manner as
in its sole discretion it shall determine, round up or down the number of shares
of APS to be purchased or sold by any Existing Holder or Potential Holder on
such Auction Date so that each Outstanding share of APS purchased or sold by
each Existing Holder or Potential Holder on such Auction Date shall be a whole
share of APS.
(iv) If, as a result of the procedures described in paragraph 10(e)(i),
any Potential Holder would be entitled or required to purchase less than a whole
share of APS on any Auction Date, the Auction Agent shall, in such manner as in
its sole discretion it shall determine, allocate shares of APS for purchase
among Potential Holders so that only whole shares of APS are purchased on such
Auction Date by any Potential Holder, even if such allocation results in one or
more of such Potential Holders not purchasing any shares of APS on such Auction
Date.
(v) Based on the results of each Auction, the Auction Agent shall
determine, with respect to each Broker-Dealer that submitted Bids or Sell Orders
on behalf of Existing Holders or Potential Holders, the aggregate number of
Outstanding shares of APS to be purchased and the aggregate number of the
Outstanding shares of APS to be sold by such Potential Holders and Existing
Holders and, to the extent that such aggregate number of Outstanding shares to
be purchased and such aggregate number of Outstanding shares to be sold differ,
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the Auction Agent shall determine to which other Broker-Dealer or Broker-Dealers
acting for one or more purchasers such Broker-Dealer shall deliver, or from
which other Broker-Dealer or Broker-Dealers acting for one or more sellers such
Broker-Dealer shall receive, as the case may be, Outstanding shares of APS
(f) Miscellaneous. The Trust may interpret the provisions of this
paragraph 10 to resolve any inconsistency or ambiguity, remedy any formal defect
or make any other change or modification that does not substantially adversely
affect the rights of Beneficial Owners of APS. A Beneficial Owner or an Existing
Holder (A) may sell, transfer or otherwise dispose of shares of APS only
pursuant to a Bid or Sell Order in accordance with the procedures described in
this paragraph 10 or to or through a Broker-Dealer, provided that in the case of
all transfers other than pursuant to Auctions such Beneficial Owner or Existing
Holder, its Broker-Dealer, if applicable, or its Agent Member advises the
Auction Agent of such transfer and (B) except as otherwise required by law,
shall have the ownership of the shares of APS held by it maintained in book
entry form by the Securities Depository in the account of its Agent Member,
which in turn will maintain records of such Beneficial Owner's beneficial
ownership. Neither the Trust nor any Affiliate shall submit an Order in any
Auction. Any Beneficial Owner that is an Affiliate shall not sell, transfer or
otherwise dispose of shares of APS to any Person other than the Trust. All of
the Outstanding shares of APS of a series shall be represented by a single
certificate registered in the name of the nominee of the Securities Depository
unless otherwise required by law or unless there is no Securities Depository. If
there is no Securities Depository, at the Trust's option and upon its receipt of
such documents as it deems appropriate, any shares of APS may be registered in
the Stock Register in the name of the Beneficial Owner thereof and such
Beneficial Owner thereupon will be entitled to receive 77 certificates therefor
and required to deliver certificates therefor upon transfer or exchange thereof.
11. SECURITIES DEPOSITORY; STOCK CERTIFICATES. (a) If there is a
Securities Depository, one certificate for all of the shares of APS of each
series shall be issued to the Securities Depository and registered in the name
of the Securities Depository or its nominee. Additional certificates may be
issued as necessary to represent shares of APS. All such certificates shall bear
a legend to the effect that such certificates are issued subject to the
provisions restricting the transfer of shares of APS contained in these Amended
By-Laws. Unless the Trust shall have elected, during a Non-Payment Period, to
waive this requirement, the Trust will also issue stop-transfer instructions to
the Auction Agent for the shares of APS. Except as provided in paragraph
(b) below, the Securities Depository or its nominee will be the Holder,
and no Beneficial Owner shall receive certificates representing its ownership
interest in such shares. (b) If the Applicable Rate applicable to all shares of
APS of a series shall be the Non-Payment Period Rate or there is no Securities
Depository, the Trust may at its option issue one or more new certificates with
respect to such shares (without the legend referred to in paragraph 11(a))
registered in the names of the Beneficial Owners or their nominees and rescind
the stop-transfer instructions referred to in paragraph 11(a) with respect to
such shares.
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