<PAGE> 1
AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 10, 1999
SECURITIES ACT FILE NO. 333-90445
INVESTMENT COMPANY ACT FILE NO. 811-09533
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. 1 [X]
-----------
Post-Effective Amendment No. [ ]
-----------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 6 [X]
---------------
COLONIAL INSURED MUNICIPAL FUND
(Exact Name of Registrant as Specified in Charter)
One Financial Center, Boston, Massachusetts 02111
(Address of Principal Executive Offices)
(617) 426-3750
(Registrant's Telephone Number, including Area Code)
Name and Address of
Agent for Service Copies to
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<S> <C> <C>
William J. Ballou, Esq. John M. Loder, Esq. Gary Schpero, Esq.
Colonial Management Associates, Inc. Ropes & Gray Simpson Thacher & Bartlett
One Financial Center One International Place 425 Lexington Avenue
Boston, Massachusetts 02111-2621 Boston, Massachusetts 02110-2624 New York, New York 10017-3954
</TABLE>
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [ ]
It is proposed that this filing will become effective (check appropriate box):
[ ] when declared effective pursuant to Section 8(c)
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED (1) UNIT (1) PRICE (1) REGISTRATION FEE (2)
- ---------------------- -------------------- --------------------- --------------------- --------------------
<S> <C> <C> <C> <C>
Municipal Auction 1,492 $25,000 $37,300,000 $10,369.40
Rate Cumulative
Preferred Shares
No Par Value
Per Share
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) $8,340 of the fee was previously paid.
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> 2
COLONIAL INSURED MUNICIPAL FUND
CROSS REFERENCE SHEET
ITEMS REQUIRED BY FORM N-2
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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
3................. Fee Table and Synopsis Not Applicable
4................. Financial Highlights Financial Highlights
5................. Plan of Distribution Underwriting
6................. Selling Shareholders Not Applicable
7................. Use of Proceeds Use of Proceeds; Investment Objective and
Policies
8................. General Description of the Registrant Prospectus Summary; Risk Factors and Special
Considerations; The Fund; Investment
Objective and Policies; Management of
the Fund; Description of Common Shares;
Certain Provisions in the Agreement and
Declaration of Trust
9................. Management Management of the Fund; Custodian,
Dividend Disbursing Agent, Transfer
Agent, and Registrar
10 ............... Capital Stock, Long-Term Debt, Capitalization at November 3, 1999;
and Other Securities Description of Municipal Preferred;
Description of Common Shares; Certain
Provisions in the Agreement and
Declaration of Trust; Repurchase of
Common Shares; Conversion to Open-End
Fund; Tax Matters
11 ............... Defaults and Arrears on Senior Securities Not Applicable
12 ............... Legal Proceedings Not Applicable
13 ............... Table of Contents of the Table of Contents of Statement of Additional
Statement of Additional Information Information
PART B STATEMENT OF ADDITIONAL
ITEM NO. ITEM CAPTION 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 Policies Investment Objective and Policies;
Miscellaneous Investment Practices
18 ............... Management Management of the Fund
19 ............... Control Persons and Principal Management of the Fund
Holders of Securities
20 ............... Investment Advisory and Other Services Fund Charges and Expenses; Management
of the Fund; Custodian; Independent
Accountants
21 ............... Brokerage Allocation and Other Practices Fund Charges and Expenses; Portfolio
Transactions
22 ............... Tax Status Tax Matters
23 ............... Financial Statements Financial Statements
</TABLE>
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED DECEMBER 10, 1999
PROSPECTUS
$37,300,000
COLONIAL INSURED MUNICIPAL FUND
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED ("MUNICIPAL PREFERRED") SHARES
1,492 SHARES, SERIES TH
LIQUIDATION PREFERENCE $25,000 PER SHARE
------------------
Colonial Insured Municipal Fund is selling 1,492 Series TH Municipal Auction
Rate Cumulative Preferred Shares. The Fund is a nondiversified, closed-end
management investment company that seeks, as its investment objective, to
provide current income generally exempt from regular federal income tax. The
Fund will invest its assets in a nondiversified portfolio of municipal bonds
that are generally exempt from regular federal income tax. The bonds and notes
purchased by the Fund generally are issued by or on behalf of state and local
governmental units, whose interest is, in the opinion of issuer's counsel (or on
the basis of other reliable authority), exempt from regular federal income tax
("Municipal Obligations"). Under normal circumstances, the Fund will invest at
least 80% of its total assets in debt securities that are consistent with its
objective of tax-exempt current income. At least 65% of the Fund's total assets
will normally be invested in Municipal Obligations that are covered by insurance
guaranteeing the timely payment of principal at maturity and interest. At least
80% of the Fund's net 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 Standard & Poor's or comparably
rated by any other nationally recognized credit rating agency), or bonds that
are unrated but judged to be of comparable quality by the Fund's investment
advisor. The Fund may invest up to 20% of its net assets in Municipal
Obligations that, at the time of investment, are rated Ba or B by Moody's or BB
or B by Standard & Poor's or comparably rated by any other nationally recognized
credit rating agency, or, if not rated, deemed by the Fund's investment advisor
to be of comparable quality. Bonds rated Ba/BB and below are regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal, and are commonly referred to as junk bonds. See
"Investment Objective and Policies." The Fund's investments in these
lower-quality bonds and notes involve special risks. The Fund's net asset value
and distribution rate will vary and may be affected by several factors,
including changes in interest rates and the credit quality of municipal issuers.
The Fund may use various investment techniques and engage in hedging
transactions. The Fund cannot assure you that it will achieve its investment
objective. See "Investment Objective and Policies." An investment in the Fund is
not appropriate for all investors.
(continued on following page)
------------------
INVESTING IN MUNICIPAL PREFERRED SHARES INVOLVES RISKS. SEE THE "RISK
FACTORS AND SPECIAL CONSIDERATIONS" SECTION BEGINNING ON PAGE 7 OF THIS
PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------
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PER SHARE TOTAL
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Public Price................................. $25,000 $37,300,000
Sales Load................................... $ $
Proceeds to Fund (before expenses)........... $ $
</TABLE>
The public offering price per share will be increased by the amount of
dividends, if any, that have accumulated from the date the shares of Municipal
Preferred are first issued.
------------------
The underwriters are offering the Municipal Preferred shares subject to
various conditions. The underwriters expect to deliver the shares to purchasers
in book-entry form through The Depository Trust Company on or about
, 1999.
------------------
Salomon Smith Barney A.G. Edwards & Sons, Inc.
, 1999
<PAGE> 4
(continued from previous page)
A substantial portion of the Fund's income may be subject to the federal
alternative minimum tax. In addition, distributions of net capital gain and
taxable income will be subject to tax. See "Tax Matters."
Because the Fund is newly organized and the initial public offering of its
common shares of beneficial interest occurred on October 29, 1999, its common
shares have a limited history of public trading. Shares of closed-end investment
companies frequently trade at a discount from their net asset value. The Fund's
common shares of beneficial interest are traded on the American Stock Exchange
under the symbol "CFX".
Investors in Municipal Preferred shares will be entitled to receive cash
dividends at an annual rate that may vary for the successive dividend periods
for such shares. The dividend rate on the Municipal Preferred shares for the
period from and including the date of issue to but excluding , 1999,
will be % per year. For each subsequent period, the auction agent will
determine the dividend rate for a particular period by an auction conducted on
the business day prior to that period. Investors in Municipal Preferred shares
may participate in auctions through their broker-dealers in accordance with the
procedures specified in this prospectus. The Fund may redeem Municipal Preferred
shares as described under "Description of Municipal Preferred -- Redemption."
Prospective purchasers should note that a buy order (called a "bid order") or
sell order is a commitment to buy or sell Municipal Preferred shares based on
the results of an auction and that purchases and sales will be settled on the
next business day after the auction.
This prospectus sets forth concisely the information you should know before
investing, including information about risks. You should read this prospectus
before deciding whether to invest, and you should retain it for future
reference. The Fund's Statement of Additional Information, dated ,
1999, contains additional information about the Fund, has been filed with the
Securities and Exchange Commission and is incorporated by reference into (which
means it is considered to be a part of) this prospectus. You may obtain a free
copy by calling Colonial Management Associates, Inc. at 1-800-426-3750. You may
also obtain the Statement of Additional Information on the Securities and
Exchange Commission's web site (http://www.sec.gov). See page 48 of this
prospectus for a table of contents of the Statement of Additional Information.
<PAGE> 5
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS. THE FUND HAS NOT, AND THE UNDERWRITERS HAVE NOT,
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. THE FUND IS NOT, AND THE UNDERWRITERS ARE NOT, 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 OF THIS PROSPECTUS ONLY. THE FUND'S BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE
THAT DATE.
------------------------
TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.......................................... 1
RISK FACTORS AND SPECIAL CONSIDERATIONS..................... 7
FINANCIAL HIGHLIGHTS (UNAUDITED)............................ 12
THE FUND.................................................... 13
USE OF PROCEEDS............................................. 13
CAPITALIZATION AT NOVEMBER 30, 1999......................... 14
PORTFOLIO COMPOSITION....................................... 14
INVESTMENT OBJECTIVE AND POLICIES........................... 15
MANAGEMENT OF THE FUND...................................... 27
THE AUCTION................................................. 28
DETERMINATION OF NET ASSET VALUE............................ 31
DESCRIPTION OF MUNICIPAL PREFERRED.......................... 32
RATING AGENCY GUIDELINES.................................... 39
DESCRIPTION OF COMMON SHARES................................ 40
CERTAIN PROVISIONS IN THE AGREEMENT AND DECLARATION OF
TRUST..................................................... 41
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND.... 41
TAX MATTERS................................................. 42
CUSTODIAN, DIVIDEND DISBURSING AGENT, TRANSFER AGENT AND
REGISTRAR................................................. 45
UNDERWRITING................................................ 46
LEGAL OPINIONS.............................................. 46
REPORTS TO SHAREHOLDERS..................................... 46
EXPERTS..................................................... 47
FURTHER INFORMATION......................................... 47
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION.... 48
</TABLE>
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(This page intentionally left blank)
<PAGE> 7
PROSPECTUS SUMMARY
This is only a summary. You should review the more detailed information
contained in this prospectus and in the Statement of Additional Information.
THE OFFERING.................. Colonial Insured Municipal Fund (the "Fund") is
offering a total of 1,492 shares of Series TH
Municipal Preferred at a purchase price of
$25,000 per share plus dividends, if any, that
have accumulated from the date the Fund first
issues the shares. A group of underwriters (the
"Underwriters") led by Salomon Smith Barney
Inc. is offering the shares as underwriters.
The Municipal Preferred shares will be
preferred shares of the Fund that entitle their
holders to receive cash dividends at an annual
rate that may vary for the successive dividend
periods for such shares. In general, except as
described under "-- Dividends and Dividend
Periods" in this summary and "Description of
Municipal Preferred -- Dividends and Dividend
Periods" in the text of this prospectus, each
dividend period will be seven days. An auction
agent will determine the dividend rate for a
particular period by an auction conducted on
the business day immediately prior to the start
of that dividend period.
Investors and potential investors in the
Municipal Preferred shares may participate in
auctions for the Municipal Preferred shares
through their broker-dealers.
Generally, investors in Municipal Preferred
shares will not receive certificates
representing ownership of their shares. The
securities depository (The Depository Trust
Company or any successor) or its nominee for
the account of the investor's agent member
(generally the investor's broker-dealer) will
maintain ownership of the Municipal Preferred
shares in book-entry form. An investor's agent
member, in turn, will maintain records of that
investor's beneficial ownership of Municipal
Preferred shares.
THE FUND...................... Colonial Insured Municipal Fund has operated as
a nondiversified, closed-end management
investment company since October 29, 1999. See
"The Fund." The Fund was organized as a
Massachusetts business trust on August 10,
1999, and has registered under the Investment
Company Act of 1940. The Fund's common shares
of beneficial interest are traded on the
American Stock Exchange under the symbol "CFX".
INVESTMENT ADVISOR............ Colonial Management Associates, Inc. (the
"Advisor"), an investment advisor registered
under the Investment Advisers Act of 1940, has
served as the Fund's investment advisor since
the Fund's inception. The Advisor receives an
annual fee, payable monthly, in a maximum
amount equal to 0.65% of the Fund's average
weekly total net assets (including assets
attributable to any Municipal Preferred shares
that may be outstanding as a result of this
offering). The Advisor has agreed to waive the
Fund's fees and expenses in the amount of 0.30%
of the Fund's average weekly total net assets
for the first five years of the Fund's
operations (through November 30, 2004), and in
a
1
<PAGE> 8
declining amount for an additional five years
(through November 30, 2009). The Advisor is a
wholly owned subsidiary of Liberty Funds Group
LLC, which is an indirect, majority-owned
subsidiary of Liberty Mutual Insurance Company.
See "Management of the Fund."
RISK FACTORS SUMMARY.......... Risk is inherent in all investing. Therefore,
before investing you should consider certain
risks carefully when you invest in the Fund.
The primary risks of investing in Municipal
Preferred shares are the following:
- if an auction fails you may not be able
to sell some or all of your shares;
- because of the nature of the market for
Municipal Preferred shares, you may
receive less than the price you paid for
your shares if you sell them outside of
the auction, especially when market
interest rates are rising;
- a rating agency could downgrade
Municipal Preferred shares, which could
affect liquidity;
- the Fund may be forced to redeem your
shares to meet regulatory or rating
agency requirements or may voluntarily
redeem your shares in certain
circumstances;
- in extraordinary circumstances the Fund
may not earn sufficient income from its
investments to pay dividends;
- if long-term rates rise, the value of
the Fund's investment portfolio may
decline, reducing the asset coverage for
the Municipal Preferred shares; and
- if an issuer of a municipal bond in
which the Fund invests defaults, there
may be a negative impact on the income
and asset value of the Fund's portfolio
(the effects of this risk may, however,
be mitigated by the Fund's investment in
municipal bonds covered by insurance).
For additional risks of investing in the
Municipal Preferred shares of the Fund, see
"Risk Factors and Special Considerations"
below.
DIVIDENDS AND DIVIDEND
PERIODS....................... Dividends on Municipal Preferred shares are
cumulative from the date the shares are first
issued. The Fund will pay dividends on the
Municipal Preferred shares, out of legally
available funds and when declared by the Board
of Trustees, beginning on , 1999.
After the initial dividend period, each
dividend period for the Municipal Preferred
shares will generally consist of seven days and
dividends generally will be payable on each
succeeding Friday. Before any auction, however,
the Fund may decide, subject to limitations and
only if it gives the required notices, to
declare a special dividend period of up to five
years. The Fund
2
<PAGE> 9
may specify different dividend payment dates
for special dividend periods.
The Fund will pay dividends through the
securities depository on each dividend payment
date.
The dividend rate on the Municipal Preferred
shares for the period from and including the
date of issue to but excluding ,
1999, will be % per year. For each
subsequent dividend period, the auction agent
(Bankers Trust Company) will determine the
dividend rate on the Municipal Preferred shares
through an auction.
MAXIMUM DIVIDEND RATE......... Generally, the rate at which the Fund pays
dividends on Municipal Preferred shares may not
exceed the maximum dividend rate. The maximum
dividend rate may vary for different dividend
periods. The maximum dividend rate is based
upon the current credit rating assigned to the
Municipal Preferred shares and an independent
reference rate that may vary over time.
If the number of shares of Municipal Preferred
available during an auction exceeds the total
number of shares subject to bids for that
auction at less than or equal to the maximum
dividend rate, then the dividend rate for the
subsequent dividend period will be the maximum
dividend rate. In addition, if the Fund fails
to pay a dividend on Municipal Preferred
shares, or if the Fund fails to pay the full
redemption price for Municipal Preferred shares
when due, then the dividend rate for the
subsequent dividend period will be the maximum
dividend rate. If, however, the Fund cures its
failure to pay a dividend or to pay the full
redemption price, then the maximum dividend
rate will not automatically apply.
ASSET MAINTENANCE............. Under the Fund's Amended and Restated By-Laws,
which establish and fix the rights and
preferences of the Municipal Preferred shares,
the Fund must maintain
- asset coverage of the Municipal
Preferred shares as required by the
rating agency or agencies rating the
Municipal Preferred shares, and
- asset coverage of the Municipal
Preferred shares of at least 200% as
required by the Investment Company Act
of 1940.
Based on the composition of the Fund's
portfolio and market conditions as of November
30, 1999, the asset coverage of the Municipal
Preferred shares as measured pursuant to the
Investment Company Act of 1940 would be
approximately 245% if the Fund were to issue
all Municipal Preferred shares offered in this
prospectus, representing approximately 41% of
the Fund's capital.
MANDATORY REDEMPTION.......... If the Fund does not maintain its required
asset coverage, it must redeem shares of
Municipal Preferred at $25,000 per share plus
any dividends that accumulate and remain unpaid
up to the date fixed for redemption. The Fund
will limit redemption to the number of
Municipal Preferred shares, together with all
other
3
<PAGE> 10
preferred shares of the Fund, if any, necessary
to restore the required asset coverage. As of
the date of this offering, there are no other
preferred shares outstanding. The Fund may
avoid mandatory redemption by restoring its
required asset coverage pursuant to rating
agency guidelines. The provisions of the
Investment Company Act of 1940 may restrict the
Fund's ability to make a mandatory redemption
in connection with a failure to comply with the
rating agencies' asset coverage requirements.
OPTIONAL REDEMPTION........... The Fund, at its option and subject to various
conditions, may choose to redeem all or a
portion of the Municipal Preferred shares
generally on the second business day preceding
any dividend payment date. If it chooses to
redeem any Municipal Preferred shares, the Fund
must pay $25,000 per share plus any accumulated
but unpaid dividends, whether or not earned or
declared, to (but not including) the date fixed
for redemption. During some special dividend
rate periods, the Fund may also have to pay any
applicable premium.
LIQUIDATION PREFERENCE........ The liquidation preference (that is, the amount
the Fund must pay to Municipal Preferred
shareholders if the Fund is liquidated) for
Municipal Preferred shares will be $25,000 per
share plus any accumulated but unpaid
dividends, whether or not earned or declared.
VOTING RIGHTS................. The Investment Company Act of 1940 requires
that the holders of Municipal Preferred shares,
and the holders of any other preferred shares
of the Fund, voting as a separate class, have
the right to
- elect at least two trustees at all
times, and
- elect a majority of the trustees at any
time when dividends on the Municipal
Preferred shares, or any other preferred
shares of the Fund, are unpaid for two
full years.
In each case, the holders of common shares,
Municipal Preferred shares, and any other
preferred shares of the Fund, voting together
as a single class, will elect the remaining
trustees. Municipal Preferred shareholders, and
the holders of any other preferred shares of
the Fund, will vote as a separate class or
classes on other matters as required under the
Fund's Agreement and Declaration of Trust, the
Investment Company Act of 1940, and
Massachusetts law. Each common share, each
Municipal Preferred share, and each share of
any other class of preferred shares of the Fund
is entitled to one vote per share.
TAXATION...................... Dividends on Municipal Preferred shares will be
exempt from regular federal income tax in the
shareholders' hands to the extent such
dividends are payable from tax-exempt income
earned on the Fund's investments. All or a
portion of the Fund's dividends may be subject
to the federal alternative minimum tax. The
Fund is currently required to allocate net
capital gain and other income taxable for
federal income tax purposes, if any,
proportionately between the Fund's common
shares and its
4
<PAGE> 11
Municipal Preferred shares. The Fund shall, in
the case of a seven-day dividend period or a
special dividend period of 28 days or fewer for
the Municipal Preferred shares, and may, in the
case of any other special dividend period for
such shares, give notice of the amount of any
income taxable for federal income tax purposes
to be included in a dividend on Municipal
Preferred shares in advance of the related
auction. The amount of taxable income allocable
to Municipal Preferred shares will depend upon
the amount of such income realized by the Fund,
but is not generally expected to be
significant.
INVESTMENT OBJECTIVES......... The Fund's investment objective is to provide
current income generally exempt from regular
federal income tax.
INVESTMENT STRATEGIES......... The Fund will invest its assets in a
nondiversified portfolio of municipal bonds
that are generally exempt from regular federal
income tax ("Municipal Obligations"). The bonds
and notes purchased by the Fund generally are
issued by or on behalf of state and local
governmental units, 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. At least 65% of the
Fund's total assets will normally be invested
in Municipal Obligations that are covered by
insurance guaranteeing the timely payment of
principal at maturity and interest. Each
insured Municipal Obligation in the Fund's
portfolio will be covered by specific insurance
(either original issue insurance or secondary
market insurance) or portfolio insurance
purchased by the Fund.
At least 80% of the Fund's net 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 Investors Service, Inc. ("Moody's")
or BBB or higher by Standard & Poor's Ratings
Services ("Standard & Poor's") or comparably
rated by any other nationally recognized credit
rating agency ("Rating Agency")), or, if
unrated, determined by the Advisor to be of at
least investment grade quality. The Fund may
invest up to 20% of its net assets in Municipal
Obligations rated Ba or B by Moody's or BB or B
by Standard & Poor's or comparably rated by
another Rating Agency and unrated municipal
bonds considered to be of comparable quality by
the Advisor. The Fund may not invest in bonds
rated below B by Moody's or Standard & Poor's
or comparably rated by another Rating Agency.
Bonds rated Ba/BB and below are regarded as
having predominantly speculative
characteristics with respect to capacity to pay
interest and repay principal, and are commonly
referred to as "junk bonds." These lower-rated
securities involve special risks, including
greater sensitivity to a general economic
downturn and less secondary market trading.
Under normal conditions, the Fund will invest
primarily in long-term Municipal Obligations
(i.e., those with maturities over 10 years).
The Fund may, however, invest in Municipal
Obligations without regard to maturity or
duration.
5
<PAGE> 12
The Fund may also purchase and sell financial
futures and tax-exempt bond index futures
contracts ("index futures") to hedge against
changes caused by changing interest rates or
changes in the market value of Municipal
Obligations that are in its portfolio or that
it intends to acquire. The Fund may also
attempt to hedge by purchasing and writing put
and call options on financial futures,
tax-exempt bond indices and index futures. See
"Investment Objective and Policies -- Hedging
Activities." Some of the securities in which
the Fund invests may include "zero coupon"
bonds, whose values are subject to greater
fluctuation in response to changes in market
interest rates than bonds that pay interest
currently. Until the Fund is fully invested
(approximately two to three months after
completion of the initial public offering of
its common shares), the Fund may invest up to
20% of its total assets in inverse floating
rate municipal bonds ("inverse floaters").
An investment in the Fund is not appropriate
for all investors. The Fund cannot assure you
that it will attain its investment objective.
See "Investment Objective and Policies."
RATINGS....................... The Fund will not issue Municipal Preferred
shares unless such shares have a rating of
"aaa" from Moody's and "AAA" from Standard &
Poor's.
SECONDARY MARKET TRADING...... Broker-dealers may, but are not obligated to,
maintain a secondary market in Municipal
Preferred shares outside of auctions. There can
be no assurance that a secondary market will
develop or, if it does develop, that it will
provide owners with liquidity of investment.
Municipal Preferred shares may be transferred
outside of auctions only to a broker-dealer or
such other persons who may be permitted by the
Fund.
6
<PAGE> 13
RISK FACTORS AND SPECIAL CONSIDERATIONS
You should consider the following risk factors and other special
considerations in deciding whether to invest in Municipal Preferred shares.
INTEREST RATE AND MARKET RISK. The prices of Municipal Obligations tend to
fall as interest rates rise. Securities that have longer maturities tend to
fluctuate more in price in response to changes in market interest rates. A
decline in the prices of the Municipal Obligations owned by the Fund would cause
a decline in the net asset value of the Fund. This risk is usually greater among
Municipal Obligations with longer maturities or durations and when residual
interest municipal bonds, known as inverse floaters, are held by the Fund.
Although the Fund has no policy governing the maturities or durations of its
investments, the Fund expects that it will invest in a portfolio of longer-term
securities (generally, securities with maturities of 10 years or more). This
means that the Fund will be subject to greater market risk (other things being
equal) than a fund investing solely in shorter-term securities. Market risk is
often greater among certain types of income securities, such as zero coupon
bonds, which do not make regular interest payments. As interest rates change,
these bonds often fluctuate in price more than bonds that make regular interest
payments. Conversely, the values of lower-quality securities are less likely
than higher-quality securities to fluctuate inversely with changes in interest
rates. Because the Fund may invest in these types of income securities, it may
be subject to greater market risk than a fund that invests only in securities
that pay interest on a current basis.
Until the Fund is fully invested (approximately two to three months after
the completion of the initial public offering of its Common Shares), the Fund
may invest to a significant extent in inverse floaters. Compared to similar
fixed-rate Municipal Obligations, the value of inverse floaters will fluctuate
to a greater extent in response to changes in prevailing long-term interest
rates. Moreover, the income earned on inverse floaters will fluctuate in
response to changes in prevailing short-term interest rates. Thus, when inverse
floaters are held by the Fund, 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 the Fund's shares. To the extent that the Fund has preferred shares
outstanding, an increase in short-term rates would also result in an increased
cost of leverage, which would adversely affect the Fund's income available for
distribution. The Fund does not intend to invest in inverse floaters once it
becomes fully invested.
Although insurance on the Municipal Obligations will reduce the credit risk
to which the Fund is subject by guaranteeing the timely payment of principal at
maturity and interest, it does not protect against fluctuations in the value of
the Municipal Obligations held by the Fund or the Fund's shares caused by
changes in interest rates or other factors.
LOWER-RATED SECURITIES. Municipal Obligations in the lower rating
categories of recognized Rating Agencies and unrated Municipal Obligations of
comparable quality generally involve greater risk of nonpayment of principal and
interest than securities in higher rating categories. The Fund may invest up to
20% of its net assets in Municipal Obligations that, at the time of investment,
are rated Ba or B by Moody's or BB or B by Standard & Poor's, or considered to
be of comparable quality by another Rating Agency, or unrated Municipal
Obligations judged to be of comparable quality by the Advisor. The possibility
of defaults by or bankruptcies of issuers of these securities causes, in part,
this principal and interest risk and may result in nonpayment of principal or
interest or restructuring of the debt obligation and, possibly, a reduction in
the Fund's net asset value. The lower-rated Municipal Obligations in which the
Fund may invest are speculative to varying degrees. While such securities may
have some quality and protective characteristics, large uncertainties or major
risk exposures to adverse conditions are expected to outweigh such
characteristics. In addition, the values of lower-rated securities may be more
susceptible to real or perceived adverse economic conditions than the values of
higher-rated securities. Municipal Obligations in the lower rating categories
are regarded as predominantly speculative in character. With respect to
lower-rated or unrated Municipal Obligations, the Fund will rely more on the
judgment, analysis and experience of the Advisor than it will with respect to
investment grade securities.
7
<PAGE> 14
In evaluating the creditworthiness of a Municipal Obligation, whether rated
or unrated, the Advisor may consider, among other things, the following factors:
- the issuer's financial resources;
- the issuer's sensitivity to economic conditions and trends;
- any operating history of and the community support for the facility, if
any, financed by the issue;
- the ability of the issuer's management; and
- regulatory matters.
In addition, lower-rated or unrated Municipal Obligations are frequently
traded only in markets where the number of potential purchasers and sellers, if
any, is very limited. This may limit the availability of such securities for the
Fund to purchase and the ability of the Fund to sell such securities at their
fair value. The Advisor will attempt to reduce the risks of investing in
lower-rated or unrated Municipal Obligations to the greatest extent practicable
through the use of credit analysis.
INCOME RISK. The income investors receive from the Fund is based primarily
on the interest it earns from its investments, which can vary widely over the
short and long term. If interest rates drop, investors' income from the Fund
over time could drop as well if the Fund purchases securities paying lower rates
of interest. This risk is magnified when prevailing short-term interest rates
increase and the Fund holds inverse floaters.
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 Fund would be likely to replace the called
security with a lower-yielding security. If that were to happen, it would
decrease the Fund's dividends.
CREDIT RISK. Municipal Obligations are subject to the risk of nonpayment
of scheduled interest and/or principal payments. Such nonpayment would result in
a reduction of income to the Fund, a reduction in the value of the security
experiencing nonpayment and a potential decrease in the net asset value of the
Fund. Securities rated below investment grade or unrated securities of
comparable quality (generally, "lower-rated" securities) are subject to the risk
of an issuer's inability to meet principal and interest payments on the
obligations ("credit risk"). Lower-rated securities 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-rated securities are also more likely to react to
real or perceived developments affecting market and credit risk than are prices
of investment grade or comparable unrated securities, which react primarily to
movements in the general level of interest rates.
As indicated above, the Fund may invest in Municipal Obligations rated
below investment grade 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. The
Advisor seeks to minimize the risks of investing in below investment grade
securities through professional investment analysis, attention to current
developments in interest rates and economic conditions, and industry and
geographic diversification (if practicable). Because the Fund invests in
lower-rated and unrated Municipal Obligations, the achievement of the Fund's
goals is more dependent on the Advisor's ability than would be the case if the
Fund were investing solely in investment grade or comparable unrated Municipal
Obligations. In evaluating the credit quality of a particular security, whether
rated or unrated, the Advisor will normally take into consideration, among other
things, the financial resources of the issuer (or, as appropriate, of the
underlying source of funds for debt service), its sensitivity to economic
conditions and trends, any operating history of and the community support for
the facility financed by the issue, the ability of the issuer's management and
regulatory matters. The Advisor will attempt to reduce the risks of investing in
below investment grade and comparable
8
<PAGE> 15
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-rated Municipal Obligations to pay interest and
to repay principal, to meet projected financial goals and to obtain additional
financing. In the event that an issuer of securities held by the Fund
experiences difficulties in the timely payment of principal or interest and such
issuer seeks to restructure the terms of its borrowings, the Fund may incur
additional expenses and may determine to invest additional assets with respect
to such issuer or the project or projects to which the Fund's portfolio
securities relate. Further, the Fund 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 Fund may be
unable to obtain full recovery thereof.
To the extent that there is no established retail market for some of the
lower-rated Municipal Obligations in which the Fund may invest, trading in such
securities may be relatively inactive. The Advisor is responsible for
determining the net asset value of the Fund, subject to the supervision of the
Board of Trustees of the Fund. During periods of reduced market liquidity and in
the absence of readily available market quotations for lower-rated Municipal
Obligations held in the Fund's portfolio, the ability of the Advisor to value
the Fund's securities becomes more difficult and the Advisor's use of judgment
may play a greater role in the valuation of the Fund'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 Fund 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.
Changes in the credit quality of the issuers of Municipal Obligations held
by the Fund will affect the principal value of (and possibly the income earned
on) such obligations. In addition, the values of such securities are affected by
changes in general economic conditions and business conditions affecting the
relevant economic sectors. Changes by Rating Agencies in their ratings of a
security and in the ability of the issuer to make payments of principal and
interest may also affect the value of the Fund's investments. The amount of
information about the financial condition of an issuer of Municipal Obligations
may not be as extensive as that made available by corporations whose securities
are publicly traded.
The Fund may invest in municipal leases and participations in municipal
leases. The obligation of the issuer to meet its obligations under such leases
is often subject to the appropriation by the appropriate legislative body, on an
annual or other basis, of funds for the payment of the obligations. Investments
in municipal leases are thus subject to the risk that the legislative body will
not make the necessary appropriation and the issuer will not otherwise be
willing or able to meet its obligations.
PORTFOLIO INSURANCE RESTRICTIONS. The Fund may be subject to certain
restrictions on investments imposed by guidelines of one or more insurance
companies which may issue portfolio insurance to the Fund. These guidelines may
impose asset coverage and Fund composition requirements that are more stringent
than those imposed on the Fund by the Investment Company Act of 1940. Although
the Fund does not anticipate that these guidelines will impede the Advisor from
managing the Fund's portfolio in accordance with the Fund's investment objective
and policies, the Fund can offer no assurances to that effect.
CONCENTRATION. The Fund may invest 25% or more of its total assets in
Municipal Obligations of issuers located in the same state (or U.S. territory).
This may make the Fund more susceptible to adverse economic, political, or
regulatory occurrences affecting a particular state. As concentration increases,
so does the potential for fluctuation of the Common Shares of the Fund.
LIQUIDITY RISK. At times, a substantial portion of the Fund's assets may
be invested in securities as to which the Fund, by itself or together with other
accounts managed by the Advisor and its affiliates, holds a major portion of all
of such securities. Under adverse market or economic conditions or in the
9
<PAGE> 16
event of adverse changes in the financial condition of the issuer, the Fund
could find it more difficult to sell such securities when the Advisor believes
it is advisable to do so or may be able to sell such securities only at prices
lower than if such securities were more widely held. Under such circumstances,
it may also be more difficult to determine the fair value of such securities for
purposes of computing the Fund's net asset value.
The secondary market for some Municipal Obligations is less liquid than is
the secondary market for taxable debt obligations or other more widely traded
Municipal Obligations. No established resale market exists for certain Municipal
Obligations in which the Fund may invest. The market for Municipal Obligations
rated below investment grade is also likely to be less liquid than the market
for higher-rated Municipal Obligations. As a result, the Fund may be unable to
dispose of these Municipal Obligations at times when it would otherwise wish to
do so at the prices at which they are valued.
A secondary market may be subject to irregular trading activity, wide
bid/ask spreads and extended trade settlement periods. The Fund 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
Fund's operations require cash, such as if the Fund tenders for its Common
Shares, and may result in the Fund borrowing to meet short-term cash
requirements.
OPTIONS AND FUTURES TRANSACTIONS. The Fund may seek to hedge its portfolio
against changes in interest rates using options, index options and futures and
financial futures contracts. The Fund's hedging transactions are designed to
manage the average duration of the Fund's portfolio, but may come at some cost.
In large part, the success of the Fund's hedging activities depends on the
Advisor's ability to forecast movements in securities prices and interest rates,
and the Fund can offer no assurance that the Advisor will be able to forecast
such movements successfully. The Fund does not, however, intend to enter into
options and futures transactions for speculative purposes. The Fund is not
required to hedge its portfolio.
CLOSED-END FUNDS. The Fund is a closed-end investment company with no
history of operations and is designed primarily for long-term investors and not
as a trading vehicle. The shares of closed-end investment companies often trade
at a discount from their net asset value. Shares of closed-end investment
companies like the Fund that invest predominantly in municipal bonds have traded
during some periods at prices higher than net asset value and have traded during
other periods at prices lower than net asset value.
PRIVATE ACTIVITY BONDS. The Fund may invest in tax-exempt securities
classified as "private activity bonds." These bonds may subject some investors
in the Fund to the alternative minimum tax. The Fund may invest all or any part
of its assets in such private activity bonds.
ALTERNATIVE MINIMUM TAX AND OTHER TAX CONSIDERATIONS. Interest on certain
"private activity" Municipal Obligations is treated as a tax preference item for
purposes of the federal alternative minimum tax. In addition, for corporations,
interest on all tax-exempt obligations is taken into account in the computation
of income subject to the federal alternative minimum tax. There is no specific
limitation on the amount of the Fund's assets that may be invested in Municipal
Obligations that pay interest that is treated as a tax preference item.
Accordingly, an investment in Municipal Preferred shares of the Fund may not be
appropriate for investors who are already subject to the federal alternative
minimum tax or who would become subject thereto as a result of owning Municipal
Preferred shares. Moreover, distributions of any taxable net investment income
and net short-term capital gain are taxable as ordinary income. See "Tax
Matters."
ANTITAKEOVER PROVISIONS. The Fund's Agreement and Declaration of Trust
includes provisions that could limit the ability of other entities or persons to
acquire control of the Fund or to change the composition of its Board of
Trustees. Such provisions could discourage a third party from seeking to obtain
control of the Fund.
10
<PAGE> 17
INVESTMENT CONSIDERATIONS. Investors in the Municipal Preferred shares
should consider the following factors:
- The credit ratings of the Municipal Preferred shares could be reduced
while an investor holds such shares.
- Neither broker-dealers nor the Fund are obligated to purchase Municipal
Preferred shares in an auction or otherwise, nor is the Fund required to
redeem shares of Municipal Preferred in the event of a failed auction.
- If sufficient bids do not exist in an auction, the applicable dividend
rate will be the maximum applicable dividend rate, and in such event,
owners of Municipal Preferred shares wishing to sell will not be able to
sell all, and may not be able to sell any, of such shares in the auction.
As a result, investors may not have liquidity of investment.
NONDIVERSIFICATION. The Fund has registered as a "nondiversified"
investment company under the Investment Company Act of 1940. This means that, as
limited by federal income tax considerations, the Fund, with respect to up to
50% of its total assets, will be able to invest more than 5% (but not more than
25%) of the value of its total assets in the obligations of any single issuer.
To the extent the Fund invests a relatively high percentage of its assets in
obligations of a limited number of issuers, the Fund may be more susceptible
than a more widely diversified investment company to any single economic,
political or regulatory occurrence.
AUCTION RISK. You may not be able to sell your Municipal Preferred shares
at an auction if the auction fails; that is, if there are more Municipal
Preferred shares offered for sale than there are buyers for those shares. The
Fund believes this event is unlikely. Also, if you place hold orders (orders to
retain Municipal Preferred shares) at an auction only at a specified rate, and
that bid rate exceeds the rate set at the auction, you will not retain your
Municipal Preferred shares. Finally, if you buy shares or elect to retain shares
without specifying a rate below which you would not wish to continue to hold
those shares, and the auction sets a below-market rate, you may receive a lower
rate of return on your shares than the market rate. See "Description of
Municipal Preferred" and "The Auction -- Summary of Auction Procedures."
SECONDARY MARKET. The broker-dealers intend to maintain a secondary
trading market in the shares of Municipal Preferred outside of auctions;
however, they have no obligation to do so and there can be no assurance that a
secondary market for Municipal Preferred shares will develop or, if it does
develop, that it will provide holders with a liquid trading market. The
Municipal Preferred shares will not be registered on any stock exchange or on
any automated quotation system. An increase in the level of interest rates
likely will have an adverse effect on the secondary market price of the
Municipal Preferred shares, and a selling shareholder may have to sell Municipal
Preferred shares between auctions at a price per share of less than $25,000. You
may transfer Municipal Preferred shares outside of auctions only to
broker-dealers or such other persons as may be permitted by the Trust.
YEAR 2000 COMPLIANCE. Like other investment companies, financial and
business organizations and individuals around the world, the Fund could be
adversely affected if the computer systems used by the Advisor, other service
providers and the issuers in which the Fund invests 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." The Advisor is taking steps that
it believes are reasonably designed to address the Year 2000 Problem, including
communicating with vendors who provide services, software and systems to the
Fund in an attempt to ensure that date-related information and data can be
properly processed and calculated on and after January 1, 2000. Many Fund
service providers and vendors, including the Advisor, and the insurers who will
provide portfolio insurance for the Fund or insurance for specific Municipal
Obligations in which the Fund invests are in the process of making Year 2000
modifications to their services, software and systems and believe that such
modifications will be completed on a timely basis prior to January 1, 2000. In
addition, Year 2000 readiness information, if available, is one of the factors
considered by the Advisor in its assessment of the issuers in which the Fund
invests. There can be no assurance that these steps will be sufficient to avoid
any adverse impact on the Fund.
11
<PAGE> 18
FINANCIAL HIGHLIGHTS
(UNAUDITED)
The table below sets forth the unaudited operating performance of the Fund
from the commencement of the Fund's operations on October 29, 1999, until
November 30, 1999. Since the Fund was recently organized and commenced
operations on October 29, 1999, the table covers less than five weeks of
operations, during which a substantial portion of the Fund's portfolio was held
in temporary investments pending investment in accordance with the Fund's
investment objective and policies. Accordingly, the information presented may
not provide a meaningful picture of the Fund's operating performance.
<TABLE>
<CAPTION>
OCTOBER 29, 1999 TO
NOVEMBER 30, 1999
-------------------
<S> <C>
Net asset value -- beginning of period...................... $ 14.325
--------
Net investment income....................................... 0.055(a)
Net realized and unrealized gain (loss)..................... (0.050)
--------
Total from investment operations.......................... 0.005
Expenses incurred from initial public offering.............. (0.030)
--------
Net asset value -- end of period............................ $ 14.300
========
Per share market value -- end of period..................... $ 15.000
========
Total return based on net asset value(b).................... (0.17)%(d)
========
Total return based on market value(c)....................... 0%(d)
========
Ratio of operating expenses to average net assets(e)........ 0.55%(a)(f)
Ratio of offering costs to average net assets............... 0.21%
Ratio of total net expenses to average net assets(e)........ 0.76%(a)(f)
Ratio of net investment income to average net assets(e)..... 4.03%(a)(f)
Portfolio turnover rate..................................... 10%
Net assets at end of period (000)........................... $54,423
</TABLE>
- ---------------
(a) Net of fees and expenses waived or borne by the Advisor, which amounted to
$0.028 and a ratio of fees and expenses waived or borne by the Advisor to
average net assets of 2.17% (annualized).
(b) Had the Advisor not reimbursed and/or waived a portion of expenses, total
return would have been reduced.
(c) Total return at market value excluding brokerage commissions.
(d) Not annualized.
(e) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
(f) Annualized.
12
<PAGE> 19
THE FUND
The Fund is a recently organized, closed-end, nondiversified management
investment company. The Fund was organized as a Massachusetts business trust
under the laws of the Commonwealth of Massachusetts on August 10, 1999, and is
registered under the Investment Company Act of 1940. On October 29, 1999, the
Fund issued 2,400,000 common shares of beneficial interest, no par value (the
"Common Shares"), pursuant to the initial public offering thereof and commenced
operations. The Fund's common shares of beneficial interest are traded on the
American Stock Exchange under the symbol "CFX". The Fund's principal office is
located at One Financial Center, Boston, MA 02111, and its telephone number is
(617) 426-3750.
USE OF PROCEEDS
The net proceeds of this offering will be approximately $36,848,130, after
payment of the sales load to the Underwriters and estimated offering costs.
The net proceeds of the offering will be invested in accordance with the
Fund's investment objective and policies. It is presently anticipated that the
Fund will be able to invest substantially all of the net proceeds in Municipal
Obligations that meet the Fund's investment objective at or shortly (within six
to eight weeks) after the completion of the offering. To the extent that all of
the proceeds cannot be so invested, pending such investment, the Fund will
invest such proceeds initially in high-quality, short-term tax-exempt money
market securities, the income on which will be exempt from federal income taxes
(other than the possible incidence of any alternative minimum tax), or in
high-quality Municipal Obligations with relatively low volatility (such as
prerefunded and intermediate-term securities), to the extent such securities are
available. If necessary to invest fully the net proceeds of the offering
immediately, the Fund may also purchase, as temporary investments, short-term
taxable investments of the type described under "Investment Objective and
Policies -- Temporary and Defensive Investments," the income on which is subject
to federal income taxes.
13
<PAGE> 20
CAPITALIZATION
AT NOVEMBER 30, 1999
The following table sets forth the unaudited capitalization of the Fund at
November 30, 1999, and as adjusted to give effect to the issuance of the Series
TH Municipal Preferred shares offered hereby (including estimated offering
expenses and sales loads of $451,870).
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Shareholders' Equity:
Preferred Shares, no par value per share; 1,492 shares
authorized (no shares issued; 1,492 shares of Municipal
Auction Rate Cumulative Preferred Shares issued, as
adjusted, at $25,000 per share liquidation
preference)............................................ $ -- $37,300,000
Common Shares, no par value per share; unlimited shares
authorized; 3,806,667 shares outstanding*.............. 54,535,000 54,083,130
Undistributed (overdistributed) net investment income..... 95,702 95,702
Net realized gain (loss) from investment transactions..... -- --
Net unrealized appreciation (depreciation) of
investments............................................ (208,080) (208,080)
----------- -----------
Net Assets............................................. $54,422,622 $91,270,752
=========== ===========
</TABLE>
- ---------------
* No outstanding shares are held by or for the account of the Fund.
PORTFOLIO COMPOSITION
As of November 30, 1999, approximately 99.16% of the market value of the
Fund's portfolio was invested in long- and intermediate-term Municipal
Obligations and approximately 0.84% of the market value of the Fund's portfolio
was invested in short-term securities. The following table sets forth
information with respect to the composition of the Fund's investment portfolio
(excluding short-term securities) as of November 30, 1999.
<TABLE>
<CAPTION>
STANDARD & NUMBER OF MARKET NUMBER OF MARKET
POOR'S* ISSUES VALUE PERCENT MOODY'S* ISSUES VALUE PERCENT
---------- --------- --------------- ------- -------- --------- --------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
AAA 23 $ 40,753,504.60 69.08% Aaa 22 $ 39,839,594.60 67.53%
AA 2 3,922,800.00 6.65 Aa 3 4,938,510.00 8.37
A 1 969,650.00 1.64 A 3 4,461,310.00 7.56
BBB 5 2,986,855.00 5.06 Baa 3 1,983,435.00 3.36
BB 1 471,875.00 0.80 Ba 1 471,875.00 0.80
B 1 245,625.00 0.42 B 1 245,625.00 0.42
NR** 8 9,648,793.00 16.35 NR** 8 7,058,753.00 11.96
--- --------------- ------ --- --------------- ------
Total 41 $ 58,999,102.60 100.00% Total 41 $ 58,999,102.60 100.00%
=== =============== ====== === =============== ======
</TABLE>
- ---------------
* Standard & Poor's 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.
** Some bonds are rated by only one rating agency, which results in a higher
percentage of bonds in this category. The total market value of bonds that do
not carry a rating from any rating service is $1,683,693.00, which represents
2.83% of the Fund's portfolio.
14
<PAGE> 21
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide current income generally
exempt from regular federal income tax. The Fund may seek to achieve its
objective by engaging in hedging transactions. Securities will be purchased and
sold in an effort to maintain a competitive yield and to enhance return based
upon the relative value of the securities available in the marketplace.
Investments are based on the Advisor's research and ongoing credit analysis, the
underlying materials for which are generally not available to individual
investors.
During normal market conditions, substantially all of the Fund's total
assets (at least 80%) will be invested in debt obligations issued by or on
behalf of states (including the District of Columbia), territories and
possessions of the United States, and their political subdivisions, agencies or
instrumentalities, 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 ("Municipal Obligations"). At least 65% of the Fund's total assets
will normally be invested in Municipal Obligations that are covered by insurance
guaranteeing the timely payment of principal at maturity and interest. Each
insured Municipal Obligation in the Fund's portfolio will be covered by specific
insurance (either original issue insurance or secondary market insurance) or
portfolio insurance purchased by the Fund. At least 80% of the Fund's net 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 Standard & Poor's or comparably rated by any other Rating
Agency) or, if unrated, determined by the Advisor to be of at least investment
grade quality. From time to time, the Fund may hold a significant amount of
Municipal Obligations not rated by a Rating Agency. Under normal conditions, the
Fund will invest primarily in long-term Municipal Obligations (i.e., those with
maturities over 10 years). The Fund may, however, invest in Municipal
Obligations without regard to maturity or duration.
The Fund may invest up to 20% of its net assets in Municipal Obligations
rated Ba or B by Moody's or BB or B by Standard & Poor's and unrated Municipal
Obligations considered to be of comparable quality by the Advisor. The Fund may
not invest in bonds rated below B or unrated bonds deemed by the Advisor to be
of comparable quality. 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 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. When the Fund invests in
lower-rated or unrated Municipal Obligations, it may be more dependent on the
Advisor's research capabilities than when it invests in investment grade
Municipal Obligations. See "Risk Factors and Special Considerations." For a
description of municipal bond ratings, see Appendix A to the Statement of
Additional Information.
In assessing the quality of Municipal Obligations (as defined below in
"-- Description of Municipal Obligations") with respect to the foregoing
requirements, the Advisor will consider the portfolio insurance purchased by the
Fund or the specific insurance, letters of credit or similar credit enhancements
covering particular Municipal Obligations and the creditworthiness of the
financial institution providing such insurance or credit enhancements. For
example, if Municipal Obligations are covered by insurance policies issued by
insurers whose claims-paying ability is rated Aaa by Moody's or AAA by Standard
& Poor's, or comparably rated by any other Rating Agency, the Advisor may
consider such Municipal Obligations to be equivalent to Aaa or AAA rated
securities, as the case may be, even though such Municipal Obligations would
generally be assigned a lower rating if the rating were based primarily upon the
credit characteristics of the issuers without regard to the insurance feature.
When assessing the quality of Municipal Obligations, the Advisor will also
consider the standards applied by insurance companies when determining
eligibility for portfolio insurance.
The foregoing credit quality policies apply only at the time a security is
purchased, and the Fund is not required to dispose of a security in the event
that a Rating Agency downgrades its assessment of the credit characteristics of
a particular issue. In determining whether to retain or sell such a security,
the
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<PAGE> 22
Advisor may consider such factors as the Advisor'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.
If current market conditions persist, the Fund expects that approximately
90% of its initial portfolio will consist of investment grade Municipal
Obligations rated as such at the time of investment by Moody's, Standard &
Poor's or another Rating Agency (approximately 65% in Aaa/AAA; 10% in A; and 15%
in Baa/BBB). Subject to market availability, the Fund would likely seek to
invest approximately 5% of its initial portfolio in Municipal Obligations that
are, at the time of investment, rated Ba by Moody's, BB by Standard & Poor's or
comparably rated by another Rating Agency and 5% in Municipal Obligations that
are not rated by any Rating Agency.
The Fund's policy is not to concentrate in any industry, but the Fund may
invest up to 25% of its total assets in industrial development revenue bonds or
private activity revenue bonds that are based, directly or indirectly, on the
credit of private entities in any one industry, or in securities of private
issuers in any one industry (governmental issuers are not considered to be part
of any "industry"). See "Investment Objective and Policies -- Fundamental
Investment Policies" and "Investment Objective and Policies -- Other Investment
Policies" in the Statement of Additional Information.
Some of the securities in which the Fund invests may include so-called
"zero coupon" bonds, whose values are subject to greater fluctuation in response
to changes in market interest rates than bonds that pay interest currently. Zero
coupon bonds are issued at a significant discount from face value and pay
interest only at maturity, rather than at intervals during the life of the
security. The Fund is required to take into account income from zero coupon
bonds on a current basis, even though it does not receive that income currently
in cash, and the Fund is required to distribute substantially all of its income
for each taxable year. Thus, the Fund may have to sell other investments to
obtain cash needed to make income distributions.
Until such time as the Fund is fully invested (approximately two to three
months after the completion of the initial public offering of its common
shares), the Fund may invest up to 20% of its total assets in inverse floating
rate municipal bonds (which are 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 Fund when short-term interest rates rise, and increase the interest paid
to the Fund when short-term interest rates fall. Inverse floaters have varying
degrees of liquidity, and the prices of these securities may be 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. 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. Investment in inverse floaters may amplify the effects of the Fund's use
of leverage. Should short-term interest rates rise, the combination of the
Fund's investment in inverse floaters and its use of leverage likely will
adversely affect the Fund's income and distributions to shareholders. The Fund
does not intend to invest in inverse floaters once it becomes fully invested.
It is a fundamental policy of the Fund, which may not be changed without
approval of holders of a majority of the Fund's outstanding voting securities
(as defined in the Statement of Additional Information under "Investment
Objective and Policies -- Fundamental Investment Policies"), to invest, under
normal circumstances, at least 80% of its total assets in Municipal Obligations.
Except for this policy and the other fundamental investment policies listed in
the Statement of Additional Information under
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<PAGE> 23
"Investment Objective and Policies -- Fundamental Investment Policies," the
Fund's investment policies and its investment objective may be changed without
shareholder approval.
In addition to investing in Municipal Obligations, the Fund may attempt to
hedge against changes in interest rates by engaging in transactions involving
interest rate futures contracts ("financial futures"), index futures and options
on financial futures, tax-exempt indices and index futures. See "Investment
Objective and Policies -- Hedging Activities." The costs of and possible losses
incurred from such transactions may reduce the Fund's current return.
The Fund may also purchase securities on a "when-issued" basis, enter into
repurchase agreements and invest in other taxable instruments, subject to
certain limitations. See "Investment Objective and Policies -- Forward
Commitments," "Investment Objective and Policies -- Repurchase Agreements" and
"Investment Objective and Policies -- Temporary and Defensive Investments."
The Advisor utilizes a top-down investment strategy that seeks to strike a
balance between investment performance potential and avoiding undue credit risk.
The Advisor first analyzes the various factors that can influence the direction
of interest rates, including economic growth and inflation. It then structures
the Fund based on its view of the appropriate sector and geographic
diversification. Investments are based on the Advisor's fundamental research and
ongoing credit analysis. The Advisor's research analysts examine credit
histories, revenue sources, capital structures and other data. The Advisor
employs a total of 20 municipal investment professionals. These professionals
work in a team-based environment in which every investment team holds a vested
interest in a portfolio's performance.
DESCRIPTION OF MUNICIPAL OBLIGATIONS
As used in this prospectus, the term "Municipal Obligations" refers to debt
obligations the interest on which was at the time of issuance, in the opinion of
issuer's counsel (or on the basis of other reliable authority), exempt from
federal income tax (other than the possible incidence of any alternative minimum
tax). (For a description of the federal alternative minimum tax, see "Tax
Matters -- Federal Taxation of Shareholders.") Municipal Obligations include
debt obligations issued by states (including the District of Columbia),
territories or possessions of the United States, or any political subdivision
thereof, to obtain funds for various public purposes, including the construction
of a wide range of public facilities such as airports, bridges, highways,
housing, mass transportation, roads, schools and water and sewer works or for
other public purposes. Interest on industrial development bonds used to fund the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities may also be exempt from federal income tax, but the
size of such issues is limited under current federal tax law. The Fund may not
be a desirable investment for "substantial users" of facilities financed by
industrial development bonds or other private activity bonds or for "related
persons" of substantial users. See "Tax Matters" in the Statement of Additional
Information. The Fund has no present intention of investing in Municipal
Obligations the interest on which is not exempt from federal income tax (other
than the possible incidence of any alternative minimum tax). The Advisor will
not, in any event, conduct any independent investigation as to the tax status of
any securities in which the Fund invests or of the issuers of such securities.
The two principal classifications of Municipal Obligations are general
obligation bonds and revenue bonds. General obligation bonds are obligations
involving the credit of an issuer possessing taxing power and are payable from
the issuer's general unrestricted revenues and not from any particular fund or
source. The characteristics and method of enforcement of general obligation
bonds vary according to the law applicable to the particular issuer, and payment
may be dependent upon appropriation by the issuer's legislative body. Revenue
bonds are payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise or
other specific revenue source. Tax-exempt industrial development bonds and other
private activity bonds also generally are revenue bonds and thus not payable
from the unrestricted revenues of the issuer. The credit quality of industrial
development bonds and other private activity bonds is usually directly related
to the credit of the corporate
17
<PAGE> 24
user of the facilities. Payment of principal of and interest on industrial
development bonds and other private activity bonds is the responsibility of the
corporate user (and any guarantor).
Prices and yields on Municipal Obligations are dependent on a variety of
factors, including general market conditions, the financial condition of the
issuer, general conditions in the tax-exempt bond market, the size of a
particular offering, the maturity of the obligation and the ratings of
particular issues, and are subject to change from time to time. Information
about the financial condition of an issuer of Municipal Obligations may not be
as extensive as that which is made available by corporations whose securities
are publicly traded.
The ratings of Moody's, Standard & Poor's and other Rating Agencies
represent their opinions and are not absolute standards of quality. Municipal
Obligations with the same maturity, interest rate and rating may have different
yields, while Municipal Obligations of the same maturity and interest rate with
different ratings may have the same yield.
Obligations of issuers of Municipal Obligations are subject to the
provisions of bankruptcy, insolvency and other laws, such as the Federal
Bankruptcy Reform Act of 1978, affecting the rights and remedies of creditors.
Congress or state legislatures may seek to extend the time for payment of
principal or interest, or both, or to impose 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 issuers to meet their
obligations to pay interest on and principal of their Municipal Obligations may
be materially impaired or their obligations may be found to be invalid or
unenforceable. Such litigation or conditions may from time to time have the
effect of introducing uncertainties into the market for Municipal Obligations or
certain segments thereof, or materially affecting the credit risk with respect
to particular bonds. Adverse economic, business, legal or political developments
might affect all or a substantial portion of the Fund's Municipal Obligations in
the same manner.
Interest income from certain types of Municipal Obligations may be a tax
preference item for purposes of the federal alternative minimum tax for
individual investors. Distributions to corporate investors of exempt interest
income may also be indirectly subject to the alternative minimum tax. The Fund
may not be suitable for investors currently or who may become subject to the
alternative minimum tax.
MUNICIPAL OBLIGATION INSURANCE
At least 65% of the Fund's total assets will normally be invested in
Municipal Obligations that are covered by insurance guaranteeing the timely
payment of principal at maturity and interest. Each insured Municipal Obligation
in the Fund's portfolio will be covered by specific insurance (either original
issue insurance or secondary market insurance) or portfolio insurance purchased
by the Fund. It is anticipated that initially a majority of the insured
Municipal Obligations held by the Fund will be insured under insurance obtained
by parties other than the Fund.
When purchasing insured Municipal Obligations, the Fund will generally seek
to purchase those Municipal Obligations covered by insurance that is issued by
insurers whose claims-paying ability is rated "Aaa" by Moody's or "AAA" by
Standard & Poor's, or comparably rated by another Rating Agency. Similarly, the
Fund will generally obtain portfolio insurance issued by insurers whose
claims-paying ability is rated "Aaa" by Moody's or "AAA" by Standard & Poor's,
or comparably rated by another Rating Agency. However, the Fund may also
purchase Municipal Obligations insured by, and obtain portfolio insurance from,
insurers with a lower rating. The Fund may obtain Municipal Obligation insurance
from Ambac Assurance Corporation, Financial Security Assurance Inc., MBIA
Insurance Corporation, Financial Guaranty Insurance Company, Asset Guaranty
Insurance Company and American Capital Access Financial Guaranty Corporation.
The Fund is not obligated to obtain Municipal Obligation insurance from any of
these insurers, and may obtain Municipal Obligation insurance from insurers
other than or in addition to these insurers. While there is currently no limit
on the percentage of the Fund's assets that may be invested in Municipal
Obligations insured by any one insurer, guidelines of one or more Rating
Agencies rating the Municipal Preferred shares may impose such limitations.
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<PAGE> 25
Municipal Obligations covered by specific insurance, rather than by
portfolio insurance, will have the same rating as the rating of the
claims-paying ability of the insurer issuing the policy. Municipal Obligations
covered by portfolio insurance, however, will be rated based primarily on the
credit characteristics of the issuer, without regard to the portfolio insurance,
and generally will be rated below "Aaa" or "AAA." While the Fund holds a
Municipal Obligation covered by portfolio insurance, such Municipal Obligation
will, effectively, be of the same credit quality as a Municipal Obligation
covered by a specific insurance policy issued by the same insurance company.
The Fund's policy of generally buying Municipal Obligations insured by
insurers whose claims-paying ability is rated "Aaa" or "AAA" applies only at the
time the Fund buys the Municipal Obligation. If a Rating Agency downgrades an
insurer's claims-paying ability, the Fund is not required to sell Municipal
Obligations covered by that insurer's policies. If a Rating Agency downgrades
its rating of an insurer, it would probably downgrade its rating of a Municipal
Obligation covered by that insurer's original issue insurance or secondary
market insurance. Municipal Obligations in the Fund's portfolio covered by that
insurer's portfolio insurance would also probably be downgraded. Moody's and
Standard & Poor's continually assess the claims-paying ability of insurers and
the creditworthiness of Municipal Obligation issuers, and there can be no
assurance that Moody's and Standard & Poor's will not downgrade their ratings.
The value of Municipal Obligations covered by portfolio insurance that are in
default or in significant risk of default will be determined by separately
establishing a value for the Municipal Obligation and a value for the portfolio
insurance.
ORIGINAL ISSUE INSURANCE. Original issue insurance is insurance purchased
by the issuer of Municipal Obligations or a third party to cover a particular
issue of Municipal Obligations at the time those Municipal Obligations are
issued. Under this insurance, the insurer unconditionally guarantees to the
holder of the Municipal Obligation the timely payment of principal and interest
when and as these payments become due if the issuer does not pay them. However,
if the due date of the principal is accelerated because of mandatory or optional
redemption (other than acceleration because of a mandatory sinking fund
payment), default or otherwise, the payments guaranteed may be made in the
amounts and at the times as principal payments would have been due had there not
been any acceleration. The insurer is responsible for these payments less any
amounts the holders receive from any trustee for the Municipal Obligation issuer
or from any other source. Original issue insurance does not guarantee the
payment of any redemption premium (except for certain premium payments for
certain small issue industrial development and pollution control Municipal
Obligations), the value of the Fund's shares or the market value of Municipal
Obligations, or payments of any tender purchase price upon the tender of the
Municipal Obligations. Original issue insurance also does not insure against
nonpayment of principal or interest on Municipal Obligations resulting from the
insolvency, negligence, or any other act or omission of the trustee or other
paying agent for these Municipal Obligations.
Original issue insurance remains in effect as long as the Municipal
Obligations it covers remain outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of these Municipal
Obligations. Consequently, original issue insurance may be considered to
represent an element of market value of the Municipal Obligations so insured,
but the exact effect, if any, of this insurance on the market value cannot be
estimated.
SECONDARY MARKET INSURANCE. Secondary market insurance is insurance that
is purchased by the purchaser of a Municipal Obligation (such as the Fund),
rather than the issuer, to cover that security. Secondary market insurance
generally provides the same type of coverage as original issue insurance and, as
with original issue insurance, secondary market insurance remains in effect as
long as the Municipal Obligations it covers remain outstanding and the insurer
remains in business, regardless of whether the Fund ultimately disposes of these
Municipal Obligations.
One of the purposes of acquiring secondary market insurance for a
particular Municipal Obligation is to enable the Fund to enhance the value of
the security. The Fund, for example, might seek to buy a particular Municipal
Obligation and obtain secondary market insurance for it if, in the Advisor's
opinion, the market value of the security, as insured, would exceed the current
value of the security without
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<PAGE> 26
insurance plus the cost of the secondary market insurance. Similarly, if the
Fund owns but wishes to sell a Municipal Obligation that is then covered by
portfolio insurance, the Fund might seek to obtain secondary market insurance
for it if, in the Advisor's opinion, the net proceeds of the Fund's sale of the
security, as insured, would exceed the current value of the security plus the
cost of the secondary market insurance. In determining whether to insure
Municipal Obligations the Fund owns, an insurer will apply its own standards,
which correspond generally to the standards it has established for determining
the insurability of new issues of Municipal Obligations. See "Original Issue
Insurance" above.
PORTFOLIO INSURANCE. The Fund may also purchase policies of portfolio
insurance, each of which would guarantee the payment of principal and interest
on specified eligible Municipal Obligations the Fund has bought. Except as
described below, portfolio insurance generally provides the same type of
coverage as original issue insurance or secondary market insurance. Municipal
Obligations insured under one portfolio insurance policy would generally not be
insured under any other policy the Fund buys. A Municipal Obligation is eligible
for coverage under a policy if it meets certain requirements of the insurer. If
a Municipal Obligation is already covered by original issue insurance or
secondary market insurance, then the security is not required to be additionally
insured under any portfolio insurance policy that the Fund may buy.
Each portfolio insurance policy will terminate for any Municipal Obligation
that has been redeemed or that the Fund has sold on the date of redemption or
the settlement date of sale. A portfolio insurer will have no liability after
such date under the relevant portfolio insurance policy for any such Municipal
Obligation, except that if the redemption date or settlement date occurs after a
record date and before the related payment date for any Municipal Obligation,
the policy will terminate for that Municipal Obligation on the business day
immediately following the payment date.
One or more portfolio insurance policies purchased by the Fund may provide
the Fund, under an irrevocable commitment of the insurer, with an option to
obtain permanent insurance for a Municipal Obligation upon the sale of that
Municipal Obligation by the Fund. The Fund would exercise the right to obtain
permanent insurance upon payment of a single, predetermined insurance premium
payable from the sale proceeds of the Municipal Obligation. The Fund expects to
exercise any such option only if, in the Advisor's opinion, the net proceeds
from the sale of a given Municipal Obligation, as insured, would exceed the
proceeds from the sale of that security without insurance.
The permanent insurance premium for each Municipal Obligation is determined
based upon the insurability of each security as of the date the Fund originally
bought the security. This premium will not be increased or decreased for any
change in the security's creditworthiness, unless the security is in default as
to payment of principal or interest, or both. If this happens, the permanent
insurance premium will be subject to an increase predetermined at the date of
the Fund's purchase.
The Fund generally intends to retain any insured Municipal Obligations
covered by portfolio insurance that are in default or in significant risk of
default and to place a value on the insurance, which value ordinarily will be
the difference between the market value of the defaulted Municipal Obligation
and the market value of similar Municipal Obligations of minimum investment
grade (that is, rated "Baa" or "BBB") that are not in default. In certain
circumstances, however, the Advisor may determine that an alternative value for
the insurance, such as the difference between the market value of the defaulted
Municipal Obligation and either its par value or the market value of similar
Municipal Obligations that are not in default or in significant risk of default,
is more appropriate. To the extent that the Fund holds defaulted Municipal
Obligations, it may be limited in its ability to manage its investment portfolio
and to purchase other Municipal Obligations. Except as described above for
Municipal Obligations covered by portfolio insurance that are in default or
subject to significant risk of default, the Fund will not place any value on the
insurance in valuing the Municipal Obligations it holds.
Because each portfolio insurance policy will terminate for a particular
covered Municipal Obligation on the date the Fund sells that Municipal
Obligation, the insurer will be liable only for those payments of principal and
interest that are then due and owing (unless the Fund obtains permanent
insurance). Portfolio insurance will not enhance the marketability of the Fund's
Municipal Obligations, whether or not
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<PAGE> 27
the Municipal Obligations are in default or in significant risk of default. On
the other hand, because original issue insurance and secondary market insurance
will remain in effect as long as the Municipal Obligations they cover are
outstanding, these insurance policies may enhance the marketability of these
Municipal Obligations even when they are in default or in significant risk of
default. The exact effect of insurance, if any, on marketability, cannot be
estimated. Accordingly, the Fund may determine to retain or, alternatively, to
sell Municipal Obligations covered by original issue insurance or secondary
market insurance that are in default or in significant risk of default.
The Fund would generally pay the premiums for a portfolio insurance policy
monthly, and premiums are adjusted for purchases and sales of Municipal
Obligations covered by the policy during the month. The yield on the Fund's
portfolio would be reduced to the extent of the insurance premiums the Fund pays
which, in turn, will depend upon the characteristics of the covered Municipal
Obligations. If the Fund were to buy secondary market insurance for any
Municipal Obligation then covered by a portfolio insurance policy, the coverage
and the obligation to pay monthly premiums under the portfolio insurance policy
would cease with respect to that Municipal Obligation.
HEDGING ACTIVITIES
Hedging is a means of transferring risk that an investor does not desire to
assume in an uncertain interest rate environment. The Advisor believes it is
possible to reduce or enhance the effects of interest rate fluctuations through
the use of futures contracts and options on financial instruments. However, so
long as either Standard & Poor's or Moody's is rating the Municipal Preferred
shares, the Fund will only engage in futures or options transactions in
accordance with guidelines of such Rating Agencies and, to the extent
transactions would not be permitted by such guidelines, only after it has
received written confirmation from Standard & Poor's or Moody's, as appropriate,
that such transactions would not impair the ratings then assigned by such Rating
Agency to Municipal Preferred shares. Thus, the ability of the Fund to engage in
hedging activities may be limited by such Rating Agency restrictions.
The Fund may purchase and sell financial futures and tax-exempt bond index
futures contracts ("index futures") to hedge against changes, caused by changing
interest rates, in the market value of Municipal Obligations in its portfolio or
that it intends to acquire. In order to hedge, the Fund may also purchase and
write put and call options on financial futures, tax-exempt bond indices and
index futures. The costs of and possible losses incurred from these transactions
may reduce the Fund's current return. The decision as to when and to what extent
the Fund will engage in hedging transactions will depend upon a number of
factors, including any Rating Agency guideline restrictions, prevailing market
conditions, the composition of the Fund's portfolio and the availability of
suitable transactions. Accordingly, there can be no assurance that the Fund will
engage in hedging transactions at any given time or from time to time or that
such transactions, if available, will be effective.
Income earned by the Fund from its hedging activities will be treated as
capital gain and, if not offset by net realized capital loss, will be
distributed to shareholders in taxable distributions. See "Tax
Matters -- Federal Taxation of Shareholders."
The Fund will not engage in transactions in futures contracts or related
options for speculative purposes but only as a hedge against changes resulting
from market conditions in the values of securities in its portfolio or that it
intends to acquire. In addition, the Fund will not purchase or sell futures
contracts or purchase or sell related options if immediately thereafter the sum
of the amount of its initial margin deposits on its existing futures and related
options positions and premiums paid for related options would exceed 5% of its
total assets (taken at current value). In instances involving the purchase or
sale of futures contracts or call options thereon or the writing of call or put
options thereon by the Fund, an amount of cash or liquid high-grade securities
equal to the underlying commodity value of the futures contracts and options
(less any related margin deposits) will be deposited in a segregated account
with the Fund's custodian to collateralize the position and thereby ensure that
the use of such futures contracts and options is unleveraged.
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<PAGE> 28
The Fund might not employ any of the hedging strategies described below,
and no assurance can be given that any strategy used will succeed. If the
Advisor incorrectly forecasts interest rates, market values or other economic
factors in utilizing a hedging strategy for the Fund, the Fund might have been
in a better position if it had not entered into the position at all. Also,
suitable hedging transactions may not be available in all circumstances or, if
available, effective.
FINANCIAL FUTURES. In connection with its hedging activities, the Fund may
engage in transactions involving financial futures. A financial future is a
contract that obligates the seller to deliver and the purchaser to take delivery
of a specified type of financial instrument at a specified future time and at a
specified price. Although financial futures contracts by their terms require
actual delivery and acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract purchase or sale is effected by
entering into an offsetting transaction. Financial futures trade on boards of
trade that have been designated "contracts markets" by the Commodity Futures
Trading Commission. Financial futures trade on these markets in a manner that is
similar to the way a stock trades on a stock exchange. The boards of trade,
through their clearing corporations, guarantee performance of the contracts.
Currently, there are financial futures based on long-term U.S. Treasury bonds,
U.S. Treasury notes, Government National Mortgage Association ("GNMA")
certificates, three-month U.S. Treasury bills and three-month domestic bank
certificates of deposit. The Fund expects other financial futures to be
developed and traded. The Fund expects to engage in transactions involving
financial futures if, in the opinion of the Advisor, they are appropriate
hedging instruments for the Fund.
The sale of financial futures by the Fund is for the purpose of hedging the
Fund's holdings of long-term debt securities. In the event of a rise in interest
rates, the value of the Fund's short position in financial futures would
increase at approximately the same rate as the value of the long-term bonds in
its portfolio would decline, thereby keeping the net asset value of the Fund
from declining as much as it otherwise would have.
If, on the other hand, interest rates were expected to decline, the Fund
might purchase futures contracts and thus take advantage of the anticipated rise
in the value of long-term securities. In such an event, the futures contracts
could be liquidated and the Fund's cash reserves could be raised to buy long-
term securities in the cash market.
Unlike when the Fund purchases or sells a security, no price is paid or
received by the Fund upon the sale or purchase of a financial future. The Fund
will initially be required to deposit with the Fund's custodian an amount of
"initial margin" of cash or U.S. Treasury bills equal to a small percentage of
the contract amount. The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that initial margin
on financial futures does not involve the borrowing of funds by the customer to
finance the transactions. Rather, the initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned to the
Fund upon termination of the financial future, assuming all contractual
obligations have been satisfied. Subsequent payments to and from the broker,
called maintenance margin, will be made on a daily basis as the price of the
underlying debt security fluctuates, making the long and short positions in the
financial future more or less valuable, a process known as "marking to market."
For example, when the Fund has sold a financial future and the price of the
underlying debt security has declined, that position will have increased in
value and the Fund will receive from the broker a maintenance margin payment
equal to that increase. Conversely, where the Fund has sold a financial future
and the price of the underlying debt security has increased, the position would
be less valuable, and the Fund would be required to make a maintenance margin
payment to the broker. At any time prior to expiration of the financial future,
the Fund may elect to close the position by taking an opposite position in the
financial future. A final determination of maintenance margin is then made,
additional cash is required to be paid by or released to the Fund, and the Fund
realizes a loss or a gain. While financial futures based on debt securities do
provide for the delivery and acceptance of securities, such deliveries and
acceptances are very seldom made. Generally, the financial future is terminated
by entering into an offsetting transaction. An offsetting transaction for a
financial future sale is effected by the Fund entering into a financial future
purchase for the same aggregate amount of the
22
<PAGE> 29
specific type of financial instrument and same delivery date. If the price in
the sale exceeds the price in the offsetting purchase, the Fund immediately is
paid the difference and thus realizes a gain. If the offsetting purchase price
exceeds the sale price, the Fund pays the difference and realizes a loss.
There are several risks in connection with the use of financial futures by
the Fund as a hedging device. One risk may arise because of the imperfect
correlation between movements in the price of the financial future and movements
in the price of the debt securities that are the subject of the hedge. Financial
futures based on U.S. Government securities and GNMA certificates historically
have reacted to an increase or decrease in interest rates in a similar fashion
to the underlying U.S. Government securities and GNMA certificates. To the
extent, however, that the Fund enters into financial futures on other than
Municipal Obligations, there is a possibility that the value of such financial
futures would not vary in direct proportion to the value of the Fund's holdings
of Municipal Obligations.
Another result of the imperfect correlation between movements in the prices
of the financial future and of the debt securities being hedged is that the
price of the financial future may move more or less than the price of the debt
securities being hedged. If the price of the financial future moves less than
the price of the securities that are the subject of the hedge, the hedge will
not be fully effective, but if the price of the securities being hedged has
moved in an unfavorable direction, the Fund would be in a better position than
if it had not hedged at all. If the price of the securities being hedged has
moved in a favorable direction, the advantage will be partially offset by the
futures contract. If the price of the financial future moves more than the price
of the security, the Fund will experience either a loss or a gain on the future
which will not be completely offset by movements in the prices of the debt
securities which are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of debt securities being hedged and
movements in the price of related financial futures, the Fund may purchase or
sell financial futures in a greater or lesser dollar amount than the dollar
amount of the securities being hedged.
The market prices of financial futures may be affected by several factors
other than interest rates. First, all participants in the futures market are
subject to margin deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors may close financial futures
through offsetting transactions, which could distort the normal relationship
between the debt securities and futures markets. Second, from the point of view
of speculators, the deposit requirements in the futures markets are less onerous
than margin requirements in the securities markets. Therefore, increased
participation by speculators in the futures markets may also cause temporary
price distortions. Due to the possibility of price distortions in the futures
markets and the imperfect correlation between movements in the prices of debt
securities and movements in the prices of related financial futures, a correct
forecast of interest rate trends by the Advisor may still not result in a
successful hedging transaction.
Positions in futures contracts may be closed out only on an exchange or
board of trade that provides a secondary market for such futures. Although the
Fund intends to engage in futures transactions only on exchanges or boards of
trade where there appear to be active secondary markets, there is no assurance
that a liquid secondary market on an exchange or board of trade will exist for
any particular contract or at any particular time. If there is not a liquid
secondary market at a particular time, it may not be possible to close a futures
position at such time, and in the event of adverse price movements, the Fund
would continue to be required to make daily cash payments of maintenance margin.
OPTIONS ON FINANCIAL FUTURES. The Fund may also purchase put and call
options on financial futures which are traded on a U.S. exchange or board of
trade or over the counter and enter into closing transactions with respect to
such options to terminate an existing position. The purchase of put options on
financial futures is analogous to the sale of futures so as to hedge the Fund's
portfolio of debt securities against the risk of rising interest rates. The
purchase of call options on financial futures is analogous to the purchase of
futures contracts and represents a means of obtaining temporary exposure to
market appreciation at limited risk. Such options may be used to protect against
a market advance when the Fund is not fully invested.
23
<PAGE> 30
The Fund may write call options on futures contracts, which constitutes a
partial hedge against any declining price of long-term debt securities. If the
futures price at expiration is below the exercise price, the Fund will retain
the full amount of the option premium, which provides a partial hedge against
any decline that may have occurred in the Fund's holdings of debt securities. If
the futures price at expiration exceeds the exercise price, the Fund will
ordinarily realize a loss equal to the amount of such excess.
The Fund may write put options on futures contracts, which constitutes a
partial hedge against an increase in the price of long-term debt securities when
the Fund is not fully invested. If the futures price at expiration is above the
exercise price, the Fund will retain the full amount of the option premium,
which provides a partial hedge against any increase in the market price of
long-term debt securities. If the futures price at expiration is less than the
exercise price, the Fund will ordinarily realize a loss equal to the difference
between the futures price and the exercise price.
An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account which represents the
amount by which the market price of the futures contract, at exercise, exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. If an option is exercised on the last
trading day prior to the expiration date of the option, the settlement will be
made entirely in cash in an amount equal to the difference between the exercise
price of the option and the closing price of the futures contract on the
expiration date. Currently options can be purchased or written with respect to
futures contracts on U.S. Treasury bonds or notes on the Chicago Board of Trade.
The holder or writer of an option may terminate his or her position by selling
or purchasing an option of the same series. There is no guarantee that such
closing transactions can be effected.
There are several special risks related to transactions in options on
futures. The ability to establish and close out positions on such options will
be subject to the maintenance of a liquid secondary market. Compared to the sale
of financial futures, the purchase of put options on financial futures involves
less potential risk to the Fund because the maximum amount at risk is the
premium paid for the options (plus transaction costs). However, there may be
circumstances when the purchase of a put option on a financial future would
result in a loss to the Fund when the sale of a financial future would not, such
as when there is no movement in the price of debt securities.
An option position may be closed out only on an exchange or board of trade
that provides a secondary market for an option of the same series. Although the
Fund generally will purchase only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange or board of trade will exist for any particular option, or at any
particular time, and for some options, no secondary market on an exchange or
board of trade may exist. In such event, it might not be possible to effect
closing transactions in particular options, with the result that the Fund would
have to exercise its options in order to realize any profit and would incur
transaction costs upon closing out the futures positions acquired pursuant to
the exercise of such option.
Reasons for the absence of a liquid secondary market for options on
financial futures on an exchange or board of trade include the following:
- there may be insufficient trading interest in certain options;
- restrictions may be imposed by an exchange or board of trade on opening
transactions or closing transactions or both;
- trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options;
- unusual or unforeseen circumstances may interrupt normal operations on an
exchange or board of trade;
24
<PAGE> 31
- the facilities of an exchange or board of trade or the Options Clearing
Corporation (the "Clearing Corporation") may not at all times be adequate
to handle current trading volume; or
- one or more exchanges or boards of trade could, for economic or other
reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which
event the secondary market on that exchange or board of trade (or in that
class or series of options) would cease to exist, although outstanding
options on that exchange or board of trade which had been issued by the
Clearing Corporation as a result of trades on that exchange or board of
trade could continue to be exercisable in accordance with their terms.
Privately negotiated and over-the-counter options on financial futures may not
be as regulated as and may be less marketable than options traded on an exchange
or board of trade.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Clearing Corporation inadequate, and thereby result in the institution by an
exchange or board of trade of special procedures that may interfere with the
timely execution of customers' orders.
TAX-EXEMPT BOND INDEX TRANSACTIONS. The Fund anticipates utilizing
tax-exempt bond index futures as a hedge against changes in the market value of
the Municipal Obligations in its portfolio or which it intends to acquire. A
tax-exempt bond index assigns relative values to the Municipal Obligations
included in the index. A tax-exempt bond index fluctuates with changes in the
market values of the Municipal Obligations included in the index. An index
future is a bilateral agreement pursuant to which two parties agree to receive
or deliver at settlement an amount of cash equal to a specified dollar amount
multiplied by the difference between the value of the index at the close of the
last trading day of the contract and the price at which the future was
originally written. An index future has similar characteristics to financial
futures discussed above except that settlement is made through delivery of cash
rather than the underlying securities.
The Fund's strategies in employing index futures will be similar to the
strategies involved in financial futures transactions. Tax-exempt bond index
futures transactions also will be subject to risks similar to those described
above with respect to financial futures, except that the correlation between
movements in the price of a futures contract and movements in the price of the
Fund's portfolio securities is likely to be higher for tax-exempt index futures
than for financial futures.
The Fund may also purchase and write put and call options on tax-exempt
bond indices and on tax-exempt bond index futures and enter into closing
transactions with respect to such options. An option on an index gives the
holder the right to receive cash upon exercise of the option in an amount equal
to a specified multiple times the amount by which the fixed exercise price of
the option exceeds, in the case of a put, or is less than, in the case of a
call, the closing value of the underlying index on the date of exercise. An
option on an index future gives the purchaser the right, in return for the
premium paid, to assume a position in an index contract rather than to sell (in
the case of a put option) or buy (in the case of a call option) a debt
instrument at a specified exercise price at any time during the period of the
option. Upon exercise of the put option, the delivery of the futures position by
the holder of the option to the writer of the option will be accompanied by
delivery of the accumulated balance of the writer's futures margin account,
which represents the amount by which the market price of the index futures
contract, at exercise, is less than the exercise price of the put option on the
index future.
FORWARD COMMITMENTS
New issues of Municipal Obligations are often purchased on a "when-issued"
or delayed delivery basis. The payment obligations and the interest rate that
will be received on the securities are fixed at the time the buyer enters into
the commitment. The Fund will not begin earning interest on such securities,
however, until the securities are scheduled for settlement. The Fund may enter
into such "forward commitments" if it holds and maintains until the settlement
date, in a segregated account, cash or liquid securities which are "marked to
market" daily in an amount sufficient to meet the purchase price. Forward
25
<PAGE> 32
commitments involve a risk of loss if the value of the Municipal Obligation to
be purchased declines prior to the settlement date. Such a decline in value
could result from, among other things, changes in the level of interest rates or
other market factors. This risk is in addition to the risk of decline in the
value of the Fund's other assets. Although the Fund generally will enter into
forward commitments with the intention of acquiring Municipal Obligations for
its portfolio, the Fund may dispose of a commitment prior to settlement if the
Advisor deems it appropriate to do so. The Fund may realize capital gain or loss
upon the sale of forward commitments. Any such gains, if not offset by net
realized capital losses, will be distributed to shareholders in taxable
distributions.
REPURCHASE AGREEMENTS
The Fund may purchase U.S. Government securities and concurrently enter
into so-called "repurchase agreements" with the seller, usually a bank or
broker-dealer, whereby the seller agrees to repurchase such securities at the
Fund's cost plus interest within a specified time (normally one day). While
repurchase agreements involve certain risks not associated with direct
investments in U.S. Government securities, the Fund will follow procedures
designed to minimize such risks. These procedures include effecting repurchase
transactions only with the member banks of the Federal Reserve System and
registered broker-dealers having creditworthiness substantially equivalent to
that of the issuers of investment grade debt securities. In addition, the Fund's
repurchase agreements will require that the Fund receive collateral which must
always be at least equal to the repurchase price, including any accrued interest
earned on the repurchase agreement. In the event of a default or bankruptcy by a
seller, the Fund will seek to liquidate such collateral. However, the exercise
of the Fund's right to liquidate such collateral could involve costs or delays
and, to the extent that proceeds from any sale upon a default of the obligation
to repurchase were less than the repurchase price, the Fund could suffer a loss.
INVESTMENT COMPANY SECURITIES
The Fund may purchase common shares of closed-end investment companies that
have a similar investment objective and similar policies to the Fund. In
addition to providing tax-exempt income, such securities may provide capital
appreciation. Such investments, which may also be leveraged and subject to the
same risks as the Fund, will not exceed 10% of the Fund's total assets, and no
such company will be affiliated with the Advisor. These companies bear fees and
expenses that the Fund will incur directly.
TEMPORARY AND DEFENSIVE INVESTMENTS
A portion of the Fund's assets will be held in cash or invested in
short-term securities for day-to-day operating purposes. It is the intention of
the Fund that short-term investments will also be in tax-exempt securities.
However, if suitable short-term tax-exempt securities are not available or if
short-term tax-exempt securities are available only on a when-issued basis, the
Fund may invest up to 20% of its total assets in short-term obligations of the
U.S. Government. In such situations, the Fund may also invest in repurchase
agreements or short-term notes and obligations rated A-1+ of banks that have or
whose parent holding companies have long-term debt ratings of Aaa/AAA or of
corporations with long-term debt ratings of Aaa/AAA, the interest on all of
which is not exempt from federal income taxes. Notwithstanding the foregoing,
the Fund may temporarily invest more than 20% of its assets in such taxable
obligations for defensive purposes. The ability of the Fund to invest in
securities other than tax-exempt securities (as well as its ability to enter
into repurchase agreements) is limited, however, by a requirement of the
Internal Revenue Code that at least 50% of its total assets be invested in
tax-exempt securities at the end of each quarter in order to pass through to
shareholders the federal income tax exemption for dividends derived from net
investment income on tax-exempt securities. See "Tax Matters -- Federal Taxation
of Shareholders." The Fund's use of temporary and defensive investments may
prevent it from achieving its investment objective.
26
<PAGE> 33
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Board of Trustees is responsible for the general supervision of the
Fund, including general supervision of the duties performed by the Advisor under
its Management Agreement with the Fund. There are 13 trustees of the Fund, four
of whom are "interested persons" (as defined in the Investment Company Act of
1940) of the Fund, the Advisor or one or more of the Underwriters. The names and
addresses of the trustees and officers of the Fund and their principal
occupations and other affiliations during the past five years are set forth
under "Management of the Fund" in the Statement of Additional Information.
THE ADVISOR
The Advisor is Colonial Management Associates, Inc., a Massachusetts
corporation having its principal offices at One Financial Center, Boston,
Massachusetts 02111. The Advisor is a wholly owned subsidiary of Liberty Funds
Group LLC ("Liberty Funds Group") and both Liberty Funds Group and the Advisor
are indirect, majority-owned subsidiaries of Liberty Mutual Insurance Company
("Liberty"), an underwriter of workers' compensation insurance and a property
and casualty insurer in the United States. The Advisor has been an investment
advisor since 1931. As of October 31, 1999, the Advisor served as investment
advisor or sub-advisor for 62 open-end and 7 closed-end management investment
companies and managed over $16.3 billion in assets.
The Advisor's mutual funds and institutional investment advisory businesses
are part of a larger business unit known as Liberty Funds Group LLC ("LFG") that
includes several separate legal entities. LFG includes certain affiliates of the
Advisor, principally Stein Roe & Farnham Incorporated ("Stein Roe"). The Advisor
and the LFG business unit are managed by a single management team. The Advisor,
Stein Roe and the other LFG entities also share personnel, facilities and
systems that may be used in providing administrative or operational services to
the Fund. The Advisor is a registered investment advisor. The Advisor, Stein Roe
and the other entities that make up LFG are subsidiaries of Liberty Financial
Companies, Inc.
William C. Loring and Brian M. Hartford, each a Senior Vice President of
the Advisor, have managed the Fund since its inception in 1999. Messrs. Loring
and Hartford have managed various other tax-exempt funds for the Advisor since
1986 and 1993, respectively.
MANAGEMENT AGREEMENT
The Management Agreement between the Advisor and the Fund (the "Management
Agreement") provides that, subject to the direction of the Board of Trustees of
the Fund and the applicable provisions of the Investment Company Act of 1940,
the Advisor is responsible for the actual management of the Fund's portfolio.
The responsibility for making decisions to buy, sell or hold a particular
investment rests with the Advisor, subject to review by the Board of Trustees of
the Fund and compliance with the applicable provisions of the Investment Company
Act of 1940.
The Advisor provides the Fund with accounting, bookkeeping and pricing
services and other services and office facilities (the expenses of which are
borne by the Fund as specified below), except to the extent these services are
provided by an administrator or an accounting firm hired by the Fund.
Under the Management Agreement, the Advisor receives a monthly advisory fee
at the annual rate of 0.65% of the average weekly net assets of the Fund. Since
the Advisor's fee is based on the average weekly net assets of the Fund, the
Advisor will benefit from the increase in the Fund's net assets resulting from
the offering of the Municipal Preferred shares. It is not possible to state
precisely the amount of additional compensation the Advisor will receive as a
result of the offering because the proceeds of the offering will be invested in
additional portfolio securities which will fluctuate in value. However, based on
the estimated proceeds from the offering, assuming all of the Municipal
Preferred shares offered hereby are purchased,
27
<PAGE> 34
the Advisor would receive additional annual advisory fees of approximately
$ as a result of the increase in average weekly net assets under
management over the Fund's current net assets under management, assuming no
fluctuations in the value of the Fund's portfolio securities.
The Advisor places all orders for the purchase and sale of portfolio
securities. In selecting broker-dealers, the Advisor may consider research and
brokerage services furnished by such broker-dealers to the Advisor and its
affiliates. In recognition of the research and brokerage services provided, the
Advisor may cause the Fund to pay the selected broker-dealer a higher commission
than would have been charged by another broker-dealer not providing such
services. Subject to seeking best execution, the Advisor may consider sales of
shares of certain other funds distributed by affiliates of Liberty in selecting
broker-dealers for portfolio security transactions.
In addition to the fee of the Advisor, the Fund pays all other costs and
expenses of its operations, including compensation of its trustees (other than
those affiliated with the Advisor), custodian, registrar, transfer and dividend
disbursing expenses, legal fees, expenses of independent auditors, expenses of
repurchasing shares, expenses of shareholder reports, expenses of preparing,
printing and distributing notices, proxy statements and reports to governmental
agencies, and taxes, if any.
For the first ten years of the Fund's operation, the Advisor has agreed to
waive the Fund's fees and expenses in the amounts, and for the time periods, set
forth below:
<TABLE>
<CAPTION>
PERCENTAGE
WAIVED
(AS A
PERCENTAGE
OF AVERAGE
YEAR ENDING WEEKLY TOTAL
NOVEMBER 30, NET ASSETS)*
- ------------ ------------
<S> <C>
2000**........................... 0.30%
2001............................. 0.30%
2002............................. 0.30%
2003............................. 0.30%
2004............................. 0.30%
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE
WAIVED
(AS A
PERCENTAGE
OF AVERAGE
YEAR ENDING WEEKLY TOTAL
NOVEMBER 30, NET ASSETS)*
- ------------ ------------
<S> <C>
2005............................. 0.25%
2006............................. 0.20%
2007............................. 0.15%
2008............................. 0.10%
2009............................. 0.05%
</TABLE>
- ---------------
* Including net assets attributable to Municipal Preferred shares.
** From the commencement of operations.
The Advisor has not agreed to waive any portion of the Fund's fees and
expenses beyond November 30, 2009.
THE AUCTION
SUMMARY OF AUCTION PROCEDURES
The following is a brief summary of the auction procedures. They are
described in more detail in the Statement of Additional Information. The auction
procedures are complicated, and there are exceptions to these procedures. Many
of the terms in this section have a special meaning. Any terms in this section
not defined have the meaning assigned to them in the Statement of Additional
Information or the proposed provisions of the Amended and Restated By-Laws of
the Fund (the "By-Laws"). See the Statement of Additional Information for a full
description of the auction procedures. The auction determines the Applicable
Rate (the dividend rate) for Municipal Preferred shares, but the Applicable Rate
will not be higher than the Maximum Rate. See "Description of Municipal
Preferred -- Dividends and Dividend Periods." You also may buy or sell Municipal
Preferred shares in the auction.
If you own Municipal Preferred shares, you may instruct, orally or in
writing, a Broker-Dealer or a broker-dealer that has entered into an agreement
with a Broker-Dealer, to enter an order in the auction. For purposes of this
discussion regarding the auction procedures, a "Broker-Dealer" is any
broker-dealer,
28
<PAGE> 35
commercial bank or other entity permitted by law to perform the functions
required of a broker-dealer that is a member of, or a participant in, The
Depository Trust Company or is an affiliate of such member or participant, has
been selected by the Fund and has entered into an agreement with the Fund and
the auction agent to follow the auction procedures. Existing Municipal Preferred
shareholders can enter three kinds of orders regarding their Municipal Preferred
shares: sell, bid, and hold.
- If you enter a sell order, you indicate that you want to sell shares of
Municipal Preferred at $25,000 per share, no matter what the next rate
period's Applicable Rate will be.
- If you enter a bid (or "hold at a rate") order, you indicate that you
want to sell shares of Municipal Preferred only if the next rate period's
Applicable Rate is less than the rate you specify.
- If you enter a hold order, you indicate that you want to continue to own
shares of Municipal Preferred, no matter what the next rate period's
Applicable Rate will be.
You may enter different types of orders for your Municipal Preferred
shares, as well as orders for additional Municipal Preferred shares. All orders
must be for whole shares. All orders you submit are irrevocable. There are a
fixed number of Municipal Preferred shares, and the Applicable Rate likely will
vary from auction to auction depending on the number of bidders, the number of
shares the bidders seek to buy, and general economic conditions including
current interest rates. If you own Municipal Preferred shares and submit a bid
higher than the Maximum Rate, your bid will be treated as a sell order. If you
do not enter an order, the Broker-Dealer will assume that you want to continue
to hold Municipal Preferred shares, but if you fail to submit an order and the
rate period is longer than 28 days, the Broker-Dealer will treat your failure to
submit a bid as a sell order.
If you do not currently own Municipal Preferred shares, or want to buy more
shares, you may instruct a Broker-Dealer, or a broker-dealer that has entered
into an agreement with a Broker-Dealer, to enter a bid order to buy shares in an
auction at $25,000 per share at or above a specified dividend rate. If your bid
specifies a rate higher than the Maximum Rate, your order will not be accepted.
Broker-Dealers will submit orders from existing and potential shareholders
to the auction agent. Neither the Fund nor the auction agent will be responsible
for a Broker-Dealer's failure to submit orders from existing shareholders and
potential shareholders. A Broker-Dealer's failure to submit orders for Municipal
Preferred shares held by it or its customers will be treated in the same manner
as a shareholder's failure to submit an order to the Broker-Dealer. A
Broker-Dealer may submit orders to the auction agent for its own account
provided it is not an affiliate of the Fund.
The auction agent after each auction for Municipal Preferred shares will
pay to each Broker-Dealer, from funds provided by the Fund, a service charge at
the annual rate of 1/4 of 1% in the case of any auction immediately preceding a
rate period of less than one year, or a percentage agreed to by the Fund and the
Broker-Dealers, in the case of any auction immediately preceding a rate period
of one year or longer, of the purchase price of Municipal Preferred shares
placed by the Broker-Dealers at the auction.
If the number of Municipal Preferred shares subject to bid orders with a
dividend rate equal to or lower than the Maximum Rate for Municipal Preferred
shares is at least equal to the number of Municipal Preferred shares subject to
sell orders, then the Applicable Rate for the next rate period will be the
lowest rate submitted which, taking into account that rate and all lower rates
submitted in order from existing and potential shareholders, would result in
existing and potential shareholders owning all the Municipal Preferred shares
available for purchase in the auction.
If the number of Municipal Preferred shares subject to bid orders with a
dividend rate equal to or lower than the Maximum Rate for Municipal Preferred
shares is less than the number of Municipal Preferred shares subject to sell
orders, then the auction is considered to be a failed auction, and the dividend
rate will be the Maximum Rate. In that event, existing shareholders that have
submitted sell orders (or are treated as having submitted sell orders) may not
be able to sell any or all of the shares for which they submitted sell orders.
29
<PAGE> 36
The auction agent will not accept a bid above the Maximum Rate. The purpose
of the Maximum Rate is to place an upper limit on Municipal Preferred dividends
and in so doing to help protect the earnings available to pay common share
dividends, and to serve as the Applicable Rate in the event of a failed auction
(that is, an auction where there are more Municipal Preferred shares offered for
sale than there are buyers for those shares).
If Broker-Dealers submit or are deemed to submit hold orders for all
outstanding Municipal Preferred shares, that is considered an "all hold" auction
and the Applicable Rate for the next rate period will be the All Hold Order
Rate. The All Hold Order Rate is the lesser of the Standard & Poor's Kenny
30-day High Grade Index (if the rate period is less than 183 days) or the
product of:
(1)(a) the "AA" Composite Commercial Paper Rate on the auction date
for that rate period if the rate period is less than 183 days, (b) the
Treasury Bill Rate on the auction date for that rate period if the rate
period is greater than 182 days but less than 365 days, or (c) the Treasury
Note Rate on the auction date for that rate period if the rate period is
greater than 364 days; and
(2) 1 minus the greater of the maximum marginal regular federal
individual income tax rate applicable to ordinary income or the maximum
marginal regular federal corporate income tax rate.
However, if the Fund has notified the auction agent that it intends to allocate
any net capital gains or other federally taxable income to Municipal Preferred
shares for that rate period, the All Hold Order Rate may be adjusted as set
forth in the Statement of Additional Information.
The auction procedures include a pro rata allocation of shares for purchase
and sale. This allocation process may result in an existing shareholder
continuing to hold or selling, or a potential shareholder buying, fewer shares
than the number of shares in his or her order. If this happens, Broker-Dealers
will be required to make appropriate pro rata allocations among their customers.
Settlement of purchases and sales will be made on the next business day
(which also is a dividend payment date) after the auction date through The
Depository Trust Company. Purchasers will pay for their shares through
Broker-Dealers in same-day funds to The Depository Trust Company against
delivery to the Broker-Dealers. The Depository Trust Company will make payment
to the sellers' Broker-Dealers in accordance with its normal procedures, which
require Broker-Dealers to make payment against delivery in same-day funds.
Throughout this prospectus, a business day is a day on which the New York Stock
Exchange is open for trading, and which is neither a Saturday, Sunday nor any
other day on which banks in New York, New York, are authorized by law to close.
If the Fund plans to include any net capital gains or other federal taxable
income in a Municipal Preferred dividend, it generally will notify the auction
agent of the amount to be included at least a week before the next dividend
payment date for the rate period in which taxable income will be included in the
dividend. The auction agent will notify Broker-Dealers, who in turn will notify
their customers.
The first auction for Municipal Preferred shares will be held on Thursday,
, 1999, the business day preceding the dividend payment date for the
initial rate period. Thereafter, except during special rate periods, auctions
will normally be held every Thursday, and each subsequent rate period will
normally begin on the following Friday.
The following is a simplified example of how a typical auction works.
Assume that the Fund has 1,000 outstanding shares of Municipal Preferred, and
three current shareholders. The three current shareholders and three potential
shareholders submit orders through Broker-Dealers at the auction:
<TABLE>
<S> <C> <C>
Current Shareholder A Owns 500 shares, wants to sell Bid order of 3.5% rate for all
all 500 shares if auction rate 500 shares
is less than 3.5%
Current Shareholder B Owns 300 shares, wants to hold Hold order -- will take the
auction rate
</TABLE>
30
<PAGE> 37
<TABLE>
<S> <C> <C>
Current Shareholder C Owns 200 shares, wants to sell Bid order of 3.3% rate for all
all 200 shares if auction rate 200 shares
is less than 3.3%
Potential Shareholder D Wants to buy 200 shares Places order to buy at or
above 3.4%
Potential Shareholder E Wants to buy 300 shares Places order to buy at or
above 3.3%
Potential Shareholder F Wants to buy 200 shares Places order to buy at or
above 3.5%
</TABLE>
The lowest dividend rate that will result in all 1,000 shares of Municipal
Preferred continuing to be held is 3.4% (the offer by D). Therefore, the
Applicable Rate will be 3.4%. Current shareholders B and C will continue to own
their shares. Current shareholder A will sell its shares because A's dividend
rate bid was higher than the Applicable Rate. Potential shareholder D will buy
200 shares and Potential shareholder E will buy 300 shares, both because their
bid rates were at or below the Applicable Rate. Potential shareholder F will not
buy any shares because its bid rate was above the Applicable Rate.
SECONDARY MARKET TRADING AND TRANSFER OF MUNICIPAL PREFERRED
The Broker-Dealers (including the Underwriters) expect, but are not
obligated, to maintain a secondary trading market in Municipal Preferred shares
outside of auctions. There can be no assurance that a secondary trading market
for Municipal Preferred shares will develop or, if it does develop, that it will
provide owners with liquidity of investment. The Municipal Preferred shares will
not be registered on any stock exchange or on the National Association of
Securities Dealers Automated Quotations System. Investors who purchase Municipal
Preferred shares in an auction for a special rate period should note that
because the dividend rate on such shares will be fixed for the length of that
rate period, the value of such shares may fluctuate in response to changes in
interest rates, and may be more or less than their original cost if sold on the
open market in advance of the next auction thereof, depending on market
conditions.
An existing shareholder may sell, transfer, or otherwise dispose of
Municipal Preferred shares only in whole shares and only (1) pursuant to a bid
or sell order placed with the auction agent in accordance with the auction
procedures, (2) to a Broker-Dealer or (3) to such other persons as may be
permitted by the Fund; provided, however, that (a) a sale, transfer or other
disposition of Municipal Preferred shares from a customer of a Broker-Dealer who
is listed on the records of that Broker-Dealer as the holder of such shares to
that Broker-Dealer or another customer of that Broker-Dealer shall not be deemed
to be a sale, transfer or other disposition for purposes of the foregoing if
such Broker-Dealer remains the existing shareholder of the shares so sold,
transferred or disposed of immediately after such sale, transfer or disposition
and (b) in the case of all transfers other than pursuant to auctions, the
Broker-Dealer (or other person, if permitted by the Fund) to whom such transfer
is made shall advise the auction agent of such transfer.
DETERMINATION OF NET ASSET VALUE
Net asset value of the Fund will be determined no less frequently than as
of the close of regular trading on the New York Stock Exchange (generally 4:00
p.m. Eastern time) on the last business day of each week (generally Friday), and
at such other times as the Fund may authorize. The net asset value of the Fund
equals the value of the Fund's assets less the Fund's liabilities. Portfolio
securities for which market quotations are readily available are valued at
current market value. Short-term investments maturing in 60 days or less are
valued at amortized cost when the Advisor determines, pursuant to procedures
adopted by the Board of Trustees, that such cost approximates current market
value. All other securities and assets are valued at their fair value following
procedures adopted by the Board of Trustees.
When price quotations are not readily available (which is usually the case
for Municipal Obligations), the pricing service establishes a fair market value
based on prices of comparable Municipal Obligations. All valuations are subject
to review by the Fund's Board of Trustees or its delegate, the Advisor.
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<PAGE> 38
DESCRIPTION OF MUNICIPAL PREFERRED
GENERAL
The following is a brief description of the terms of the Municipal
Preferred shares. For the complete terms of the Municipal Preferred shares, you
may refer to the Fund's Amended and Restated By-Laws filed as an exhibit to the
Fund's registration statement on Form N-2. The Agreement and Declaration of
Trust of the Fund (the "Declaration") provides that the Fund may authorize
separate classes of shares of beneficial interest. The By-Laws of the Fund will,
at the time they are amended and restated, authorize the issuance of 1,492
preferred shares of beneficial interest, no par value per share, which may be
issued from time to time in such series and with such designations, preferences
and other rights, qualifications, limitations and restrictions as are determined
in a resolution of the Board of Trustees ("Preferred Shares"). The By-Laws of
the Fund will, at the time they are amended and restated, authorize the issuance
of 1,492 shares of Series TH Municipal Preferred. Municipal Preferred shares
carry one vote per share. Municipal Preferred shares will, when issued, be fully
paid and, subject to matters discussed in "Shareholder Liability" in the
Statement of Additional Information, nonassessable, and will have no preemptive
or conversion rights or rights to cumulative voting.
DIVIDENDS AND DIVIDEND PERIODS
GENERAL. The following is a general description of dividends and rate
periods. The calculation of dividends and rate periods is complex and subject to
special rules. See the Statement of Additional Information for a description of
the terms used in this section and a more detailed discussion of this topic.
The dividend rate for the initial rate period for Municipal Preferred
shares will be the rate set out on the cover of this prospectus. For subsequent
rate periods, Municipal Preferred shares will pay dividends based on a rate set
at the auction, normally held weekly, but the rate set at the auction will not
exceed the Maximum Rate. Rate periods generally will be seven days, and a rate
period will begin on the first business day after the auction. In most
instances, dividends are also paid weekly, on the day following the end of the
rate period. The Fund, subject to some limitations, may change the length of
rate periods, designating them as "special rate periods." See "Description of
Municipal Preferred -- Designation of Special Rate Periods."
DIVIDEND PAYMENTS. Except as provided below, the dividend payment date
will be the day after the rate period ends. If the Friday on which your shares
normally pay dividends is not a business day, then your dividends will be paid
on the first business day that falls before that Friday. The Fund may specify
different dividend payment dates in respect of any special rate period of more
than 28 rate period days. See "Description of Municipal Preferred -- Designation
of Special Rate Periods" for a discussion of payment dates for a special rate
period.
Dividends on Municipal Preferred shares will be paid on the dividend
payment date to holders of record as their names appear on the Fund's record
books on the business day next preceding the dividend payment date. If dividends
are in arrears, they may be declared and paid at any time to holders of record
as their names appear on the Fund's record books on that date, not more than 15
days before the payment date, as the Fund's Board of Trustees may fix.
The Depository Trust Company, in accordance with its current procedures, is
expected to credit on each dividend payment date dividends received from the
Fund to the accounts of its agent members in next-day funds. "Agent members" are
Broker-Dealers or broker-dealers that are members of or participants in The
Depository Trust Company who act on behalf of Municipal Preferred shareholders.
Agent members, in turn, are expected to distribute dividend payments to the
person for whom they are acting as agents. The initial Broker-Dealer, Salomon
Smith Barney Inc., however, has indicated to the Fund that it or the agent
member it designates will make these dividend payments available in same-day
funds, rather than next-day funds, on each dividend payment date to customers
that use that Broker-Dealer or its designee as its agent member. A Municipal
Preferred shareholder that does not use the initial Broker-Dealer, or one of its
affiliates, should contact his or her Broker-Dealer or another broker-dealer
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<PAGE> 39
that is an agent member of The Depository Trust Company to determine whether it
will make dividend payments available to the shareholder in same-day or next-day
funds. If a Broker-Dealer or a broker-dealer that is an agent member of The
Depository Trust Company does not make dividends available to Municipal
Preferred shareholders in same-day funds, these shareholders will not have funds
available until the next business day.
DIVIDEND RATE SET AT AUCTION. Municipal Preferred shares pay dividends
based on a rate set at auction. The auction usually is held weekly, but may be
held less frequently. The auction sets the dividend rate, and Municipal
Preferred shares may be bought and sold at the auction. Bankers Trust Company,
the auction agent, reviews orders from Broker-Dealers on behalf of existing
shareholders that wish to sell, hold at the auction rate, or hold only at a
specified rate, and on behalf of potential shareholders that wish to buy
Municipal Preferred shares. The auction agent then determines the lowest
dividend rate that will result in all of the outstanding Municipal Preferred
shares continuing to be held. The shares in this offering will trade at auction
starting in the week following this offering. See "The Auction."
DETERMINATION OF DIVIDENDS. The Fund computes the dividends per share by
multiplying the dividend rate determined at the auction by a fraction, the
numerator of which normally is seven and the denominator of which normally is
365. If the Fund has designated a special rate period, then the numerator is the
number of days in the rate period and the denominator is 360. In either case,
this rate is then multiplied by $25,000 to arrive at the dividend per share. The
numerator may be different if the rate period includes a holiday.
If an auction for any subsequent rate period of Municipal Preferred shares
is not held for any reason other than as described below, the dividend rate on
those shares will be the Maximum Rate on the auction date for that subsequent
rate period.
MAXIMUM RATE. The dividend rate that results from an auction for Municipal
Preferred shares will not be greater than the Maximum Rate, which is:
(a) for any auction date which is not the auction date immediately
prior to the first day of any proposed special rate period, the product of
(i) the Reference Rate on that auction date for the next rate period of
Municipal Preferred shares and (ii) the Rate Multiple on that auction date,
unless Municipal Preferred shares have or had a special rate period (other
than a special rate period of 28 rate period days or fewer) and an auction
at which sufficient clearing bids existed has not yet occurred after that
special rate period for a minimum rate period (seven days) of Municipal
Preferred shares, in which case the Maximum Rate will be the higher of:
(A) the dividend rate on Municipal Preferred shares for the
then-ending rate period, and
(B) the product of (x) the higher of (I) the Reference Rate on that
auction date for a rate period equal in length to the then-ending rate
period of Municipal Preferred shares, if the then-ending rate period was
364 rate period days or fewer, or the Treasury Note Rate on that auction
date for a rate period equal in length to the then-ending rate period of
Municipal Preferred shares, if the then-ending rate period was more than
364 rate period days, and (II) the Reference Rate on that auction date
for a rate period equal in length to that special rate period of
Municipal Preferred shares, if that special rate period was 364 rate
period days or fewer, or the Treasury Note Rate on that auction date for
a rate period equal in length to that special rate period, if that
special rate period was more than 364 rate period days and (y) the Rate
Multiple on that auction date; or
(b) for any auction date that is the auction date immediately prior to
the first day of any proposed special rate period, the product of (i) the
highest of (x) the Reference Rate on that auction date for a rate period
equal in length to the then-ending rate period of Municipal Preferred
shares, if the then-ending rate period was 364 rate period days or fewer,
or the Treasury Note Rate on that auction date for a rate period equal in
length to the then-ending rate period of Municipal Preferred shares, if the
then-ending rate period was more than 364 rate period days, (y) the
Reference Rate on that auction date for the special rate period for which
the auction is being held if that special rate
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<PAGE> 40
period is 364 rate period days or fewer or the Treasury Note Rate on that
auction date for the special rate period for which the auction is being
held if that special rate period is more than 364 rate period days, and (z)
the Reference Rate on that auction date for minimum rate periods and (ii)
the Rate Multiple on that auction date.
The Reference Rate is (i) the higher of the Taxable Equivalent of the
Short-Term Municipal Bond Rate and the "AA" Composite Commercial Paper Rate in
the case of minimum rate periods and special rate periods of 28 rate period days
or fewer; (ii) the "AA" Composite Commercial Paper Rate in the case of special
rate periods of more than 28 rate period days but fewer than 183 rate period
days; and (iii) the Treasury Bill Rate in the case of special rate periods of
more than 182 rate period days but fewer than 365 rate period days.
The Taxable Equivalent of the Short-Term Municipal Bond Rate, "AA"
Composite Commercial Paper Rate, Treasury Bill Rate and Treasury Note Rate will
be the rates announced on the auction date for the business day immediately
before the auction date. See the Statement of Additional Information for the
definitions of these rates. The "Rate Multiple" will be a percentage, determined
as set out below, based on the prevailing rating of Municipal Preferred shares
in effect at the close of business on the business day immediately before the
auction date. See the Statement of Additional Information for a description of
"prevailing rating."
<TABLE>
<CAPTION>
PREVAILING RATING PERCENTAGE
- ----------------- ----------
<S> <C>
"aa3"/AA- or higher......................................... 110%
"a3"/A-..................................................... 125%
"baa3"/BBB-................................................. 150%
"ba3"/BB-................................................... 200%
Below "ba3"/BB-............................................. 250%
</TABLE>
If the Fund has notified the auction agent that it intends to allocate
federal taxable income to Municipal Preferred shares before the auction
establishing the Applicable Rate for those shares, the applicable percentage in
the table above will be divided by the quantity 1 minus the greater of the
maximum marginal regular federal individual income tax rate applicable to
ordinary income or the maximum marginal regular federal corporate income tax
rate. If the ratings for Municipal Preferred shares are split between two of the
foregoing categories, the lower rating will determine the prevailing rating. If
only one rating agency is rating Municipal Preferred shares, that agency's
rating will be the prevailing rating.
The Fund may only pay dividends when and if the Fund's Board of Trustees
declares dividends out of monies legally available for this purpose, at the
applicable rate per year for this purpose and no more (except as described under
"Description of Municipal Preferred -- Dividends and Dividend Periods --
Gross-Up Payments"), payable on the dates determined as described below. If the
Fund does not pay a dividend when the Board of Trustees declares it, then that
dividend will be added to dividends payable on those Municipal Preferred shares
in the future.
EFFECT OF FAILURE TO PAY DIVIDENDS IN A TIMELY MANNER. If the Fund fails
to pay, in a timely manner, the auction agent the full amount of any dividend
on, or the redemption price of, any Municipal Preferred shares during any rate
period (other than any special rate period of more than 364 rate period days or
any rate period succeeding any special rate period of more than 364 rate period
days during which a failure occurred that has not been cured), but the Fund
cures the failure and pays any late charge before 12:00 noon Eastern time on the
third business day following the date the failure occurred, no auction will be
held for Municipal Preferred shares for the first subsequent rate period
thereafter, and the dividend rate for Municipal Preferred shares for that
subsequent rate period will be the Maximum Rate on the auction date for that
subsequent rate period.
If the Fund fails to pay, in a timely manner, the auction agent the full
amount of any dividend on, or the redemption price of, any Municipal Preferred
shares during any rate period thereof (other than any
34
<PAGE> 41
special rate period of more than 364 rate period days or any rate period
succeeding any special rate period of more than 364 rate period days during
which a failure occurred that has not been cured), and the Fund does not cure
the failure and pay any late charge before 12:00 noon Eastern time on the third
business day next succeeding the date on which the failure occurred, no auction
will be held for Municipal Preferred shares for the first subsequent rate period
thereafter (or for any rate period thereafter, to and including the rate period
during which the failure is cured and the late charge is paid) (the late charge
is to be paid only in the event Moody's is rating the shares at the time the
Fund cures the failure), and the dividend rate for shares of that series for
each such subsequent rate period will be an annual rate equal to the Maximum
Rate on the auction date for that subsequent rate period (but with the
prevailing rating for Municipal Preferred shares, for purposes of determining
the Maximum Rate, being "Below 'ba3'/BB-").
If the Fund fails to pay, in a timely manner, the auction agent the full
amount of any dividend on, or the redemption price of, any Municipal Preferred
shares during a special rate period of more than 364 rate period days, or during
any rate period succeeding any special rate period of more than 364 rate period
days during which a failure occurred that has not been cured, and the Fund does
not cure the failure and pay a late charge before 12:00 noon Eastern time on the
fourth business day preceding the auction date for the subsequent rate period,
no auction will be held for Municipal Preferred shares for that subsequent rate
period (or for any rate period thereafter, to and including the rate period
during which the failure is cured and the late charge paid) (the late charge is
to be paid only in the event Moody's is rating Municipal Preferred shares at the
time the Fund cures the failure), and the dividend rate for Municipal Preferred
shares for each such subsequent rate period will be an annual rate equal to the
Maximum Rate on the auction date for each such subsequent rate period (but with
the prevailing rating for Municipal Preferred shares, for purposes of
determining the Maximum Rate, being "Below 'ba3'/BB-").
The Fund cures a failure to pay dividends on Municipal Preferred shares for
any rate period, within the respective time periods described in the By-Laws, by
paying the auction agent all accumulated and unpaid dividends on the Municipal
Preferred shares.
GROSS-UP PAYMENTS. Holders of Municipal Preferred shares shall be entitled
to receive, when, as and if declared by the Board of Trustees, out of funds
legally available therefor in accordance with the Declaration, the By-Laws and
applicable law, dividends in an amount equal to the aggregate Gross-up Payment
in accordance with the following:
If, in the case of any minimum rate period or any special rate period of 28
rate period days or fewer, the Fund allocates any net capital gain or other
income taxable for federal income tax purposes to a dividend paid on Municipal
Preferred shares without having given advance notice thereof to the auction
agent as described above under "The Auction -- Auction Procedures" (a "Taxable
Allocation") solely by reason of the fact that such allocation is made
retroactively as a result of the redemption of all or a portion of the
outstanding shares of Municipal Preferred or the liquidation of the Fund, the
Fund will, prior to the end of the calendar year in which such dividend was
paid, provide notice thereof to the auction agent and direct the Fund's dividend
disbursing agent to send such notice with a Gross-up Payment to each holder of
shares (initially Cede & Co., as nominee of The Depository Trust Company) that
was entitled to such dividend payment with respect to Municipal Preferred shares
during such calendar year at such holder's address as the same appears or last
appeared on the record books of the Fund.
If, in the case of any special rate period of more than 28 rate period
days, the Fund makes a Taxable Allocation to a dividend paid on Municipal
Preferred shares, the Fund shall, prior to the end of the calendar year in which
such dividend was paid, provide notice thereof to the auction agent and direct
the Fund's dividend disbursing agent to send such notice with a Gross-up Payment
to each holder of such shares that was entitled to such dividend payment during
such calendar year at such holder's address as the same appears or last appeared
on the record books of the Fund.
The Fund shall not be required to make Gross-up Payments with respect to
any net capital gain or other taxable income determined by the Internal Revenue
Service to be allocable in a manner different from that allocated by the Fund.
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<PAGE> 42
A "Gross-up Payment" in respect of any dividend means payment to a
Municipal Preferred shareholder of an amount which, giving effect to the Taxable
Allocations made with respect to such dividend, would cause such holder's
after-tax return (after any applicable federal income tax consequences, taking
into account both the Taxable Allocations and the Gross-up Payment) to be equal
to the after-tax return the holder would have received if no such Taxable
Allocations had occurred. Such Gross-up Payment shall be calculated: (i) without
consideration being given to the time value of money; (ii) assuming that no
Municipal Preferred shareholder is subject to the federal alternative minimum
tax with respect to dividends received from the Fund; and (iii) assuming that
each Municipal Preferred shareholder is taxable at the maximum regular federal
income tax rate applicable to the character of income distributed in effect at
the time such Gross-up Payment is made.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS. When the Fund has any
Municipal Preferred shares outstanding, the Fund may not pay any dividend or
distribution (other than a dividend or other distribution paid in shares of a
series of, or in options, warrants or rights to subscribe for or purchase,
Common Shares) in respect of Common Shares or call for redemption, redeem,
purchase or otherwise acquire for consideration any Common Shares (except by
conversion into or exchange for shares of the Fund ranking junior to the
Municipal Preferred shares as to the payment of dividends and the distribution
of assets upon liquidation), unless (1) it has paid all cumulative dividends on
Municipal Preferred shares; (2) it has redeemed any Municipal Preferred shares
that it has called for mandatory redemption; and (3) after paying the dividend,
the Fund meets Moody's and Standard & Poor's asset coverage requirements
described under "Rating Agency Guidelines."
Except as set forth in the next sentence, no dividends shall be declared or
paid or set apart for payment on any class of shares of beneficial interest of
the Fund ranking, as to the payment of dividends, on a parity with Municipal
Preferred shares for any period unless full cumulative dividends have been or
contemporaneously are declared and paid on the Municipal Preferred shares
through their most recent dividend payment date. When dividends are not paid in
full upon the Municipal Preferred shares through their most recent dividend
payment date or upon any other class or series of shares ranking on a parity as
to the payment of dividends with Municipal Preferred shares through their most
recent respective dividend payment dates, all dividends declared upon Municipal
Preferred shares and any other such class or series of shares ranking on a
parity as to the payment of dividends with Municipal Preferred shares shall be
declared pro rata so that the amount of dividends declared per share on
Municipal Preferred shares and such other class or series of shares shall in all
cases bear to each other the same ratio that accumulated dividends per share on
the shares of Municipal Preferred and such other class or series of shares bear
to each other.
DESIGNATION OF SPECIAL RATE PERIODS
The Fund may instruct the auction agent to hold auctions and pay dividends
less frequently than weekly. The Fund may do this if, for example, the Fund
expects that short-term rates might increase or market conditions otherwise
change, in an effort to optimize the effect of the Fund's leverage on common
shareholders. If the Fund decides to use a special rate period, the special rate
period will consist of a number of days evenly divisible by seven and not more
than 1,820 days (approximately five years), subject to adjustments. The Fund
does not currently expect to hold auctions and pay dividends less frequently
than weekly in the near future. If the Fund designates a special rate period,
changes in interest rates could affect the price you would receive if you sold
your shares in the secondary market.
Before the Fund designates a special rate period: (1) at least 20 (or such
lesser number of days as may be agreed to from time to time by the auction
agent) and not more than 30 days before the first day of the proposed special
rate period, the Fund must publish a notice of its intention to designate a
special rate period in a newspaper circulated to the financial community in New
York, and must mail a notice to Municipal Preferred shareholders of its intent
to designate a special rate period; (2) the Fund must inform the auction agent
by 11:00 a.m. Eastern time on the second business day before the first day of
the proposed special rate period; (3) an auction must have been held in the rate
period before the special rate
36
<PAGE> 43
period, and in that auction sufficient clearing bids existed; and (4) the Fund
must deposit the redemption price with the auction agent for any shares it has
decided to redeem.
If the Fund has designated a special rate period of 14, 21, or 28 days,
then dividends will be paid on the same day of the week on which dividends are
paid in a seven-day rate period, but will be the second, third, or fourth such
day, respectively, after the first day of the special rate period. Thus, the
dividend payment date for a special rate period of 14, 21, or 28 days will be
the second, third, or fourth Friday, respectively, after the first day of the
special rate period. The dividend payment date for a special rate period of more
than 28 days will be set out in the notice designating a special rate period.
The dividend payment date will be a business day, and the last dividend payment
date for any special rate period will be the business day immediately following
the last day of the special rate period. After any special rate period, the rate
periods normally will be seven days, and dividends on Municipal Preferred shares
will be payable, except as described elsewhere in this prospectus or the
Statement of Additional Information, on each succeeding regular dividend payment
date, but the Fund may further designate any subsequent rate period as a special
rate period.
VOTING RIGHTS
In addition to voting rights described below under "Certain Provisions in
the Agreement and Declaration of Trust" and in the Statement of Additional
Information under "Investment Objective and Policies -- Fundamental Investment
Policies," holders of Municipal Preferred shares, voting as a separate class,
are entitled to elect (1) two trustees of the Fund at all times and (2) a
majority of the trustees if at any time dividends on Municipal Preferred shares
shall be unpaid in an amount equal to two years' dividends thereon, and to
continue to be so represented until all dividends in arrears shall have been
paid or otherwise provided for. In all other cases, trustees shall be elected by
holders of Common Shares and Preferred Shares (including Municipal Preferred
shares), voting together as a single class. On all matters, unless otherwise
specified in the Declaration or the By-Laws or otherwise required by law, the
holders of the Preferred Shares and the holders of the Common Shares have one
vote per share.
Subject to the voting rights described above and except as otherwise
specified under "Certain Provisions in the Agreement and Declaration of Trust,"
the Fund may not, among other things, without the approval of the holders of a
"majority of the outstanding" shares of Municipal Preferred, voting as a
separate class, approve any plan of reorganization adversely affecting Municipal
Preferred shares. In addition, the Fund may not, without the affirmative vote of
the holders of at least a majority of the shares of Municipal Preferred
outstanding at the time, voting as a separate class: (a) authorize, create or
issue additional shares of Municipal Preferred or classes or series of Preferred
Shares ranking prior to or on a parity with Municipal Preferred shares with
respect to the payment of dividends or the distribution of assets upon
liquidation or (b) amend, alter or repeal the provisions of the Declaration or
the By-Laws, whether by merger, consolidation or otherwise, so as to materially
affect any preference, right or power of such Municipal Preferred shares or the
holders thereof; provided, however, that a division of a share of Municipal
Preferred shall be deemed to materially affect any such preference, right or
power only if the terms of such division adversely affect the Municipal
Preferred shareholders. The Fund may not, without the affirmative vote of the
holders of at least 66 2/3% of the shares of Municipal Preferred outstanding at
the time, voting as a separate class, file a voluntary application for relief
under federal bankruptcy law or any similar application under state law for so
long as the Fund is solvent and does not foresee becoming insolvent.
Notwithstanding the second sentence of this paragraph, the Fund may, without the
vote of the Municipal Preferred shareholders, authorize, create or issue
additional shares of Municipal Preferred or classes or series of Preferred
Shares ranking on a parity with Municipal Preferred shares with respect to the
payment of dividends and the distribution of assets upon liquidation if the Fund
obtains written confirmation from Moody's (if Moody's is then rating the
Municipal Preferred shares) and Standard & Poor's (if Standard & Poor's is then
rating the Municipal Preferred shares) that the issuance of any such additional
shares or class or series of shares would not impair the rating then assigned by
such rating agency to Municipal Preferred shares; provided, however, that if
Moody's or Standard & Poor's is not then rating the Municipal Preferred shares,
the aggregate liquidation preference of all Preferred Shares of the
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<PAGE> 44
Fund outstanding after any such issuance, exclusive of accumulated and unpaid
dividends, may not exceed $37,300,000. If any action set forth in this paragraph
would adversely affect the rights of one or more series (the "Affected Series")
of Municipal Preferred in a manner different from any other series of Municipal
Preferred, the Fund will not approve any such action without the affirmative
vote of the holders of at least a majority of the shares of each such Affected
Series outstanding at the time (each such Affected Series voting as a separate
class).
REDEMPTION
MANDATORY REDEMPTION. In the event the Fund does not timely cure a failure
to maintain (1) a Discounted Value of its portfolio equal to the Municipal
Preferred Basic Maintenance Amount or (2) the 1940 Act Municipal Preferred Asset
Coverage, in each case in accordance with the requirements of the rating agency
or agencies then rating the Municipal Preferred shares, the Municipal Preferred
shares will be subject to mandatory redemption on a date specified by the Board
of Trustees, out of funds legally available therefor in accordance with the
Declaration, the By-Laws and applicable law, at the redemption price of $25,000
per share plus an amount equal to accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date fixed for
redemption. Any such redemption will be limited to the lesser of (i) the number
of shares of Municipal Preferred necessary to restore the required Discounted
Value or the 1940 Act Municipal Preferred Asset Coverage, as the case may be,
and (ii) the maximum number of shares of Municipal Preferred, together with all
other shares of Municipal Preferred and Preferred Shares subject to redemption
or retirement, that can be redeemed out of funds expected to be legally
available in accordance with the Declaration, the By-Laws and applicable law.
In determining the number of shares of Municipal Preferred required to be
redeemed in accordance with the foregoing, the Fund will allocate the number of
shares required to be redeemed to satisfy the Municipal Preferred Basic
Maintenance Amount or the 1940 Act Municipal Preferred Asset Coverage, as the
case may be, pro rata among shares of Municipal Preferred and other Preferred
Shares of the Fund, subject to redemption or retirement.
OPTIONAL REDEMPTION. Municipal Preferred shares are redeemable, at the
option of the Fund:
(i) in whole or in part, on the second business day preceding any
dividend payment date for such shares, out of funds legally available
therefor in accordance with the Declaration, the By-Laws and applicable
law, at the redemption price of $25,000 per share plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or
declared) to (but not including) the date fixed for redemption; provided,
however, that (1) Municipal Preferred shares may not be redeemed in part if
after such partial redemption fewer than 500 shares remain outstanding and
(2) the notice establishing a special rate period for Municipal Preferred
shares, as delivered to the auction agent and filed with the Secretary of
the Fund, may provide that such shares shall not be redeemable during the
whole or any part of such special rate period (except as provided in (ii)
below) or shall be redeemable during the whole or any part of such special
rate period only upon payment of such redemption premium or premiums as
shall be specified therein; and
(ii) as a whole but not in part, out of funds legally available
therefor in accordance with the Declaration, the By-Laws and applicable
law, on the first day following any dividend period included in a rate
period of more than 364 rate period days if, on the date of determination
of the Applicable Rate for that rate period, that Applicable Rate equaled
or exceeded on such date of determination the Treasury Note Rate for that
rate period, at a redemption price of $25,000 per share plus an amount
equal to accumulated but unpaid dividends thereon (whether or not earned or
declared) to (but not including) the date fixed for redemption.
Notwithstanding the foregoing, if any dividends on Municipal Preferred
shares (whether or not earned or declared) are in arrears, no Municipal
Preferred shares shall be redeemed unless all outstanding shares of Municipal
Preferred are simultaneously redeemed, and the Fund shall not purchase or
otherwise acquire any shares of Municipal Preferred; provided, however, that the
foregoing shall not prevent the purchase or acquisition of all outstanding
shares of Municipal Preferred pursuant to the successful completion of an
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<PAGE> 45
otherwise lawful purchase or exchange offer made on the same terms to, and
accepted by, holders of all outstanding shares of Municipal Preferred.
LIQUIDATION
Subject to the rights of holders of any series or class or classes of
shares ranking on a parity with Municipal Preferred shares with respect to the
distribution of assets upon liquidation of the Fund, upon a liquidation of the
Fund, whether voluntary or involuntary, the holders of shares of Municipal
Preferred then outstanding will be entitled to receive and to be paid out of the
assets of the Fund available for distribution to its shareholders, before any
payment or distribution shall be made on the Common Shares, an amount equal to
the liquidation preference with respect to such shares ($25,000 per share), plus
an amount equal to all dividends thereon (whether or not earned or declared)
accumulated but unpaid to (but not including) the date of final distribution in
same-day funds, together with any applicable Gross-up Payments in connection
with the liquidation of the Fund. After the payment to the Municipal Preferred
shareholders of the full preferential amounts provided for as described herein,
the Municipal Preferred shareholders as such shall have no right or claim to any
of the remaining assets of the Fund. In the event the assets of the Fund
available for distribution upon liquidation to the holders of shares of
Municipal Preferred and any other class or series of shares ranking on a parity
as to liquidation with Municipal Preferred shares are insufficient to pay in
full all amounts to which such holders are entitled in accordance with the first
sentence of this paragraph, payment shall be made pro rata among all such
holders of Municipal Preferred shares and of any other class or series of shares
ranking on a parity as to liquidation with Municipal Preferred shares.
Neither the sale of all or substantially all the property or business of
the Fund, nor the merger or consolidation of the Fund into or with any
Massachusetts business trust or corporation nor the merger or consolidation of
any Massachusetts business trust or corporation into or with the Fund shall be a
liquidation, whether voluntary or involuntary, for the purposes of the foregoing
paragraph.
RATING AGENCY GUIDELINES
The Fund is required under Moody's and Standard & Poor's guidelines to
maintain assets having in the aggregate a Discounted Value at least equal to the
Municipal Preferred Basic Maintenance Amount. Moody's and Standard & Poor's have
each 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 (as defined by such rating
agency). The Moody's and Standard & Poor's guidelines do not impose any
limitations on the percentage of Fund assets that may be invested in holdings
not eligible for inclusion in the calculation of the Discounted Value of the
Fund's portfolio. The amount of such assets included in the portfolio at any
time may vary depending upon the rating, diversification and other
characteristics of the eligible assets included in the portfolio. The Municipal
Preferred Basic Maintenance Amount includes the sum of (i) the aggregate
liquidation preference of the shares of Municipal Preferred then outstanding and
(ii) accrued and projected payment obligations of the Fund.
The Fund is also required under rating agency guidelines to maintain, with
respect to the Municipal Preferred shares, as of the last business day of each
month in which any shares of Municipal Preferred are outstanding, asset coverage
of at least 200% with respect to senior securities which are shares, including
Municipal Preferred shares (or such other asset coverage as may in the future be
specified in or under the Investment Company Act of 1940 as the minimum asset
coverage for senior securities which are shares of a closed-end investment
company as a condition of declaring dividends on its common shares) ("1940 Act
Municipal Preferred Asset Coverage"). Based on the composition of the Fund's
portfolio and market conditions as of November 30, 1999, the 1940 Act Municipal
Preferred Asset Coverage with respect to Municipal Preferred shares, assuming
the issuance on the date hereof of all shares of Municipal Preferred
39
<PAGE> 46
offered hereby and after giving effect to the deduction of the sales load and
offering costs relating thereto estimated at $451,870, would be computed as
follows:
<TABLE>
<S> <C> <C> <C> <C>
Value of Fund assets less liabilities not
constituting senior securities $ 91,270,752
- ------------------------------------------- = ------------ = 245%
Senior securities representing indebtedness $ 37,300,000
plus liquidation value of the Municipal
Preferred shares
</TABLE>
In the event the Fund does not timely cure a failure to maintain (1) a
Discounted Value of its portfolio equal to the Municipal Preferred Basic
Maintenance Amount or (2) the 1940 Act Municipal Preferred Asset Coverage, in
each case in accordance with the requirements of the rating agency or agencies
then rating the Municipal Preferred shares, the Fund will be required to redeem
shares of Municipal Preferred as described above under "Description of Municipal
Preferred -- Redemption."
The Fund may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by Moody's or Standard & Poor's.
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 Municipal Preferred shares may, at any
time, change or withdraw any such rating. The Board of Trustees may, without
shareholder approval, amend, alter or repeal any or all of the definitions and
related provisions which have been adopted by the Fund pursuant to the rating
agency guidelines in the event the Fund receives written confirmation from
Moody's or Standard & Poor's, or both, as appropriate, that any such change
would not impair the ratings then assigned by Moody's and Standard & Poor's to
Municipal Preferred shares.
As described by Moody's and Standard & Poor's, a preferred share rating is
an assessment of the capacity and willingness of an issuer to pay preferred
share obligations. The ratings on the Municipal Preferred shares are not
recommendations to purchase, hold or sell Municipal Preferred shares, inasmuch
as the ratings do not comment as to market price or suitability for a particular
investor. The rating agency guidelines described above also do not address the
likelihood that a Municipal Preferred shareholder will be able to sell such
shares in an auction or otherwise. The ratings are based on current information
furnished to Moody's and Standard & Poor's by the Fund and the Advisor, 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.
A rating agency's guidelines will apply to Municipal Preferred shares only
so long as such rating agency is rating such shares. The Fund will pay fees to
Moody's or Standard & Poor's, or both, for rating Municipal Preferred shares.
DESCRIPTION OF COMMON SHARES
In addition to authorizing the Municipal Preferred shares, the Declaration
authorizes the issuance of an unlimited number of Common Shares, no par value.
All Common Shares have equal noncumulative voting rights and equal rights with
respect to dividends, assets and liquidation. Common Shares are fully paid and
nonassessable when issued and have no preemptive, conversion or exchange rights.
So long as any shares of Municipal Preferred are outstanding, the Fund is not
permitted to declare dividends on, make any distributions with respect to, or
purchase its Common Shares unless, at the time of such declaration, distribution
or purchase, as applicable (and after giving effect thereto), all accumulated
dividends on any preferred shares of the Fund have been paid. The Fund's common
shares of beneficial interest are traded on the American Stock Exchange under
the symbol "CFX".
Shares of closed-end investment companies may frequently trade at prices
lower than net asset value. Shares of closed-end investment companies like the
Fund that invest predominantly in municipal bonds have traded during some
periods at prices higher than net asset value and have traded during other
periods at prices lower than net asset value.
40
<PAGE> 47
CERTAIN PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST
The Board of Trustees is divided into three classes, each having a term of
three years. Each year the term of one class expires. This may make it more
difficult to change the Fund's management and could have the effect of depriving
shareholders of an opportunity to sell their Common Shares at a premium over
prevailing market prices by discouraging a third party from seeking to obtain
control of the Fund in a tender offer or similar transaction. In addition, the
Declaration provides that the affirmative vote or consent of two-thirds of the
outstanding Common Shares and any Preferred Shares of the Fund (including
Municipal Preferred shares), voting together as a single class, and of the
Preferred Shares (including Municipal Preferred shares) voting together as a
single class, would be required to authorize the conversion of the Fund from a
closed-end to an open-end investment company. This two-thirds vote requirement
is higher than the vote required under the Investment Company Act of 1940.
Please refer to the Declaration, which is on file with the Securities and
Exchange Commission, for the full text of these provisions.
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND
REPURCHASE OF COMMON SHARES
Shares of closed-end investment companies frequently trade at a discount
from net asset value. The Board of Trustees regularly monitors the relationship
between the market price and net asset value of the Fund's Common Shares. If the
Fund's Common Shares were to trade at a substantial discount to net asset value
for an extended period of time, the Board of Trustees may consider the
repurchase of its Common Shares on the open market or the making of tender
offers for such shares. Since commencement of the Fund's operations, no such
open market purchases or tender offers have been made, and no assurances can be
given that such actions will be taken in the future. Subject to its investment
restrictions, the Fund may borrow money to finance the repurchase of its Common
Shares, subject to compliance with the 1940 Act Municipal Preferred Asset
Coverage, Section 18 of the Investment Company Act of 1940 and the other
limitations described under "Rating Agency Guidelines." The Fund may not
repurchase any of its Common Shares, however, (i) if applicable asset coverage
requirements under the Investment Company Act of 1940 (i.e., 200% with respect
to any Preferred Shares of the Fund, including Municipal Preferred shares) are
not met or would not be met following such repurchase or (ii) if otherwise
prohibited by applicable law.
There can be no assurance that repurchases or tenders, if they were to
occur, would result in the Common Shares trading at a price which is equal to
their net asset value. The Fund anticipates that the market price of the Common
Shares will usually vary from net asset value. The market price of the Common
Shares will be determined, among other things, by the relative demand for and
supply of the Common Shares in the market, the Fund's investment performance,
the Fund's dividends and yield and investor perception of the Fund's overall
attractiveness as an investment as compared with other investment alternatives.
It should be recognized that any such acquisitions of Common Shares would
decrease the total assets of the Fund and therefore have the effect of
increasing the Fund's expense ratio. Furthermore, any interest on borrowings to
finance share repurchase transactions would reduce the Fund's net income.
CONVERSION TO OPEN-END FUND
The Fund's Board of Trustees may from time to time consider submitting to
the holders of the shares of beneficial interest of the Fund a proposal to
convert the Fund to an open-end investment company. In determining whether to
exercise its discretion to submit this issue to shareholders, the Board of
Trustees would consider all factors then relevant, including the relationship of
the market price of the Common Shares to net asset value, the extent to which
the Fund's capital structure is leveraged and the possibility of de-leveraging
and re-leveraging, the spread, if any, between yields on securities in the
Fund's portfolio and interest and dividend charges on preferred shares issued by
the Fund and general market and
41
<PAGE> 48
economic conditions. In addition to any vote required by Massachusetts law,
conversion of the Fund to an open-end investment company would require the
affirmative vote of two-thirds of the Common Shares and any Preferred Shares of
the Fund (including Municipal Preferred shares), voting together as a single
class, and of the Preferred Shares (including Municipal Preferred shares) voting
together as a single class, entitled to be voted on the matter. This two-thirds
vote requirement is higher than the vote required under the Investment Company
Act of 1940. Shareholders of an open-end investment company may require the
company to redeem their shares at any time (except in certain circumstances as
authorized by or under the Investment Company Act of 1940) at their net asset
value, less such redemption charges, if any, as might be in effect at the time
of redemption. If the Fund were to convert to an open-end investment company, it
would be required to redeem all shares of Municipal Preferred then outstanding
at the redemption price specified under "Description of Municipal
Preferred -- Redemption -- Optional Redemption." In addition, the Fund could be
required to liquidate portfolio securities to meet required and requested
redemptions, and its Common Shares would no longer be listed on the American
Stock Exchange. No assurance can be given that the Board of Trustees will, at
any time in the future, decide to submit to the shareholders of the Fund a
proposal to convert to open-end status.
TAX MATTERS
The following federal tax discussion is based on the advice of Ropes &
Gray, counsel to the Fund, and reflects provisions of the Internal Revenue Code,
existing Treasury regulations, rulings published by the Internal Revenue
Service, and other applicable authority, as of the date of this prospectus.
These authorities are subject to change by legislative or administrative action.
The discussions below and in the Statement of Additional Information are only a
summary of some of the important tax considerations generally applicable to
investments in the Fund. There may be other important tax considerations
applicable to particular investors. Because tax laws are complex and often
change, you should consult your tax advisor about the tax consequences of an
investment in the Fund. For more information on federal income tax
considerations, see "Tax Matters" in the Statement of Additional Information.
FEDERAL TAXATION OF THE TRUST
The Fund intends to qualify each year for taxation as a regulated
investment company under Subchapter M of the Internal Revenue Code. If the Fund
so qualifies, the Fund will not be subject to federal income tax on income
distributed in a timely manner to Fund shareholders in the form of dividends or
capital gain distributions.
The Fund's investments and hedging activities are subject to certain
special federal tax rules. The federal rules governing the Fund's hedging
transactions (including hedging transactions in futures and options) may alter
the character of distributions to Municipal Preferred shareholders. Income
earned as a result of the Fund's hedging transactions will not be eligible to be
treated as "exempt-interest dividends" when distributed to shareholders. The
Fund's investment in securities issued at a discount will (and investments in
securities purchased at a discount may) require the Fund to accrue and
distribute income not yet received. Therefore, in order to generate sufficient
cash to make the requisite distributions, the Fund may be required to sell
securities in its portfolio that it otherwise would have continued to hold.
FEDERAL TAXATION OF SHAREHOLDERS
DIVIDENDS AND OTHER DISTRIBUTIONS. Assuming that the Fund qualifies for
taxation as a regulated investment company under Subchapter M of the Internal
Revenue Code and that, at the close of each quarter of the Fund's taxable year,
at least 50% of the value of the Fund's total assets consists of obligations the
interest on which is exempt from federal income tax under Internal Revenue Code
Section 103(a), the Fund will qualify to pay "exempt-interest dividends" to its
shareholders to the extent of its tax-exempt interest income (less applicable
expenses). Distributions of net tax-exempt interest income that the Fund
properly designates as exempt-interest dividends are treated by shareholders as
42
<PAGE> 49
interest excludable from their gross income for federal income tax purposes but
may be taxable for federal alternative minimum tax purposes (discussed below)
and for foreign, state and local tax purposes.
Under the Internal Revenue Code, the interest on certain "private activity
bonds" issued after August 7, 1986, is treated as a preference item and is
(after reduction by applicable expenses) included in the federal alternative
minimum taxable income of both individuals and corporations. The Fund will
furnish to shareholders annually a report indicating the percentage of Fund
income treated as a preference item for alternative minimum tax purposes. In
addition, for corporations, alternative minimum taxable income is increased by a
percentage of the amount by which an alternative measure of income that includes
interest on all tax-exempt securities exceeds the amount otherwise determined to
be alternative minimum taxable income. Accordingly, the portion of the Fund's
dividends that would otherwise be tax-exempt to shareholders may cause certain
shareholders to be subject to the federal alternative minimum tax or may
increase the tax liability of a shareholder who is subject to such tax.
Investors should thus consider the possible effect of an investment in the Fund
on their federal alternative minimum tax liability.
Exempt-interest dividends attributable to interest received on certain
private activity bonds and certain industrial development bonds will not be
tax-exempt to any shareholders who are, within the meaning of the Internal
Revenue Code Section 147(a), "substantial users" of the facilities financed by
such obligations or bonds or who are "related persons" of such substantial
users.
The receipt of exempt-interest dividends may affect the portion, if any, of
an individual shareholder's Social Security and Railroad Retirement benefits
that will be includable in gross income subject to federal income tax. Up to 85
percent of Social Security and Railroad Retirement benefits may be included in
gross income in cases where the recipient's combined income, consisting of
adjusted gross income (with certain adjustments), tax-exempt interest income and
one-half of any Social Security and Railroad Retirement benefits, exceeds a base
amount ($25,000 for a single individual and $32,000 for individuals filing a
joint return). Individual shareholders receiving Social Security or Railroad
Retirement benefits should consult their tax advisors.
All or a portion of interest on indebtedness incurred or continued by a
shareholder to purchase or carry Fund shares may not be deductible by the
shareholder. See "Tax Matters -- Federal Income Tax Matters -- Federal Taxation
of Shareholders" in the Statement of Additional Information.
Distributions of net investment income that do not qualify as
exempt-interest dividends (including the excess, if any, of net short-term
capital gain over net long-term capital loss), will be taxable to shareholders
as ordinary income, and will not qualify for the corporate dividends-received
deduction. Distributions of net capital gain will be taxable to shareholders as
long-term capital gain (generally at a 20% rate for noncorporate shareholders),
without regard to how long a shareholder has held shares of the Fund, and will
not qualify for the corporate dividends-received deduction.
Due to certain of the Fund's hedging and other investment activities, the
net investment income calculated for accounting purposes and distributed to
shareholders may in certain circumstances exceed or be less than the Fund's net
tax-exempt and taxable income. Because Fund expenses attributable to earning
tax-exempt income do not reduce the Fund's current earnings and profits, a
portion of any distribution in excess of the Fund's net tax-exempt and taxable
income may be considered paid out of the Fund's earnings and profits and may
therefore be treated as a taxable dividend (even though that portion
economically represents a return of the Fund's capital). If the Fund distributes
amounts in excess of the Fund's "earnings and profits" (which provides the
measure of the Fund's dividend-paying capacity for tax purposes), such
distributions to shareholders will be treated as a return of capital to the
extent of a shareholder's basis in his or her shares of Municipal Preferred, and
thereafter as gain from the sale or exchange of a capital asset. A return of
capital is not taxable to a shareholder and has the effect of reducing a
shareholder's basis in the relevant shares, which basis reduction would cause
Municipal Preferred shareholders to realize gain if their Municipal Preferred
shares were sold for an amount equal to the liquidation price.
43
<PAGE> 50
The Internal Revenue Service's position in a published revenue ruling
indicates that the Fund is required to designate distributions paid with respect
to its Common Shares and its Preferred Shares as consisting of a portion of each
type of income distributed by the Fund. The portion of each type of income
deemed received by the holders of each class of shares will be equal to the
portion of total Fund distributions received by such class. Thus, the Fund will
designate dividends paid as exempt-interest dividends in a manner that allocates
such dividends between the holders of the Common Shares and the holders of
Municipal Preferred shares, in proportion to the total dividends paid to each
such class during or with respect to the taxable year, or otherwise as required
by applicable law. Long-term capital gain distributions and other income subject
to regular federal income tax will similarly be allocated between the two
classes. The amount of taxable income allocable to Municipal Preferred shares
will depend on the amount of such income realized by the Fund, but generally is
not expected to be significant. No dividend that the Fund pays will be increased
to compensate for the fact that it may be subject to foreign, state or local
taxes (see "Description of Municipal Preferred -- Dividends and Dividend
Periods -- Gross-Up Payments").
If for any reason it is determined after the payment of any dividend that a
portion of that dividend was subject to federal income tax, the Fund will not be
required to pay any additional amount to compensate for any tax payable on the
dividend (other than Gross-up Payments payable under the circumstances described
in this prospectus). See "Description of Municipal Preferred -- Dividends and
Dividend Periods -- Gross-up Payments." The Fund will generally designate
Gross-up Payments as exempt-interest dividends to the extent it determines such
designation is consistent with the allocation principles set forth above. The
federal income tax consequences of Gross-up Payments under existing law are
uncertain. For example, existing authorities, including the revenue ruling
discussed in the above paragraph, do not specifically address whether dividends
(including, possibly, Gross-up Payments) that are paid following the close of a
taxable year, but that are treated for tax purposes as derived from the income
of such prior taxable year, are treated as dividends "paid" during such prior
taxable year for purposes of determining each class's proportionate share of a
particular type of income. The Fund currently intends to treat such dividends as
having been "paid" in the prior taxable year for purposes of determining each
class's proportionate share of a particular type of income with respect to such
prior taxable year. Existing authorities also do not specifically address the
allocation of taxable income among the dividends paid to holders of a class of
shares during or with respect to a taxable year. It is possible that the
Internal Revenue Service could disagree with the Fund's position concerning the
treatment of dividends paid after the close of a taxable year or with the Fund's
method of allocation, in which case the Internal Revenue Service could attempt
to recharacterize a portion of the dividends paid to the Municipal Preferred
shareholders and designated by the Fund as exempt-interest dividends as
consisting instead of capital gain or other taxable income. If the Internal
Revenue Service were to prevail with respect to any such attempted
recharacterization, Municipal Preferred shareholders could be subject to tax on
amounts so recharacterized and the Fund could be subject to federal income and
excise tax. In such event, no additional amounts (including Gross-up Payments)
would be paid by the Fund with respect to dividends so recharacterized to
compensate for any additional tax owed by Municipal Preferred shareholders.
Gross-up Payments will not include any amount to compensate for the fact that
the Gross-up Payments or the Taxable Allocations (see "Description of Municipal
Preferred -- Dividends and Dividend Periods -- Gross-up Payments") may
themselves be subject to foreign, state or local taxes. No provision will be
made to compensate Municipal Preferred shareholders for any alternative minimum
tax liability in respect of distributions on such Municipal Preferred shares.
Ropes & Gray has advised the Fund that, should the Internal Revenue Service
attempt to so recharacterize amounts allocated by the Fund to Municipal
Preferred shares, the Internal Revenue Service would be unlikely to prevail.
However, such advice represents only Ropes & Gray's best legal judgment and is
not binding on the Internal Revenue Service.
Any dividend paid by the Fund during January of a given year generally is
deemed to have been received by shareholders on December 31 of the preceding
year, provided that the dividend actually was declared by the Fund in October,
November or December of such preceding year and payable to shareholders of
record on a date in such a month.
44
<PAGE> 51
The Fund will notify shareholders each year of the amount and tax status of
dividends and other distributions, including the amount of any distribution of
net capital gain.
The Internal Revenue Code provides that every shareholder required to file
a tax return must include for information purposes on such return the amount of
exempt-interest dividends received from all sources (including the Fund) during
the taxable year.
SALE OR REDEMPTION OF SHARES. In certain circumstances, the sale or
exchange of Municipal Preferred shares may give rise to gain or loss. In
general, any gain or loss realized upon a taxable disposition of Municipal
Preferred shares by a shareholder will be treated as long-term capital gain or
loss if the shares have been held for more than twelve months, and otherwise as
short-term capital gain or loss. However, if a shareholder buys Municipal
Preferred shares and sells them at a loss within six months, any loss will be
disallowed for federal income tax purposes to the extent of any exempt-interest
dividends received on such shares. In addition, any loss (not already disallowed
as provided in the preceding sentence) realized upon a taxable disposition of
Municipal Preferred shares held for six months or less will be treated as
long-term, rather than short-term, capital loss to the extent of any net capital
gain distributions received by the shareholder with respect to those shares. All
or a portion of any loss realized upon a taxable disposition of Municipal
Preferred shares will be disallowed if other Municipal Preferred shares are
purchased within 30 days before or after the disposition. In such a case, the
basis of the newly purchased Municipal Preferred shares will be adjusted to
reflect the disallowed loss.
Gain or loss, if any, resulting from a redemption of Municipal Preferred
shares generally will be treated as gain or loss from the sale or exchange of a
capital asset under Internal Revenue Code Section 302, rather than as a
dividend, but only if the redemption distribution (i) is deemed not to be
essentially equivalent to a dividend, (ii) is in complete redemption of an
owner's interest in the Fund, (iii) is substantially disproportionate with
respect to the owner, or (iv) with respect to non-corporate owners, is in
partial liquidation of the Fund. For purposes of (i), (ii) and (iii) above, an
owner's common share ownership will be taken into account.
STATE AND LOCAL TAX MATTERS
The exemption from federal income tax for exempt-interest dividends does
not necessarily result in exemption for such dividends under the income or other
tax laws of any state or local taxing authority. Some states exempt from state
income tax that portion of any exempt-interest dividend that is derived from
interest received by a regulated investment company on its holdings of
securities of that state and its political subdivisions and instrumentalities.
The Fund will report annually to its shareholders the percentage of
interest income earned by the Fund during the preceding year on tax-exempt
obligations indicating, on a state-by-state basis, the source of such income.
Shareholders of the Fund are advised to consult with their own tax advisors
about state and local tax matters.
Please refer to the Statement of Additional Information for more detailed
information. You are urged to consult your tax advisor.
CUSTODIAN, DIVIDEND DISBURSING AGENT, TRANSFER AGENT
AND REGISTRAR
The Fund's securities and cash are held by The Chase Manhattan Bank, whose
principal business address is 270 Park Avenue, New York, New York 10017-2070, as
custodian (the "Custodian") under a custodian contract.
Bankers Trust Company, whose principal business address is Four Albany
Street, New York, New York 10006, serves as auction agent for the Fund in
connection with the Municipal Preferred shares. EquiServe, whose principal
business address is 150 Royall Street, Canton, Massachusetts 02021, acts as
45
<PAGE> 52
servicing agent for BankBoston, N.A., in serving as dividend disbursing agent,
as agent under the Fund's Dividend Reinvestment Plan and as transfer agent and
registrar for the Fund's Common Shares.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement between
Salomon Smith Barney Inc. as representative of the Underwriters and the Fund
(the "Underwriting Agreement") dated the date hereof, each Underwriter has
agreed to purchase, and the Fund has agreed to sell to such Underwriter, the
number of shares of Series TH Municipal Preferred set forth opposite the name of
such Underwriter.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- ---- ----------------
<S> <C>
Salomon Smith Barney Inc. ..................................
A.G. Edwards & Sons, Inc. ..................................
Total.............................................
========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to the approval of certain legal matters by counsel and
to certain conditions precedent, and that the Underwriters are obligated to
purchase all of the Municipal Preferred shares if any are purchased. In the
Underwriting Agreement, the Fund and the Advisor have agreed to indemnify the
Underwriters with respect to certain liabilities, including liabilities arising
under the Securities Act of 1933, and to contribute in respect thereof.
The Fund has been advised by the Underwriters that it proposes initially to
offer the Municipal Preferred shares offered hereby to the public at the price
set forth on the cover page of this prospectus and to selected dealers at such
price less a concession not to exceed $ per share. The underwriting
commission to be paid by the Fund of $ per share is equal to % of the
initial offering price. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share on sales to certain other
dealers. After the initial public offering, the public offering price and the
concession may be changed by the Underwriters.
The Fund anticipates that one or more of the Underwriters may from time to
time act as a broker or dealer in connection with the execution of its portfolio
transactions after they have ceased to be Underwriters. The Fund anticipates
that one or more of the Underwriters or any of their affiliates may, from time
to time, act in auctions as a Broker-Dealer as set forth under "The Auction" and
will receive the fees described under "The Auction -- Broker-Dealers" in the
Statement of Additional of Information in exchange for so acting. The
Underwriters are active underwriters of, and dealers in, securities and act as
market makers in a number of such securities and therefore can be expected to
engage in portfolio transactions with the Fund.
The principal business address of Salomon Smith Barney Inc. is 388
Greenwich Street, New York, New York 10010.
LEGAL OPINIONS
Certain legal matters in connection with the Series TH Municipal Preferred
offered hereby will be passed upon for the Fund by Ropes & Gray, Boston,
Massachusetts, and for the Underwriters by Simpson Thacher & Bartlett. Simpson
Thacher & Bartlett will rely, as to certain matters of Massachusetts law in its
opinion, on the opinion of Ropes & Gray.
REPORTS TO SHAREHOLDERS
The Fund will send unaudited semiannual and audited annual reports to its
shareholders, including, as currently required by regulations of the Securities
and Exchange Commission, a list of investments held.
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<PAGE> 53
EXPERTS
The Financial Statements included in the Statement of Additional
Information have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing. The address of
PricewaterhouseCoopers LLP is 160 Federal Street, Boston, Massachusetts 02110.
FURTHER INFORMATION
The Fund has filed with the Securities and Exchange Commission (the
"Commission"), Washington, DC 20549, a registration statement under the
Securities Act with respect to the Municipal Preferred shares offered in this
prospectus. Further information concerning these securities and the Fund may be
found in the registration statement, of which this prospectus constitutes a
part, on file with the Commission. The registration statement may be inspected
without charge at the Commission's office in Washington, DC, and copies of all
or any part thereof may be obtained from such office after payment of the fees
prescribed by the Commission.
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the Investment Company Act of 1940, and in accordance
therewith files reports and other information with the Commission. You may
inspect and copy such reports, proxy and information statements and other
information at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, DC 20549 and the Commission's regional
offices, including offices at Seven World Trade Center, New York, New York
10048. Call 1-800-SEC-0330 for information about the public reference
facilities. You may obtain copies of such material from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, DC 20549 at
prescribed rates. The Commission maintains a Web site (http://www.sec.gov) that
contains the Statement of Additional Information, material incorporated by
reference into this prospectus and the Statement of Additional Information, and
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. In addition, you may
also inspect such reports, proxy and information statements and other
information concerning the Fund at the offices of the American Stock Exchange,
86 Trinity Place, New York, New York 10006-1872.
47
<PAGE> 54
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Use of Proceeds............................................. B-2
Investment Objectives and Policies.......................... B-2
Fund Charges and Expenses................................... B-4
Management of the Fund...................................... B-5
Portfolio Transactions...................................... B-12
Net Asset Value............................................. B-13
The Auction................................................. B-14
Description of Municipal Preferred.......................... B-26
Repurchase of Common Shares................................. B-46
Miscellaneous Investment Practices.......................... B-48
Tax Matters................................................. B-58
Shareholder Liability....................................... B-61
Custodian................................................... B-61
Independent Accountants..................................... B-61
Miscellaneous Matters....................................... B-61
Glossary.................................................... B-63
Financial Statements........................................ F-1
Appendix A -- Ratings of Investments........................ A-1
Appendix B -- Auction Procedures............................ B-1
Appendix C -- Settlement Procedures......................... C-1
Appendix D -- Rating Agency Futures and Options
Restrictions.................................. D-1
</TABLE>
48
<PAGE> 55
(This page intentionally left blank)
<PAGE> 56
(This page intentionally left blank)
<PAGE> 57
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$37,300,000
COLONIAL INSURED MUNICIPAL FUND
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
1,492 SHARES, SERIES TH
---------------
PROSPECTUS
, 1999
---------------
SALOMON SMITH BARNEY
A.G. EDWARDS & SONS, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 58
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT
COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
IS EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED DECEMBER 10, 1999
COLONIAL INSURED MUNICIPAL FUND
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") relating to the Series TH
Municipal Auction Rate Cumulative Preferred Shares ("Municipal Preferred")
offered by Colonial Insured Municipal Fund (the "Fund") contains information
which may be useful to investors but which is not included in the Prospectus of
the Fund. This SAI is not a prospectus and is authorized for distribution only
when accompanied or preceded by the Prospectus of the Fund dated
, 1999, describing the Municipal Preferred (the "Prospectus").
This SAI should be read together with the Prospectus. Investors may obtain a
free copy of the Prospectus by calling Colonial Management Associates, Inc. at
1-800-426-3750. Capitalized terms used but not defined in this SAI have the
meanings ascribed to them in the Prospectus.
TABLE OF CONTENTS
<TABLE>
<S> <C>
USE OF PROCEEDS............................................. B-2
INVESTMENT OBJECTIVE AND POLICIES........................... B-2
FUND CHARGES AND EXPENSES................................... B-4
MANAGEMENT OF THE FUND...................................... B-5
PORTFOLIO TRANSACTIONS...................................... B-12
NET ASSET VALUE............................................. B-13
THE AUCTION................................................. B-14
DESCRIPTION OF MUNICIPAL PREFERRED.......................... B-26
REPURCHASE OF COMMON SHARES................................. B-46
MISCELLANEOUS INVESTMENT PRACTICES.......................... B-48
TAX MATTERS................................................. B-58
SHAREHOLDER LIABILITY....................................... B-61
CUSTODIAN................................................... B-61
INDEPENDENT ACCOUNTANTS..................................... B-61
MISCELLANEOUS MATTERS....................................... B-61
GLOSSARY.................................................... B-63
FINANCIAL STATEMENTS........................................ F-1
APPENDIX A -- Ratings of Investments........................ A-1
APPENDIX B -- Auction Procedures............................ B-1
APPENDIX C -- Settlement Procedures......................... C-1
APPENDIX D -- Rating Agency Futures and Options
Restrictions.............................................. D-1
</TABLE>
<PAGE> 59
USE OF PROCEEDS
The net proceeds of the offering of shares of Municipal Preferred will be
approximately $ after payment of the sales load to a group of
underwriters (the "Underwriters") led by Salomon Smith Barney Inc. and estimated
offering costs. A portion of the offering costs has been advanced by the Fund's
investment advisor, Colonial Management Associates, Inc. (the "Advisor").
The net proceeds of the offering will be invested in accordance with the
Fund's investment objective and policies. It is presently anticipated that the
Fund will be able to invest substantially all of the net proceeds in Municipal
Obligations (as defined below) that meet the Fund's investment objective at or
shortly (within six to eight weeks) after the completion of the offering. To the
extent that all of the proceeds cannot be so invested, pending such investment,
they will be invested initially in high-quality, short-term tax-exempt money
market securities, the income on which will be exempt from federal income taxes,
or in high-quality Municipal Obligations with relatively low volatility (such as
prerefunded and intermediate-term securities), to the extent such securities are
available. If necessary to invest fully the net proceeds of the offerings
immediately, the Fund may also purchase, as temporary investments, short-term
taxable investments of the type described under "Investment Objective and
Policies -- Temporary and Defensive Investments" in the Prospectus, the income
on which may be subject to federal income taxes.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's Prospectus describes its investment objective and investment
policies. This SAI includes additional information concerning, among other
things, the investment policies of the Fund and information about certain
securities and investment techniques that are described or referred to in the
Prospectus or in which the Fund expects to engage. Except as indicated under
"Fundamental Investment Policies," the Fund's investment policies are not
fundamental and the Fund's Board of Trustees may change the policies without
shareholder approval.
As used in this SAI, the term "Municipal Obligations" refers to debt
obligations the interest on which was at the time of issuance, in the opinion of
issuer's counsel (or on the basis of other reliable authority), exempt from
federal income tax (other than the possible incidence of any alternative minimum
tax ("AMT")).
FUNDAMENTAL INVESTMENT POLICIES
The following fundamental restrictions are for the protection of the Fund's
shareholders and cannot be changed without the approval of the holders of a
"majority of the outstanding" Common Shares and Preferred Shares, including any
Municipal Preferred shares, voting together as a single class, and of the
holders of a "majority of the outstanding" Preferred Shares, including any
Municipal Preferred shares, voting as a separate class. A "majority of the
outstanding" shares means the lesser of (i) 67% of the shares represented at a
meeting at which more than 50% of the outstanding shares are represented or (ii)
more than 50% of the outstanding shares.
The Fund may:
1. issue senior securities or borrow money to the extent permitted by the
1940 Act;
2. only own real estate acquired as a result of owning securities;
3. purchase and sell futures contracts and related options;
4. underwrite securities issued by others only when disposing of portfolio
securities;
5. make loans only through lending of securities, through the purchase of
debt instruments or similar evidences of indebtedness typically sold to
financial institutions and through repurchase agreements;
6. not concentrate more than 25% of its total assets in any one industry
(in the utilities category, gas, electric, water and telephone companies
will be considered as separate industries.);
B-2
<PAGE> 60
7. purchase or sell commodities or commodities contracts, except that,
consistent with its investment policies, the Fund may purchase and sell
financial futures contracts and options and may enter into swap
agreements, foreign exchange contracts and other financial transactions
not requiring the delivery of physical commodities; and
8. will, under normal circumstances, invest at least 80% of its assets in
debt obligations 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.
For the purpose of applying the limitation set forth above in subparagraph
(6), an issuer shall be deemed the sole issuer of a security when its assets and
revenues are separate from other governmental entities and its securities are
backed only by its assets and revenues. Similarly, in the case of a non-
governmental issuer, such as an industrial corporation or a privately owned or
operated hospital, if the security is backed only by the assets and revenues of
the non-governmental issuer, then such non-governmental issuer would be deemed
to be the sole issuer. Where a security is also backed by the enforceable
obligation of a superior or unrelated governmental or other entity (other than a
bond insurer), it shall also be included in the computation of securities owned
that are issued by such governmental or other entity. Where a security is
guaranteed by a governmental entity or some other facility, such as a bank
guarantee or letter of credit, such a guarantee or letter of credit would be
considered a separate security and would be treated as an issue of such
government, other entity or bank. When a Municipal Obligation is insured by bond
insurance, it shall not be considered a security that is issued or guaranteed by
the insurer; instead, the issuer of such Municipal Obligation will be determined
in accordance with the principles set forth above. The foregoing restrictions do
not limit the percentage of the Fund's assets that may be invested in Municipal
Obligations insured by any given insurer.
The restrictions and other limitations set forth above will apply only at
the time of purchase of securities and will not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of an
acquisition of securities.
The Fund has no intention to file a voluntary application for relief under
federal bankruptcy law or any similar application under state law for so long as
the Fund is solvent, and does not foresee becoming insolvent.
OTHER INVESTMENT POLICIES
As non-fundamental investment policies which may be changed by the Fund
without a shareholder vote, the Fund may not:
1. purchase securities on margin, but it may receive short-term credit to
clear securities transactions and may make initial or maintenance margin
deposits in connection with futures transactions;
2. make short sales of securities, other than short sales "against the
box," provided that this restriction will not be applied to limit the
use of options, futures contracts and related options, in the manner
otherwise permitted by the investment restrictions, policies and
investment program of the Fund. The Fund has no current intention of
making short sales against the box; and
3. invest in interests in oil, gas or other mineral exploration or
development programs, including leases.
Restrictions imposed by Moody's or Standard & Poor's, or both, on engaging
in futures and options transactions as described under "Description of Municipal
Preferred -- Asset Maintenance," are not fundamental policies and may be changed
by the Fund from time to time without shareholder approval; provided, however,
that if Moody's or Standard & Poor's, or both, are rating the shares of
Municipal Preferred, the Fund must receive written confirmation from Moody's or
Standard & Poor's, or both, as appropriate, that any such change would not
impair the ratings then assigned by Moody's and Standard & Poor's to shares of
Municipal Preferred. See also "Description of Municipal Preferred -- Rating
Agency Guidelines" for a description of other rating agency restrictions, none
of which is a fundamental policy of the Fund and which may be changed by the
Fund from time to time without shareholder approval subject to the foregoing
proviso.
B-3
<PAGE> 61
FUND CHARGES AND EXPENSES
Under the Fund's Management Agreement with the Advisor, the Fund pays the
Advisor a monthly fee based on the average weekly net assets of the Fund,
including the proceeds of the offering of the shares of Municipal Preferred, for
such month at the annual rate of 0.65% of average weekly total net assets.
For the first ten years of the Fund's operation, the Advisor has agreed to
waive the Fund's fees and expenses in the amounts, and for the time periods, set
forth below:
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
WAIVED WAIVED
(AS A (AS A
PERCENTAGE PERCENTAGE
OF AVERAGE OF AVERAGE
YEAR ENDING WEEKLY TOTAL YEAR ENDING WEEKLY TOTAL
NOVEMBER 30, NET ASSETS)* NOVEMBER 30, NET ASSETS)*
- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
2000**....................... 0.30% 2005......................... 0.25%
2001......................... 0.30% 2006......................... 0.20%
2002......................... 0.30% 2007......................... 0.15%
2003......................... 0.30% 2008......................... 0.10%
2004......................... 0.30% 2009......................... 0.05%
</TABLE>
- ---------------
* Including net assets attributable to Municipal Preferred shares.
** From the commencement of operations.
The Advisor has not agreed to waive any portion of the Fund's fees and
expenses beyond November 30, 2009.
The Fund recently commenced operations and has not paid any advisory fees
to the Advisor.
BROKERAGE COMMISSIONS
The Fund recently commenced operations and has not paid any brokerage
commissions.
B-4
<PAGE> 62
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The names and business addresses of the Trustees and officers of the Fund
and their principal occupations and other affiliations during the past five
years are set forth below.
<TABLE>
<CAPTION>
NAME (AGE) POSITIONS AND PRINCIPAL OCCUPATIONS
AND ADDRESS OFFICES WITH FUND DURING PAST FIVE YEARS
- ----------- ------------------------- --------------------------------------
<S> <C> <C>
Robert J. Birnbaum (71).............. Trustee Consultant (formerly Special Counsel,
313 Bedford Road Dechert Price & Rhoads (law firm) from
Ridgewood, NJ 07450 September, 1988 to December, 1993;
President, New York Stock Exchange
from May, 1985 to June, 1988;
President, American Stock Exchange,
Inc. from 1977 to May, 1985).
Tom Bleasdale (69)................... Trustee Retired (formerly Chairman of the
502 Woodlands Drive Board and Chief Executive Officer,
Linville, NC 28646 Shore Bank & Trust Company from 1992
to 1993); Director of The Empire
Company since June, 1995.
John V. Carberry* (52)............... Trustee Senior Vice President of Liberty
56 Woodcliff Road Financial Companies, Inc. (formerly
Wellesley Hills, MA 02481 Managing Director, Salomon Brothers
(investment banking) from January,
1988 to January, 1998).
Lora S. Collins (63)................. Trustee Attorney (formerly Attorney, Kramer,
1175 Hill Road Levin, Naftalis & Frankel (law firm)
Southold, NY 11971 from September, 1986 to November,
1996).
James E. Grinnell (69)............... Trustee Private Investor since November, 1988.
22 Harbor Avenue
Marblehead, MA 01945
Richard W. Lowry* (63)............... Trustee Private Investor since August, 1987.
Seven Winter Street
Nantucket, MA 02554
Salvatore Macera (67)................ Trustee Private Investor (formerly Executive
26 Little Neck Lane Vice President and Director of Itek
New Seabury, MA 02649 Corporation (electronics) from 1975 to
1981).
William E. Mayer* (59)............... Trustee Partner, Development Capital, LLC
500 Park Avenue, 5th Floor (venture capital) (formerly Dean,
New York, NY 10022 College of Business and Management,
University of Maryland from October,
1992 to November, 1996; Dean, Simon
Graduate School of Business,
University of Rochester from October,
1991 to July, 1992).
James L. Moody, Jr.* (67)............ Trustee Retired (formerly Chairman of the
16 Running Tide Road Board, Hannaford Bros. Co. (food
Cape Elizabeth, ME 04107 retailer) from May, 1984 to May, 1997,
and Chief Executive Officer, Hannaford
Bros. Co. from May, 1973 to May,
1992).
</TABLE>
B-5
<PAGE> 63
<TABLE>
<CAPTION>
NAME (AGE) POSITIONS AND PRINCIPAL OCCUPATIONS
AND ADDRESS OFFICES WITH FUND DURING PAST FIVE YEARS
- ----------- ------------------------- --------------------------------------
<S> <C> <C>
John J. Neuhauser (56)............... Trustee Academic Vice President and Dean of
84 College Road Faculties, Boston College since
Chestnut Hill, MA 02467 August, 1999 (formerly Dean, Boston
College School of Management since
September, 1977).
Thomas E. Stitzel (63)............... Trustee Professor of Finance, College of
2208 Tawny Woods Place Business, Boise State University
Boise, ID 83706 (higher education); Business
consultant and author.
Robert L. Sullivan (71).............. Trustee Retired (formerly Partner, KPMG Peat
45 Sankaty Avenue Marwick LLP, from July, 1966 to June,
Siasconset, MA 02564 1985).
Anne-Lee Verville (53)............... Trustee Consultant (formerly General Manager,
359 Stickney Hill Road Global Education Industry from 1994 to
Hopkinton, NH 03229 1997, and President, Applications
Solutions Division from 1991 to 1994,
IBM Corporation (global education and
global applications)).
Stephen E. Gibson (45)............... President President of the Fund and the Liberty
Funds since June, 1998, Chairman of
the Board since July, 1998, and Chief
Executive Officer and President since
December, 1996, and Director since
1996 of the Advisor (formerly
Executive Vice President from July,
1996 to December, 1996); Director,
Chief Executive Officer and President
of Liberty Funds Group LLC (formerly
known as COGRA, LLC) ("LFG") since
December, 1998 (formerly Director,
Chief Executive Officer and President
of The Colonial Group, Inc. ("TCG")
from December, 1996 to December,
1998); Assistant Chairman since August
1998 and President since November,
1999 of Stein Roe & Farnham
Incorporated ("SR&F"); President of
the Liberty-Stein Roe Funds Investment
Trust, Liberty-Stein Roe Funds Income
Trust, Liberty-Stein Roe Funds
Municipal Trust, Liberty-Stein Roe
Advisor Trust, Liberty-Stein Roe Funds
Trust, SR&F Base Trust, Liberty-Stein
Roe Advisor Floating Rate Fund,
Liberty-Stein Roe Institutional
Floating Rate Income Fund, Stein Roe
Floating Rate Limited Liability
Company, Stein Roe Variable Investment
Trust, Liberty-Stein Roe Funds
Institutional Trust and Stein Roe
Advisor Floating Rate Advantage Fund
since November, 1999 (formerly
Managing Director of Marketing of
Putnam Investments from June, 1992 to
July, 1996).
</TABLE>
B-6
<PAGE> 64
<TABLE>
<CAPTION>
NAME (AGE) POSITIONS AND PRINCIPAL OCCUPATIONS
AND ADDRESS OFFICES WITH FUND DURING PAST FIVE YEARS
- ----------- ------------------------- --------------------------------------
<S> <C> <C>
J. Kevin Connaughton (34)............ Controller and Chief Controller and Chief Accounting
Accounting Officer Officer of the Fund and the Liberty
Funds, except Liberty Funds Trust IX,
since February, 1998; Controller,
Liberty Funds Trust IX, since
December, 1998; Vice President of the
Advisor since February, 1998 (formerly
Senior Tax Manager, Coopers & Lybrand,
LLP from April, 1996 to January, 1998;
Vice President, 440 Financial
Group/First Data Investor Services
Group from March, 1994 to April,
1996).
Timothy J. Jacoby (45)............... Treasurer and Chief Treasurer and Chief Financial Officer
Financial Officer of the Fund and the Liberty Funds,
except Liberty Funds Trust IX, since
October, 1996 (formerly Controller and
Chief Accounting Officer from October,
1997 to February, 1998); Treasurer of
Liberty Funds Trust IX since December,
1998; Senior Vice President of the
Advisor since September, 1996; Vice
President, Chief Financial Officer and
Treasurer of LFG since December, 1998
(formerly Vice President, Chief
Financial Officer and Treasurer of TCG
from July, 1997 to December, 1998);
Senior Vice President of SR&F since
August, 1998 (formerly Senior Vice
President, Fidelity Accounting and
Custody Services from September, 1993
to September, 1996).
Nancy L. Conlin (45)................. Secretary Secretary of the Fund and the Liberty
Funds, except Liberty Funds Trust IX,
since April, 1998 (formerly Assistant
Secretary from July, 1994 to April,
1998); Director, Senior Vice
President, General Counsel, Clerk and
Secretary of the Advisor since April,
1998 (formerly Vice President,
Counsel, Assistant Secretary and
Assistant Clerk from July, 1994 to
April, 1998); Vice President, General
Counsel and Secretary of LFG since
December, 1998 (formerly Vice
President, General Counsel and Clerk
of TCG from April, 1998 to December,
1998; formerly Assistant Clerk from
July, 1994 to April, 1998).
Joseph R. Palombo (46)............... Vice President Vice President of the Fund since
August, 1999; Executive Vice President
and Director of the Advisor since
April, 1999; executive Vice President
and Chief Administrative Officer of
LFG since April, 1999 (formerly Chief
Operating Officer, Putnam Mutual Funds
from 1994 to 1998).
</TABLE>
- ---------------
* Denotes those Trustees who are "interested persons" (as defined in the 1940
Act) of the Fund, the Advisor or one or more of the Underwriters. Mr. Carberry
is an "interested person" as defined in the 1940 Act because of his
affiliation with Liberty Financial Companies, Inc., an indirect parent company
of the Advisor, and also because he has a direct or indirect beneficial
interest in one of the Underwriters. Mr. Mayer is an "interested person" as
defined in the 1940 Act because he is a director
B-7
<PAGE> 65
of Hambrecht & Quist Incorporated, a registered broker-dealer. Messrs. Lowry
and Moody are "interested persons" as defined in the 1940 Act because each has
a direct or indirect beneficial interest in, or is designated as trustee,
executor or guardian of a legal interest in, one or more of the Underwriters
or a controlling person (as such term is defined in the 1940 Act) of one or
more of the Underwriters.
The business address of the officers of the Fund is One Financial Center,
Boston, MA 02111.
The Trustees of the Fund are also directors or trustees, as the case may
be, of Liberty Funds Trust I, Liberty Funds Trust II, Liberty Funds Trust III,
Liberty Funds Trust IV, Liberty Funds Trust V, Liberty Funds Trust VI, Liberty
Funds Trust VII, Liberty Funds Trust VIII (formerly known as LFC Utilities
Trust), Liberty Variable Investment Trust ("LVIT"), Colonial Municipal Income
Trust, Colonial High Income Municipal Trust, Colonial Investment Grade Municipal
Trust, Colonial Intermediate High Income Fund, Colonial Intermarket Income Trust
I, Colonial California Insured Municipal Fund, Colonial Massachusetts Insured
Municipal Fund and Colonial New York Insured Municipal Fund (collectively, each
trust or any series thereof termed the "Liberty Funds").
At the first annual meeting of the Fund's shareholders following the
issuance of Municipal Preferred shares, holders of outstanding shares of
Municipal Preferred, voting together as one separate class, will elect two
Trustees, and holders of outstanding Common Shares and shares of Municipal
Preferred, voting together as a single class, will elect the remaining Trustees.
See "Description of Municipal Preferred -- Municipal Preferred Shares -- Voting
Rights."
The Trustees serve as trustees of all Liberty Funds for which each Trustee
(except Mr. Carberry) receives an annual retainer of $45,000 and attendance fees
of $8,000 for each regular joint meeting and $1,000 for each special joint
meeting. Committee chairs and the lead Trustee receive an annual retainer of
$1,000, and Committee chairs receive $1,000 for each special meeting attended on
a day other than a regular joint meeting day. Committee members receive an
annual retainer of $1,000 and $1,000 for each special meeting attended on a day
other than a regular joint meeting day. Two-thirds of the Trustee fees are
allocated among the Liberty Funds based on each Liberty Fund's relative net
assets, and one-third of the fees are divided equally among the Liberty Funds.
B-8
<PAGE> 66
TRUSTEES AND TRUSTEES' FEES
It is estimated that the Trustees will receive the amounts set forth below
for the fiscal year ending November 30, 1999. For the calendar year ended
December 31, 1998, the Trustees received the compensation set forth below for
serving as trustees of the Liberty Funds.(a)
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
ESTIMATED COMPENSATION FROM THE THE FUND COMPLEX PAID TO THE
FUND FOR THE FISCAL YEAR ENDED TRUSTEES FOR THE CALENDAR YEAR ENDED
TRUSTEE NOVEMBER 30, 1999 December 31, 1998(b)
- ------- ------------------------------- ------------------------------------
<S> <C> <C>
Robert J. Birnbaum(c)............... $812 $ 99,429
Tom Bleasdale(c).................... 845(d) 115,000(e)
John V. Carberry(f)(g).............. N/A N/A
Lora S. Collins(c).................. 812 97,429
James E. Grinnell(c)................ 845 103,071
Richard W. Lowry(c)................. 812 98,214
Salvatore Macera(h)................. 804 25,250
William E. Mayer(c)................. 845 99,286
James L. Moody, Jr.(c).............. 845(i) 105,857(j)
John J. Neuhauser(c)................ 849 105,323
Thomas E. Stitzel(h)................ 804 25,250
Robert L. Sullivan(c)............... 876 104,100
Anne-Lee Verville(c)(f)............. 804(k) 23,445(l)
</TABLE>
- ---------------
(a) Neither the Fund nor the Fund Complex currently provides pension or
retirement plan benefits to the Trustees.
(b) At December 31, 1998, the complex consisted of 56 open-end and 5 closed-end
management investment portfolios in the Liberty Funds (the "Fund Complex").
(c) Elected by the shareholders of LVIT on October 30, 1998.
(d) Is expected to include $431 payable in later years as deferred compensation.
(e) Includes $52,000 payable in later years as deferred compensation.
(f) Elected by the trustees of the closed-end Liberty Funds on June 18, 1998,
and by the shareholders of the open-end Liberty Funds on October 30, 1998.
(g) Does not receive compensation because he is an affiliated Trustee and
employee of Liberty Financial Companies, Inc. ("Liberty Financial").
(h) Elected by the shareholders of the open-end Liberty Funds on October 30,
1998, and by the trustees of the closed-end Liberty Funds on December 17,
1998.
(i) Total estimated compensation of $845 for the fiscal year ended November 30,
1998, is expected to be payable in later years as deferred compensation.
(j) Total compensation of $105,857 for the calendar year ended December 31,
1998, will be payable in later years as deferred compensation.
(k) Total estimated compensation of $804 for the fiscal year ended November 30,
1998, is expected to be payable in later years as deferred compensation.
(l) Total compensation of $23,445 for the calendar year ended December 31,
1998, will be payable in later years as deferred compensation.
For the calendar year ended December 31, 1998, certain of the Trustees
received the following compensation in their capacities as trustees or directors
of Liberty All-Star Equity Fund, Liberty All-Star
B-9
<PAGE> 67
Growth Fund, Inc. and Liberty Funds Trust IX (formerly known as LAMCO Trust I)
(together, the "Liberty All-Star Funds").(m)
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM THE LIBERTY
ALL-STAR FUNDS FOR THE CALENDAR YEAR
TRUSTEE Ended December 31, 1998(n)
- ------- ------------------------------------
<S> <C>
Robert J. Birnbaum.......................................... $25,000
John V. Carberry(o)......................................... N/A
James E. Grinnell........................................... 25,000
Richard W. Lowry............................................ 25,000
William E. Mayer(p)......................................... 14,000
John J. Neuhauser(q)........................................ 25,000
</TABLE>
- ---------------
(m) The Liberty All-Star Funds do not currently provide pension or retirement
plan benefits to the trustees/directors.
(n) The Liberty All-Star Funds are advised by Liberty Asset Management Company
("LAMCO"). LAMCO is an indirect, wholly owned subsidiary of Liberty
Financial (an intermediate parent of the Advisor).
(o) Elected by the trustees/directors of the Liberty All-Star Funds on June 30,
1998. Does not receive compensation because he is an affiliated trustee and
employee of Liberty Financial.
(p) Elected by the shareholders of the Liberty All-Star Equity Fund on April
22, 1998, and by the directors of the Liberty All-Star Growth Fund, Inc. on
December 17, 1998.
(q) Elected by the shareholders of the Liberty All-Star Funds on April 22,
1998.
At , 1999, the Fund's officers and Trustees as a group owned
less than 1% of the outstanding Common Shares.
At , 1999, , [Address], owned of record
shares, representing %, of the Fund's outstanding shares.
In addition to the provisions discussed in the Prospectus under "Certain
Provisions in the Agreement and Declaration of Trust," the Declaration provides
that the obligations of the Fund are not binding upon the Trustees of the Fund
individually, but only upon the assets and property of the Fund. The Declaration
also provides that the Fund will indemnify its Trustees and officers against
liabilities and expenses incurred in connection with litigation in which they
may be involved because of their offices with the Fund but that such
indemnification will not relieve any officer or Trustee of any liability to the
Fund or its shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of his or her duties. The Fund, at its expense,
provides liability insurance for the benefit of its Trustees and officers.
INVESTMENT ADVISOR
Colonial Management Associates, Inc. (the "Advisor"), and/or its affiliate,
Colonial Advisory Services, Inc. ("CASI"), has rendered investment advisory
services to investment company, institutional and other clients since 1931. The
Advisor currently serves as investment advisor, sub-advisor or administrator for
62 open-end and 7 closed-end management investment company portfolios. Trustees
and officers of the Fund, who are also officers of the Advisor or its
affiliates, will benefit from the advisory fees, sales commissions and agency
fees paid or allowed by the Fund. More than 30,000 financial advisors have
recommended the Liberty Funds to over 800,000 clients worldwide, representing
more than $16.3 billion in assets.
The Advisor is a subsidiary of Liberty Funds Group LLC ("LFG"), One
Financial Center, Boston, MA 02111. LFG is an indirect, wholly owned subsidiary
of Liberty Financial Companies, Inc. ("Liberty Financial"), which in turn is a
direct, majority-owned subsidiary of LFC Management Corporation, which in turn
is a direct, wholly owned subsidiary of Liberty Corporate Holdings, Inc., which
in turn is a direct, wholly owned subsidiary of LFC Holdings, Inc., which in
turn is a direct, wholly owned subsidiary of
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Liberty Mutual Equity Corporation, which in turn is a direct, wholly owned
subsidiary of Liberty Mutual Insurance Company ("Liberty Mutual"). Liberty
Mutual is an underwriter of workers' compensation insurance and of property and
casualty insurance in the United States. Liberty Financial's address is 600
Atlantic Avenue, Boston, MA 02210. Liberty Mutual's address is 175 Berkeley
Street, Boston, MA 02117.
Under a Management Agreement (the "Agreement"), the Advisor has contracted
to furnish the Fund with investment research and recommendations or fund
management, respectively, and accounting and administrative personnel and
services, and with office space, equipment and other facilities. For these
services and facilities, the Fund pays a monthly fee based on the average weekly
net assets of the Fund for such month. Under the Agreement, any liability of the
Advisor to the Fund and/or its shareholders is limited to situations involving
the Advisor's own willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties.
The Agreement may be terminated with respect to the Fund at any time on 60
days' written notice by the Advisor or by the Trustees of the Fund or by a vote
of a majority of the outstanding voting securities of the Fund. The Agreement
will automatically terminate upon any assignment thereof and shall continue in
effect from year to year only so long as such continuance is approved at least
annually (i) by the Trustees of the Fund or by a vote of a majority of the
outstanding voting securities of the Fund and (ii) by vote of a majority of the
Trustees who are not interested persons (as such term is defined in the 1940
Act) of the Advisor or the Fund, cast in person at a meeting called for the
purpose of voting on such approval.
The Advisor pays all salaries of officers of the Fund. The Fund pays all
expenses not assumed by the Advisor, including, but not limited to, auditing,
legal, custodial, investor servicing and shareholder reporting expenses. The
Fund pays the cost of printing and mailing any prospectuses sent to
shareholders.
The Advisor also provides the Fund with bookkeeping and pricing services,
and for these services, the Fund pays the Advisor a monthly fee of $1,500 for
the first $50 million of Fund assets, plus a monthly percentage fee at the
following annual rates: 0.0233% on the next $950 million; 0.0167% on the next $1
billion; 0.0100% on the next $1 billion; and 0.0007% on the excess over $3
billion of the average weekly net assets of the Fund for such month.
The Advisor also acts as investment advisor to the other Liberty Funds
(described under "Fund Charges and Expenses -- Trustees' Fees"). The Advisor's
affiliate, CASI, advises other institutional, corporate, fiduciary and
individual clients for which CASI performs various services. Various officers
and Trustees of the Fund also serve as officers, directors or trustees of other
Liberty Funds and the other corporate or fiduciary clients of the Advisor. The
other investment companies and clients advised by the Advisor may sometimes
invest in securities and options in which the Fund will also invest. If the
Fund, such other investment companies and such clients desire to buy or sell the
same portfolio securities or options at about the same time, the purchases and
sales will normally be made as nearly as practicable on a pro rata basis in
proportion to the amounts desired to be purchased or sold by each. Although in
some cases these practices may have a detrimental effect on the price or volume
of the securities or options as far as the Fund is concerned, in most cases it
is believed that these practices should produce better executions. It is the
opinion of the Trustees that the desirability of retaining the Advisor as
investment advisor to the Liberty Funds outweighs the disadvantages, if any,
which might result from these practices.
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PORTFOLIO TRANSACTIONS
The Advisor is responsible for decisions to buy and sell securities and
other portfolio holdings for the Fund, the selection of brokers and dealers to
effect the transactions and the negotiation of brokerage commissions, if any.
Fixed-income securities are generally traded on a "net" basis with dealers
acting as principals for their own accounts without a stated commission,
although the price of the security will likely include a profit to the dealer.
In underwritten offerings, securities are usually purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
In placing orders for portfolio securities of the Fund, the Advisor is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Advisor will seek to execute each
transaction at a price and commission, if any, which provides the most favorable
total cost or proceeds reasonably attainable under the circumstances. In seeking
the most favorable price and execution, the Advisor, having in mind the Fund's
best interests, will consider all factors it deems relevant, including, by way
of illustration, price, the size of the transaction, the nature of the market
for the security, the amount of commission, the timing of the transaction taking
into account market prices and trends, the reputation, experience and financial
stability of the broker-dealer involved and the quality of service rendered by
the broker-dealer in other transactions. Though the Advisor generally seeks
reasonably competitive spreads or commissions, the Fund will not necessarily be
paying the lowest spread or commission available. Within the framework of the
policy of obtaining the most favorable price and efficient execution, the
Advisor will consider research and investment services provided by brokers and
dealers who effect or are parties to portfolio transactions with the Fund, the
Advisor or the Advisor's other clients. Such research and investment services
are those which brokerage houses customarily provide to institutional investors
and include statistical and economic data and research reports on particular
issuers and industries. Such services are used by the Advisor in connection with
all of its investment activities, and some of such services obtained in
connection with the execution of transactions for the Fund may be used in
managing other investment accounts. Conversely, brokers furnishing such services
may be selected for the execution of transactions for such other accounts, and
the services furnished by such brokers may be used by the Advisor in providing
investment management for the Fund. Commission rates are established pursuant to
negotiations based on the quality and quantity of execution services provided by
the broker or dealer in light of generally prevailing rates. The management fee
paid by the Fund will not be reduced because the Advisor and/or other clients
receive such services. The allocation of orders and the commission rates paid by
the Fund will be reviewed periodically by the Board of Trustees.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, as
amended (the "1934 Act"), the Advisor may cause the Fund to pay a broker-dealer
which provides "brokerage and research services" (as defined in the 1934 Act) to
the Advisor, an amount of disclosed commission for effecting a securities
transaction for the Fund in excess of the commission which another broker-dealer
would have charged for effecting that transaction.
The Fund recently commenced operations and has not paid any brokerage
commissions for the execution of portfolio transactions. The rate of portfolio
turnover for the Fund is expected to be approximately 50%.
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NET ASSET VALUE
Net asset value of the Fund will be determined no less frequently than as
of the close of regular trading on the New York Stock Exchange (generally 4:00
p.m. Eastern time) on the last Business Day of each week (generally Friday), and
at such other times as the Fund may authorize. The net asset value of the Fund
equals the value of the Fund's assets less the Fund's liabilities. Portfolio
securities for which market quotations are readily available are valued at
current market value. Short-term investments maturing in 60 days or less are
valued at amortized cost when the Advisor determines, pursuant to procedures
adopted by the Board of Trustees, that such cost approximates current market
value. All other securities and assets are valued at their fair value following
procedures adopted by the Board of Trustees.
In determining net asset value for the Fund, the Fund's custodian utilizes
the valuations of portfolio securities furnished by a pricing service approved
by the Board of Trustees. Securities for which quotations are not readily
available (which will constitute a majority of the securities held by the Fund)
are valued at fair value as determined by the pricing service using methods
which include consideration of the following: yields or prices of municipal
bonds of comparable quality, type of issue, coupon, maturity and rating;
indications as to value from dealers; and general market conditions. The pricing
service may employ electronic data processing techniques or a matrix system, or
both, to determine valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general
supervision of the Board of Trustees.
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THE AUCTION
GENERAL
The Amended and Restated By-Laws of Colonial Insured Municipal Fund,
adopted by the Board of Trustees (the "By-Laws"), provide that the Applicable
Rate for each Rate Period of Municipal Preferred after the Initial Rate Period
therefor shall be equal to the rate per annum that the Auction Agent advises has
resulted on the Business Day preceding the first day of such Subsequent Rate
Period (an "Auction Date") from implementation of the auction procedures (the
"Auction Procedures") set forth in the By-Laws and summarized below, in which
persons determine to hold or offer to sell or, based on dividend rates bid by
them, offer to purchase or sell such shares. Each periodic implementation of the
Auction Procedures is referred to herein as an "Auction." The following summary
is qualified by reference to the Auction Procedures set forth in the By-Laws.
As used herein with respect to shares of Municipal Preferred, (i)
"Applicable Rate" means the rate per annum at which dividends are payable on
such shares for any Rate Period thereof, (ii) "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 such shares, (iii)
"Business Day" means a day on which the New York Stock Exchange is open for
trading and is not a Saturday, Sunday or other day on which banks in New York
City are authorized by law to close, (iv) "Date of Original Issue" means the
date on which the Fund initially issued such shares, (v) "Dividend Payment Date"
means any date on which dividends on such shares are payable as provided under
"Description of Municipal Preferred -- Dividends -- General," (vi) "Dividend
Period" means the period from and including the Date of Original Issue of such
shares to but excluding the initial Dividend Payment Date for such shares and
any period thereafter from and including one Dividend Payment Date for such
shares to but excluding the next succeeding Dividend Payment Date for such
shares, (vii) "Existing Holder" means a Broker-Dealer (or any such other Person
as may be permitted by the Fund) that is listed on the records of the Auction
Agent as a holder of such shares, (viii) "Initial Rate Period" means the period
from and including the Date of Original Issue of such shares to but excluding
the initial Dividend Payment Date for such shares, (ix) "Potential Beneficial
Owner" means a customer of a Broker-Dealer that is not a Beneficial Owner of
such shares that wishes to purchase such shares, or that is a Beneficial Owner
that wishes to purchase additional such shares, (x) "Potential Holder" means a
Broker-Dealer (or any such other Person as may be permitted by the Fund) that is
not an Existing Holder of such shares or that is an Existing Holder of such
shares that wishes to become the Existing Holder of additional such shares, (xi)
"Rate Period" means the Initial Rate Period of such shares and any Subsequent
Rate Period, including any Special Rate Period, of such shares, (xii)
"Subsequent Rate Period" means any period from and including the first day
following the Initial Rate Period of such shares to but excluding the next
Dividend Payment Date for such shares and any period thereafter from and
including one Dividend Payment Date for such shares to but excluding the next
succeeding Dividend Payment Date for such shares; provided, however, that if any
Subsequent Rate Period is also a Special Rate Period, such term shall mean the
period commencing on the first day of such Special Rate Period and ending on the
last day of the last Dividend Period thereof, (xiii) "Minimum Rate Period" means
any Rate Period consisting of 7 Rate Period Days and (xiv) "Special Rate Period"
means any Subsequent Rate Period commencing on the date designated by the Fund,
as set forth under "Description of Municipal Preferred -- Dividends --
Designation of Special Rate Periods," and ending on the last day of the last
Dividend Period thereof.
AUCTION AGENCY AGREEMENT. The Fund will enter into an agreement (the
"Auction Agency Agreement") with Bankers Trust Company (together with any
successor bank or trust company or other entity entering into a similar
agreement with the Fund, the "Auction Agent") which provides, among other
things, that the Auction Agent will follow the Auction Procedures for purposes
of determining the Applicable Rate for shares of Municipal Preferred so long as
the Applicable Rate for such shares is to be based on the results of an Auction.
BROKER-DEALER AGREEMENTS. Each Auction requires the participation of one
or more broker-dealers. The Auction Agent will enter into an agreement with
Salomon Smith Barney Inc., and may enter into
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similar agreements (collectively, the "Broker-Dealer Agreements") with one or
more additional broker-dealers (collectively, the "Broker-Dealers") selected by
the Fund, which provide for the participation of Broker-Dealers in Auctions. See
"Broker-Dealers" below.
SECURITIES DEPOSITORY. The Depository Trust Company ("DTC," together with
any successor securities depository selected by the Fund, the "Securities
Depository") will act as the Securities Depository for the Agent Members with
respect to shares of Municipal Preferred. One certificate for all of the shares
of Municipal Preferred will be registered in the name of Cede & Co. ("Cede"), as
nominee of the Securities Depository. Such certificate will bear a legend to the
effect that such certificate is issued subject to the provisions restricting
transfers of shares of Municipal Preferred contained in the By-Laws. The Fund
will also issue stop-transfer instructions to the transfer agent for shares of
Municipal Preferred. Prior to the commencement of the right of holders of
Preferred Shares to elect a majority of the Fund's trustees, as described below
under "Description of Municipal Preferred -- Voting Rights," Cede will be the
holder of record of all shares of Municipal Preferred, and owners of shares of
Municipal Preferred will not be entitled to receive certificates representing
their ownership interest in such shares.
DTC, a New York-chartered limited purpose trust company, performs services
for its participants (including the Agent Members), some of whom (and/or their
representatives) own DTC. DTC maintains lists of its participants and will
maintain the positions (ownership interests) held by each such participant (the
"Agent Member") in shares of Municipal Preferred, whether for its own account or
as a nominee for another person.
AUCTION DATES; ADVANCE NOTICE OF ALLOCATION OF TAXABLE INCOME
The first Auction for shares of Series TH Municipal Preferred will be held
on Thursday, , 1999, the Business Day preceding the Dividend
Payment Date for the Initial Rate Period of Municipal Preferred. See
"Description of Municipal Preferred -- Dividends." Thereafter, Auctions will
normally be held every Thursday, and each Subsequent Rate Period will normally
begin on the following Friday, unless the then-current Rate Period is a Special
Rate Period or, in certain circumstances, the day that would normally be the
Auction Date or the first day of such Subsequent Rate Period is not a Business
Day. The Auction Date and the first day of the related Rate Period (also a
Dividend Payment Date) must be Business Days but need not be consecutive days.
See "Description of Municipal Preferred -- Dividends" for information concerning
the circumstances under which the first day of a Rate Period or the Auction
Date, or both, may be moved to a date other than such specified days.
Whenever the Fund intends to include any net capital gain or other income
taxable for federal income tax purposes in any dividend on shares of Municipal
Preferred, the Fund shall, in the case of Minimum Rate Periods or Special Rate
Periods of 28 Rate Period Days or fewer, and may, in the case of any other
Special Rate Period, notify the Auction Agent of the amount to be so included
not later than the Dividend Payment Date next preceding the Auction Date on
which the Applicable Rate for such dividend is to be established. Whenever the
Auction Agent receives such notice from the Fund, it will be required in turn to
notify each Broker-Dealer, who, on or prior to such Auction Date, in accordance
with its Broker-Dealer Agreement, will be required to notify its customers who
are Beneficial Owners and Potential Beneficial Owners believed by it to be
interested in submitting an Order in the Auction to be held on such Auction
Date. See also "Description of Municipal Preferred -- Dividends -- Gross-up
Payments" below.
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ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS
Prior to the Submission Deadline (as defined under "Submission of Orders by
Broker-Dealers to Auction Agent" below) on each Auction Date for shares of
Municipal Preferred:
(a) each Beneficial Owner of such shares may submit to its
Broker-Dealer by telephone or otherwise a:
(i) "Hold Order" -- indicating the number of outstanding shares of
Municipal Preferred, if any, that such Beneficial Owner desires to
continue to hold without regard to the Applicable Rate for such shares
for the next succeeding Rate Period;
(ii) "Bid" -- indicating the number of outstanding shares of
Municipal Preferred, if any, that such Beneficial Owner offers to sell
if the Applicable Rate for such shares for the next succeeding Rate
Period shall be less than the rate per annum specified by such
Beneficial Owner in such bid; and/or
(iii) "Sell Order" -- indicating the number of outstanding shares
of Municipal Preferred, if any, that such Beneficial Owner offers to
sell without regard to the Applicable Rate for such shares for the next
succeeding Rate Period; and
(b) Broker-Dealers shall contact customers who are Potential
Beneficial Owners by telephone or otherwise to determine whether such
customers desire to submit Bids, in which they will indicate the number of
shares of Municipal Preferred that they offer to purchase if the Applicable
Rate for such shares for the next succeeding Rate Period is not less than
the rate per annum specified in such Bids.
The communication to a Broker-Dealer of the foregoing information is herein
referred to as an "Order" and collectively as "Orders." A Beneficial Owner or a
Potential Beneficial Owner placing an Order with its Broker-Dealer is herein
referred to as a "Bidder" and collectively as "Bidders." The submission by a
Broker-Dealer of an Order to the Auction Agent shall likewise be referred to
herein as an "Order" and collectively as "Orders," and an Existing Holder or
Potential Holder who places an Order with the Auction Agent or on whose behalf
an Order is placed with the Auction Agent shall likewise be referred to herein
as a "Bidder" and collectively as "Bidders."
A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of Municipal Preferred then held by such
Beneficial Owner. A Bid placed by a Beneficial Owner specifying a rate higher
than the Applicable Rate determined in the Auction shall constitute an
irrevocable offer to sell the shares subject thereto. A Beneficial Owner that
submits a Bid to its Broker-Dealer having a rate higher than the Maximum Rate on
the Auction Date thereof will be treated as having submitted a Sell Order to its
Broker-Dealer. A Beneficial Owner that fails to submit to its Broker-Dealer
prior to the Submission Deadline for shares of Municipal Preferred an Order or
Orders covering all the outstanding shares of Municipal Preferred held by such
Beneficial Owner will be deemed to have submitted a Hold Order to its
Broker-Dealer covering the number of outstanding shares of Municipal Preferred
held by such Beneficial Owner and not subject to Orders submitted to its
Broker-Dealer; provided, however, that if a Beneficial Owner fails to submit to
its Broker-Dealer prior to the Submission Deadline for shares of Municipal
Preferred an Order or Orders covering all of the outstanding shares of Municipal
Preferred held by such Beneficial Owner for an Auction relating to a Special
Rate Period consisting of more than 28 Rate Period Days, such Beneficial Owner
will be deemed to have submitted a Sell Order to its Broker-Dealer covering the
number of outstanding shares of Municipal Preferred held by such Beneficial
Owner and not subject to Orders submitted to its Broker-Dealer. A Sell Order
shall constitute an irrevocable offer to sell the shares of Municipal Preferred
subject thereto at a price per share equal to $25,000. A Beneficial Owner of
shares of Municipal Preferred that offers to become the Beneficial Owner of
additional shares of Municipal Preferred is, for purposes of such offer, a
Potential Beneficial Owner.
A Potential Beneficial Owner of shares of Municipal Preferred may submit to
its Broker-Dealer Bids in which it offers to purchase shares of Municipal
Preferred if the Applicable Rate for the next Rate Period is not less than the
rate specified in such Bid. A Bid placed by a Potential Beneficial Owner
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specifying a rate not higher than the Maximum Rate shall constitute an
irrevocable offer to purchase the number of shares of Municipal Preferred
specified in such Bid if the rate determined in the Auction is equal to or
greater than the rate specified in such Bid.
As described more fully below under "Submission of Orders by Broker-Dealers
to Auction Agent," the Broker-Dealers will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves (unless otherwise permitted by the Fund)
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.
However, neither the Fund nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing. Any Order placed with the
Auction Agent by a Broker-Dealer as or on behalf of an Existing Holder or a
Potential Holder will be treated in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or a Potential Beneficial Owner, as
described in the preceding paragraph. Similarly, any failure by a Broker-Dealer
to submit to the Auction Agent an Order in respect of any shares of Municipal
Preferred 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 shares of Municipal Preferred held by it,
as described in the second preceding paragraph. 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" below.
Neither the Fund nor an affiliate may submit an Order in any Auction,
except that any Broker-Dealer that is an affiliate of the Fund may submit Orders
in an Auction, but only if such Orders are not for its own account.
The Auction Procedures include a pro rata allocation of shares for purchase
and sale, which may result in an Existing Holder continuing to hold or selling,
or a Potential Holder purchasing, a number of shares of Municipal Preferred that
is fewer than the number of shares of Municipal Preferred specified in its
Order. See "Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocation of Shares" below. To the extent the allocation procedures have
that result, Broker-Dealers that have designated themselves as Existing Holders
or Potential Holders in respect of customer Orders will be required to make
appropriate pro rata allocations among their respective customers. Each purchase
or sale shall be made for settlement on the Business Day next succeeding the
Auction Date at a price per share equal to $25,000. See "Notification of
Results; Settlement" below.
As described above, any Bid specifying a rate higher than the Maximum Rate
(as defined below) will (i) be treated as a Sell Order if submitted by a
Beneficial Owner or an Existing Holder and (ii) not be accepted if submitted by
a Potential Beneficial Owner or a Potential Holder. Accordingly, the Auction
Procedures establish the Maximum Rate as a maximum rate per annum that can
result from an Auction. 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" below.
As used herein, "Maximum Rate," when used with respect to shares of
Municipal Preferred on an Auction Date, means:
(i) in the case of any Auction Date which is not the Auction Date
immediately prior to the first day of any proposed Special Rate Period, the
product of (1) the Reference Rate on such Auction Date for the next Rate
Period and (2) the Rate Multiple on such Auction Date, unless such shares
have or had a Special Rate Period (other than a Special Rate Period of 28
Rate Period Days or fewer) and an Auction at which Sufficient Clearing Bids
existed has not yet occurred for a Minimum Rate Period after such Special
Rate Period, in which case the higher of:
(A) the dividend rate on such shares for the then-ending Rate
Period; and
(B) the product of (x) the higher of (I) the Reference Rate on such
Auction Date for a Rate Period equal in length to the then-ending Rate
Period, if such then-ending Rate Period was 364 Rate Period Days or
fewer, or the Treasury Note Rate on such Auction Date for a Rate Period
equal in length to the then-ending Rate Period, if such then-ending Rate
Period was more
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than 364 Rate Period Days, and (II) the Reference Rate on such Auction
Date for a Rate Period equal in length to such Special Rate Period, if
such Special Rate Period was 364 Rate Period Days or fewer, or the
Treasury Note Rate on such Auction Date for a Rate Period equal in
length to such Special Rate Period, if such Special Rate Period was more
than 364 Rate Period Days and (y) the Rate Multiple on such Auction
Date; or
(ii) in the case of any Auction Date which is the Auction Date
immediately prior to the first day of any proposed Special Rate Period, the
product of (1) the highest of (x) the Reference Rate on such Auction Date
for a Rate Period equal in length to the then-ending Rate Period, if such
then-ending Rate Period was 364 Rate Period Days or fewer, or the Treasury
Note Rate on such Auction Date for a Rate Period equal in length to the
then-ending Rate Period, if such then-ending Rate Period was more than 364
Rate Period Days, (y) the Reference Rate on such Auction Date for the
Special Rate Period for which the Auction is being held if such Special
Rate Period is 364 Rate Period Days or fewer or the Treasury Note Rate on
such Auction Date for the Special Rate Period for which the Auction is
being held if such Special Rate Period is more than 364 Rate Period Days,
and (z) the Reference Rate on such Auction Date for Minimum Rate Periods
and (2) the Rate Multiple on such Auction Date.
As used herein, "Reference Rate" shall mean (i) the higher of the Taxable
Equivalent of the Short-Term Municipal Bond Rate and the "AA" Composite
Commercial Paper Rate in the case of Minimum Rate Periods and Special Rate
Periods of 28 Rate Period Days or fewer; (ii) the "AA" Composite Commercial
Paper Rate in the case of Special Rate Periods of more than 28 Rate Period Days
but fewer than 183 Rate Period Days; and (iii) the Treasury Bill Rate in the
case of Special Rate Periods of more than 182 Rate Period Days but fewer than
365 Rate Period Days.
As used herein, "Taxable Equivalent of the Short-Term Municipal Bond Rate,"
on any date for any Minimum Rate Period or Special Rate Period of 28 Rate Period
Days or fewer, shall mean 90% of the quotient of (A) the per annum rate
expressed on an interest equivalent basis equal to the Standard & Poor's Kenny
30 day High Grade Index or any successor index (the "Kenny Index") (provided,
however, that any such successor index must be approved by Moody's (if Moody's
is then rating the shares of Municipal Preferred) and Standard & Poor's (if
Standard & Poor's is then rating the shares of Municipal Preferred)), made
available for the Business Day immediately preceding such date but in any event
not later than 8:30 a.m., Eastern time, on such date by Standard & Poor's J.J.
Kenny Evaluation Services or any successor thereto, based upon 30-day yield
evaluations at par of short-term bonds, the interest on which is excludable for
regular federal income tax purposes under the Code, of "high grade" component
issuers selected by Standard & Poor's J.J. Kenny Evaluation Services 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 greater of the maximum
marginal regular federal individual income tax rate applicable to ordinary
income or the maximum marginal regular federal corporate income tax rate
applicable to ordinary income (in each case expressed as a decimal); provided,
however, that if the Kenny Index is not made so available by 8:30 a.m., Eastern
time, on such date by Standard & Poor's J.J. Kenny Evaluation Services 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 greater of the maximum marginal
regular federal individual income tax rate applicable to ordinary income or the
maximum marginal regular federal corporate income tax rate applicable to
ordinary income (in each case expressed as a decimal).
As used herein, " 'AA' Composite Commercial Paper Rate," on any date for
any Rate Period, means:
(i) (A) in the case of any Minimum Rate Period or any Special Rate
Period of fewer than 49 Rate Period Days, the interest equivalent of the
30-day rate; provided, however, that if such Rate Period is a Minimum Rate
Period and the "AA" Composite Commercial Paper Rate is being used to
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determine the Applicable Rate when all of the outstanding shares of
Municipal Preferred are subject to Submitted Hold Orders, then the interest
equivalent of the seven-day rate, and (B) in the case of any Special Rate
Period of (1) 49 or more but fewer than 70 Rate Period Days, the interest
equivalent of the 60-day rate; (2) 70 or more but fewer than 85 Rate Period
Days, the arithmetic average of the interest equivalent of the 60-day and
90-day rates; (3) 85 or more but fewer than 99 Rate Period Days, the
interest equivalent of the 90-day rate; (4) 99 or more but fewer than 120
Rate Period Days, the arithmetic average of the interest equivalent of the
90-day and 120-day rates; (5) 120 or more but fewer than 141 Rate Period
Days, the interest equivalent of the 120-day rate; (6) 141 or more but
fewer than 162 Rate Period Days, the arithmetic average of the 120-day and
180-day rates; and (7) 162 or more but fewer than 183 Rate Period Days, the
interest equivalent of the 180-day rate, in each case on commercial paper
placed on behalf of issuers whose corporate bonds are rated "AA" by
Standard & Poor's or the equivalent of such rating by Standard & Poor's or
another rating agency, as 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 any such rate, then the arithmetic average of such rates, as
quoted on a discount basis or otherwise, by the Commercial Paper Dealers to
the Auction Agent for the close of business on the Business Day next
preceding such date.
If any Commercial Paper Dealer does not quote a rate required to determine the
"AA" Composite Commercial Paper Rate, the "AA" Composite Commercial Paper Rate
shall be determined on the basis of the quotation or quotations furnished by the
remaining Commercial Paper Dealer or Commercial Paper Dealers and any Substitute
Commercial Paper Dealer or Substitute Commercial Paper Dealers selected by the
Fund to provide such rate or rates not being supplied by any Commercial Paper
Dealer or Commercial Paper Dealers, as the case may be, or, if the Fund does not
select any such Substitute Commercial Paper Dealer or Substitute Commercial
Paper Dealers, by the remaining Commercial Paper Dealer or Commercial Paper
Dealers. For purposes of this definition, the "interest equivalent" of a rate
stated on a discount basis (a "discount rate") for commercial paper of a given
days' maturity shall be equal to the quotient (rounded upwards to the next
higher one-thousandth (0.001) of 1%) of (A) the discount rate divided by (B) the
difference between (x) 1.00 and (y) a fraction the numerator of which shall be
the product of the discount rate times the number of days in which such
commercial paper matures and the denominator of which shall be 360. As used
herein, "Commercial Paper Dealers" means Lehman Commercial Paper Incorporated,
Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated and
such other commercial paper dealer or dealers as the Fund may from time to time
appoint, or, in lieu of any thereof, their respective affiliates or successors.
As used herein, "Substitute Commercial Paper Dealer" means CS First Boston
Corporation or Morgan Stanley & Co. Incorporated or their respective affiliates
or successors, if such entity is a commercial paper dealer, provided that none
of such entities shall be a Commercial Paper Dealer.
As used herein, "Treasury Bill Rate," on any date for any Rate Period,
means:
(i) the bond equivalent yield, calculated in accordance with
prevailing industry convention, of the rate on the most recently auctioned
Treasury Bill with a remaining maturity closest to the length of such Rate
Period, as quoted in The Wall Street Journal on such date for the Business
Day next preceding such date; or
(ii) in the event that any such rate is not published in The Wall
Street Journal, then the bond equivalent yield, calculated in accordance
with prevailing industry convention, as calculated by reference to the
arithmetic average of the bid price quotations of the most recently
auctioned Treasury Bill with a remaining maturity closest to the length of
such Rate Period, as determined by bid price quotations as of the close of
business on the Business Day immediately preceding such date obtained from
the U.S. Government Securities Dealers to the Auction Agent.
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As used herein, "Treasury Note Rate," on any date for any Rate Period,
means:
(i) the yield on the most recently auctioned Treasury Note with a
remaining maturity closest to the length of such Rate Period, as quoted in
The Wall Street Journal on such date for the Business Day next preceding
such date; or
(ii) in the event that any such rate is not published in The Wall
Street Journal, then the yield as calculated by reference to the arithmetic
average of the bid price quotations of the most recently auctioned Treasury
Note with a remaining maturity closest to the length of such Rate Period,
as determined by bid price quotations as of the close of business on the
Business Day immediately preceding such date obtained from the U.S.
Government Securities Dealers to the Auction Agent.
For purposes of the foregoing, "Treasury Bill" means a direct obligation of
the U.S. government having a maturity at the time of issuance of 364 days or
less, and "Treasury Note" means a direct obligation of the U.S. government
having a maturity at the time of issuance of five years or less but more than
364 days. If any U.S. Government Securities Dealer does not quote a rate
required to determine the Treasury Bill Rate or the Treasury Note Rate, such
rate shall be determined on the basis of the quotation or quotations furnished
by the remaining U.S. Government Securities Dealer or U.S. Government Securities
Dealers and any Substitute U.S. Government Securities Dealers selected by the
Fund to provide such rate or rates not being supplied by any U.S. Government
Securities Dealer or U.S. Government Securities Dealers, as the case may be, or,
if the Fund does not select any such Substitute U.S. Government Securities
Dealer or Substitute U.S. Government Securities Dealers, by the remaining U.S.
Government Securities Dealer or U.S. Government Securities Dealers. As used
herein, "U.S. Government Securities Dealer" means Lehman Government Securities
Incorporated, Goldman, Sachs & Co., Salomon Smith Barney Inc. and Morgan
Guaranty Trust Company of New York or their respective affiliates or successors,
if such entity is a U.S. government securities dealer. As used herein,
"Substitute U.S. Government Securities Dealer" shall mean CS First Boston
Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated or their
respective affiliates or successors, if such entity is a U.S. government
securities dealer, provided that none of such entities shall be a U.S.
Government Securities Dealer.
The applicable "AA" Composite Commercial Paper Rates, Taxable Equivalent of
the Short-Term Municipal Bond Rates, Treasury Bill Rates and Treasury Note Rates
will be the rates announced on such Auction Date for the Business Day
immediately prior to such Auction Date.
The "Rate Multiple" will be a percentage, determined as set forth below,
based on the prevailing rating of shares of Municipal Preferred in effect at the
close of business on the Business Day next preceding such Auction Date:
<TABLE>
<CAPTION>
PREVAILING RATING PERCENTAGE
- ----------------- ----------
<S> <C>
"aa3"/AA- or higher......................................... 110%
"a3"/A-..................................................... 125%
"baa3"/BBB-................................................. 150%
"ba3"/BB-................................................... 200%
Below "ba3"/BB-............................................. 250%
</TABLE>
provided, however, that in the event the Fund has notified the Auction Agent of
its intent to allocate income taxable for federal income tax purposes to shares
of Municipal Preferred prior to the Auction establishing the Applicable Rate for
such shares, the applicable percentage in the foregoing table shall be divided
by the quantity 1 minus the maximum federal income tax rate applicable to the
character of the income distributed. If the shares of Municipal Preferred are
rated by only one rating agency, such rating will be the prevailing rating.
For purposes of this definition, the "prevailing rating" of shares of
Municipal Preferred shall be (i) "aa3"/AA- or higher if such shares have a
rating of "aa3" or better by Moody's and AA- or better by Standard & Poor's or
the equivalent of such ratings by such agencies or a substitute rating agency or
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<PAGE> 78
substitute rating agencies selected as provided below, (ii) if not "aa3"/AA- or
higher, then "a3"/A- if such shares have a rating of "a3" or better by Moody's
and A- or better by Standard & Poor's or the equivalent of such ratings by such
agencies or a substitute rating agency or substitute rating agencies selected as
provided below, (iii) if not "aa3"/AA- or higher or "a3"/A-, then "baa3"/BBB- if
such shares have a rating of "baa3" or better by Moody's and BBB- or better by
Standard & Poor's or the equivalent of such ratings by such agencies or a
substitute rating agency or substitute rating agencies selected as provided
below, (iv) if not "aa3"/AA- or higher, "a3"/A- or "baa3"/BBB-, then "ba3"/BB-
if such shares have a rating of "ba3" or better by Moody's and BB- or better by
Standard & Poor's or the equivalent of such ratings by such agencies or a
substitute rating agency or substitute rating agencies selected as provided
below, and (v) if not "aa3"/AA- or higher, "a3"/A-, "baa3"/BBB-, or "ba3"/BB-,
then Below "ba3"/BB-; provided, however, that if such shares are rated by only
one rating agency, the prevailing rating shall be determined without reference
to the rating of any other rating agency. The Fund will take all reasonable
action necessary to enable either Standard & Poor's or Moody's to provide a
rating for shares of Municipal Preferred. If neither Standard & Poor's nor
Moody's shall make such a rating available, Salomon Smith Barney Inc. or its
successor shall select at least one nationally recognized statistical rating
organization (as that term is used in the rules and regulations of the SEC under
the 1934 Act) to act as a substitute rating agency in respect of the shares of
Municipal Preferred, and the Fund shall take all reasonable action to enable
such rating agency to provide a rating for such shares.
SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT
Prior to 1:30 p.m., Eastern time, on each Auction Date, or such other time
on the Auction Date 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 Fund) as the Existing Holder or
Potential Holder, as the case may be, in respect of the shares of Municipal
Preferred 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 any rate specified in any Bid contains more than three figures to the
right of the decimal point, the Auction Agent will round such rate to the next
highest one-thousandth (0.001) of 1%.
If one or more Orders of an Existing Holder is submitted to the Auction
Agent covering in the aggregate more than the number of outstanding shares of
Municipal Preferred subject to an Auction held by such Existing Holder, such
Orders will be considered valid in the following order of priority:
(a) all Hold Orders will be considered valid, but only up to and
including in the aggregate the number of shares of Municipal Preferred held
by such Existing Holder, and, if the number of shares subject to such Hold
Orders exceeds the number of shares held by such Existing Holder, the
number of shares subject to each such Hold Order shall be reduced pro rata
to cover the number of shares held by such Existing Holder;
(b) (i) any Bid will be considered valid up to and including the
excess of the number of shares of Municipal Preferred held by such Existing
Holder over the number of shares of Municipal Preferred subject to any Hold
Orders referred to in clause (a) above;
(ii) subject to subclause (i), if more than one Bid of an Existing
Holder is submitted to the Auction Agent with the same rate and the
number of shares of Municipal Preferred subject to such Bids is greater
than such excess, such Bids will be considered valid up to and including
the amount of such excess, and the number of shares of Municipal
Preferred subject to each Bid with the same rate will be reduced pro
rata to cover the number of shares of Municipal Preferred equal to such
excess;
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<PAGE> 79
(iii) subject to subclauses (i) and (ii), if more than one Bid of
an Existing Holder is submitted to the Auction Agent with different
rates, such Bids shall be considered valid in the ascending order of
their respective rates up to and including the amount of such excess;
and
(iv) in any such event, the number, if any, of such shares subject
to any portion of Bids considered not valid in whole or in part under
this clause (b) will be treated as the subject of a Bid by or on behalf
of a Potential Holder at the rate specified therein; and
(c) all Sell Orders will be considered valid up to and including the
excess of the number of outstanding shares of Municipal Preferred held by
such Existing Holder over the sum of shares of Municipal Preferred subject
to valid Hold Orders referred to in clause (a) above and valid Bids
referred to in clause (b) above.
If more than one Bid of a Potential Holder for shares of Municipal
Preferred is submitted to the Auction Agent by or on behalf of any Potential
Holder, each Bid submitted will be a separate Bid with the rate and number of
shares therein specified.
DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE RATE
Not earlier than the Submission Deadline on each Auction Date, the Auction
Agent will assemble all valid 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 being herein 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 collectively as "Submitted Hold Orders," "Submitted
Bids" or "Submitted Sell Orders," as the case may be, or as "Submitted Orders")
and will determine the excess of the number of outstanding shares of Municipal
Preferred over the number of outstanding shares of Municipal Preferred subject
to Submitted Hold Orders (such excess being herein referred to as the "Available
Municipal Preferred") and whether Sufficient Clearing Bids have been made in the
Auction. "Sufficient Clearing Bids" will have been made if the number of
outstanding shares of Municipal Preferred that are the subject of Submitted Bids
of Potential Holders specifying rates not higher than the Maximum Rate equals or
exceeds the number of outstanding shares of Municipal Preferred that are the
subject of Submitted Sell Orders (including the number of shares subject to Bids
of Existing Holders specifying rates higher than the Maximum Rate).
If Sufficient Clearing Bids have been made, the Auction Agent will
determine the lowest rate specified in the Submitted Bids (the "Winning Bid
Rate") which, taking into account the rates in the Submitted Bids of Existing
Holders, would result in Existing Holders continuing to hold an aggregate number
of outstanding shares of Municipal Preferred which, when added to the number of
outstanding shares of Municipal Preferred to be purchased by Potential Holders,
based on the rates in their Submitted Bids, would equal not less than the
Available Municipal Preferred. In such event, the Winning Bid Rate will be the
Applicable Rate for the next Rate Period for all shares of Municipal Preferred.
If Sufficient Clearing Bids have not been made (other than because all of
the outstanding shares of Municipal Preferred are subject to Submitted Hold
Orders), the Applicable Rate for the next Rate Period for all shares of
Municipal Preferred will be equal to the Maximum Rate. If Sufficient Clearing
Bids have not been made, Beneficial Owners that have submitted or that are
deemed to have submitted Sell Orders may not be able to sell in the Auction all
shares of Municipal Preferred subject to such Sell Orders but will continue to
own shares of Municipal Preferred for the next Rate Period, dividends for which
may include income taxable to such Beneficial Owners. See "The
Auction -- Auction Dates; Advance Notice of Allocation of Taxable Income" above
and "Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares" below.
If all of the outstanding shares of Municipal Preferred are subject to
Submitted Hold Orders, the Applicable Rate for the next Rate Period will be the
lesser of the Kenny Index (if such Rate Period consists of fewer than 183 Rate
Period Days) or the product of (i) (1) the "AA" Composite Commercial Paper Rate
on the Auction Date for such Rate Period, if such Rate Period consists of fewer
than 183 Rate Period Days; (2) the Treasury Bill Rate on such Auction Date for
such Rate Period, if such Rate Period
B-22
<PAGE> 80
consists of more than 182 but fewer than 365 Rate Period Days; or (3) the
Treasury Note Rate on such Auction Date for such Rate Period, if such Rate
Period is more than 364 Rate Period Days (the rate described in the foregoing
clause (i)(1), (2) or (3) as applicable, being referred to herein as the
"Benchmark Rate") and (ii) 1 minus the greater of the maximum marginal regular
federal individual income tax rate applicable to ordinary income or the maximum
marginal regular federal corporate income tax rate applicable to ordinary
income; provided, however, that if the Fund has notified the Auction Agent of
its intent to allocate to shares of Municipal Preferred in such Rate Period any
net capital gain or other income taxable for federal income tax purposes
("Taxable Income"), the Applicable Rate for shares of Municipal Preferred for
such Rate Period will be (A) if the Taxable Yield Rate (as defined below) is
greater than the Benchmark Rate, then the Benchmark Rate, or (B) if the Taxable
Yield Rate is less than or equal to the Benchmark Rate, then the rate equal to
the sum of (x) the lesser of the Kenny Index (if such Rate Period consists of
fewer than 183 Rate Period Days) or the product of the Benchmark Rate multiplied
by the factor set forth in the preceding clause (ii) and (y) the product of the
greater of the maximum marginal regular federal individual income tax rate
applicable to ordinary income or the maximum marginal regular federal corporate
income tax applicable to ordinary income, multiplied by the Taxable Yield Rate.
For purposes of the foregoing, "Taxable Yield Rate" means the rate determined by
(a) dividing the amount of Taxable Income available for distribution per share
of Municipal Preferred by the number of days in the Dividend Period in respect
of which such Taxable Income is contemplated to be distributed, (b) multiplying
the amount determined in (a) above by 365 (in the case of a Dividend Period of 7
Rate Period Days) or 360 (in the case of any other Dividend Period), and (c)
dividing the amount determined in (b) above by $25,000. In calculating the "AA"
Composite Commercial Paper Rate, the Treasury Bill Rate and the Treasury Note
Rate for such purpose, the rates used will be the rates or yields specified in
the applicable definitions of "AA" Composite Commercial Paper Rate, Treasury
Bill Rate and Treasury Note Rate set forth under "The Auction -- Orders by
Existing Holders and Potential Holders."
ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES
Based on the determinations made under "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" above and, subject to the
discretion of the Auction Agent to round and allocate certain shares 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 shares of Municipal
Preferred will sell, continue to hold and/or purchase such shares as set forth
below. Existing Holders that submitted or were deemed to have submitted Hold
Orders (or on whose behalf Hold Orders were submitted or deemed to have been
submitted) will continue to hold the shares of Municipal Preferred subject to
such Hold Orders.
If Sufficient Clearing Bids have been made:
(a) Each Existing Holder that placed or on whose behalf was placed a
Submitted Sell Order or Submitted Bid specifying any rate higher than the
Winning Bid Rate will sell the outstanding shares of Municipal Preferred
subject to such Submitted Sell Order or Submitted Bid;
(b) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate lower than the Winning Bid Rate will
continue to hold the outstanding shares of Municipal Preferred subject to
such Submitted Bid;
(c) Each Potential Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate lower than the Winning Bid Rate will
purchase the number of outstanding shares of Municipal Preferred subject to
such Submitted Bid;
(d) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to the Winning Bid Rate will continue
to hold the shares of Municipal Preferred subject to such Submitted Bid,
unless the number of outstanding shares of Municipal Preferred subject to
all such Submitted Bids is greater than the number of shares of Municipal
Preferred in excess of the Available Municipal Preferred over the number of
shares of Municipal Preferred accounted for in clauses (b) and (c) above,
in which event each Existing Holder with such a Submitted Bid will
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<PAGE> 81
continue to hold a number of outstanding shares of Municipal Preferred
subject to such Submitted Bid determined on a pro rata basis based on the
number of outstanding shares of Municipal Preferred subject to all such
Submitted Bids of such Existing Holders; and
(e) Each Potential Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to the Winning Bid Rate will purchase
any shares of Available Municipal Preferred not accounted for in clauses
(b) through (d) above on a pro rata basis based on the outstanding shares
of Municipal Preferred subject to all such Submitted Bids.
If Sufficient Clearing Bids have not been made (unless this results because
all outstanding shares of Municipal Preferred are subject to Submitted Hold
Orders):
(a) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to or lower than the Maximum Rate
will continue to hold the outstanding shares of Municipal Preferred subject
to such Submitted Bid;
(b) Each Potential Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to or lower than the Maximum Rate
will purchase the number of outstanding shares of Municipal Preferred
subject to such Submitted Bid; and
(c) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate higher than the Maximum Rate or a Submitted
Sell Order will sell a number of shares of Municipal Preferred determined
on a pro rata basis based on the number of outstanding shares of Municipal
Preferred subject to all such Submitted Bids and Submitted Sell Orders.
If, as a result of the pro rata allocation described in clauses (d) or (e)
of the second preceding paragraph or clause (c) of the next preceding paragraph,
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
Municipal Preferred, the Auction Agent will, in such manner as, in its sole
discretion, it will determine, round up or down to the nearest whole share the
number of shares of Municipal Preferred being sold or purchased on such Auction
Date so that the number of shares sold or purchased by each Existing Holder or
Potential Holder will be whole shares of Municipal Preferred. If as a result of
the pro rata allocation described in clause (e) of the second preceding
paragraph, any Potential Holder would be entitled or required to purchase less
than a whole share of Municipal Preferred, the Auction Agent will, in such
manner as, in its sole discretion, it will determine, allocate shares of
Municipal Preferred for purchase among Potential Holders so that only whole
shares of Municipal Preferred are purchased by any such Potential Holder, even
if such allocation results in one or more of such Potential Holders not
purchasing shares of Municipal Preferred.
NOTIFICATION OF RESULTS; SETTLEMENT
The Auction Agent will be required to advise each Broker-Dealer that
submitted an Order of the Applicable Rate for the next Rate Period and, if the
Order was a Bid or Sell Order, whether such Bid or Sell Order was accepted or
rejected, in whole or in part, by telephone by approximately 3:00 p.m., Eastern
time, on each Auction Date. Each Broker-Dealer that submitted an Order for the
account of a customer will then be required to advise such customer of the
Applicable Rate for the next Rate Period and, if such Order was a Bid or a Sell
Order, whether such Bid or Sell Order was accepted or rejected, in whole or in
part, will be required to confirm purchases and sales with each customer
purchasing or selling shares of Municipal Preferred as a result of the Auction
and will be required to advise each customer purchasing or selling shares of
Municipal Preferred as a result of the Auction 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. The Auction Agent will be required to record each transfer of
shares of Municipal Preferred on the registry of Existing Holders to be
maintained by the Auction Agent. See "General" above.
In accordance with the Securities Depository's normal procedures, on the
Business Day after the Auction Date, the transactions described above will be
executed through the Securities Depository and the
B-24
<PAGE> 82
accounts of the respective Agent Members at the Securities Depository will be
debited and credited and shares delivered as necessary to effect the purchases
and sales of shares of Municipal Preferred as determined in the 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 against delivery by their Agent
Members in same-day funds. The settlement procedures to be used with respect to
Auctions for shares of Municipal Preferred are set forth in Appendix C hereto.
If any Existing Holder selling shares of Municipal Preferred in an Auction
fails to deliver such shares, the Broker-Dealer of any person that was to have
purchased shares of Municipal Preferred in such Auction may deliver to such
person a number of whole shares of Municipal Preferred that is less than the
number of shares that otherwise was to be purchased by such person. In such
event, the number of shares of Municipal Preferred to be so delivered shall be
determined by such Broker-Dealer. Delivery of such lesser number of shares shall
constitute good delivery.
CONCERNING THE AUCTION AGENT
The Auction Agent is acting as agent for the Fund 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
Agency Agreement and will not be liable for any error of judgment made in good
faith unless the Auction Agent will have been negligent in ascertaining the
pertinent facts.
The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of shares of Municipal Preferred, a list of initial owners of
such shares provided by the Fund, the results of Auctions, notices from any
Broker-Dealer (or other Person, if permitted by the Fund) with respect to
transfers described in the Prospectus under "The Auction -- Secondary Market
Trading and Transfer of Municipal Preferred" and notices from the Fund. The
Auction Agent is not required to accept any such notice for an Auction unless it
is received by the Auction Agent by 3:00 p.m., Eastern time, on the Business Day
preceding such Auction.
The Auction Agent will be the transfer agent, registrar, dividend
disbursing agent and redemption agent for shares of Municipal Preferred. The
registrar for shares of Municipal Preferred will send notices to holders of
shares of Municipal Preferred of any special meetings at which holders of
Municipal Preferred have the right to elect trustees of the Fund. See
"Description of Municipal Preferred -- Voting Rights" below.
The Auction Agent may terminate the Auction Agency Agreement upon notice to
the Fund on a date no earlier than 45 days after such notice. If the Auction
Agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Fund may remove the Auction
Agent provided that prior to such removal the Fund shall have entered into such
an agreement with a successor Auction Agent.
BROKER-DEALERS
The Auction Agent after each Auction for shares of Municipal Preferred will
pay to each Broker-Dealer, from funds provided by the Fund, a service charge at
the annual rate of 1/4 of 1% in the case of any Auction immediately preceding a
Rate Period of less than one year, or a percentage agreed to by the Fund and the
Broker-Dealers in the case of any Auction immediately preceding a Rate Period of
one year or longer, of the purchase price of shares of Municipal Preferred
placed by such Broker-Dealer at such Auction. For the purposes of the preceding
sentence, shares of Municipal Preferred will be placed by a Broker-Dealer if
such shares were (i) the subject of Hold Orders deemed to have been submitted to
the Auction Agent by the Broker-Dealer and were acquired by such Broker-Dealer
for its own account or were acquired by such Broker-Dealer for its customers who
are Beneficial Owners or (ii) the subject of an Order submitted by such
Broker-Dealer that is (A) a Submitted Bid of an Existing Holder that resulted
B-25
<PAGE> 83
in such Existing Holder continuing to hold such shares as a result of the
Auction or (B) a Submitted Bid of a Potential Holder that resulted in such
Potential Holder purchasing such shares as a result of the Auction or (C) a
valid Hold Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
The Broker-Dealer Agreements provide that a Broker-Dealer (other than an
affiliate of the Fund) may submit Orders in Auctions for its own account, unless
the Fund notifies all Broker-Dealers that they may no longer do so, in which
case Broker-Dealers may continue to submit Hold Orders and Sell Orders for their
own accounts. Any Broker-Dealer that is an affiliate of the Fund may submit
Orders in Auctions, but only if such Orders are not for its own account. If a
Broker-Dealer submits an Order for its own account in any Auction, it might have
an advantage over other Bidders because it would have knowledge of all Orders
submitted by it in that Auction; such Broker-Dealer, however, would not have
knowledge of Orders submitted by other Broker-Dealers in that Auction.
The Broker-Dealers expect, but are not obligated, to maintain a secondary
trading market in shares of Municipal Preferred outside of Auctions. There can
be no assurance that a secondary trading market in shares of Municipal Preferred
will develop or, if it does develop, that it will provide owners with liquidity
of investment. The shares of Municipal Preferred will not be registered on any
stock exchange or on the National Association of Securities Dealers Automated
Quotations system.
DESCRIPTION OF MUNICIPAL PREFERRED
The descriptions of the shares of Municipal Preferred contained in the
Prospectus and this Statement of Additional Information do not purport to be
complete and are subject to and qualified in their entireties by reference to
the Declaration and the By-Laws. Copies of the Declaration and the form of the
By-Laws are filed as exhibits to the Registration Statement of which the
Prospectus and this Statement of Additional Information are a part and may be
inspected, and copies thereof may be obtained, as described under "Further
Information" in the Prospectus.
GENERAL
The shares of Municipal Preferred will rank on a parity with each other,
with shares of any other series of Municipal Preferred and with shares of any
other series of Preferred Shares as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund.
DIVIDENDS
GENERAL. The holders of shares of Municipal Preferred offered pursuant to
the Prospectus will be entitled to receive, when, as and if declared by the
Board of Trustees, out of funds legally available therefor in accordance with
the Declaration, the By-Laws and applicable law, cumulative cash dividends at
the Applicable Rate thereof, determined as set forth below under "Determination
of Dividend Rate," and no more (except as otherwise provided below under
"Gross-up Payments"), payable on the respective dates determined as set forth
below. Holders of shares of Municipal Preferred shall not be entitled to any
dividend, whether payable in cash, property or shares, in excess of full
cumulative dividends on shares of Municipal Preferred. No interest, or sum of
money in lieu of interest, will be payable in respect of any dividend payment or
payments on shares of Municipal Preferred which may be in arrears, and, except
as otherwise provided herein, no additional sum of money will be payable in
respect of any such arrearage.
Dividends on shares of Municipal Preferred shall accumulate at the
Applicable Rate from the Date of Original Issue and, except as provided below,
shall be payable on Friday, , 1999, and thereafter on each Friday;
provided, however, that (1) if the Friday on which dividends would otherwise be
payable as set forth above is not a Business Day, then dividends shall be
payable instead on the first Business Day that falls before such
and (2) the Fund in its discretion may
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establish Dividend Payment Dates in respect of any Special Rate Period of such
shares consisting of more than 28 Rate Period Days that differ from those set
forth above; provided, however, that such dates shall be set forth in the Notice
of Special Rate Period relating to such Special Rate Period, as delivered to the
Auction Agent and filed with the Secretary of the Fund; and further provided
that (1) any such Dividend Payment Date shall be a Business Day and (2) the last
Dividend Payment Date in respect of such Special Rate Period shall be the
Business Day immediately following the last day thereof, as such last day is
determined as set forth below under "Designation of Special Rate Periods."
The amount of dividends per share payable on shares of Municipal Preferred
on any date on which dividends shall be payable on such shares shall be computed
by multiplying the Applicable Rate in effect for such Dividend Period or
Dividend Periods or part thereof for which dividends have not been paid by a
fraction, the numerator of which shall be the number of days in such Dividend
Period or Dividend Periods or part thereof and the denominator of which shall be
365 if such Dividend Period consists of 7 Rate Period Days and 360 for all other
Dividend Periods, and applying the rate obtained against $25,000. Any dividend
payment made on shares of Municipal Preferred shall first be credited against
the earliest accumulated but unpaid dividends due with respect to such shares.
Each dividend on shares of Municipal Preferred will be paid on the Dividend
Payment Date therefor to the holders of record as their names appear on the
record books of the Fund on the Business Day next preceding such 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 of record as their names appear on the record books of the Fund on
such date, not exceeding 15 days preceding the payment date thereof, as may be
fixed by the Board of Trustees.
The Securities Depository, in accordance with its current procedures, is
expected to credit on each Dividend Payment Date dividends received from the
Fund to the accounts of the respective Agent Members in next-day funds. Each of
the initial Broker-Dealers, however, has represented to the Fund that such
Broker-Dealer (or if such Broker-Dealer does not act as Agent Member, the Agent
Member designated by such Broker-Dealer) will make such dividend payments
available in same-day funds on each Dividend Payment Date to Beneficial Owners
that use such Broker-Dealer or its designee as Agent Member. A Beneficial Owner
of shares of Municipal Preferred that does not use one of the initial Broker-
Dealers or a designee thereof as its Agent Member should contact the Agent
Member used by such Beneficial Owner to determine whether such Agent Member will
make dividend payments available to such Beneficial Owner in next-day or
same-day funds. If any Agent Member does not make such dividends available in
same-day funds to a Beneficial Owner, such Beneficial Owner who uses such Agent
Member would not have same-day funds available to it until the next Business
Day, which, in the case of a Dividend Payment Date that is a Friday, would be
the following Monday if it is a Business Day.
DETERMINATION OF DIVIDEND RATE. The dividend rates on shares of Municipal
Preferred offered pursuant to the Prospectus during the period from and after
the Date of Original Issue thereof to and including the last day of the Initial
Rate Period therefor will be equal to the rate per annum set forth with respect
to such shares on the cover page of the Prospectus. For each Subsequent Rate
Period thereafter, the dividend rate on such shares will be equal to the rate
per annum that results from an Auction on the Auction Date next preceding such
Subsequent Rate Period; provided, however, if:
(i) an Auction for any Subsequent Rate Period is not held for any
reason other than as described below, the dividend rate on such shares for
such Subsequent Rate Period will be the Maximum Rate on the Auction Date
therefor;
(ii) any Failure to Deposit shall have occurred with respect to shares
of Municipal Preferred during any Rate Period thereof (other than any
Special Rate Period of more than 364 Rate Period Days or any Rate Period
succeeding any Special Rate Period of more than 364 Rate Period Days during
which a Failure to Deposit occurred that has not been cured), but, prior to
12:00 noon, Eastern time, on the third Business Day next succeeding the
date on which such Failure to Deposit occurred, such Failure to Deposit
shall have been cured in accordance with the next succeeding
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paragraph and the Fund shall have paid to the Auction Agent a late charge
("Late Charge") equal to the sum of (1) if such Failure to Deposit
consisted of the failure timely to pay to the Auction Agent the full amount
of dividends with respect to any Dividend Period of such shares, an amount
computed by multiplying (x) 200% of the Reference Rate for the Rate Period
during which such Failure to Deposit occurs on the Dividend Payment Date
for such Dividend Period by (y) a fraction, the numerator of which shall be
the number of days for which such Failure to Deposit has not been cured in
accordance with the next succeeding paragraph (including the day such
Failure to Deposit occurs and excluding the day such Failure to Deposit is
cured) and the denominator of which shall be 360, and applying the rate
obtained against the aggregate Liquidation Preference of the outstanding
shares of Municipal Preferred and (2) if such Failure to Deposit consisted
of the failure timely to pay to the Auction Agent the Redemption Price of
the shares of Municipal Preferred, if any, for which a Notice of Redemption
has been mailed by the Fund, an amount computed by multiplying (x) 200% of
the Reference Rate for the Rate Period during which such Failure to Deposit
occurs on the redemption date by (y) a fraction, the numerator of which
shall be the number of days for which such Failure to Deposit is not cured
in accordance with the next succeeding paragraph (including the day such
Failure to Deposit occurs and excluding the day such Failure to Deposit is
cured) and the denominator of which shall be 360, and applying the rate
obtained against the aggregate Liquidation Preference of the outstanding
shares of Municipal Preferred to be redeemed, no Auction will be held in
respect of shares of Municipal Preferred for the Subsequent Rate Period
thereof and the dividend rate for such Subsequent Rate Period will be the
Maximum Rate on the Auction Date for such Subsequent Rate Period;
(iii) any Failure to Deposit shall have occurred with respect to
shares of Municipal Preferred during any Rate Period thereof (other than
any Special Rate Period of more than 364 Rate Period Days or any Rate
Period succeeding any Special Rate Period of more than 364 Rate Period Days
during which a Failure to Deposit occurred that has not been cured), and,
prior to 12:00 noon, Eastern time, on the third Business Day next
succeeding the date on which such Failure to Deposit occurred, such Failure
to Deposit shall not have been cured in accordance with the next succeeding
paragraph or the Fund shall not have paid the applicable Late Charge to the
Auction Agent, no Auction will be held in respect of Municipal Preferred
for the first Subsequent Rate Period thereof thereafter (or for any Rate
Period thereafter to and including the Rate Period during which (1) such
Failure to Deposit is cured in accordance with the next succeeding
paragraph and (2) the Fund pays the applicable Late Charge to the Auction
Agent (the condition set forth in this clause (2) to apply only in the
event Moody's is rating such shares at the time the Fund cures such Failure
to Deposit), in each case no later than 12:00 noon, Eastern time, on the
fourth Business Day prior to the end of such Rate Period), and the dividend
rate for shares of Municipal Preferred for each such Subsequent Rate Period
will be a rate per annum equal to the Maximum Rate on the Auction Date for
such Subsequent Rate Period (but with the prevailing rating for such
shares, for purposes of determining such Maximum Rate, being deemed to be
"Below 'ba3'/BB-"); or
(iv) any Failure to Deposit shall have occurred with respect to shares
of Municipal Preferred during a Special Rate Period thereof of more than
364 Rate Period Days, or during any Rate Period thereof succeeding any
Special Rate Period of more than 364 Rate Period Days during which a
Failure to Deposit occurred that has not been cured, and, prior to 12:00
noon, Eastern time, on the fourth Business Day preceding the Auction Date
for the Rate Period subsequent to such Rate Period, such Failure to Deposit
shall not have been cured in accordance with the next succeeding paragraph
or, in the event Moody's is then rating such shares, the Fund shall not
have paid the applicable Late Charge to the Auction Agent (such Late
Charge, for purposes of this subparagraph (iv), to be calculated by using,
as the Reference Rate, the Reference Rate applicable to a Rate Period (x)
consisting of more than 182 Rate Period Days but fewer than 365 Rate Period
Days and (y) commencing on the date on which the Rate Period during which
Failure to Deposit occurs commenced), no Auction will be held in respect of
shares of Municipal Preferred for such Subsequent Rate Period (or for any
Rate Period thereafter to and including the Rate Period during which (1)
such Failure to Deposit is cured in accordance with the next succeeding
paragraph and
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<PAGE> 86
(2) the Fund pays the applicable Late Charge to the Auction Agent (the
condition set forth in this clause (2) to apply only in the event Moody's
is rating such shares at the time the Fund cures such Failure to Deposit),
in each case no later than 12:00 noon, Eastern time, on the fourth Business
Day prior to the end of such Rate Period), and the dividend rate for shares
of Municipal Preferred for each such Subsequent Rate Period shall be a rate
per annum equal to the Maximum Rate on the Auction Date for such Subsequent
Rate Period (but with the prevailing rating for such shares, for purposes
of determining such Maximum Rate, being deemed to be "Below 'ba3'/BB-")
(the rate per annum at which dividends are payable on shares of Municipal
Preferred for any Rate Period being herein referred to as the "Applicable
Rate" for such shares).
A Failure to Deposit with respect to shares of Municipal Preferred shall
have been cured (if such Failure to Deposit is not solely due to the willful
failure of the Fund to make the required payments to the Auction Agent) with
respect to any Rate Period if, within the respective time periods described
immediately above, the Fund shall have paid to the Auction Agent (i) all
accumulated and unpaid dividends on the shares of Municipal Preferred and (ii)
without duplication, the Redemption Price for the shares of Municipal Preferred,
if any, for which a Notice of Redemption has been mailed; provided, however,
that the foregoing clause (ii) shall not apply to the Fund's failure to pay the
Redemption Price in respect of shares of Municipal Preferred when the related
Notice of Redemption provides that redemption of such shares is subject to one
or more conditions precedent and any such condition precedent shall not have
been satisfied at the time or times and in the manner specified in such Notice
of Redemption.
The Fund shall pay to the Auction Agent, not later than 12:00 noon Eastern
time on the Business Day next preceding each Dividend Payment Date for shares of
Municipal Preferred, an aggregate amount of funds available on the next Business
Day in The City of New York, New York, equal to the dividends to be paid to all
Holders of such shares on such Dividend Payment Date. All moneys paid to the
Auction Agent for the payment of dividends (or for payment of any Late Charge)
shall be held in trust for the payment of such dividends (and any such Late
Charge) by the Auction Agent for the benefit of the Holders specified above. Any
moneys paid to the Auction Agent in accordance with the foregoing but not
applied by the Auction Agent to the payment of dividends (and any such Late
Charge) will, to the extent permitted by law, be repaid to the Fund at the end
of 90 days from the date on which such moneys were so to have been applied.
GROSS-UP PAYMENTS. Holders of shares of Municipal Preferred shall be
entitled to receive, when, as and if declared by the Board of Trustees, out of
funds legally available therefor in accordance with the Declaration, the By-Laws
and applicable law, dividends in an amount equal to the aggregate Gross-up
Payment in accordance with the following:
If, in the case of any Minimum Rate Period or any Special Rate Period of 28
Rate Period Days or fewer, the Fund allocates any net capital gain or other
income taxable for federal income tax purposes to a dividend paid on shares of
Municipal Preferred without having given advance notice thereof to the Auction
Agent as described above under "The Auction -- Auction Dates; Advance Notice of
Allocation of Taxable Income" (such allocation is referred to herein as a
"Taxable Allocation") solely by reason of the fact that such allocation is made
retroactively as a result of the redemption of all or a portion of the
outstanding shares of Municipal Preferred or the dissolution, liquidation or
winding up of the affairs of the Fund, the Fund will, prior to the end of the
calendar year in which such dividend was paid, provide notice thereof to the
Auction Agent and direct the Fund's dividend disbursing agent to send such
notice with a Gross-up Payment to each holder of shares (initially Cede & Co.,
as nominee of the Securities Depository) that was entitled to such dividend
payment during such calendar year at such holder's address as the same appears
or last appeared on the record books of the Fund.
If, in the case of any Special Rate Period of more than 28 Rate Period
Days, the Fund makes a Taxable Allocation to a dividend paid on shares of
Municipal Preferred, the Fund shall, prior to the end of the calendar year in
which such dividend was paid, provide notice thereof to the Auction Agent and
direct the Fund's dividend disbursing agent to send such notice with a Gross-up
Payment to each holder of
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<PAGE> 87
shares that was entitled to such dividend payment during such calendar year at
such holder's address as the same appears or last appeared on the record books
of the Fund.
The Fund shall not be required to make Gross-up Payments with respect to
any net capital gain or other taxable income determined by the Internal Revenue
Service to be allocable in a manner different from that allocated by the Fund.
A "Gross-up Payment" in respect of any dividend means payment to a holder
of shares of Municipal Preferred of an amount which, giving effect to the
Taxable Allocations made with respect to such dividend, would cause such
holder's after-tax returns (after any applicable federal income tax
consequences, taking into account both the Taxable Allocations and the Gross-up
Payment) to be equal to the after-tax return the holder would have received if
no such Taxable Allocations had occurred. Such Gross-up Payment shall be
calculated: (i) without consideration being given to the time value of money;
(ii) assuming that no holder of shares of Municipal Preferred is subject to the
federal alternative minimum tax with respect to dividends received from the
Fund; and (iii) assuming that each holder of shares of Municipal Preferred is
taxable at the maximum federal income tax rate applicable to the character of
income distributed in effect at the time such Gross-up Payment is made.
RESTRICTIONS ON DIVIDENDS AND OTHER PAYMENTS. Under the 1940 Act, the
Board of Trustees may not declare any dividend (except a dividend payable in
Common Shares), or declare any other distribution, upon Common Shares, or
purchase Common Shares, unless in every such case the Preferred Shares,
including the shares of Municipal Preferred, have, at the time of any such
declaration or purchase (and after giving effect thereto), an asset coverage (as
defined in and determined pursuant to the 1940 Act) of at least 200% (or such
other percentage as may in the future be required by law).
In addition, for so long as any shares of Municipal Preferred are
outstanding, except as set forth in the following paragraph or otherwise
described herein, (A) the Fund may not declare, pay or set apart for payment any
dividend or other distribution (other than a dividend or distribution paid in
shares of, or in options, warrants or rights to subscribe for or purchase,
Common Shares or other shares, if any, ranking junior to the shares of Municipal
Preferred as to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Fund) in respect of
Common Shares or any other shares of the Fund ranking junior to or on a parity
with the shares of Municipal Preferred as to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund, or call for redemption, redeem, purchase or otherwise
acquire for consideration any Common Shares or any other such junior shares
(except by conversion into or exchange for shares of the Fund ranking junior to
the shares of Municipal Preferred as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund), or any such parity shares (except by conversion into or
exchange for shares of the Fund ranking junior to or on a parity with the shares
of Municipal Preferred as to payment of dividends and the distribution of assets
upon dissolution, liquidation or winding up of the affairs of the Fund), unless
(1) full cumulative dividends on shares of Municipal Preferred through their
most recently ended Dividend Period shall have been paid or shall have been
declared and sufficient funds for the payment thereof deposited with the Auction
Agent and (2) the Fund has redeemed the full number of shares of Municipal
Preferred required to be redeemed by any provision for mandatory redemption
pertaining thereto and (B) if either Moody's or Standard & Poor's is rating the
shares of Municipal Preferred, the Fund may not declare, pay or set apart for
payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or in options, warrants or rights to subscribe
for or purchase, Common Shares or other shares, if any, ranking junior to shares
of Municipal Preferred as to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up of the affairs of the Fund)
in respect of Common Shares or any other shares of the Fund ranking junior to
shares of Municipal Preferred as to the payment of dividends or the distribution
of assets upon dissolution, liquidation or winding up of the affairs of the
Fund, or call for redemption, redeem, purchase or otherwise acquire for
consideration any Common Shares or any other such junior shares (except by
conversion into or exchange for shares of the Fund ranking junior to the shares
of Municipal Preferred as to the payment of dividends or the distribution of
assets upon dissolution, liquidation or winding up of the affairs of the Fund),
unless immediately after such transaction the
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Discounted Value of Moody's Eligible Assets or Standard & Poor's Eligible
Assets, or both, as the case may be, would at least equal the Municipal
Preferred Basic Maintenance Amount (see "Description of Municipal
Preferred -- Rating Agency Guidelines" and "-- Redemption").
Except as set forth in the next sentence, no dividends shall be declared or
paid or set apart for payment on any class or series of shares of beneficial
interest of the Fund ranking, as to the payment of dividends, on a parity with
shares of Municipal Preferred for any period unless full cumulative dividends
have been or contemporaneously are declared and paid on the shares of Municipal
Preferred through their most recent Dividend Payment Date. When dividends are
not paid in full upon the shares of Municipal Preferred through their most
recent Dividend Payment Date or upon any other class or series of shares ranking
on a parity as to the payment of dividends with shares of Municipal Preferred
through their most recent respective dividend payment dates, all dividends
declared upon shares of Municipal Preferred and any other such class or series
of shares ranking on a parity as to the payment of dividends with shares of
Municipal Preferred shall be declared pro rata so that the amount of dividends
declared per share on shares of Municipal Preferred and such other class or
series of shares shall in all cases bear to each other the same ratio that
accumulated dividends per share on the shares of Municipal Preferred and such
other class or series of shares bear to each other (for purposes of this
sentence, the amount of dividends declared per share of Municipal Preferred
shall be based on the Applicable Rate for such share for the Dividend Periods
during which dividends were not paid in full).
Under the Code, the Fund must, among other things, distribute at least 90%
of the sum of its net investment income (including the excess, if any, of net
short-term capital gain over net long-term capital loss) and its net tax-exempt
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 may under certain circumstances impair the Fund's
ability to maintain such qualification. See "Tax Matters -- Federal Income Tax
Matters."
DESIGNATION OF SPECIAL RATE PERIODS. The Fund, at its option, may
designate any succeeding Subsequent Rate Period of shares of Municipal Preferred
as a Special Rate Period consisting of a specified number of Rate Period Days
evenly divisible by seven and not more than 1,820 (approximately 5 years),
subject to adjustment as described below. A designation of a Special Rate Period
shall be effective only if (i) notice thereof shall have been given as provided
herein, (ii) an Auction for such shares shall have been held on the Auction Date
immediately preceding the first day of such proposed Special Rate Period and
Sufficient Clearing Bids for such shares shall have existed in such Auction and
(iii) if the Fund shall have mailed a Notice of Redemption with respect to any
shares of Municipal Preferred, as described under "Redemption -- Notice of
Redemption" below, the Redemption Price with respect to such shares shall have
been deposited with the Auction Agent. In the event the Fund wishes to designate
any succeeding Subsequent Rate Period for shares of Municipal Preferred as a
Special Rate Period consisting of more than 28 Rate Period Days, the Fund shall
notify Standard & Poor's (if Standard & Poor's is then rating such shares) and
Moody's (if Moody's is then rating such shares) in advance of the commencement
of such Subsequent Rate Period that the Fund wishes to designate such Subsequent
Rate Period as a Special Rate Period and shall provide Standard & Poor's (if
Standard & Poor's is then rating such shares) and Moody's (if Moody's is then
rating such shares) with such documents as either may request.
In the event the Fund wishes to designate a Subsequent Rate Period of
shares of Municipal Preferred as a Special Rate Period, but the day following
what would otherwise be the last day of such Special Rate Period is not a Friday
that is a Business Day, then the Fund shall designate such Subsequent Rate
Period as a Special Rate Period consisting of the period commencing on the first
day following the end of the immediately preceding Rate Period and ending on the
first Thursday that is followed by a Friday that is a Business Day preceding
what would otherwise be such last day.
If the Fund proposes to designate any succeeding Subsequent Rate Period of
shares of Municipal Preferred as a Special Rate Period, not less than 20 (or
such lesser number of days as may be agreed to from time to time by the Auction
Agent) nor more than 30 days prior to the date the Fund proposes to designate as
the first day of such Special Rate Period (which shall be such day that would
otherwise be
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the first day of a Minimum Rate Period), notice shall be (i) published or caused
to be published by the Fund in a newspaper of general circulation to the
financial community in The City of New York, New York, which carries financial
news, and (ii) mailed by the Fund by first-class mail, postage prepaid, to the
holders of shares of Municipal Preferred. Each such notice shall state (A) that
the Fund may exercise its option to designate a succeeding Subsequent Rate
Period of shares of Municipal Preferred as a Special Rate Period, specifying the
first day thereof and (B) that the Fund will, by 11:00 a.m., Eastern time, on
the second Business Day next preceding such date (or by such later time or date,
or both, as may be agreed to by the Auction Agent), notify the Auction Agent of
either (x) its determination, subject to certain conditions, to exercise such
option, in which case the Fund shall specify the Special Rate Period designated,
or (y) its determination not to exercise such option.
No later than 11:00 a.m., Eastern time, on the second Business Day next
preceding the first day of any proposed Special Rate Period as to which notice
has been given as set forth in the preceding paragraph (or such later time or
date, or both, as may be agreed to by the Auction Agent), the Fund shall deliver
to the Auction Agent either:
(i) a notice ("Notice of Special Rate Period") stating (A) that the
Fund has determined to designate the next succeeding Rate Period of shares
of Municipal Preferred as a Special Rate Period, specifying the same and
the first day thereof, (B) the Auction Date immediately prior to the first
day of such Special Rate Period, (C) that such Special Rate Period shall
not commence if (1) an Auction for such shares shall not be held on such
Auction Date for any reason or (2) an Auction for such shares shall be held
on such Auction Date but Sufficient Clearing Bids for such shares shall not
exist in such Action, (D) the scheduled Dividend Payment Dates for such
shares during such Special Rate Period and (E) the Special Redemption
Provisions, if any, applicable to such shares in respect of such Special
Rate Period; such notice to be accompanied by a Municipal Preferred Basic
Maintenance Report showing that, as of the third Business Day next
preceding such proposed Special Rate Period, Moody's Eligible Assets (if
Moody's is then rating such shares) and Standard & Poor's Eligible Assets
(if Standard & Poor's is then rating such shares) each have an aggregate
Discounted Value at least equal to the Municipal Preferred Basic
Maintenance Amount as of such Business Day (assuming for purposes of the
foregoing calculation that (a) the Maximum Rate is the Maximum Rate on such
Business Day as if such Business Day were the Auction Date for the proposed
Special Rate Period, and (b) the Moody's Discount Factors applicable to
Moody's Eligible Assets will be determined by reference to the first
Moody's Exposure Period longer than the Moody's Exposure Period then
applicable to the Fund); or
(ii) a notice stating that the Fund has determined not to exercise its
option to designate a Special Rate Period of shares of Municipal Preferred
and that the next succeeding Rate Period shall be a Minimum Rate Period.
If the Fund fails to deliver either such notice (and, in the case of the
notice described in clause (i) above, a Municipal Preferred Basic Maintenance
Report to the effect set forth in clause (i) (if either Moody's or Standard &
Poor's is then rating the shares of Municipal Preferred)) with respect to any
designation of any proposed Special Rate Period to the Auction Agent by 11:00
a.m., Eastern time, on the second Business Day next preceding the first day of
such proposed Special Rate Period (or by such later time or date, or both, as
may be agreed to by the Auction Agent), the Fund shall be deemed to have
delivered a notice to the Auction Agent with respect to such Special Rate Period
to the effect set forth in clause (ii) above. In the event the Fund delivers to
the Auction Agent a notice described in clause (i) above, it shall file a copy
of such notice with the Secretary of the Fund, and the contents of such notice
shall be binding on the Fund. In the event the Fund delivers to the Auction
Agent a notice described in clause (ii) above, the Fund will provide Moody's (if
Moody's is then rating the shares of Municipal Preferred) and Standard & Poor's
(if Standard & Poor's is then rating the shares of Municipal Preferred) a copy
of such notice.
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VOTING RIGHTS
Holders of shares of Municipal Preferred are entitled to vote on certain
matters as described herein under "Investment Objectives and
Policies -- Fundamental Investment Policies" and in the Prospectus under
"Description of Municipal Preferred -- Voting Rights" and "Certain Provisions in
the Agreement and Declaration of Trust."
In connection with the election of the Fund's trustees, holders of
outstanding Preferred Shares, including shares of Municipal Preferred, voting
together as one separate class, shall be entitled to elect two of the Fund's
trustees, and the remaining trustees will be elected by holders of Common Shares
and Preferred Shares, including shares of Municipal Preferred, voting together
as a single class. In addition, if at any time dividends (whether or not earned
or declared) on outstanding Preferred Shares, including shares of Municipal
Preferred, shall be due and unpaid in an amount equal to two full years'
dividends thereon, and sufficient cash or specified securities shall not have
been deposited with the Auction Agent for the payment of such dividends, then,
as the sole remedy of holders of outstanding Preferred Shares, including shares
of Municipal Preferred, the number of trustees constituting the Board of
Trustees shall be automatically increased by the smallest number that, when
added to the two trustees elected exclusively by the holders of Preferred
Shares, including shares of Municipal Preferred, 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 Preferred Shares, including shares of Municipal
Preferred, 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 will be in any event entitled to elect, constitutes a majority of the
total number of trustees of the Fund as so increased. The terms of office of the
persons who are trustees at the time of that election will continue. If the Fund
thereafter shall pay, or declare and set apart for payment, in full all
dividends payable on all outstanding Preferred Shares, including shares of
Municipal Preferred, the voting rights stated in the preceding sentence shall
cease, and the terms of office of all of the additional trustees elected by the
holders of Preferred Shares, including shares of Municipal Preferred (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 Preferred Shares have the
right to elect in any event), will terminate automatically.
So long as any shares of Municipal Preferred are outstanding, the Fund may
not, without the affirmative vote of the holders of at least a majority of the
shares of Municipal Preferred outstanding at the time, voting together as one
separate class:
(a) authorize, create or issue additional shares of Municipal
Preferred or classes or series of Preferred Shares ranking prior to or on a
parity with shares of Municipal Preferred with respect to the payment of
dividends or the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Fund (except that the Fund may, without
the vote of the holders of shares of Municipal Preferred, authorize, create
or issue additional shares of Municipal Preferred or classes or series of
Preferred Shares ranking on a parity with shares of Municipal Preferred
with respect to the payment of dividends and the distribution of assets
upon dissolution, liquidation or winding up of the affairs of the Fund if
the Fund obtains written confirmation from Moody's (if Moody's is then
rating the shares of Municipal Preferred) and Standard & Poor's (if
Standard & Poor's is then rating the shares of Municipal Preferred) that
the issuance of any such additional shares or class or series of shares
would not impair the rating then assigned by such rating agency to shares
of Municipal Preferred; provided, however, that if Moody's or Standard &
Poor's is not then rating the shares of Municipal Preferred the aggregate
liquidation preference of all Preferred Shares of the Fund outstanding
after any such issuance, exclusive of accumulated and unpaid dividends, may
not exceed $37,300,000);
(b) amend, alter or repeal the provisions of the Declaration or the
By-Laws, whether by merger, consolidation or otherwise, so as to materially
affect any preference, right or power of the shares of Municipal Preferred
or the holders thereof (provided, however, that a division of a share of
Municipal
B-33
<PAGE> 91
Preferred shall be deemed to affect any such preference, right or power
only if the terms of such division adversely affect the holders of any
shares of Municipal Preferred);
provided, however, that (i) none of the actions permitted by the exception to
(a) above will be deemed to affect such preferences, rights or powers, (ii) a
division of a share of Municipal Preferred will be deemed to affect such
preferences, rights or powers only if the terms of such division adversely
affect the holders of shares of Municipal Preferred, and (iii) the
authorization, creation and issuance of classes or series of shares ranking
junior to the Municipal Preferred with respect to the payment of dividends and
the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund will be deemed to affect such preferences, rights or powers
only if at least one of Moody's or Standard & Poor's is then rating the shares
of Municipal Preferred and such issuance would, at the time thereof, cause the
Fund not to satisfy the 1940 Act Municipal Preferred Asset Coverage or the
Municipal Preferred Basic Maintenance Amount. So long as any shares of Municipal
Preferred are outstanding, the Fund may not, without the affirmative vote of the
holders of at least 66 2/3% of the shares of Municipal Preferred outstanding at
the time, voting as a separate class, file a voluntary application for relief
under federal bankruptcy law or any similar application under state law for so
long as the Fund is solvent and does not foresee becoming insolvent.
To the extent permitted by the 1940 Act, if any action set forth in the
immediately preceding paragraph would adversely affect the rights of one or more
series (the "Affected Series") of Municipal Preferred in a manner different from
any other series of Municipal Preferred, the Fund will not approve any such
action without the affirmative vote of the holders of at least a majority of the
shares of each such Affected Series outstanding at the time (each such Affected
Series voting as a separate class).
Voting provisions will not apply with respect to shares of Municipal
Preferred if, at or prior to the time when a vote is required, 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.
The Board of Trustees may, without shareholder approval, amend, alter or
repeal any or all of the definitions and related provisions required to be
contained in the By-Laws by the rating agencies in the event the Fund receives
written confirmation from Moody's or Standard & Poor's, or both, as appropriate,
that any such amendment, alteration or repeal would not impair the ratings then
assigned by Moody's and Standard & Poor's to shares of Municipal Preferred.
RATING AGENCY GUIDELINES
The Fund intends that, so long as shares of Municipal Preferred are
outstanding, the composition of its portfolio will reflect guidelines
established by at least one of Moody's or Standard & Poor's in connection with
the Fund's receipt on the Date of Original Issue of the shares of Municipal
Preferred of ratings of "aaa" from Moody's or AAA from Standard & Poor's.
Moody's and Standard & Poor's, nationally recognized independent rating
agencies, issue ratings for various securities reflecting their perceived
creditworthiness of such securities. The guidelines described below have been
developed by Moody's and Standard & Poor's in connection with other issuances of
asset-backed and similar securities, including debt obligations and adjustable
rate preferred shares, generally on a case-by-case basis through discussions
with the issuers of those securities. The guidelines are designed to ensure that
assets underlying outstanding debt or preferred shares will be sufficiently
varied 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 Fund in order to satisfy current requirements necessary for Moody's or
Standard & Poor's, or both, to issue the above-described ratings for shares of
Municipal Preferred, which ratings are generally relied upon by investors in
purchasing such securities. In the context of a closed-end investment company
such as the Fund, therefore, 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. A rating
agency's guidelines will apply to shares of Municipal Preferred only so long as
such rating agency is rating such shares. The Board of Trustees may, without
shareholder approval, amend, alter or repeal any or all of the definitions and
related provisions which have been adopted by the Fund pursuant to the rating
B-34
<PAGE> 92
agency guidelines in the event the Fund receives written confirmation from
Moody's or Standard & Poor's, or both, as appropriate, that any such change
would not impair the ratings then assigned by Moody's and Standard & Poor's to
shares of Municipal Preferred.
So long as either Standard & Poor's or Moody's, or both, are rating the
shares of Municipal Preferred, the Fund may not, among other things, (1) buy or
sell futures or write put or call options and similar securities and buy or sell
Inverse Floaters, except to the extent set forth in the By-Laws, which include
the restrictions set forth as Appendix D to this Statement of Additional
Information, (2) borrow money, except that the Fund may, without obtaining the
written confirmation described below, borrow money for the purpose of clearing
securities transactions if (a) the Municipal Preferred Basic Maintenance Amount
would continue to be satisfied after giving effect to such borrowing (which
shall mean, for purposes of the calculation of the Municipal Preferred Basic
Maintenance Amount, adding the amount of the liability for such borrowing to the
calculation of the Municipal Preferred Basic Maintenance Amount) and (b) such
borrowing (i) is privately arranged with a bank or other person and is evidenced
by a promissory note or other evidence of indebtedness that is not intended to
be publicly distributed or (ii) is for "temporary purposes," is evidenced by a
promissory note or other evidence of indebtedness and is an amount not exceeding
5 per centum of the value of the total assets of the Fund at the time of the
borrowing (for purposes of the foregoing, "temporary purpose" means that the
borrowing is to be repaid within sixty days and is not to be extended or
renewed), (3) issue additional shares of Municipal Preferred or any class or
series of shares ranking prior to or on a parity with the shares of Municipal
Preferred with respect to the payment of dividends or the distribution of assets
upon dissolution, liquidation or winding up of the affairs of the Fund, or
reissue any shares of Municipal Preferred previously purchased or redeemed by
the Fund, (4) engage in any short sales of securities, (5) lend any securities,
(6) merge or consolidate into or with any corporation, (7) change the pricing
service (currently the Fund uses both Muller Data Corporation and Standard &
Poor's J.J. Kenny Evaluation Services) referred to in the definition of Market
Value to a pricing service other than Muller Data Corporation or Standard &
Poor's J.J. Kenny Evaluation Services, or (8) enter into reverse repurchase
agreements, unless in each case (except as described above) it has received
written confirmation from Standard & Poor's or Moody's, or both, as appropriate,
that any such action would not impair the rating then assigned by such rating
agency to shares of Municipal Preferred. While the Fund does not presently
intend to borrow, and while the Fund is restricted under the 1940 Act from
borrowing in excess of 33 1/3% of its total assets and is otherwise restricted
from borrowing pursuant to rating agency guidelines, under certain circumstances
and notwithstanding adverse interest rate or market conditions, the Fund is
permitted to borrow for temporary or emergency purposes (e.g., to make required
distributions or pay dividends) or to repurchase shares when such borrowing is
deemed to be in the best interest of the common shareholders. See "Repurchase of
Common Shares" herein and "Repurchase of Common Shares; Conversion to Open-End
Fund" in the Prospectus for the circumstances under which the Fund may purchase
Common Shares and incur indebtedness in connection therewith. Should the Fund
borrow, the Fund would be required to pay when due the interest obligation on
any debt incurred by the Fund before it would be able to pay dividends on shares
of Municipal Preferred, and it is likely that the Fund would be required to pay
the principal amount of any such debt prior to meeting the liquidation
preference of the shares of Municipal Preferred. Because the interest expense on
borrowings by the Fund will reduce the Fund's net investment earnings available
to pay dividends on shares of Municipal Preferred, borrowing may impair the
Fund's ability to pay such dividends on shares of Municipal Preferred. This risk
is heightened in the event the Fund incurs variable rate debt, the interest rate
on which may increase with increases in prevailing market rates.
ASSET MAINTENANCE
1940 ACT MUNICIPAL PREFERRED ASSET COVERAGE. The Fund will be required
under rating agency guidelines to maintain, as of the last Business Day of each
month on which any shares of Municipal Preferred are outstanding, asset coverage
of at least 200% with respect to such shares (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 a closed-end investment
company as a condition of declaring dividends on its common shares). If the Fund
fails to maintain such asset coverage in accordance with the
B-35
<PAGE> 93
requirements of the rating agency or agencies then rating the shares of
Municipal Preferred ("1940 Act Municipal Preferred Asset Coverage") and such
failure is not cured as of the last Business Day of the following month (the
"1940 Act Cure Date"), the Fund will be required under certain circumstances to
redeem certain of the shares of Municipal Preferred. See "Redemption" below.
MUNICIPAL PREFERRED BASIC MAINTENANCE AMOUNT. The Fund will be required
under rating agency guidelines to maintain, as of each Business Day (a
"Valuation Date") on which shares of Municipal Preferred are outstanding, assets
having in the aggregate a Discounted Value at least equal to the Municipal
Preferred Basic Maintenance Amount established by the rating agency or agencies
then rating the shares of Municipal Preferred. If the Fund fails to meet such
requirement on any Valuation Date and such failure is not cured on or before the
second Business Day after such Valuation Date (the "Municipal Preferred Basic
Maintenance Cure Date"), the Fund will be required under certain circumstances
to redeem certain of the shares of Municipal Preferred. See "Redemption" below.
The "Municipal Preferred Basic Maintenance Amount" as of any Valuation Date
is defined as the dollar amount equal to the sum of:
(A) (i) the product of the number of shares of Municipal Preferred
outstanding on such date multiplied by $25,000 (plus the product of the
number of shares of any other series of Preferred Shares outstanding on
such date multiplied by the liquidation preference of such shares), plus
any redemption premium applicable to shares of Municipal Preferred (or
other Preferred Shares) then subject to redemption;
(ii) the aggregate amount of dividends that will have accumulated
at the Applicable Rate (whether or not earned or declared) to (but not
including) the first Dividend Payment Date for each share of Municipal
Preferred outstanding that follows such Valuation Date (plus the
aggregate amount of dividends, whether or not earned or declared, that
will have accumulated in respect of other outstanding Preferred Shares
to, but not including, the first respective dividend payment dates for
such other shares that follow such Valuation Date);
(iii) subject to certain exceptions, the aggregate amount of
dividends that would accumulate on shares of Municipal Preferred
outstanding from such first Dividend Payment Date through the 49th day
after such Valuation Date, at the Maximum Rate (calculated as if such
Valuation Date were the Auction Date for the Rate Period commencing on
such Dividend Payment Date) for a Minimum Rate Period thereof to
commence on such Dividend Payment Date, assuming, solely for purposes of
the foregoing, that if on such Valuation Date the Fund shall have
delivered a Notice of Special Rate Period to the Auction Agent with
respect to such shares, such Maximum Rate shall be the higher of (a) the
Maximum Rate for the Special Rate Period of such shares to commence on
such Dividend Payment Date and (b) the Maximum Rate for a Minimum Rate
Period of such shares to commence on such Dividend Payment Date,
multiplied by the Volatility Factor applicable to a Minimum Rate Period,
or, in the event the Fund shall have delivered a Notice of Special Rate
Period to the Auction Agent with respect to such shares designating a
Special Rate Period consisting of 49 Rate Period Days or more, the
Volatility Factor applicable to a Special Rate Period of that length;
(iv) the amount of anticipated Fund expenses for the 90 days
subsequent to such Valuation Date;
(v) the amount of the Fund's Maximum Potential Gross-up Payment
Liability as of such Valuation Date; and
(vi) any current liabilities as of such Valuation Date to the
extent not reflected in any of (A)(i) through (A)(v) (including, without
limitation, any payables for Municipal Obligations purchased as of such
Valuation Date and any liabilities incurred for the purpose of clearing
securities transactions) less
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<PAGE> 94
(B) the value of any Fund assets irrevocably deposited by the Fund for
the payment of any of (A)(i) through (A)(vi), all as calculated in
accordance with the requirements of the rating agency or agencies then
rating the shares of Municipal Preferred.
For Standard & Poor's, the Fund shall include as a liability an amount
calculated semi-annually equal to 150% of the estimated cost of obtaining other
insurance guaranteeing the timely payment of interest on a Standard & Poor's
Eligible Asset and principal thereof to maturity with respect to Standard &
Poor's Eligible Assets that (i) are covered by a Policy which provides the Fund
with the option to obtain such other insurance and (ii) are discounted by a
Standard & Poor's Discount Factor determined, as the case may be, by reference
to the insurance claims-paying ability rating of the issuer of such Policy. For
purposes of the foregoing, "Maximum Potential Gross-up Payment Liability," as of
any Valuation Date, means the aggregate amount of Gross-up Payments that would
be due if the Fund were to make Taxable Allocations, with respect to any taxable
year, estimated based upon dividends paid and the amount of undistributed
realized net capital gain and other taxable income earned by the Fund, as of the
end of the calendar month immediately preceding such Valuation Date, and
assuming such Gross-up Payments are fully taxable. "Policy" means an insurance
policy purchased by the Fund which guarantees the payment of principal and
interest on specified Municipal Obligations during the period in which such
Municipal Obligations are owned by the Fund; provided, however, that, as long as
the shares of Municipal Preferred are rated by Standard & Poor's, the Fund will
not obtain any Policy unless Standard & Poor's advises the Fund in writing that
the purchase of such Policy will not adversely affect their then-current rating
on shares of Municipal Preferred.
In managing the Fund's portfolio, the Advisor will not alter the
composition of the Fund's portfolio if, in the reasonable belief of the Advisor,
the effect of any such alteration would be to cause the Fund to have Eligible
Assets with an aggregate Discounted Value, as of the immediately preceding
Valuation Date, less than the Municipal Preferred Basic Maintenance Amount as of
such Valuation Date; provided, however, that in the event that, as of the
immediately preceding Valuation Date, the aggregate Discounted Value of the
Fund's Eligible Assets exceeded the Municipal Preferred Basic Maintenance Amount
by 5% or less, the Advisor will not alter the composition of the Fund's
portfolio in a manner reasonably expected to reduce the aggregate Discounted
Value of the Fund's Eligible Assets unless the Fund shall have confirmed that,
after giving effect to such alteration, the aggregate Discounted Value of the
Fund's Eligible Assets would exceed the Municipal Preferred Basic Maintenance
Amount.
Upon any failure to maintain the required Discounted Value, the Fund will
seek to alter the composition of its portfolio to reattain the Municipal
Preferred Basic Maintenance Amount on or prior to the Municipal Preferred Basic
Maintenance Cure Date, thereby incurring additional transaction costs and
possible losses and/or gains on dispositions of portfolio securities.
On or before the third Business Day after a Valuation Date on which the
Fund fails to meet the Municipal Preferred Basic Maintenance Amount, and on the
third Business Day after the Municipal Preferred Basic Maintenance Cure Date
with respect to such Valuation Date, the Fund is required to deliver to the
Auction Agent (so long as either Moody's or Standard & Poor's is rating the
shares of Municipal Preferred) a report with respect to the calculation of the
Municipal Preferred Basic Maintenance Amount and the value of its portfolio
holdings as of the date of such failure or such cure date, as the case may be (a
"Municipal Preferred Basic Maintenance Report"). The Fund will also deliver, as
required, a Municipal Preferred Basic Maintenance Report as of (i) the fifteenth
day of each month (or, if such day is not a Business Day, the next succeeding
Business Day) and (ii) the last Business Day of each month, in each case 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 each of January,
April, July and October of each year, commencing , 1999, the Fund will
deliver a letter prepared by the Fund's independent accountants regarding the
accuracy of the calculations made by the Fund in its most recent Municipal
Preferred Basic Maintenance Report. If any such letter prepared by the Fund's
independent accountants shows that an error was made in the most recent
Municipal Preferred Basic Maintenance Report, the calculation or determination
made by the Fund's independent accountants will be conclusive and binding on the
Fund.
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<PAGE> 95
The Discount Factors and guidelines for determining the market value of the
Fund's portfolio holdings, described below, have been based by the rating
agencies on criteria such as 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. The ratings
may be changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information.
STANDARD & POOR'S AAA RATING GUIDELINES. For purposes of calculating the
Discounted Value of the Fund's portfolio under current Standard & Poor's
guidelines, the fair market value of Municipal Obligations eligible for
consideration under such guidelines ("Standard & Poor's Eligible Assets") must
be discounted by certain discount factors set forth in the table below
("Standard & Poor's Discount Factors"). The Discounted Value of a Municipal
Obligation under Standard & Poor's guidelines is the fair market value thereof
divided by the Standard & Poor's Discount Factor. The Standard & Poor's Discount
Factor used to discount a particular Municipal Obligation will be determined by
reference to the "Standard & Poor's Exposure Period" (currently, three Business
Days) and to either (i) the Standard & Poor's rating on such Municipal
Obligation, (ii) in the event the Municipal Obligation is insured under a Policy
and the terms of the Policy permit the Fund, at its option, to obtain other
permanent insurance guaranteeing the timely payment of interest on such
Municipal Obligation and principal thereof to maturity, the Standard & Poor's
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 asset and principal thereof to
maturity, the Standard & Poor's insurance claims-paying ability rating of the
issuer of the policy. Standard & Poor's Discount Factors for a range of exposure
periods are set forth below:
<TABLE>
<CAPTION>
STANDARD & POOR'S DISCOUNT
FACTORS RATING CATEGORY
---------------------------------------------------
EXPOSURE PERIOD AAA* AA* A* BBB* UNRATED** ZEROS***
--------------- ---- --- --- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C>
45 Business Days.................. 190% 195% 210% 250% 220% 572%
25 Business Days.................. 170 175 190 230 220 496
10 Business Days.................. 155 160 175 215 220 426
7 Business Days................... 150 155 170 210 220 411
3 Business Days................... 130 135 150 190 220 388
</TABLE>
- ---------------
* Standard & Poor's rating.
** Standard & Poor's eligible assets not rated or rated less than BBB by
Standard & Poor's and not rated at least the equivalent of an "A" rating by
another nationally recognized crediting rating agency.
*** Municipal Obligations rated AAA by Standard & Poor's which are not interest
bearing or do not pay interest at least semi-annually.
Since the Standard & Poor's Exposure Period currently applicable to the
Fund is three Business Days, the Standard & Poor's Discount Factors currently
applicable to Standard & Poor's Eligible Assets will be determined by reference
to the factors set forth opposite the line entitled "3 Business Days."
Notwithstanding the foregoing, (i) the Standard & Poor's Discount Factor for
short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated A-1+ or SP-1+ by Standard & Poor's and mature or have a
demand feature exercisable within 30 days or less, 120% if such Municipal
Obligations are rated A-1 or SP-1- by Standard & Poor's and mature or have a
demand feature exercisable within 30 days or less, or 125% if such Municipal
Obligations are not rated by Standard & Poor's but are rated VMIG-1, P-1 or
MIG-1 by Moody's; provided, however, that any such Moody's-rated short-term
Municipal Obligations which have demand features exercisable within 30 days or
less must be backed by a letter of credit, liquidity facility or guarantee from
a bank or other financial institution with a short-term rating of at least A-1+
from Standard & Poor's; and further provided that such Moody's-rated short-term
Municipal Obligations may comprise no more than 50% of short-term Municipal
Obligations
B-38
<PAGE> 96
that qualify as Standard & Poor's Eligible Assets; (ii) no Standard & Poor's
Discount Factor will be applied to cash options and similar instruments or to
Receivables for Municipal Obligations Sold; and (iii) except as set forth in
clause (i) above, in the case of any Municipal Obligation that is not rated by
Standard & Poor's but qualifies as a Standard & Poor's Eligible Asset pursuant
to clause (1)(c) of the following paragraph, such Municipal Obligation will be
deemed to have a Standard & Poor's rating one full rating category lower than
the Standard & Poor's rating category that is the equivalent of the rating
category in which such Municipal Obligation is placed by another nationally
recognized credit rating agency. For purposes of the foregoing, Anticipation
Notes rated SP-1+ or, if not rated by Standard & Poor's, rated MIG-1 or VMIG-1
by Moody's, which do not mature or have a demand feature at par exercisable in
30 days and which do not have a long-term rating, will be considered to be
short-term Municipal Obligations. "Receivables for Municipal Obligations Sold,"
for purposes of calculating Standard & Poor's 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.
The Standard & Poor's guidelines impose certain minimum issue size, issuer,
geographical diversification and other requirements for purposes of determining
Standard & Poor's Eligible Assets. Solely for purposes of this definition, the
term "Municipal Obligation" means any obligation the interest on which is exempt
from regular federal income taxation and which is issued by any of the fifty
United States, the District of Columbia or any of the territories of the United
States, their subdivisions, counties, cities, towns, villages, school districts
and agencies (including authorities and special districts created by the
states), and federally sponsored agencies such as local housing authorities.
Notwithstanding the foregoing limitations:
(1) In order to be considered Standard & Poor's Eligible Assets,
Municipal Obligations owned by the Fund must:
(a) be interest bearing and pay interest at least semi-annually;
(b) be payable in U.S. dollars;
(c) be publicly rated BBB or higher by Standard & Poor's or, except
in the case of Anticipation Notes that are Grant Anticipation Notes or
Bond Anticipation Notes which must be rated by Standard & Poor's to be
included in Standard & Poor's Eligible Assets, if not rated by Standard
& Poor's but rated by another nationally recognized credit rating
agency, be publicly rated A or higher by such agency;
(d) not be private placements (except in the case of Inverse
Floaters);
(e) 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 lower than $10 million), be issued by an issuer with a
total of at least $50 million of securities outstanding; and
(f) not be subject to a covered call or covered put option written
by the Fund.
(2) Municipal Obligations (excluding Escrowed Bonds) of any one issuer
or guarantor (excluding bond insurers) will be considered Standard & Poor's
Eligible Assets only to the extent the Market Value of such Municipal
Obligations does not exceed 10% of the aggregate Market Value of Standard &
Poor's Eligible Assets, provided that 2% is added to the applicable
Standard & Poor's Discount Factor for every 1% by which the Market Value of
such Municipal Obligations exceeds 5% of the aggregate Market Value of
Standard & Poor's Eligible Assets, and provided that Municipal Obligations
(excluding Escrowed Bonds) not rated or rated less than BBB by Standard &
Poor's and not rated at least A by another nationally recognized credit
rating agency of any one issuer or guarantor (excluding bond insurers)
shall constitute Standard & Poor's Eligible Assets only to the extent the
Market Value of such Municipal Obligations does not exceed 5% of the
aggregate Market Value of Standard & Poor's Eligible Assets.
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<PAGE> 97
(3) Municipal Obligations not rated by Standard & Poor's will be
considered Standard & Poor's Eligible Assets only to the extent the Market
Value of such Municipal Obligations does not exceed 50% of the aggregate
Market Value of Standard & Poor's Eligible Assets, provided that such
Municipal Obligations are rated at least A by another nationally recognized
credit rating agency. The Market Value of Municipal Obligations not rated
at least BBB by Standard & Poor's or not rated by Standard & Poor's or not
rated at least A by another nationally recognized credit rating agency may
not exceed 20% of the aggregate Market Value of Standard & Poor's Eligible
Assets; provided, however, that if the Market Value of such Municipal
Obligations exceeds 20% of the aggregate Market Value of Standard & Poor's
Eligible Assets, a portion of such Municipal Obligations (selected by the
Fund) shall not be considered Standard & Poor's Eligible Assets, so that
the Market Value of such Municipal Obligations (excluding such portion)
does not exceed 20% of the aggregate Market Value of Standard & Poor's
Eligible Assets.
(4) Long-term Municipal Obligations (excluding Escrowed Bonds) issued
by issuers in any one state or territory will be considered Standard &
Poor's Eligible Assets only to the extent the Market Value of such
Municipal Obligations does not exceed 25% of the aggregate Market Value of
Standard & Poor's Eligible Assets.
(5) Municipal Obligations which are not interest bearing or do not pay
interest at least semi-annually shall be considered Standard & Poor's
Eligible Assets if rated AAA by Standard & Poor's.
MOODY'S "aaa" RATING GUIDELINES. For purposes of calculating the
Discounted Value of the Fund's portfolio under current Moody's guidelines,
Municipal Obligations eligible for consideration under such guidelines ("Moody's
Eligible Assets") must be discounted by certain discount factors set forth in
the table below ("Moody's Discount Factors"). The Discounted Value of a
Municipal Obligation under Moody's guidelines is, as of any Valuation Date, (i)
with respect to a Moody's Eligible Asset that is not currently callable as of
such Valuation Date at the option of the issuer thereof, the quotient of the
market value thereof divided by the applicable Moody's Discount Factor, or (ii)
with respect to a Moody's Eligible Asset that is currently callable as of such
Valuation Date at the option of the issuer thereof, the quotient of (a) the
lesser of the market value or call price thereof, including any call premium,
divided by (b) the applicable Moody's Discount Factor. The Moody's Discount
Factor used to discount a particular Municipal Obligation will be determined by
reference to the "Moody's Exposure Period" (currently, the period commencing on
a given Valuation Date and ending 49 days thereafter) and the Moody's rating on
such Municipal Obligation. Moody's Discount Factors for a range of exposure
periods are set forth below:
<TABLE>
<CAPTION>
MOODY'S DISCOUNT FACTORS
RATING CATEGORY
--------------------------------------------------------------------------
EXPOSURE PERIOD AAA* AA* A* BAA* OTHER** (V)MIG-1*** SP-1+**** UNRATED*****
- --------------- ---- --- --- ---- ------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
7 weeks....................... 151% 159% 166% 173% 187% 136% 148% 225%
8 weeks or less but greater
than 7 weeks.................. 154 161 168 176 190 137 149 231
9 weeks or less but greater
than 8 weeks................ 156 163 170 177 192 138 150 240
</TABLE>
- ---------------
* Moody's rating.
** Municipal Obligations not rated by Moody's but rated BBB by Standard &
Poor's.
*** Municipal Obligations rated MIG-1 or VMIG-1, which do not mature or have
a demand feature at par exercisable in 30 days and which do not have a
long-term rating.
**** Municipal Obligations not rated by Moody's but rated SP-1+ by Standard &
Poor's, which do not mature or have a demand feature at par exercisable
in 30 days and which do not have a long-term rating.
***** Municipal Obligations not rated or rated lower than Baa3 by Moody's and
not rated or rated lower than BBB by Standard & Poor's.
B-40
<PAGE> 98
Since the Moody's Exposure Period currently applicable to the Fund is 49
days, the Moody's Discount Factors currently applicable to Moody's Eligible
Assets will be determined by reference to the factors set forth opposite the
line entitled "7 weeks." Notwithstanding the foregoing, (i) the Moody's Discount
Factor for short-term Municipal Obligations will be 115%, so long as such
Municipal Obligations are rated at least MIG-1, VMIG-1 or P-1 by Moody's and
mature or have a demand feature at par exercisable in 30 days or less or 125% so
long as such Municipal Obligations are rated at least A-1+/AA or SP-1+/AA by
Standard & Poor's and mature or have a demand feature at par exercisable in 30
days or less and (ii) no Moody's Discount Factor will be applied to cash or to
Receivables for Municipal Obligations Sold or futures, options and similar
instruments (to the extent such securities are Moody's Eligible Assets);
provided, however, that for purposes of determining the Moody's Discount Factor
applicable to a Municipal Obligation, any Municipal Obligation (excluding any
short-term Municipal Obligation) not rated by Moody's but rated by Standard &
Poor's shall be deemed to have a Moody's rating which is one full rating
category lower than its Standard & Poor's rating. "Receivables for Municipal
Obligations Sold," for purposes of calculating Moody's Eligible Assets as of any
Valuation Date, means no more than the aggregate of the following: (i) 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, and if the trades which generated such receivables are (x)
settled through clearing house firms with respect to which the Fund has received
prior written authorization from Moody's or (y) with counterparties having a
Moody's long-term debt rating of at least Baa3; and (ii) the Moody's Discounted
Value of Municipal Obligations sold as of or prior to such Valuation Date which
generated receivables, if such receivables are due within five business days of
such Valuation Date but do not comply with either of conditions (x) or (y).
The Moody's guidelines impose certain minimum issue size, issuer,
geographical diversification and other requirements for purposes of determining
Moody's Eligible Assets, as set forth in the table below:
<TABLE>
<CAPTION>
MINIMUM MAXIMUM MAXIMUM
ISSUE SIZE UNDERLYING STATE OR TERRITORY
RATING ($ MILLIONS) OBLIGOR (%) CONCENTRATION (%)
- ------ ------------ ----------- ------------------
<S> <C> <C> <C>
Aaa............................................ 10 100 100
Aa............................................. 10 20 60
A.............................................. 10 10 40
Baa............................................ 10 6 20
Other*......................................... 10 4 12
Unrated**...................................... 10 4 12
</TABLE>
- ---------------
* Municipal Obligations not rated by Moody's but rated BBB by Standard &
Poor's.
** Municipal Obligations not rated or rated lower than Baa3 by Moody's and not
rated or rated lower than BBB by Standard & Poor's.
For purposes of the foregoing table, the percentages provided, for a given
rating, in the columns entitled "Maximum Underlying Obligor" and "Maximum State
or Territory Concentration" shall apply to the aggregate total of the Municipal
Obligations in the rating category indicated and all rated Municipal Obligations
in lower rating categories, as well as unrated Municipal Obligations that are
Moody's Eligible Assets. In no event may (i) student loan Municipal Obligations
comprise more than 10% of Moody's Eligible Assets, (ii) resource recovery
Municipal Obligations comprise more than 10% of Moody's Eligible Assets, and
(iii) Other Issues comprise more than 10% of Moody's Eligible Assets.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset to the extent it is (i) subject to any material lien, mortgage,
pledge, security interest or security agreement of any kind (collectively,
"Liens"), except for (a) Liens which are being contested in good faith by
appropriate proceedings and which Moody's has indicated to the Fund will not
affect the status of such asset as a Moody's Eligible Asset, (b) Liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (c) Liens to secure payment for services rendered or cash advanced to
the Fund by Colonial Management Associates, Inc., The Chase Manhattan Bank or
the Auction Agent and (d) Liens by virtue of any repurchase agreement or futures
contract; or (ii) deposited irrevocably for the payment of any liabilities for
purposes of determining the Municipal Preferred Basic Maintenance Amount.
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The percentages set forth in the preceding table are based upon Moody's
Eligible Assets calculated excluding cash. Current Moody's guidelines also
require that Municipal Obligations constituting Moody's Eligible Assets (i) pay
interest in cash, (ii) not have suspended ratings, and (iii) not be subject to a
covered call or a covered put option written by the Fund. For purposes of
determining the Moody's Discount Factors applicable to such Standard &
Poor's-rated Municipal Obligations, any such Municipal Obligation (excluding
short-term Municipal Obligations) will be deemed to have a Moody's rating which
is one full rating category lower than its Standard & Poor's rating. For
purposes of applying the foregoing requirements, Municipal Obligations rated
MIG-1, VMIG-1, or P-1, or, if not rated by Moody's, rated A-1+/AA or SP-1+/AA by
Standard & Poor's, will be considered to have a long-term rating of A. In
general, Municipal Obligations which are rated less than Baa3 by Moody's or less
than BBB by Standard & Poor's or not rated by Moody's or Standard & Poor's may
comprise no more than 40% of the aggregate Market Value of Moody's Eligible
Assets.
The Fund will enter into futures and options transactions only for bona
fide hedging purposes and not for leveraging or speculative purposes. So long as
either Standard & Poor's or Moody's is rating the Municipal Preferred, the Fund
will only engage in futures or options transactions in accordance with
guidelines of such ratings agencies and, to the extent transactions would not be
permitted by such guidelines, only after it has received written confirmation
from Standard & Poor's or Moody's, as appropriate, that such transactions would
not impair the ratings then assigned by such rating agency to shares of
Municipal Preferred. The guidelines in effect with respect to futures and
options transactions in which the Fund may engage are set forth in the By-Laws
and are included as Appendix D to this Statement of Additional Information.
REDEMPTION
OPTIONAL REDEMPTION. Except as described below,
(i) shares of Municipal Preferred are redeemable, at the option of the
Fund, as a whole or from time to time in part, on the second Business Day
preceding any Dividend Payment Date therefor, out of funds legally
available therefor in accordance with the Declaration, the By-Laws and
applicable law, at a redemption price per share equal to the sum of $25,000
plus an amount equal to accumulated but unpaid dividends thereon (whether
or not earned or declared) to (but not including) the date fixed for
redemption; provided, however, that (1) shares of Municipal Preferred may
not be redeemed in part if after such partial redemption fewer than 500
shares remain outstanding; (2) unless otherwise provided in the By-laws,
shares of Municipal Preferred are redeemable by the Fund during the Initial
Rate Period thereof only on the second Business Day next preceding the last
Dividend Payment Date for such Initial Rate Period; and (3) subject to the
next succeeding sentence, the Notice of Special Rate Period relating to a
Special Rate Period of shares of Municipal Preferred, as delivered to the
Auction Agent and filed with the Secretary of the Fund, may provide that
such shares shall not be redeemable during the whole or any part of such
Special Rate Period (except as provided in (ii) below) or shall be
redeemable during the whole or any part of such Special Rate Period only
upon payment of such redemption premium or premiums as shall be specified
therein ("Special Redemption Provisions"); and
(ii) shares of Municipal Preferred are redeemable, at the option of
the Fund, as a whole but not in part, out of funds legally available
therefor in accordance with the Declaration, the By-Laws and applicable
law, on the first day following any Dividend Period thereof included in a
Rate Period of more than 364 Rate Period Days if, on the date of
determination of the Applicable Rate for such shares for such Rate Period,
such Applicable Rate equaled or exceeded on such date of determination the
Treasury Note Rate for such Rate Period, at a redemption price of $25,000
per share plus an amount equal to accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date fixed
for redemption.
A Notice of Special Rate Period relating to shares of Municipal Preferred for a
Special Rate Period may contain Special Redemption Provisions only if the Board
of Trustees, after consultation with the Broker-
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Dealer or Broker-Dealers for such Special Rate Period of such shares, determines
that such Special Redemption Provisions are in the best interest of the Fund.
If fewer than all of the outstanding shares of Municipal Preferred are to
be redeemed as set forth above, the number of shares to be redeemed shall be
determined by the Board of Trustees, and such shares shall be redeemed pro rata
from the holders of record of shares of such series (initially Cede & Co. as
nominee of the Securities Depository) in proportion to the number of such shares
held by such holders. Since the nominee of the Securities Depository is the only
record holder of shares of Municipal Preferred, the Securities Depository will
determine the number of shares to be redeemed from the accounts of the Agent
Members. The Agent Members, in turn, may determine to redeem shares from some
persons listed on their records as beneficial owners (which may include an Agent
Member holding shares for its own account) without redeeming shares from the
accounts of other persons listed on their records as beneficial owners.
The Fund may not mail a Notice of Redemption relating to an optional
redemption as described above on any date unless on such date (a) the Fund has
available certain 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 (including any applicable premium) due to holders of shares
of Municipal Preferred by reason of the redemption of such shares on such
redemption date and (b) the Discounted Value of Moody's Eligible Assets (if
Moody's is then rating the shares of Municipal Preferred) and the Discounted
Value of Standard & Poor's Eligible Assets (if Standard & Poor's is then rating
the shares of Municipal Preferred) each at least equal the Municipal Preferred
Basic Maintenance Amount and would at least equal the Municipal Preferred Basic
Maintenance Amount immediately subsequent to such redemption if such redemption
were to occur on such date. For purposes of determining in clause (b) of the
preceding sentence whether the Discounted Value of Moody's Eligible Assets at
least equals the Municipal Preferred Basic Maintenance Amount, the Moody's
Discount Factors applicable to Moody's Eligible Assets will be determined by
reference to the first Moody's Exposure Period longer than the Moody's Exposure
Period then applicable to the Fund.
MANDATORY REDEMPTION. The Fund will be required to redeem, at a redemption
price equal to $25,000 per share plus accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date fixed by the
Board of Trustees for redemption (such amount, together with the redemption
prices described above under "Optional Redemption," being herein referred to as
the "Redemption Price"), certain of the shares of Municipal Preferred to the
extent permitted under the 1940 Act, the Declaration, the By-Laws and any
applicable law, if the Fund fails to maintain the Municipal Preferred Basic
Maintenance Amount or the 1940 Act Municipal Preferred Asset Coverage in
accordance with the requirements of the rating agency or rating agencies then
rating the shares of Municipal Preferred and such failure is not cured on or
before the Municipal Preferred Basic Maintenance Cure Date or the 1940 Act Cure
Date (herein respectively referred to as a "Cure Date"), as the case may be. The
number of shares of Municipal Preferred to be redeemed will be equal to the
lesser of (a) the minimum number of shares of Municipal Preferred, together with
all other Preferred Shares subject to redemption or retirement, the redemption
of which, if deemed to have occurred immediately prior to the opening of
business on the Cure Date, would have resulted in the satisfaction of the
Municipal Preferred Basic Maintenance Amount or the 1940 Act Municipal Preferred
Asset Coverage, as the case may be, on such Cure Date (provided, however, that,
if there is no such minimum number of shares of Municipal Preferred and other
Preferred Shares the redemption or retirement of which would have had such
result, all shares of Municipal Preferred and Preferred Shares then outstanding
will be redeemed), and (b) the maximum number of shares of Municipal Preferred,
together with all other Preferred Shares subject to redemption or retirement,
that can be redeemed out of funds expected to be legally available therefor. In
determining the shares of Municipal Preferred required to be redeemed in
accordance with the foregoing, the Fund will allocate the number of shares
required to be redeemed to satisfy the Municipal Preferred Basic Maintenance
Amount or the 1940 Act Municipal Preferred Asset Coverage, as the case may be,
pro rata among shares of Municipal Preferred and any other Preferred Shares
subject to redemption or retirement.
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The Fund is required to effect such a mandatory redemption not earlier than
20 days and not later than 40 days after such Cure Date, except that if the Fund
does not have funds legally available under the Declaration, the By-Laws and
applicable law for the redemption of all of the required number of shares of
Municipal Preferred and other Preferred Shares which are subject to mandatory
redemption or retirement or the Fund otherwise is unable to effect such
redemption on or prior to 40 days after such Cure Date, the Fund will redeem
those shares of Municipal Preferred and other Preferred Shares which it was
unable to redeem on the earliest practicable date on which it is able to effect
such redemption. If fewer than all of the outstanding shares of Municipal
Preferred are to be redeemed pursuant to a mandatory redemption, the number of
shares to be redeemed shall be redeemed pro rata from the holders of such shares
in proportion to the number of such shares held by such holders, in the same
manner as described above in respect of optional redemptions of fewer than all
outstanding shares of Municipal Preferred.
NOTICE OF REDEMPTION. Notice of redemption shall be given by mailing the
same to each holder of the shares to be redeemed (initially Cede & Co. as
nominee of the Securities Depository), not less than 20 nor more than 45 days
prior to the date fixed for redemption thereof, to the respective addresses of
such holders as the same shall appear on the record books of the Fund ("Notice
of Redemption"). Each such notice shall state (i) the redemption date; (ii) the
number of shares of Municipal Preferred to be redeemed; (iii) the CUSIP number
for such shares; (iv) the Redemption Price; (v) the place or places where
certificate(s) for such shares (properly endorsed or assigned for transfer, if
the Board of Trustees shall so require and the notice shall so state) are to be
surrendered for payment of the Redemption Price; (vi) that dividends on the
shares to be redeemed will cease to accumulate on such redemption date; and
(vii) the provisions of the By-Laws under which such redemption is made. If
fewer than all shares of Municipal Preferred held by any holder are to be
redeemed, the notice mailed to such holder shall also specify the number of
shares to be redeemed from such holder. The Fund may provide in any Notice of
Redemption relating to an optional redemption that such redemption is subject to
one or more conditions precedent and that the Fund shall not be required to
effect such redemption unless each such condition shall have been satisfied at
the time or times and in the manner specified in such Notice of Redemption.
OTHER REDEMPTION PROCEDURES. To the extent that any redemption for which a
Notice of Redemption has been mailed is not made by reason of the absence of
legally available funds therefor, such redemption will be made as soon as
practicable to the extent such funds become available. Failure to redeem shares
of Municipal Preferred will be deemed to exist at any time after the date
specified for redemption in a Notice of Redemption when the Fund shall have
failed, for any reason whatsoever, to deposit with the Auction Agent the
Redemption Price with respect to any shares for which such Notice of Redemption
has been mailed. Notwithstanding the fact that the Fund may not have redeemed
shares of Municipal Preferred for which a Notice of Redemption has been mailed,
dividends may be declared and paid on shares of Municipal Preferred and will
include those shares of Municipal Preferred for which a Notice of Redemption has
been mailed. The first two sentences of this paragraph shall not apply in the
event the Fund provides in any Notice of Redemption relating to an optional
redemption that such redemption is subject to one or more conditions precedent
and any such condition precedent shall not have been satisfied at the time or
times and in the manner specified in such Notice of Redemption.
Provided a Notice of Redemption has been mailed as described above, upon
the deposit with the Auction Agent (on the Business Day next preceding the date
fixed for redemption thereby, in funds available on the next Business Day in The
City of New York, New York) of funds sufficient to redeem the shares of
Municipal Preferred that are the subject of such notice, dividends on such
shares will cease to accumulate and such shares will no longer be deemed
outstanding for any purpose, and all rights of the holders of the shares so
called for redemption will cease and terminate, except the right of the holders
thereof to receive the Redemption Price, but without any interest or other
additional amount, except as otherwise provided above under
"Dividends -- Determination of Dividend Rate" and "-- Gross-up Payments." Upon
surrender in accordance with the Notice of Redemption of the certificates for
any shares so redeemed (properly endorsed or assigned for transfer, if the Board
of Trustees shall so require and the notice shall so state), the Redemption
Price shall be paid by the Auction Agent to the holders of shares of Municipal
Preferred subject to redemption. In the case that fewer than all of the shares
represented by any
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<PAGE> 102
such certificate are redeemed, a new certificate shall be issued, representing
the unredeemed shares, without cost to the holder thereof. The Fund will be
entitled to receive from the Auction Agent, promptly after the date fixed for
redemption, any cash deposited with the Auction Agent in excess of (i) the
aggregate Redemption Price of the shares of Municipal Preferred called for
redemption on such date and (ii) all other amounts to which holders of shares of
Municipal Preferred called for redemption may be entitled. Any funds so
deposited that are unclaimed at the end of 90 days from such redemption date
will, to the extent permitted by law, be repaid to the Fund, after which time
the holders of shares of Municipal Preferred so called for redemption may look
only to the Fund for payment of the Redemption Price and all other amounts to
which they may be entitled. The Fund will be entitled to receive, from time to
time after the date fixed for redemption, any interest on the funds so
deposited.
Notwithstanding the foregoing, if any dividends on shares of Municipal
Preferred (whether or not earned or declared) are in arrears, no shares of
Municipal Preferred shall be redeemed unless all outstanding shares of Municipal
Preferred are simultaneously redeemed, and the Fund shall not purchase or
otherwise acquire any shares of Municipal Preferred; provided, however, that the
foregoing shall not prevent the purchase or acquisition of all outstanding
shares of Municipal Preferred pursuant to the successful completion of an
otherwise lawful purchase or exchange offer made on the same terms to, and
accepted by, holders of all outstanding shares of Municipal Preferred.
Except as described above with respect to redemptions and under "The
Auction -- Orders by Existing Holders and Potential Holders," the Declaration
and the By-Laws do not prohibit the Fund or any affiliate of the Fund from
purchasing or otherwise acquiring any shares of Municipal Preferred.
The Fund has the right to arrange for third parties to purchase from the
holders thereof shares of Municipal Preferred which are to be redeemed as
described above.
LIQUIDATION
Upon a dissolution, liquidation or winding up of the affairs of the Fund,
whether voluntary or involuntary, the holders of shares of Municipal Preferred
then outstanding will be entitled to receive and to be paid out of the assets of
the Fund available for distribution to its shareholders, before any payment or
distribution shall be made on the Common Shares or on any other class of shares
of the Fund ranking junior to the Municipal Preferred upon dissolution,
liquidation or winding up of the affairs of the Fund, an amount equal to the
liquidation preference with respect to such shares. The liquidation preference
for shares of Municipal Preferred shall be $25,000 per share, plus an amount
equal to all dividends thereon (whether or not earned or declared) accumulated
but unpaid to (but not including) the date of final distribution in same-day
funds, together with any applicable Gross-up Payments in connection with the
dissolution, liquidation or winding up of the affairs of the Fund. After the
payment to the holders of the shares of Municipal Preferred of the full
preferential amounts provided for as described herein, the holders of Municipal
Preferred as such shall have no right or claim to any of the remaining assets of
the Fund. In the event the assets of the Fund available for distribution to the
holders of shares of Municipal Preferred, upon any dissolution, liquidation or
winding up of the affairs of the Fund, whether voluntary or involuntary, shall
be insufficient to pay in full all amounts to which such holders are entitled,
no such distribution shall be made on account of any other class or series of
Preferred Shares ranking on a parity with the shares of Municipal Preferred upon
such dissolution, liquidation or winding up unless proportionate distributive
amounts shall be paid on account of the shares of Municipal Preferred, ratably,
in proportion to the full distributable amounts for which holders of all such
parity shares are respectively entitled upon such dissolution, liquidation or
winding up. Subject to the rights of the holders of any series or class or
classes of shares ranking on a parity with the shares of Municipal Preferred
with respect to the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Fund, after payment shall have been made in
full to the holders of the shares of Municipal Preferred as described herein,
but not prior thereto, any other series or class or classes of shares ranking
junior to the shares of Municipal Preferred with respect to the distribution of
assets upon dissolution, liquidation or winding up shall, subject to the
respective terms and provisions (if any) applying thereto, be entitled to
receive any and all assets
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remaining to be paid or distributed, and the holders of the shares of Municipal
Preferred shall not be entitled to share therein.
Neither the sale of all or substantially all the property or business of
the Fund, nor the merger or consolidation of the Fund into or with any
Massachusetts business trust or corporation nor the merger or consolidation of
any Massachusetts business trust or corporation into or with the Fund shall be a
dissolution, liquidation or winding up of the affairs of the Fund, whether
voluntary or involuntary, for the purposes of the foregoing paragraph.
REPURCHASE OF COMMON SHARES
The Fund is a closed-end investment company and as such its shareholders
will not have the right to cause the Fund to redeem their shares. Common Shares
trade in the open market at a price that is a function of several factors,
including net asset value and yield. Shares of closed-end investment companies
like the Fund that invest predominantly in municipal bonds sometimes have traded
at prices higher than net asset value and at other times have traded at prices
lower than net asset value. The Board of Trustees has currently determined that,
at least annually, it will consider action that might be taken to reduce or
eliminate any material discount from net asset value in respect of Common
Shares, which may include the repurchase of such shares in the open market or in
private transactions, the making of a tender offer for such shares at net asset
value, or the conversion of the Fund to an open-end investment company. There
can be no assurance, however, that the Board of Trustees will decide to take any
of these actions, or that share repurchases or tender offers, if undertaken,
will reduce market discount. In addition, see "Description of Municipal
Preferred -- Dividends -- Restrictions on Dividends and Other Payments" for a
discussion of the limitations on the Fund's ability to engage in certain
transactions. The staff of the SEC currently requires that any tender offer made
by a closed-end investment company for its shares must be at a price equal to
the net asset value of such shares on the close of business on the last day of
the tender offer. Any service fees incurred in connection with any tender offer
made by the Fund will be borne by the Fund and will not reduce the stated
consideration to be paid to tendering shareholders.
Subject to its investment limitations, the Fund may borrow to finance the
repurchase of shares or to make a tender offer. Interest on any borrowings to
finance share repurchase transactions or the accumulation of cash by the Fund in
anticipation of share repurchases or tenders will reduce the Fund's net income.
Any share repurchase, tender offer or borrowing that might be approved by the
Board of Trustees would have to comply with the 1934 Act, as amended, and the
1940 Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from net
asset value will be made by the Board of Trustees at the time it considers such
issue, it is the Board's present policy, which may be changed by the Board, not
to authorize repurchases of the Fund's Common Shares or a tender offer for such
shares if (1) such transactions, if consummated, would (a) result in the
delisting of the Common Shares from the American Stock Exchange, or (b) impair
the Fund's status as a regulated investment company under the Code (which would
make the Fund a taxable entity, causing the Fund's income to be taxed at the
corporate level in addition to the taxation of shareholders who receive
dividends from the Fund) or as a registered closed-end investment company under
the 1940 Act; (2) the Fund would not be able to liquidate portfolio securities
in an orderly manner and consistent with the Fund's investment objective and
policies in order to repurchase shares; or (3) there is, in the Board's
judgment, any (a) material legal action or proceeding instituted or threatened
challenging such transactions or otherwise materially adversely affecting the
Fund, (b) general suspension of or limitation on prices for trading securities
on the American Stock Exchange, (c) declaration of a banking moratorium by
federal or state authorities or any suspension of payment by United States or
New York State banks in which the Fund invests, (d) material limitation
affecting the Fund or the issuers of its portfolio securities by federal or
state authorities on the extension of credit by lending institutions or on the
exchange of foreign currency, (e) commencement of war, armed hostilities or
other international or national calamity directly or indirectly involving the
United States, or (f) other event or condition which would have a material
adverse
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effect (including any adverse tax effect) on the Fund or its shareholders if
shares were repurchased. The Board of Trustees may in the future modify these
conditions in light of experience. Before deciding whether to take any action in
response to a discount from net asset value, the Board of Trustees would
consider all relevant factors, including the extent and duration of the
discount, the liquidity of the Fund's portfolio, the impact of any action that
might be taken on the Fund or its shareholders, and market considerations. Based
on these considerations, even if the Fund's Common Shares should trade at a
discount, the Board may determine that, in the interest of the Fund and its
shareholders, no action should be taken.
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MISCELLANEOUS INVESTMENT PRACTICES
SHORT-TERM TRADING
In seeking to accomplish the Fund's investment objective, the Advisor may
buy or sell portfolio securities whenever the Advisor believes it appropriate to
do so. In deciding whether to sell a portfolio security, the Advisor does not
consider how long the Fund has owned the security. From time to time the Fund
may buy securities intending to seek short-term trading profits. A change in the
securities held by the Fund is known as "portfolio turnover" and generally
involves some expense to the Fund. This expense may include brokerage
commissions or dealer markups and other transaction costs on both the sale of
securities and the reinvestment of the proceeds in other securities. If sales of
portfolio securities cause the Fund to realize net short-term capital gain, such
gain generally will be taxable as ordinary income. As a result of the Fund's
investment policies, under certain market conditions the Fund's portfolio
turnover rate may be higher than that of other investment companies. Portfolio
turnover rate for a fiscal year is the ratio of the lesser of purchases or sales
of portfolio securities to the monthly average of the value of portfolio
securities -- excluding securities whose maturities at acquisition were one year
or less. The Fund's portfolio turnover rate is not a limiting factor when the
Advisor considers a change in the Fund's portfolio.
LOWER-RATED SECURITIES
The Fund may invest up to 20% of its net assets in Municipal Obligations
that, at the time of investment, are rated Ba or B by Moody's or BB or B by
Standard & Poor's or comparably rated by another Rating Agency and unrated
Municipal Obligations considered to be of comparable quality by the Advisor. The
Fund may not invest in bonds rated below B by Moody's or Standard & Poor's or
comparably rated by another Rating Agency. Bonds rated Ba/BB and below are
regarded as having predominantly speculative characteristics with respect to
capacity to pay interest and repay principal, and are commonly referred to as
"junk bonds." These risks include greater sensitivity to a general economic
downturn and less secondary market trading. The lower ratings of certain
securities held by the Fund reflect a greater possibility that adverse changes
in the financial condition of the issuer or in general economic conditions, or
both, or an unanticipated rise in interest rates, may impair the ability of the
issuer to make payments of interest and principal. The inability (or perceived
inability) of issuers to make timely payments of interest and principal would
likely make the values of securities held by the Fund more volatile and could
limit the Fund's ability to sell its securities at prices approximating the
values the Fund had placed on such securities. In the absence of a liquid
trading market for securities held by it, the Fund at times may be unable to
establish the fair value for such securities.
Securities ratings are based largely on the issuer's historical financial
condition and the rating agencies' analysis at the time of rating. Consequently,
the rating assigned to any particular security is not necessarily a reflection
of the issuer's current financial condition, which may be better or worse than
the rating would indicate. In addition, the rating assigned to a security by
Moody's or Standard & Poor's (or by any other nationally recognized securities
rating organization) does not reflect an assessment of the volatility of the
security's market value or the liquidity of an investment in the security. See
Appendix A for a description of security ratings.
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. A decrease in
interest rates will generally result in an increase in the value of the Fund's
assets. Conversely, during periods of rising interest rates, the value of the
Fund's assets will generally decline. The values of lower-rated securities may
often be affected to a greater extent by changes in general economic conditions
and business conditions affecting the issuers of such securities and their
industries. Negative publicity or investor perceptions may also adversely affect
the values of lower-rated securities. Changes by recognized rating services in
their ratings of any fixed-income security and changes in the ability of an
issuer to make payments of interest and principal may also affect the value of
these investments. Changes in the value of portfolio securities generally will
not affect income derived from these securities, but will affect the Fund's net
asset value. The Fund will not necessarily dispose of a security when its rating
is reduced below its rating at the time of purchase. However, the Advisor will
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monitor the investment to determine whether its retention will assist in meeting
the Fund's investment objective.
Issuers of lower-rated securities are often highly leveraged, so that their
ability to service their debt obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. Such issuers may not
have more traditional methods of financing available to them and may be unable
to repay outstanding obligations at maturity by refinancing. The risk of loss
due to default in payment of interest or repayment of principal by such issuers
is significantly greater because such securities frequently are unsecured and
subordinated to the prior payment of senior indebtedness.
At times, a substantial portion of the Fund's assets may be invested in
securities as to which the Fund, by itself or together with other trusts and
accounts managed by the Advisor and its affiliates, holds all or a major portion
of the securities outstanding. Although the Advisor generally considers such
securities to be liquid because of the availability of an institutional market
for such securities, it is possible that, under adverse market or economic
conditions or in the event of adverse changes in the financial condition of the
issuer, the Fund could find it more difficult to sell these securities when the
Advisor believes it advisable to do so or may be able to sell the securities
only at prices lower than if they were more widely held. Under these
circumstances, it may also be more difficult to determine the fair value of such
securities for purposes of computing the Fund's net asset value. In order to
enforce its rights in the event of a default under such securities, the Fund may
be required to participate in various legal proceedings or take possession of
and manage assets securing the issuer's obligations on such securities. This
could increase the Fund's operating expenses and adversely affect the Fund's net
asset value.
Certain securities held by the Fund may permit the issuer at its option to
"call," or redeem, its securities. If an issuer were to redeem securities held
by the Fund during a time of declining interest rates, the Fund might not be
able to reinvest the proceeds in securities providing the same investment return
as the securities redeemed. The Fund may invest without limit in such bonds.
To the extent the Fund invests in lower-rated or unrated securities, the
achievement of the Fund's goals is more dependent on the Advisor's investment
analysis than would be the case if the Fund were investing in investment grade
securities.
PRIVATE PLACEMENTS
The Fund may invest in securities that are purchased in private placements
and, accordingly, may be subject to restrictions on resale as a matter of
contract or under federal securities laws. Because there may be relatively few
potential purchasers for such investments, especially under adverse market or
economic conditions or in the event of adverse changes in the financial
condition of the issuer, the Fund could find it more difficult to sell such
securities when the Advisor 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. At times, it may also be more difficult to determine the fair value
of such securities for purposes of computing the Fund's net asset value.
STEP COUPON BONDS (STEPS)
The Fund may invest in debt securities which do not pay interest for a
stated period of time and then pay interest at a series of different rates for a
series of periods. In addition to the risks associated with the credit rating of
the issuers, these securities are subject to the volatility risk of zero coupon
bonds for the period when no interest is paid.
TENDER OPTION BONDS
A tender option bond is a municipal security (generally held pursuant to a
custodial arrangement) having a relatively long maturity and bearing interest at
a fixed rate substantially higher than prevailing short-term tax-exempt rates
that has been coupled with the agreement of a third party, such as a bank,
broker-dealer or other financial institution, pursuant to which such institution
grants the security holders
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the option, at periodic intervals, to tender their securities to the institution
and receive the face value thereof. As consideration for providing the option,
the financial institution receives periodic fees equal to the difference between
the municipal security's fixed coupon rate and the rate, as determined by a
remarketing or similar agent at or near the commencement of such period, that
would cause the securities, coupled with the tender option, to trade at par on
the date of such determination. Thus, after payment of this fee, the security
holder effectively holds a demand obligation that bears interest at the
prevailing short-term tax-exempt rate. The Advisor will consider on an ongoing
basis the creditworthiness of the issuer of the underlying municipal securities,
of any custodian, and of the third-party provider of the tender option. In
certain instances and for certain tender option bonds, the option may be
terminable in the event of a default in payment of principal or interest on the
underlying municipal securities and for other reasons.
PAY-IN-KIND (PIK) SECURITIES
The Fund may invest in securities which pay interest either in cash or
additional securities at the issuer's option. These securities are generally
high yield securities and in addition to the other risks associated with
investing in high yield securities are subject to the risks that the interest
payments, which consist of additional securities, will also be subject to the
risks of high yield securities.
MONEY MARKET INSTRUMENTS
The Fund may invest in short-term money market instruments as follows:
Government obligations are issued by the U.S. or foreign governments, their
subdivisions, agencies and instrumentalities. Supranational obligations are
issued by supranational entities and are generally designed to promote economic
improvements. Certificates of deposit are issued against deposits in a
commercial bank with a defined return and maturity. Banker's acceptances are
used to finance the import, export or storage of goods and are "accepted" when
guaranteed at maturity by a bank. Commercial paper is promissory notes issued by
businesses to finance short-term needs (including those with floating or
variable interest rates, or including a frequent interval put feature).
Short-term corporate obligations are bonds and notes (with one year or less to
maturity at the time of purchase) issued by businesses to finance long-term
needs.
FORWARD COMMITMENTS
The Fund may enter into contracts to purchase securities for a fixed price
at a future date beyond customary settlement time ("forward commitments") if the
Fund sets aside, on the books and records of its custodian, liquid assets in an
amount sufficient to meet the purchase price, or if the Fund enters into
offsetting contracts for the forward sale of other securities it owns. In the
case of to-be-announced ("TBA") purchase commitments, the unit price and the
estimated principal amount are established when the Fund enters into a contract,
with the actual principal amount being within a specified range of the estimate.
Forward commitments may be considered securities in themselves, and involve a
risk of loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in the value
of the Fund's other assets. Where such purchases are made through dealers, the
Fund relies on the dealer to consummate the sale. The dealer's failure to do so
may result in the loss to the Fund of an advantageous yield or price. Although
the Fund will generally enter into forward commitments with the intention of
acquiring securities for its portfolio or for delivery pursuant to options
contracts it has entered into, the Fund may dispose of a commitment prior to
settlement if the Advisor deems it appropriate to do so. The Fund may realize
short-term profits or losses on the sale of forward commitments.
The Fund may enter into TBA sale commitments to hedge its portfolio
positions or to sell securities it owns under delayed delivery arrangements.
Proceeds of TBA sale commitments are not received until the contractual
settlement date. During the time a TBA sale commitment is outstanding,
equivalent deliverable securities, or an offsetting TBA purchase commitment
deliverable on or before the sale commitment date, are held as "cover" for the
transaction. Unsettled TBA sale commitments are valued at current market value
of the underlying securities. If the TBA sale commitment is closed through the
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acquisition of an offsetting purchase commitment, the Fund realizes a gain or
loss on the commitment without regard to any unrealized gain or loss on the
underlying security. If the Fund delivers securities under the commitment, the
Fund realizes a gain or loss from the sale of the securities based upon the unit
price established at the date the commitment was entered into.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements. A repurchase agreement is a
contract under which the Fund acquires a security for a relatively short period
(usually not more than one week), subject to the obligation of the seller to
repurchase and the Fund to resell such security at a fixed time and price
(representing the Fund's cost plus interest). It is the Fund's present intention
to enter into repurchase agreements only with commercial banks and registered
broker-dealers and only with respect to obligations of the U.S. government or
its agencies or instrumentalities. Repurchase agreements may also be viewed as
loans made by the Fund which are collateralized by the securities subject to
repurchase. The Advisor will monitor such transactions to ensure that the value
of the underlying securities will be at least equal at all times to the total
amount of the repurchase obligation, including the interest factor. If the
seller defaults, the Fund could realize a loss on the sale of the underlying
security to the extent that the proceeds of sale, including accrued interest,
are less than the resale price provided in the agreement, including interest. In
addition, if the seller should be involved in bankruptcy or insolvency
proceedings, the Fund may incur delay and costs in selling the underlying
security or may suffer a loss of principal and interest if the Fund is treated
as an unsecured creditor and required to return the underlying collateral to the
seller's estate.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund may transfer uninvested cash balances into a joint account,
along with cash of other Liberty Funds and certain other accounts. These
balances may be invested in one or more repurchase agreements and/or short-term
money market instruments.
OPTIONS ON SECURITIES
WRITING COVERED OPTIONS. The Fund may write covered call options and
covered put options on optionable securities held in its portfolio, when in the
opinion of the Advisor such transactions are consistent with the Fund's
investment objective and policies. Call options written by the Fund give the
purchaser the right to buy the underlying securities from the Fund at a stated
exercise price; put options give the purchaser the right to sell the underlying
securities to the Fund at a stated price.
The Fund may write only covered options, which means that, so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, the Fund will
hold cash and/or high-grade short-term debt obligations equal to the price to be
paid if the option is exercised. In addition, the Fund will be considered to
have covered a put or call option if and to the extent that it holds an option
that offsets some or all of the risk of the option it has written. The Fund may
write combinations of covered puts and calls on the same underlying security.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's return on the underlying security in the event the option
expires unexercised or is closed out at a profit. The amount of the premium
reflects, among other things, the relationship between the exercise price and
the current market value of the underlying security, the volatility of the
underlying security, the amount of time remaining until expiration, current
interest rates and the effect of supply and demand in the options market and in
the market for the underlying security. By writing a call option, the Fund
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option but continues to bear
the risk of a decline in the value of the underlying security. By writing a put
option, the Fund assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then-current market
value, resulting in a potential capital loss unless the security subsequently
appreciates in value.
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The Fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an offsetting option. The Fund realizes a profit or loss from a closing
transaction if the cost of the transaction (option premium plus transaction
costs) is less or more than the premium received from writing the option. If the
Fund writes a call option but does not own the underlying security, and when it
writes a put option, the Fund may be required to deposit cash or securities with
its broker as "margin," or collateral, for its obligation to buy or sell the
underlying security. As the value of the underlying security varies, the Fund
may have to deposit additional margin with the broker. Margin requirements are
complex and are fixed by individual brokers, subject to minimum requirements
currently imposed by the Federal Reserve Board and by stock exchanges and other
self-regulatory organizations.
PURCHASING PUT OPTIONS. The Fund may purchase put options to protect its
portfolio holdings in an underlying security against a decline in market value.
Such protection is provided during the life of the put option since the Fund, as
holder of the option, is able to sell the underlying security at the put
exercise price regardless of any decline in the underlying security's market
price. In order for a put option to be profitable, the market price of the
underlying security must decline sufficiently below the exercise price to cover
the premium and transaction costs. By using put options in this manner, the Fund
will reduce any profit it might otherwise have realized from appreciation of the
underlying security by the premium paid for the put option and by transaction
costs.
PURCHASING CALL OPTIONS. The Fund may purchase call options to hedge
against an increase in the price of securities that the Fund wants ultimately to
buy. Such hedge protection is provided during the life of the call option since
the Fund, as holder of the call option, is able to buy the underlying security
at the exercise price regardless of any increase in the underlying security's
market price. In order for a call option to be profitable, the market price of
the underlying security must rise sufficiently above the exercise price to cover
the premium and transaction costs.
RISK FACTORS IN OPTIONS TRANSACTIONS
The successful use of the Fund's options strategies depends on the ability
of the Advisor to forecast interest rate and market movements correctly. For
example, if the Fund were to write a call option based on the Advisor's
expectation that the price of the underlying security would fall, but the price
were to rise instead, the Fund could be required to sell the security upon
exercise at a price below the current market price. Similarly, if the Fund were
to write a put option based on the Advisor's expectation that the price of the
underlying security would rise, but the price were to fall instead, the Fund
could be required to purchase the security upon exercise at a price higher than
the current market price.
When the Fund purchases an option, it runs the risk that it will lose its
entire investment in the option in a relatively short period of time, unless the
Fund exercises the option or enters into a closing sale transaction before the
option's expiration. If the price of the underlying security does not rise (in
the case of a call) or fall (in the case of a put) to an extent sufficient to
cover the option premium and transaction costs, the Fund will lose part or all
of its investment in the option. This contrasts with an investment by the Fund
in the underlying security, since the Fund will not realize a loss if the
security's price does not change.
The effective use of options also depends on the Fund's ability to
terminate option positions at times when the Advisor deems it desirable to do
so. There is no assurance that the Fund will be able to effect closing
transactions at any particular time or at an acceptable price.
If a secondary market in options were to become unavailable, the Fund could
no longer engage in closing transactions. Lack of investor interest might
adversely affect the liquidity of the market for particular options or series of
options. A market may discontinue trading of a particular option or options
generally. In addition, a market could become temporarily unavailable if unusual
events -- such as volume in excess of trading or clearing capability -- were to
interrupt its normal operations.
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A market may at times find it necessary to impose restrictions on
particular types of options transactions, such as opening transactions. For
example, if an underlying security ceases to meet qualifications imposed by the
market or the Options Clearing Corporation, new series of options on that
security will no longer be opened to replace expiring series, and opening
transactions in existing series may be prohibited. If an options market were to
become unavailable, the Fund as a holder of an option would be able to realize
profits or limit losses only by exercising the option, and the Fund, as option
writer, would remain obligated under the option until expiration or exercise.
Disruptions in the markets for the securities underlying options purchased
or sold by the Fund could result in losses on the options. If trading is
interrupted in an underlying security, the trading of options on that security
is normally halted as well. As a result, the Fund as purchaser or writer of an
option will be unable to close out its positions until options trading resumes,
and it may be faced with considerable losses if trading in the security reopens
at a substantially different price. In addition, the Options Clearing
Corporation or other options markets may impose exercise restrictions. If a
prohibition on exercise is imposed at the time when trading in the option has
also been halted, the Fund as purchaser or writer of an option will be locked
into its position until one of the two restrictions has been lifted. If the
Options Clearing Corporation were to determine that the available supply of an
underlying security appears insufficient to permit delivery by the writers of
all outstanding calls in the event of exercise, it may prohibit indefinitely the
exercise of put options. The Fund, as holder of such a put option, could lose
its entire investment if the prohibition remained in effect until the put
option's expiration.
FUTURES CONTRACTS AND RELATED OPTIONS
Subject to applicable law, the Fund may invest without limit in the types
of futures contracts and related options identified in the Prospectus for
hedging and non-hedging purposes, such as to manage the effective duration of
the Fund's portfolio or as a substitute for direct investment. A financial
futures contract sale creates an obligation by the seller to deliver the type of
financial instrument called for in the contract in a specified delivery month
for a stated price. A financial futures contract purchase creates an obligation
by the purchaser to take delivery of the type of financial instrument called for
in the contract in a specified delivery month at a stated price. The
determination is made in accordance with the rules of the exchange on which the
futures contract sale or purchase was made. Futures contracts are traded in the
United States only on commodity exchanges or boards of trade -- known as
"contract markets" -- approved for such trading by the Commodity Futures Trading
Commission (the "CFTC"), and must be executed through a futures commission
merchant or brokerage firm which is a member of the relevant contract market.
Although futures contracts (other than index futures) by their terms call
for actual delivery or acceptance of commodities or securities, in most cases
the contracts are closed out before the settlement date without the making or
taking of delivery. Closing out a futures contract sale is effected by
purchasing a futures contract for the same aggregate amount of the specific type
of financial instrument or commodity with the same delivery date. If the price
of the initial sale of the futures contract exceeds the price of the offsetting
purchase, the seller is paid the difference and realizes a gain. Conversely, if
the price of the offsetting purchase exceeds the price of the initial sale, the
seller realizes a loss. If the Fund is unable to enter into a closing
transaction, the amount of the Fund's potential loss is unlimited. The closing
out of a futures contract purchase is effected by the purchaser's entering into
a futures contract sale. If the offsetting sale price exceeds the purchase
price, the purchaser realizes a gain, and if the purchase price exceeds the
offsetting sale price, the purchaser realizes a loss. In general, 40% of the
gain or loss arising from the closing out of a futures contract traded on an
exchange approved by the CFTC is treated as short-term gain or loss, and 60% is
treated as long-term gain or loss.
Unlike when the Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract. Upon
entering into a contract, the Fund is required to deposit with its custodian in
a segregated account in the name of the futures broker an amount of liquid
assets. This amount is known as "initial margin." The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
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funds to finance the transactions. Rather, initial margin is similar to a
performance bond or good faith deposit which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations have
been satisfied. Futures contracts also involve brokerage costs.
Subsequent payments, called "variation margin" or "maintenance margin," to
and from the broker (or the custodian) are made on a daily basis as the price of
the underlying security or commodity fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"marking to the market." For example, when the Fund has purchased a futures
contract on a security and the price of the underlying security has risen, that
position will have increased in value and the Fund will receive from the broker
a variation margin payment based on that increase in value. Conversely, when the
Fund has purchased a security futures contract and the price of the underlying
security has declined, the position would be less valuable and the Fund would be
required to make a variation margin payment to the broker.
The Fund may elect to close some or all of its futures positions at any
time prior to their expiration in order to reduce or eliminate a position then
currently held by the Fund. The Fund may close its positions by taking opposite
positions which will operate to terminate the Fund's position in the futures
contracts. Final determinations of variation margin are then made, additional
cash is required to be paid by or released to the Fund, and the Fund realizes a
loss or a gain. Such closing transactions involve additional commission costs.
The Fund does not intend to purchase or sell futures or related options for
other than hedging purposes if, as a result, the sum of the initial margin
deposits on the Fund's existing futures and related options positions and
premiums paid for outstanding options on futures contracts would exceed 5% of
the Fund's net assets.
OPTIONS ON FUTURES CONTRACTS. The Fund may purchase and write call and put
options on futures contracts and it may buy or sell and enter into closing
transactions with respect to such options to terminate existing positions.
Options on futures contracts give the purchaser the right, in return for the
premium paid, to assume a position in a futures contract at the specified option
exercise price at any time during the period of the option. The Fund may use
options on futures contracts in lieu of writing or buying options directly on
the underlying securities or purchasing and selling the underlying futures
contracts. For example, to hedge against a possible decrease in the value of its
portfolio securities, the Fund may purchase put options or write call options on
futures contracts rather than selling futures contracts. Similarly, the Fund may
purchase call options or write put options on futures contracts as a substitute
for the purchase of futures contracts to hedge against a possible increase in
the price of securities which the Fund expects to purchase. Such options
generally operate in the same manner as options purchased or written directly on
the underlying investments.
As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an offsetting option. There is
no guarantee that such closing transactions can be effected.
The Fund will be required to deposit initial margin and maintenance margin
with respect to put and call options on futures contracts written by it pursuant
to brokers' requirements, similar to those described above in connection with
the discussion of futures contracts.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. Successful
use of futures contracts by the Fund is subject to the Advisor's ability to
predict movements in various factors affecting securities markets, including
interest rates. Compared to the purchase or sale of futures contracts, the
purchase of call or put options on futures contracts involves less potential
risk to the Fund because the maximum amount at risk is the premium paid for the
options (plus transaction costs). However, there may be circumstances when the
purchase of a call or put option on a futures contract would result in a loss to
the Fund when the purchase or sale of a futures contract would not, such as when
there is no movement in the prices of the hedged investments. The writing of an
option on a futures contract involves risks similar to those risks relating to
the sale of futures contracts.
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The use of options and futures strategies also involves the risk of
imperfect correlation among movements in the prices of the securities underlying
the futures and options purchased and sold by the Fund, of the options and
futures contracts themselves, and, in the case of hedging transactions, of the
securities which are the subject of a hedge.
There is no assurance that higher than normal trading activity or other
unforeseen events might not, at times, render certain market clearing facilities
inadequate, and thereby result in the institution by exchanges of special
procedures which may interfere with the timely execution of customer orders.
To reduce or eliminate a position held by the Fund, the Fund may seek to
close out such position. The ability to establish and close out positions will
be subject to the development and maintenance of a liquid secondary market. It
is not certain that this market will develop or continue to exist for a
particular futures contract or option. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain contracts or options, (ii) restrictions
may be imposed by an exchange on opening transactions or closing transactions or
both, (iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of contracts or options, or underlying
securities, (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange, (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current trading volume,
or (vi) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of contracts or options
(or a particular class or series of contracts or options), in which event the
secondary market on that exchange for such contracts or options (or in the class
or series of contracts or options) would cease to exist, although outstanding
contracts or options on the exchange that had been issued by a clearing
corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
U.S. TREASURY SECURITY FUTURES CONTRACTS AND OPTIONS. U.S. Treasury
security futures contracts require the seller to deliver, or the purchaser to
take delivery of, the type of U.S. Treasury security called for in the contract
at a specified date and price. Options on U.S. Treasury security futures
contracts give the purchaser the right, in return for the premium paid, to
assume a position in a U.S. Treasury security futures contract at the specified
option exercise price at any time during the period of the option.
Successful use of U.S. Treasury security futures contracts by the Fund is
subject to the Advisor's ability to predict movements in the direction of
interest rates and other factors affecting markets for debt securities. For
example, if the Fund has sold U.S. Treasury security futures contracts in order
to hedge against the possibility of an increase in interest rates which would
adversely affect securities held in its portfolio, and the prices of the Fund's
securities increase instead as a result of a decline in interest rates, the Fund
would be likely to lose part or all of the benefit of the increased value of its
securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash, it may have to sell securities to meet daily maintenance margin
requirements at a time when it may be disadvantageous to do so.
There is also a risk that price movements in U.S. Treasury security futures
contracts and related options will not correlate closely with price movements in
markets for particular securities. For example, if the Fund has hedged against a
decline in the values of high yield corporate securities held by it by selling
Treasury security futures and the values of Treasury securities subsequently
increase while the values of its high yield corporate securities decrease, the
Fund would incur losses on both the Treasury security futures contracts written
by it and the high yield corporate securities held in its portfolio.
INDEX FUTURES CONTRACTS. An index futures contract is a contract to buy or
sell units of an index at a specified future date at a price agreed upon when
the contract is made. Entering into a contract to buy units of an index is
commonly referred to as buying or purchasing a contract or holding a long
position in the index. Entering into a contract to sell units of an index is
commonly referred to as selling a contract or holding a short position. A unit
is the current value of the index. The Fund may enter into stock index futures
contracts, debt index futures contracts, or other index futures contracts
appropriate to its objective. The Fund may also purchase and sell options on
index futures contracts.
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There are several risks in connection with the use by the Fund of index
futures. One risk arises because of the imperfect correlation between movements
in the prices of the index futures and movements in the prices of securities
which are the subject of the hedge. The Advisor will, however, attempt to reduce
this risk by buying or selling, to the extent possible, futures on indices the
movements of which will, in its judgment, have a significant correlation with
movements in the prices of the securities sought to be hedged.
Successful use of index futures by the Fund is also subject to the
Advisor's ability to predict movements in the direction of the market. For
example, it is possible that, where the Fund has sold futures to hedge its
portfolio against a decline in the market, the index on which the futures are
written may advance and the value of securities held in the Fund's portfolio may
decline. If this occurred, the Fund would lose money on the futures and also
experience a decline in value in its portfolio securities. It is also possible
that, if the Fund has hedged against the possibility of a decline in the market
adversely affecting securities held in its portfolio and securities prices
increase instead, the Fund will lose part or all of the benefit of the increased
value of those securities it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements at a time when it is disadvantageous to do so.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the index futures and the portion
of the portfolio being hedged, the prices of index futures may not correlate
perfectly with movements in the underlying index due to certain market
distortions. First, all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the index and
futures markets. Second, margin requirements in the futures market are less
onerous than margin requirements in the securities market, and as a result the
futures market may attract more speculators than the securities market does.
Increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and also because of the imperfect correlation between movements
in the index and movements in the prices of index futures, even a correct
forecast of general market trends by the Advisor may still not result in a
profitable position over a short time period.
OPTIONS ON INDEX FUTURES. Options on index futures are similar to options
on securities except that options on index futures give the purchaser the right,
in return for the premium paid, to assume a position in an index futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the period of
the option. Upon exercise of the option, the delivery of the futures position by
the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account which
represents the amount by which the market price of the index futures contract,
at exercise, exceeds (in the case of a call) or is less than (in the case of a
put) the exercise price of the option on the index future. If an option is
exercised on the last trading day prior to its expiration date, the settlement
will be made entirely in cash equal to the difference between the exercise price
of the option and the closing level of the index on which the future is based on
the expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
OPTIONS ON INDICES
As an alternative to purchasing call and put options on index futures, the
Fund may purchase and sell call and put options on the underlying indices
themselves. Such options would be used in a manner identical to the use of
options on index futures.
INDEX WARRANTS
The Fund may purchase put warrants and call warrants whose values vary
depending on the change in the value of one or more specified securities indices
("index warrants"). Index warrants are generally issued by banks or other
financial institutions and give the holder the right, at any time during the
term of the warrant, to receive upon exercise of the warrant a cash payment from
the issuer based on the value of
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the underlying index at the time of exercise. In general, if the value of the
underlying index rises above the exercise price of the index warrant, the holder
of a call warrant will be entitled to receive a cash payment from the issuer
upon exercise based on the difference between the value of the index and the
exercise price of the warrant. If the value of the underlying index falls, the
holder of a put warrant will be entitled to receive a cash payment from the
issuer upon exercise based on the difference between the exercise price of the
warrant and the value of the index. The holder of a warrant would not be
entitled to any payments from the issuer at any time when, in the case of a call
warrant, the exercise price is greater than the value of the underlying index,
or, in the case of a put warrant, the exercise price is less than the value of
the underlying index. If the Fund were not to exercise an index warrant prior to
its expiration, then the Fund would lose the amount of the purchase price paid
by it for the warrant.
The Fund will normally use index warrants in a manner similar to its use of
options on securities indices. The risks of the Fund's use of index warrants are
generally similar to those relating to its use of index options. Unlike most
index options, however, index warrants are issued in limited amounts and are not
obligations of a regulated clearing agency, but are backed only by the credit of
the bank or other institution which issues the warrant. Also, index warrants
generally have longer terms than index options. Although the Fund will normally
invest only in exchange-listed warrants, index warrants are not likely to be as
liquid as certain index options backed by a recognized clearing agency. In
addition, the terms of index warrants may limit the Fund's ability to exercise
the warrants at such time, or in such quantities, as the Fund would otherwise
wish to do.
ZERO COUPON SECURITIES (ZEROS)
The Fund may invest in zero coupon securities, which are securities issued
at a significant discount from face value and pay interest only at maturity
rather than at intervals during the life of the security and in certificates
representing undivided interests in the interest or principal of mortgage-backed
securities (interest only/principal only), which tend to be more volatile than
other types of securities. The Fund will accrue and distribute income from zero
coupon and stripped securities and certificates on a current basis and may have
to sell securities to generate cash for distributions.
INVERSE FLOATERS
Inverse floaters are derivative securities whose interest rates vary
inversely to changes in short-term interest rates and whose values fluctuate
inversely to changes in long-term interest rates. The value of certain inverse
floaters will fluctuate substantially more in response to a given change in
long-term rates than would a traditional debt security. These securities have
investment characteristics similar to leverage, in that interest rate changes
have a magnified effect on the value of inverse floaters.
ADDITIONAL INFORMATION ON MUNICIPAL OBLIGATION INSURANCE
ORIGINAL ISSUE INSURANCE. If interest or principal on a Municipal
Obligation is due, but the issuer fails to pay it, the insurer will make
payments in the amount due to its fiscal agent no later than one business day
after the insurer has been notified of the issuer's nonpayment. The fiscal agent
will pay the amount due to the Fund after the fiscal agent receives evidence of
the Fund's right to receive payment of principal and/or interest, and evidence
that all of the rights of payment due shall thereupon vest in the insurer. When
the insurer pays the Fund the payment due from the issuer, the insurer will
succeed to the Fund's rights to that payment.
PORTFOLIO INSURANCE. Each portfolio insurance policy will be
noncancellable and will remain in effect so long as (i) the Fund is in
existence, (ii) the Fund continues to own the Municipal Obligations covered by
the policy, and (iii) the Fund timely pays the premiums for the policy. Each
insurer generally will reserve the right at any time upon 90 days' written
notice to the Fund to refuse to insure any additional Municipal Obligations the
Fund buys after the effective date of the notice. The Fund's Board of Trustees
will generally reserve the right to terminate each policy upon seven days'
written notice to an insurer if it determines that the cost of the policy is not
reasonable in relation to the value of the insurance to the Fund.
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TAX MATTERS
FEDERAL INCOME TAX MATTERS
Federal Taxation of the Fund
The ability of the Fund to qualify for taxation as a regulated investment
company under Subchapter M of the Code requires, among other things, that the
Fund derive at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies (to the extent such
currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities, or options and futures
with respect to stock or securities) and other income (including but not limited
to gains from options, futures or forward contracts) derived with respect to its
business of investing in such stock, securities or currencies.
In addition, the Fund must satisfy an asset diversification test in order
to qualify as a regulated investment company. Under this test, at the close of
each quarter of the Fund's taxable year, at least 50% of the value of the Fund's
assets must consist of cash and cash items (including receivables), U.S.
Government securities, securities of other regulated investment companies, and
securities of other issuers (as to which the Fund has not invested more than 5%
of the value of the Fund's total assets in securities of such issuer and as to
which the Fund does not hold more than 10% of the outstanding voting securities
of such issuer), and no more than 25% of the value of its total assets may be
invested in the securities of any one issuer (other than U.S. Government
securities and securities of other regulated investment companies), or in two or
more issuers which the Fund controls and which are engaged in the same or
similar trades or businesses or related trades or businesses.
Further, in order to so qualify, the Fund must distribute to its
shareholders with respect to each year at least 90% of the sum of (1) its net
tax-exempt interest income and (2) its taxable net investment income (including,
generally, taxable interest, dividends and certain other income, less certain
expenses, and the excess, if any, of net short-term capital gain over net
long-term capital loss) (the "Distribution Requirement").
A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in each calendar year an amount at least equal to the
sum of 98% of ordinary taxable income for the calendar year and 98% of capital
gain net income for the one-year period ended on October 31 of such calendar
year (or, at the election of a regulated investment company having a taxable
year ending November 30 or December 31, for its taxable year), plus 100% of any
undistributed income from the preceding year. For the foregoing purposes, a
regulated investment company is treated as having distributed any amount on
which it is subject to income tax for any taxable year ending in such calendar
year.
The Fund generally intends to make sufficient distributions (including by
way of deemed distributions) of its ordinary taxable income and capital gain net
income prior to the end of each calendar year to avoid liability for the excise
tax. However, investors should note that the Fund may in certain circumstances
be required to liquidate portfolio investments to make sufficient distributions
to avoid excise tax liability. In addition, the Fund may elect to pay the excise
tax liability if it determines that the costs of making an excise tax
distribution are greater than the excise tax liability that would be due upon
the failure to make such excise tax distribution.
If the Fund does not qualify for taxation as a regulated investment company
for any taxable year, the Fund's income will be subject to corporate income
taxes imposed at the Fund level, and all distributions from earnings and
profits, including distributions of net exempt-interest income and net capital
gain (i.e., the excess, if any, of net long-term capital gain over net
short-term capital loss), will be taxable to shareholders as ordinary income. In
addition, in order to requalify for taxation as a regulated investment company,
the Fund may be required to recognize unrealized gains, pay substantial taxes
and interest, and make certain distributions.
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If at any time when shares of Municipal Preferred are outstanding the Fund
does not meet applicable asset coverage requirements, the Fund will be required
to suspend distributions to holders of Common Shares until the requisite asset
coverage is restored. Any such suspension may cause the Fund to pay the 4%
federal excise tax described above and may prevent the Fund from satisfying the
Distribution Requirement. The Fund may redeem shares of Municipal Preferred in
an effort to comply with the Distribution Requirement and to avoid the excise
tax. See "Description of Municipal Preferred -- Dividends."
Federal Taxation of Shareholders
DIVIDENDS AND OTHER DISTRIBUTIONS. In order for any distributions to
holders of shares of Municipal Preferred to be eligible to be treated as
exempt-interest dividends, the shares of Municipal Preferred must be treated as
equity for federal income tax purposes. Based in part on certain representations
made by the Fund to Ropes & Gray relating to the lack of any present intention
to redeem or purchase shares of Municipal Preferred at any time in the future,
it is the opinion of Ropes & Gray that the shares of Municipal Preferred will
constitute equity for federal income tax purposes. This opinion relies in part
on a published ruling of the Internal Revenue Service stating that certain
auction rate preferred stock similar in many material respects to the Municipal
Preferred represents equity. The opinion of Ropes & Gray represents only its
best legal judgment and is not binding on the Internal Revenue Service or the
courts. If the Internal Revenue Service were successfully to assert that
variable rate preferred stock such as the Municipal Preferred should be treated
as debt for federal income tax purposes, dividends on shares of Municipal
Preferred would be treated as taxable interest for federal income tax purposes.
In such event, dividends on shares of Municipal Preferred would not be increased
by the Fund and holders of shares of Municipal Preferred would not be entitled
to any additional distributions from the Fund (including any Gross-up Payments)
to offset the effect of paying federal income tax on Fund distributions so
recharacterized as interest. Ropes & Gray has advised the Fund that, should the
Internal Revenue Service pursue in court the position that the shares of
Municipal Preferred should be treated as debt for federal income tax purposes,
the Internal Revenue Service would be unlikely to prevail.
Prior proposed legislation that was ultimately not enacted would have
reinstated a deductible tax (the "Environmental Tax"), imposed through tax years
beginning before January 1, 1996, at a rate of 0.12% on a corporation's
alternative minimum taxable income (computed without regard to the alternative
minimum tax net operating loss deduction) in excess of $2 million. If the
Environmental Tax is reinstated, exempt-interest dividends paid by the Fund that
are included in a corporate shareholder's alternative minimum taxable income may
subject such shareholder to the Environmental Tax. It is not possible for the
Fund to predict whether similar legislation might be proposed and enacted in the
future. Corporate shareholders should consult with their own tax advisors
regarding the likelihood of such legislation and its effect on them.
As discussed in the Prospectus, exempt-interest dividends attributable to
interest received on certain private activity bonds and certain industrial
development bonds will not be tax-exempt to any shareholders who are, within the
meaning of Section 147(a) of the Code, "substantial users" of the facilities
financed by such obligations or bonds or who are "related persons" of such
substantial users. In general, a "substantial user" of a facility includes a
"non-exempt person who regularly uses a part of such facility in his trade or
business." "Related persons" are in general defined to include persons among
whom there exists a relationship, either by family or business, which would
result in a disallowance of losses in transactions among them under various
provisions of the Code (or if they are members of the same controlled group of
corporations under the Code), including a partnership and each of its partners
(and their spouses and minor children), an S corporation and each of its
shareholders (and their spouses and minor children) and various combinations of
these relationships. The foregoing is not a complete statement of all of the
provisions of the Code covering the definitions of "substantial user" and
"related person." For additional information, investors should consult their tax
advisors before investing in Municipal Preferred.
All or a portion of interest on indebtedness incurred or continued by a
shareholder to purchase or carry Fund shares may not be deductible by the
shareholder. The portion of interest that is not deductible
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is equal to the total interest paid or accrued on the indebtedness multiplied by
the percentage of the Fund's total distributions (not including distributions of
capital gain net income) paid to the shareholder that are exempt-interest
dividends. Under rules used by the Internal Revenue Service for determining when
borrowed funds are considered to have been used for the purpose of purchasing or
carrying particular assets, the purchase of shares of Municipal Preferred may be
considered to have been made with borrowed funds even though such funds are not
directly traceable to the purchase of shares.
Under federal tax law in effect at the date of this Prospectus, a
shareholder's interest deduction generally will not be disallowed if the average
adjusted basis of the shareholder's tax-exempt obligations (including shares of
Municipal Preferred) does not exceed two percent of the average adjusted basis
of the shareholder's trade or business assets (in the case of most corporations
and some individuals) and portfolio investments (in the case of individuals).
Prior proposed legislation that was ultimately not enacted would have further
limited or repealed this two-percent de minimis exception, which could reduce
the total after-tax yield of the Municipal Preferred to investors to whom the de
minimis exception would otherwise apply. It is not possible for the Fund to
predict whether similar legislation might be proposed and enacted in the future.
Shareholders should consult with their own tax advisors regarding the likelihood
of such legislation and its effect on them.
SALES OR REDEMPTIONS OF SHARES. From time to time the Fund may make a
tender or repurchase offer for its Common Shares. It is expected that the terms
of any such offer will require a tendering shareholder to tender all Common
Shares, and dispose of all shares of Municipal Preferred, held or considered
under Code rules to be held by such shareholder. Shareholders who tender all
Common Shares and dispose of all shares of Municipal Preferred held, or
considered held, by them will be treated as having sold such shares and
generally will realize a capital gain or loss. If, however, a shareholder
tenders fewer than all of its Common Shares, or retains a substantial portion of
its Municipal Preferred, such shareholder may be treated as having received a
taxable dividend upon the tender of its Common Shares. In such a case, there is
a remote risk that non-tendering shareholders (including holders of Municipal
Preferred) will be treated as having received taxable distributions from the
Fund. Likewise, if the Fund redeems some but not all of the Municipal Preferred
held by a holder of Municipal Preferred and such holder of Municipal Preferred
is treated as having received a taxable dividend upon such redemption, there is
a remote risk that holders of Common Shares and non-redeeming holders of
Municipal Preferred will be treated as having received taxable distributions
from the Fund.
BACKUP WITHHOLDING. The Fund generally is required to withhold and remit
to the U.S. Treasury 31% of the taxable dividends and other distributions paid
to non-corporate shareholders who fail to furnish the Fund with a correct
taxpayer identification number, who have underreported dividends or interest
income, or who fail to certify to the Fund that they are not subject to such
withholding. An individual's taxpayer identification number is his or her social
security number.
FOREIGN INVESTORS. Non-resident alien individuals, foreign corporations
and certain other foreign entities generally will be subject to a U.S.
withholding tax at a rate of 30% on the Fund's distributions from its ordinary
income and the excess of its net short-term capital gain over its net long-term
capital loss, unless the tax is reduced or eliminated by an applicable tax
treaty. Distributions of the Fund's net capital gain received by such
shareholders and any gain from the sale or other disposition of shares of the
Fund generally will not be subject to U.S. federal income taxation, provided
that non-resident alien status has been certified by the shareholder. Different
U.S. tax consequences may result if the shareholder is engaged in a trade or
business in the United States, is present in the United States for a sufficient
period of time during a taxable year to be treated as a U.S. resident, or fails
to provide any required certifications regarding status as a non-resident alien
investor. Foreign shareholders should consult their tax advisors regarding the
U.S. and foreign tax consequences of an investment in the Fund.
The Internal Revenue Service recently revised its regulations affecting the
application to foreign investors of the back-up withholding and withholding tax
rules described above. The new regulations will generally be effective for
payments made after December 31, 2000. In some circumstances, the new rules will
increase the certification and filing requirements imposed on foreign investors
in order to qualify for
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exemption from the 31% back-up withholding tax and for reduced withholding tax
rates under income tax treaties. Foreign investors in the Fund should consult
their tax advisors with respect to the potential application of these new
regulations.
The foregoing is a general, abbreviated summary of the provisions of the
Code and regulations thereunder presently in effect as they directly govern the
taxation of the Fund and owners of shares of Municipal Preferred. These
provisions are subject to change by legislative or administrative action, and
any such change may be retroactive with respect to Fund transactions. Owners of
shares of Municipal Preferred are advised to consult with their own tax advisors
for more detailed information concerning federal income tax matters.
FOREIGN, STATE AND LOCAL TAX MATTERS
The exemption from federal income tax for exempt-interest dividends does
not necessarily result in exemption for such dividends under the income or other
tax laws of any foreign, state or local taxing authority. Some states exempt
from state income tax that portion of any exempt-interest dividend that is
derived from interest received by a regulated investment company on its holdings
of securities of that state and its political subdivisions and
instrumentalities. Therefore, the Fund will report annually to its shareholders
the percentage of interest income earned by the Fund during the preceding year
on tax-exempt obligations indicating, on a state-by-state basis, the source of
such income. Holders of shares of Municipal Preferred are advised to consult
with their own tax advisors about foreign, state and local tax matters.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Declaration disclaims shareholder liability for acts or obligations of the Fund
and requires that a notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Fund or the Trustees.
The Declaration provides for indemnification out of Fund property for all loss
and expense of any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder's incurring financial loss on account of
shareholder liability is limited to circumstances (which are considered remote)
in which the Fund would be unable to meet its obligations and the disclaimer was
inoperative.
CUSTODIAN
The Chase Manhattan Bank, located at 270 Park Avenue, New York, New York
10017-2070, is the Fund's custodian. The custodian is responsible for
safeguarding the Fund's cash and securities, receiving and delivering securities
and collecting the Fund's interest and dividends.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP are the Fund's independent accountants,
providing audit and tax return preparation services and assistance and
consultation in connection with the review of various Securities and Exchange
Commission filings. The address of PricewaterhouseCoopers LLP is 160 Federal
Street, Boston, Massachusetts 02110. The financial statements included in this
SAI have been so included in reliance upon the report of PricewaterhouseCoopers
LLP given on the authority of said firm as experts in accounting and auditing.
MISCELLANEOUS MATTERS
From time to time, the Fund may discuss or quote its current portfolio
manager or managers as well as other investment personnel, including such
person's or persons' views on the following matters: the economy; securities
markets; portfolio securities and their issuers; investment philosophies,
strategies,
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techniques and criteria used in the selection of securities to be purchased or
sold for the Fund; the Fund's portfolio holdings; the investment research and
analysis process, including the use of investment teams; the formulation and
evaluation of investment recommendations; and the assessment and evaluation of
credit, interest rate, market and economic risks and similar or related matters.
The Fund may also quote evaluations mentioned in independent radio or
television broadcasts or print material, and use charts and graphs to illustrate
the effects of compounding and tax-deferral and to compare tax-exempt yields and
their taxable equivalent. The Fund may discuss current market conditions in
comparing the yields of municipal bonds and taxable bonds. The Fund may also
discuss the benefits of investing in insured bonds and the Fund's anticipated
initial portfolio composition, including using charts and graphs to illustrate
the percentages which the Fund expects to invest in bonds rated in certain
rating categories by one or more Rating Agencies.
From time to time, the Fund may also discuss or quote the views of its
investment advisor and other financial planning, legal, tax, accounting,
insurance, estate planning and other professionals, or from surveys, regarding
individual and family financial planning. Such views may include information
regarding the following matters: retirement planning; general investment
techniques (e.g., asset allocation and disciplined saving and investing);
business succession; issues with respect to insurance (e.g., disability and life
insurance and Medicare supplemental insurance); issues regarding financial and
health care management for elderly family members; and similar or related
matters.
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GLOSSARY
" 'AA' Composite Commercial Paper Rate" has the meaning set forth on pages
B-18 to B-19 of this Statement of Additional Information.
"Advisor" means Colonial Management Associates, Inc.
"Affected Series" has the meaning set forth on page B-34 of this Statement
of Additional Information.
"Affiliate" means, for purposes of the definition of "Outstanding," any
Person known to the Auction Agent to be controlled by, in control of or under
common control with the Fund; provided, however, that no Broker-Dealer
controlled by, in control of or under common control with the Fund shall be an
Affiliate nor shall any corporation or any Person controlled by, in control of
or under common control with such corporation one of the directors, trustees or
executive officers of which is a trustee of the Fund be an Affiliate solely
because such director, trustee or executive officer is also a trustee of the
Fund.
"Agent Member" means a member of or participant in the Securities
Depository that will act on behalf of a Bidder.
"Anticipation Notes" means Bond Anticipation Notes (BANs) that are rated by
Standard & Poor's, Grant Anticipation Notes (GANs) that are rated by Standard &
Poor's, Tax Anticipation Notes (TANs), Revenue Anticipation Notes (RANs) and Tax
and Revenue Anticipation Notes (TRANs).
"Applicable Rate" has the meaning set forth on page B-14 of this Statement
of Additional Information.
"Auction" means each periodic implementation of the Auction Procedures.
"Auction Agency Agreement" has the meaning set forth on page B-14 of this
Statement of Additional Information.
"Auction Agent" means the entity appointed as such by a resolution of the
Board of Trustees.
"Auction Date," with respect to any Rate Period, means the Business Day
next preceding the first day of such Rate Period.
"Auction Procedures" means the procedures for conducting Auctions as
described in this Statement of Additional Information, including Appendix B
hereto.
"Available Municipal Preferred" has the meaning set forth on page B-22 of
this Statement of Additional Information.
"Benchmark Rate" has the meaning set forth on page B-23 of this Statement
of Additional Information.
"Beneficial Owner" has the meaning set forth on page B-14 of this Statement
of Additional Information.
"Bid" has the meaning set forth on page B-16 of this Statement of
Additional Information.
"Bidder" and "Bidders" have the respective meanings set forth on page B-16
of this Statement of Additional Information.
"Board of Trustees" or "Board" means the Board of Trustees of the Fund or
any duly authorized committee thereof.
"Broker-Dealer" means any broker-dealer, commercial bank or other entity
permitted by law to perform the functions required of a Broker-Dealer, that is a
member of, or a participant in, the Securities Depository or is an affiliate of
such member or participant, has been selected by the Fund and has entered into a
Broker-Dealer Agreement that remains effective.
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"Broker-Dealer Agreement" means an agreement among the Fund, the Auction
Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow
the procedures specified in the By-Laws, the Prospectus and this Statement of
Additional Information.
"Business Day" has the meaning set forth on page B-14 of this Statement of
Additional Information.
"By-Laws" means the Amended and Restated By-Laws of Colonial Insured
Municipal Fund on file with the Secretary of the Commonwealth of Massachusetts.
"Cede" means Cede & Co., the nominee of DTC in whose name the shares of
Municipal Preferred initially will be registered.
"CFTC" has the meaning set forth on page B-53 of this Statement of
Additional Information.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" has the meaning set forth on page B-19 of this
Statement of Additional Information.
"Common Shares" means the common shares of beneficial interest, without par
value, of the Fund.
"Cure Date" means the Municipal Preferred Basic Maintenance Cure Date or
the 1940 Act Cure Date, as the case may be.
"Date of Original Issue" has the meaning set forth on page B-14 of this
Statement of Additional Information.
"Declaration" means the Agreement and Declaration of Trust of Colonial
Insured Municipal Fund, as amended, on file with the Secretary of the
Commonwealth of Massachusetts.
"Deposit Securities" means cash and Municipal Obligations rated at least
A-1+ or SP-1+ by Standard & Poor's, except that, for purposes of determining
whether the Fund may mail a Notice of Redemption, such Municipal Obligations
shall be considered "Deposit Securities" only if they are also rated P-1, MIG-1
or VMIG-1 by Moody's.
"Discount Factor" means a Moody's Discount Factor or a Standard & Poor's
Discount Factor, as the case may be.
"Discounted Value" means, as of any Valuation Date, (i) with respect to a
Standard & Poor's Eligible Asset, the quotient of the Market Value thereof
divided by the applicable Standard & Poor's Discount Factor and (ii)(a) with
respect to a Moody's Eligible Asset that is not currently callable as of such
Valuation Date at the option of the issuer thereof, the quotient of the Market
Value thereof divided by the applicable Moody's Discount Factor, or (b) with
respect to a Moody's Eligible Asset that is currently callable as of such
Valuation Date at the option of the issuer thereof, the quotient of (1) the
lesser of the market value or call price thereof, including any call premium,
divided by (2) the applicable Moody's Discount Factor.
"Dividend Payment Date" has the meaning set forth on page B-14 of this
Statement of Additional Information.
"Dividend Period" has the meaning set forth on page B-14 of this Statement
of Additional Information.
"DTC" has the meaning set forth on page B-15 of this Statement of
Additional Information.
"Eligible Assets" means Moody's Eligible Assets or Standard & Poor's
Eligible Assets, as the case may be.
"Escrowed Bonds" means Municipal Obligations that (i) have been determined
to be legally defeased in accordance with Standard & Poor's legal defeasance
criteria, (ii) have been determined to be economically defeased in accordance
with Standard & Poor's economic defeasance criteria and assigned a rating of AAA
by Standard & Poor's, (iii) are not rated by Standard & Poor's but have been
determined
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to be legally defeased by Moody's, or (iv) have been determined to be
economically defeased by Moody's and assigned a rating no lower than the rating
that is Moody's equivalent of Standard & Poor's AAA rating.
"Existing Holder" has the meaning set forth on page B-14 of this Statement
of Additional Information.
"Failure to Deposit," with respect to shares of Municipal Preferred, means
a failure by the Fund to pay to the Auction Agent, not later than 12:00 noon,
Eastern time, (A) on the Business Day next preceding any Dividend Payment Date
for such shares, in funds available on such Dividend Payment Date in The City of
New York, New York, the full amount of any dividend (whether or not earned or
declared) to be paid on such Dividend Payment Date on any share or (B) on the
Business Day next preceding any redemption date in funds available on such
redemption date for such shares in The City of New York, New York, the
Redemption Price to be paid on such redemption date for any share after Notice
of Redemption is mailed as set forth in the By-Laws, the Prospectus or this
Statement of Additional Information; provided, however, that the foregoing
clause (B) shall not apply to the Fund's failure to pay the Redemption Price in
respect of shares of Municipal Preferred when the related Notice of Redemption
provides that redemption of such shares is subject to one or more conditions
precedent and any such condition precedent shall not have been satisfied at the
time or times and in the manner specified in such Notice of Redemption.
"Fund" means Colonial Insured Municipal Fund, a Massachusetts business
trust, which is the issuer of the shares of Municipal Preferred.
"Gross-up Payment" has the meaning set forth on page B-30 of this Statement
of Additional Information.
"Hold Order" has the meaning set forth on page B-16 of this Statement of
Additional Information.
"Holder" means the registered holder of shares of Municipal Preferred as
the same appears on the record books of the Fund.
"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.
"Initial Rate Period" has the meaning set forth on page B-14 of this
Statement of Additional Information.
"IRS" means the Internal Revenue Service.
"Inverse Floater" shall mean trust certificates or other instruments
evidencing interests in one or more municipal securities that qualify as
Standard & Poor's Eligible Assets (and are not part of a private placement of
municipal securities and satisfy the issuer and size requirements of the
definition of Standard & Poor's Eligible Assets) the interest rates on which are
adjusted at short-term intervals on a basis that is inverse to the simultaneous
readjustment of the interest rates on corresponding floating rate trust
certificates or other instruments issued by the same issuer, provided that the
ratio of the aggregate dollar amount of floating rate instruments to inverse
floating rate instruments issued by the same issuer does not exceed one to one
at their time of original issuance unless the floating rate instrument has only
one reset remaining until maturity.
"Kenny Index" has the meaning set forth on page B-18 of this Statement of
Additional Information.
"Late Charge" has the meaning set forth on page B-28 of this Statement of
Additional Information.
"Liens" has the meaning set forth on page B-41 of this Statement of
Additional Information.
"Liquidation Preference," with respect to a given number of shares of
Municipal Preferred, means $25,000 times that number.
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<PAGE> 123
"Market Value" of any asset of the Fund means the market value thereof
determined by the pricing service designated from time to time by the Board of
Trustees. Market Value of any asset shall include any interest accrued thereon.
The pricing service will use current industry standards to value portfolio
securities. The pricing service may employ electronic data processing techniques
or a matrix system, or both, to determine valuations. 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 bonds of comparable quality, type of issue, coupon, maturity
and rating; indications as to value from dealers; and general market conditions.
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 Fund from
dealers who are members of the National Association of Securities Dealers, Inc.
and 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 Trustees.
"Maximum Potential Gross-up Payment Liability" has the meaning set forth on
page B-37 of this Statement of Additional Information.
"Maximum Rate" has the meaning set forth on pages B-17 to B-18 of this
Statement of Additional Information.
"Minimum Rate Period" means any Rate Period consisting of 7 Rate Period
Days.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Moody's Discount Factors" has the meaning set forth on page B-40 of this
Statement of Additional Information.
"Moody's Eligible Assets" has the meaning set forth on page B-40 of this
Statement of Additional Information.
"Moody's Exposure Period" has the meaning set forth on page B-40 of this
Statement of Additional Information.
"Moody's Volatility Factor" means, as of any Valuation Date, (i) in the
case of any Minimum Rate Period, any Special Rate Period of 28 Rate Period Days
or fewer, or any Special Rate Period of 57 Rate Period Days or more, a
multiplicative factor equal to 275%, except as otherwise provided in the last
sentence of this definition; (ii) in the case of any Special Rate Period of more
than 28 but fewer than 36 Rate Period Days, a multiplicative factor equal to
203%; (iii) in the case of any Special Rate Period of more than 35 but fewer
than 43 Rate Period Days, a multiplicative factor equal to 217%; (iv) in the
case of any Special Rate Period of more than 42 but fewer than 50 Rate Period
Days, a multiplicative factor equal to 226%; and (v) in the case of any Special
Rate Period of more than 49 but fewer than 57 Rate Period Days, a multiplicative
factor equal to 235%. If, as a result of the enactment of changes to the Code,
the greater of the maximum marginal federal individual income tax rate
applicable to ordinary income and the maximum marginal federal corporate income
tax rate applicable to ordinary income will increase, such increase being
rounded up to the next five percentage points, until the effective date of such
B-66
<PAGE> 124
increase, the Moody's Volatility Factor in the case of any Rate Period described
in (i) above in this definition instead shall be determined by reference to the
following table:
<TABLE>
<CAPTION>
FEDERAL TAX VOLATILITY
RATE INCREASE FACTOR
- ------------- ----------
<S> <C>
5%..................................................... 295%
10%...................................................... 317%
15%...................................................... 341%
20%...................................................... 369%
25%...................................................... 400%
30%...................................................... 436%
35%...................................................... 477%
40%...................................................... 525%
</TABLE>
"Municipal Obligations" has the meaning set forth on page B-2 of this
Statement of Additional Information.
"Municipal Preferred" means the Municipal Auction Rate Cumulative Preferred
Shares, without par value, liquidation preference $25,000 per share, of the
Fund.
"Municipal Preferred Basic Maintenance Amount" has the meaning set forth on
page B-36 of this Statement of Additional Information.
"Municipal Preferred Basic Maintenance Cure Date" has the meaning set forth
on page B-36 of this Statement of Additional Information.
"Municipal Preferred Basic Maintenance Report" has the meaning set forth on
page B-37 of this Statement of Additional Information.
"1940 Act" means the Investment Company Act of 1940, as amended.
"1940 Act Cure Date" has the meaning set forth on page B-36 of this
Statement of Additional Information.
"1940 Act Municipal Preferred Asset Coverage" has the meaning set forth on
pages B-35 to B-36 of this Statement of Additional Information.
"Notice of Redemption" has the meaning set forth on page B-44 of this
Statement of Additional Information.
"Notice of Special Rate Period" has the meaning set forth on page B-32 of
this Statement of Additional Information.
"Order" and "Orders" have the respective meanings set forth on page B-16 of
this Statement of Additional Information.
"Outstanding" means, as of any Auction Date with respect to shares of
Municipal Preferred, the number of such shares theretofore issued by the Fund
except, without duplication, (i) any shares of Municipal Preferred theretofore
canceled or delivered to the Auction Agent for cancellation or redeemed by the
Fund, (ii) any shares of Municipal Preferred as to which the Fund or any
Affiliate thereof shall be an Existing Holder, and (iii) any shares of Municipal
Preferred represented by any certificate in lieu of which a new certificate has
been executed and delivered by the Fund.
"Person" means and includes an individual, a partnership, a corporation, a
trust, an unincorporated association, a joint venture or other entity or a
government or any agency or political subdivision thereof.
"Policy" has the meaning set forth on page B-37 of this Statement of
Additional Information.
"Potential Beneficial Owner" has the meaning set forth on page B-14 of this
Statement of Additional Information.
B-67
<PAGE> 125
"Potential Holder" has the meaning set forth on page B-14 of this Statement
of Additional Information.
"Preferred Shares" means the preferred shares of beneficial interest,
without par value of the Fund, and includes the Municipal Preferred.
"Rate Multiple" has the meaning set forth on page B-20 of this Statement of
Additional Information.
"Rate Period" has the meaning set forth on page B-14 of this Statement of
Additional Information.
"Rate Period Days," for any Rate Period or Dividend Period, means the
number of days that would constitute such Rate Period or Dividend Period but for
the application of the second paragraph under "Description of Municipal
Preferred -- Dividends -- General" or the second paragraph under "Description of
Municipal Preferred -- Dividends -- Designation of Special Rate Periods."
"Receivables for Municipal Obligations Sold," for purposes of calculating
Moody's Eligible Assets or Standard & Poor's Eligible Assets, as the case may
be, has the meaning set forth on page B-41 and B-39 of this Statement of
Additional Information, respectively.
"Redemption Price" has the meaning set forth on page B-43 of this Statement
of Additional Information.
"Reference Rate" has the meaning set forth on page B-18 of this Statement
of Additional Information.
"SEC" means the Securities and Exchange Commission.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any other securities depository selected by the Fund
which agrees to follow the procedures required to be followed by such securities
depository in connection with shares of Municipal Preferred.
"Sell Order" has the meaning set forth on page B-16 of this Statement of
Additional Information.
"Special Rate Period" has the meaning set forth on page B-14 of this
Statement of Additional Information.
"Special Redemption Provisions" has the meaning set forth on page B-42 of
this Statement of Additional Information.
"Standard & Poor's" means Standard & Poor's Ratings Services, a division of
The McGraw-Hill Companies, Inc. and its successors.
"Standard & Poor's Discount Factors" has the meaning set forth on page B-38
of this Statement of Additional Information.
"Standard & Poor's Eligible Assets" has the meaning set forth on page B-38
of this Statement of Additional Information.
"Standard & Poor's Exposure Period" has the meaning set forth on page B-38
of this Statement of Additional Information.
"Standard & Poor's Volatility Factor" means, as of any Valuation Date, a
multiplicative factor equal to (i) 277% in the case of any Minimum Rate Period
or any Special Rate Period of 28 Rate Period Days or fewer, (ii) 228% in the
case of any Special Rate Period of more than 28 Rate Period Days but fewer than
183 Rate Period Days, and (iii) 198% in the case of any Special Rate Period of
more than 182 Rate Period Days.
"Submission Deadline" means 1:30 p.m., Eastern time, on any Auction Date or
such other time on any Auction Date by which Broker-Dealers are required to
submit Orders to the Auction Agent as specified by the Auction Agent from time
to time.
B-68
<PAGE> 126
"Submitted Bid" and "Submitted Bids" have the respective meanings set forth
on page B-22 of this Statement of Additional Information.
"Submitted Hold Order" and "Submitted Hold Orders" have the respective
meanings set forth on page B-22 of this Statement of Additional Information.
"Submitted Order" and "Submitted Orders" have the respective meanings set
forth on page B-22 of this Statement of Additional Information.
"Submitted Sell Order" and "Submitted Sell Orders" have the respective
meanings set forth on page B-22 of this Statement of Additional Information.
"Subsequent Rate Period" has the meaning set forth on page B-14 of this
Statement of Additional Information.
"Substitute Commercial Paper Dealer" has the meaning set forth on page B-19
of this Statement of Additional Information.
"Substitute U.S. Government Securities Dealer" has the meaning set forth on
page B-20 of this Statement of Additional Information.
"Sufficient Clearing Bids" has the meaning set forth on page B-22 of this
Statement of Additional Information.
"Taxable Allocation" has the meaning set forth on page B-29 of this
Statement of Additional Information.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" has the meaning
set forth on page B-18 of this Statement of Additional Information.
"Taxable Income" has the meaning set forth on page B-23 of this Statement
of Additional Information.
"Taxable Yield Rate" has the meaning set forth on page B-23 of this
Statement of Additional Information.
"Treasury Bill" has the meaning set forth on page B-20 of this Statement of
Additional Information.
"Treasury Bill Rate" has the meaning set forth on page B-19 of this
Statement of Additional Information.
"Treasury Note" has the meaning set forth on page B-20 of this Statement of
Additional Information.
"Treasury Note Rate" has the meaning set forth on page B-20 of this
Statement of Additional Information.
"U.S. Government Securities Dealer" has the meaning set forth on page B-20
of this Statement of Additional Information.
"Valuation Date" has the meaning set forth on page B-36 of this Statement
of Additional Information.
"Variation Margin" means, in connection with an outstanding futures
contract owned or sold by the Fund, 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.
"Volatility Factor" means, as of any Valuation Date, the greater of the
Moody's Volatility Factor and the Standard & Poor's Volatility Factor.
"Voting Period" means a period that shall commence (A) if at the close of
business on any dividend payment date accumulated dividends (whether or not
earned or declared) on any outstanding Preferred Share, including Municipal
Preferred, 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 (B) if at
any time holders of Preferred Shares are entitled under the 1940 Act to elect a
majority of the trustees of the Fund.
"Winning Bid Rate" has the meaning set forth on page B-22 of this Statement
of Additional Information.
B-69
<PAGE> 127
FINANCIAL STATEMENTS
Following are the audited financial statements for the initial
capitalization of the Fund and the report of PricewaterhouseCoopers LLP dated
October 26, 1999.
Colonial Insured Municipal Fund
Statement of Net Assets
October 25, 1999
<TABLE>
<S> <C>
Assets:
Cash.............................................. $100,000
Capital:
Paid in Capital (net assets)...................... $100,000
Shares Outstanding (Unlimited number authorized)............ 6,667
Net Asset Value (Capital) Per Share......................... $ 15.00
</TABLE>
NOTES TO STATEMENT OF NET ASSETS
NOTE 1. ORGANIZATION: Colonial Insured Municipal Fund (the "Fund") is a newly
organized closed-end, non-diversified management investment company. The Fund's
investment objective is to provide current income generally exempt from regular
federal income tax. The Fund will invest its assets in a non-diversified
portfolio of bonds and notes that generally are issued by or on behalf of state
and local government units whose interest is, in the opinion of the issuer's
counsel (or on the basis of other reliable authority), exempt from regular
federal income tax.
The Fund is inactive except for matters relating to its organization and
registration, as a closed-end investment company under the Investment Company
Act of 1940, and the sale of 6,667 shares of the Fund for $100,000 to Colonial
Management Associates, Inc. (the "Advisor"), a wholly-owned subsidiary of
Liberty Funds Group LLC, which is an indirect majority-owned subsidiary of
Liberty Mutual Insurance Company. The Advisor has agreed to pay (i) all
organizational expenses and (ii) offering costs (other than sales loads) that
exceed $0.03 per Common Share (0.2% of offering price).
NOTE 2. TRANSACTIONS WITH AFFILIATES: Upon commencement of investment
operations, the Advisor will receive an annual management fee from the Fund,
computed and accrued daily and paid monthly, in a maximum amount equal to 0.65%
of the Fund's average weekly total net assets. The Advisor also provides the
Fund with accounting, bookkeeping, pricing and other services. For the first ten
years of the Fund's operation, the Advisor has agreed to waive the following
amount of the Fund's fees: 0.30% for years ending through November 30, 2004,
0.25% for the year ended November 30, 2005, 0.20% for the year ended November
30, 2006, 0.15% for the year ended November 30, 2007, 0.10% for the year ended
November 30, 2008 and 0.05% for the year ended November 30, 2009. The Advisor
has not agreed to waive any portion of the Fund's fees and expenses beyond
November 30, 2009.
F-1
<PAGE> 128
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of
Colonial Insured Municipal Fund
In our opinion, the accompanying statement of net assets presents fairly,
in all material respects, the financial position of Colonial Insured Municipal
Fund (the "Fund") at October 25, 1999, in conformity with generally accepted
accounting principles. The statement of net assets is the responsibility of the
Fund's management; our responsibility is to express an opinion on the statement
of net assets based on our audit. We conducted our audit of the statement of net
assets in accordance with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable assurance about whether
the statement of net assets is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statement of net assets, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
October 26, 1999
F-2
<PAGE> 129
APPENDIX A
RATINGS OF INVESTMENTS
STANDARD & POOR'S RATINGS SERVICES -- A brief description of the applicable
Standard & Poor's Ratings Services ("S&P") rating symbols and their meanings (as
published by S&P) follows:
LONG TERM DEBT
An S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, 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 issuer or
obtained by S&P from other sources it considers reliable. S&P 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:
1. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. 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.
INVESTMENT GRADE
<TABLE>
<S> <C>
AAA Debt rated 'AAA' has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Debt rated 'AA' has a very strong capacity to pay interest
and repay principal and differs from the highest rated
issues only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
</TABLE>
SPECULATIVE GRADE RATING
Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree
A-1
<PAGE> 130
of speculation and 'C' the highest. While such debt will likely have some
quality and protective characteristics, these are outweighed by major
uncertainties or major exposures to adverse conditions.
<TABLE>
<S> <C>
BB Debt rated 'BB' has less near-term vulnerability to default
than other speculative issues. However, it faces major
ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal
payments. The 'BB' rating category is also used for debt
subordinated to senior debt that is assigned an actual or
implied 'BBB-' rating.
B Debt rated 'B' has a greater vulnerability to default but
currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial, or
economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
The 'B' rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied 'BB' or
'BB-' rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability
to default, and is dependent upon favorable business,
financial, and economic conditions to meet timely payment of
interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay
principal.
The 'CCC' rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied 'B' or
'B-' rating.
CC The rating 'CC' typically is applied to debt subordinated to
senior debt that is assigned an actual or implied 'CCC' debt
rating.
C The rating 'C' typically is applied to debt subordinated to
senior debt which is assigned an actual or implied 'CCC-'
debt rating. The 'C' rating may be used to cover a situation
where a bankruptcy petition has been filed, but debt service
payments are continued.
CI The rating 'CI' is reserved for income bonds on which no
interest is being paid.
D Debt rated 'D' is in payment default. The 'D' rating
category is used when interest payments or principal
payments are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The 'D'
rating also will be used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.
</TABLE>
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.
<TABLE>
<S> <C>
c The "c" subscript is used to provide additional information
to investors that the bank may terminate its obligation to
purchase tendered bonds if the long-term credit rating of
the issuer is below an investment-grade level and/or the
issuer's bonds are deemed taxable.
* Continuance of the ratings is contingent upon S&P's receipt
of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows.
r The "r" highlights derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility
or high variability in expected returns as a result of
noncredit risks. Examples of such obligations are securities
with principal or interest return indexed to equities,
commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The
absence of an "r" symbol should not be taken as an
indication that an obligation will exhibit no volatility or
variability in total return.
</TABLE>
PROVISIONAL RATINGS: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should exercise judgment
with respect to such likelihood and risk.
A-2
<PAGE> 131
<TABLE>
<S> <C>
NR Indicates no rating has been requested, that there is
insufficient information on which to base a rating, or that
S&P does not rate a particular type of obligation as a
matter of policy.
</TABLE>
MUNICIPAL NOTES
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note rating.
Notes maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment:
-- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
-- 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:
<TABLE>
<S> <C>
SP-1 Very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming
safety characteristics will be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
</TABLE>
A note rating is not a recommendation to purchase, sell, or hold a security
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P 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.
COMMERCIAL PAPER
An S&P 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:
<TABLE>
<S> <C>
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined
to possess extremely strong safety characteristics are
denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation
is satisfactory. However, the relative degree of safety is
not as high as for issues designated "A-1."
A-3 Issues carrying this designation have 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 S&P believes
that such payments will be made during such grace period.
</TABLE>
A commercial paper rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on
A-3
<PAGE> 132
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.
MOODY'S INVESTORS SERVICE, INC. -- A brief description of the applicable Moody's
Investors Service, Inc. ("Moody's") rating symbols and their meanings (as
published by Moody's) follows:
MUNICIPAL BONDS
<TABLE>
<S> <C>
AAA Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edge." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise
what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and
interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment
sometime in the future.
BAA Bonds which are rated Baa are considered as medium grade
obligations, i.e. they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
BA Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may
be very moderate and thereby not well safeguarded during
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.
BONDS FOR WHICH THE SECURITY DEPENDS UPON THE COMPLETION OF
SOME ACT OR THE FULFILLMENT OF SOME CONDITION ARE RATED
CONDITIONALLY. THESE ARE BONDS SECURED BY (A) EARNINGS OF
PROJECTS UNDER CONSTRUCTION, (B) EARNINGS OF PROJECTS
UNSEASONED IN OPERATION EXPERIENCE, (C) RENTALS WHICH BEGIN
WHEN FACILITIES ARE COMPLETED, OR (D) PAYMENTS TO WHICH SOME
OTHER LIMITING CONDITION ATTACHES. PARENTHETICAL RATING
DENOTES PROBABLE CREDIT STATURE UPON COMPLETION OF
CONSTRUCTION OR ELIMINATION OF BASIS OF CONDITION.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are
designated by the symbols Aal, Al, Baal, Bal and Bl.
</TABLE>
A-4
<PAGE> 133
SHORT-TERM LOANS
<TABLE>
<S> <C>
MIG 1/VMIG 1 This designation denotes best quality. There is present
strong protection by established cash flows, superior
liquidity support or demonstrated broadbased access to the
market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security
elements are accounted for but there is lacking the
undeniable strength of the preceding grades. Liquidity and
cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is
present and although not distinctly or predominantly
speculative, there is specific risk.
S.G. This designation denotes speculative quality. Debt
instruments in this category lack margins of protection.
</TABLE>
COMMERCIAL PAPER
Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity 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, will 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 related supporting institutions) have an
acceptable capacity 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 the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
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APPENDIX B
AUCTION PROCEDURES
The following procedures will be set forth as Paragraphs 1 through 8 of
Part II of Section 12.1 of the Amended and Restated By-Laws of the Fund. The
terms not defined below are defined in the Glossary or in the Prospectus or this
Statement of Additional Information.
1. Orders.
(a) Prior to the Submission Deadline on each Auction Date for shares
of a series of Municipal Preferred:
(i) each Beneficial Owner of shares of such series may submit to
its Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares, if any, of such series
held by such Beneficial Owner which such Beneficial Owners desires to
continue to hold without regard to the Applicable Rate for shares of
such series for the next succeeding Rate Period of such shares;
(B) the number of Outstanding shares, if any, of such series
held by such Beneficial Owner offers to sell if the Applicable Rate
for shares of such series for the next succeeding Rate Period of
shares of such series shall be less than the rate per annum specified
by such Beneficial Owner; and/or
(C) the number of Outstanding shares, if any, of such series
held by such Beneficial Owners which such Beneficial Owner offers to
sell without regard to the Applicable Rate for shares of such series
for the next Rate Period of shares of such series;
and
(ii) one or more Broker-Dealers, using lists of Potential
Beneficial Owners, shall in good faith for the purpose of conducting a
competitive Auction in a commercially reasonable manner, contact
Potential Beneficial Owners (by telephone or otherwise), including
Persons that are not Beneficial Owners, on such lists to determine the
number of shares, if any, of such series which each such Potential
Beneficial Owner offers to purchase if the Applicable Rate for shares of
such series for the next succeeding Rate Period of shares of such series
shall not be less than the rate per annum specified by such Potential
Beneficial Owner.
For purposes hereof, the communication by a Beneficial Owner or Potential
Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the Auction Agent,
of information referred to in clause (i)(A), (i)(B), (i)(C), or (ii) of this
subparagraph (a) is hereinafter referred to as an "order" and collectively as
"Orders" and each Beneficial Owner and each Potential Beneficial Owner placing
an Order with a Broker-Dealer, and such Broker-Dealer placing an Order with the
Auction Agent, is hereinafter referred to as a "Bidder" and collectively as
"Bidders"; an Order containing the information referred to in clause (i)(A) of
this subparagraph (a) is hereinafter referred to as a "Hold Order" and
collectively as "Hold Orders"; an Order containing the information referred to
in clause (i)(B) or (ii) of this subparagraph (a) is hereinafter referred to as
a "Bid" and collectively as "Bids"; and an Order containing the information
referred to in clause (i)(C) of this subparagraph (a) is hereinafter referred to
as a "Sell Order" and collectively as "Sell Orders."
(b)(i) A Bid by a Beneficial Owner or an Existing Holder of shares of
a series of Municipal Preferred subject to an Auction on any Auction Date
shall constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified in
such Bid if the Applicable Rate for shares of such series determined
on such Auction Date shall be less than the rate specified therein;
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(B) such number or a lesser number of Outstanding shares of such
series to be determined as set forth in paragraph 4(a)(iv) herein if
the Applicable Rate for shares of such series determined on such
Auction Date shall be equal to the rate specified therein; or
(C) the number of Outstanding shares of such series specified in
such Bid if the rate specified therein shall be higher than the
Maximum Rate for shares of such series, or such number or a lesser
number of Outstanding shares of such series to be determined as set
forth in paragraph 4(b)(iii) herein if the rate specified therein
shall be higher than the Maximum Rate for shares of such series and
Sufficient Clearing Bids for shares of such series do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder of
shares of a series of Municipal Preferred subject to an Auction on any
Auction Date shall constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified in
such Sell Order; or
(B) such number or a lesser number of Outstanding shares of such
series as set forth in paragraph 4(b)(iii) herein if Sufficient
Clearing Bids for shares of such series do not exist;
provided, however, that a Broker-Dealer that is an Existing Holder with respect
to shares of a series of Municipal Preferred shall not be liable to any Person
for failing to sell such shares pursuant to a Sell Order described in the
proviso to paragraph 2(c) herein if (1) such shares were transferred by the
Beneficial Owner thereof without compliance by such Beneficial Owner or its
transferee Broker-Dealer (or other transferee person, if permitted by the Fund)
with the provisions of paragraph 7 herein or (2) such Broker-Dealer has informed
the Auction Agent pursuant to the terms of its Broker-Dealer Agreement that,
according to such Broker-Dealer's records, such Broker-Dealer believes it is not
the Existing Holder of such shares.
(iii) A Bid by a Potential Beneficial Holder or a Potential Holder
of shares of a series of Municipal Preferred subject to an Auction on
any Auction Date shall constitute an irrevocable offer to purchase:
(A) the number of Outstanding shares of such series specified in
such Bid if the Applicable Rate for shares of such series determined
on such Auction Date shall be higher than the rate specified therein;
or
(B) such number or a lesser number of Outstanding shares of such
series as set forth in paragraph 4(a)(v) herein if the Applicable
Rate for shares of such series determined on such Auction Date shall
be equal to the rate specified therein.
(c) No Order for any number of shares of Municipal Preferred other
than whole shares shall be valid.
2. Submission of Orders by Broker-Dealers to Auction Agent.
(a) Each Broker-Dealer shall submit in writing to the Auction Agent
prior to the Submission Deadline on each Auction Date all Orders for shares
of Municipal Preferred of a series subject to an Auction on such Auction
Date obtained by such Broker-Dealer, designating itself (unless otherwise
permitted by the Fund) 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 shall specify with respect to each Order
for such shares:
(i) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Fund);
(ii) the aggregate number of shares of such series that are the
subject of such Order;
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(iii) to the extent that such Bidder is an Existing Holder of
shares of such series:
(A) the number of shares, if any, of such series subject to any
Hold Order of such Existing Holder;
(B) the number of shares, if any, of such series subject to any
Bid of such Existing Holder and the rate specified in such Bid; and
(C) the number of shares, if any, of such series subject to any
Sell Order of such Existing Holder; and
(iv) to the extent such Bidder is a Potential Holder of shares of
such series, the rate and number of shares of such series specified in
such Potential Holder's Bid.
(b) If any rate 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%.
(c) If an Order or Orders covering all of the Outstanding shares of
Municipal Preferred of a series held by any Existing Holder is not
submitted to the Auction Agent prior to the Submission Deadline, the
Auction Agent shall deem a Hold Order to have been submitted by or on
behalf of such Existing Holder covering the number of Outstanding shares of
such series held by such Existing Holder and not subject to Orders
submitted to the Auction Agent; provided, however, that if an Order or
Orders covering all of the Outstanding shares of such series held by any
Existing Holder is not submitted to the Auction Agent prior to the
Submission Deadline for an Auction relating to a Special Rate Period
consisting of more than 28 Rate Period Days, the Auction Agent shall deem a
Sell Order to have been submitted by or on behalf of such Existing Holder
covering the number of outstanding shares of such series held by such
Existing Holder and not subject to Orders submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted to the
Auction Agent covering in the aggregate more than the number of Outstanding
shares of Municipal Preferred of a series subject to an Auction held by
such Existing Holder, such Orders shall be considered valid in the
following order of priority:
(i) all Hold Orders for shares of such series shall be considered
valid, but only up to and including in the aggregate the number of
Outstanding shares of such series held by such Existing Holder, and if
the number of shares of such series subject to such Hold Orders exceeds
the number of Outstanding shares of such series held by such Existing
Holder, the number of shares subject to each such Hold Order shall be
reduced pro rata to cover the number of Outstanding shares of such
series held by such Existing Holder;
(ii) (A) any Bid for shares of such series shall be considered
valid up to and including the excess of the number of Outstanding shares
of such series held by such Existing Holder over the number of shares of
such series subject to any Hold Orders referred to in clause (i) above;
(B) subject to subclause (A), if more than one Bid of an
Existing Holder for shares of such series is submitted to the Auction
Agent with the same rate and the number of Outstanding shares of such
series subject to such Bids is greater than such excess, such Bids
shall be considered valid up to and including the amount of such
excess, and the number of shares of such series subject to each Bid
with the same rate shall be reduced pro rata to cover the number of
shares of such series equal to such excess;
(C) subject to subclauses (A) and (B), if more than one Bid of
an Existing Holder for shares of such series is submitted to the
Auction Agent with different rates, such Bids shall be considered
valid in the ascending order of their respective rates up to and
including the amount of such excess; and
(D) in any such event, the number, if any, of such Outstanding
shares of such series subject to any portion of Bids considered not
valid in whole or in part under this clause (ii)
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shall be treated as the subject of a Bid for shares of such series by
or on behalf of a Potential Holder at the rate therein specified; and
(iii) all Sell Orders for shares of such series shall be considered
valid up to and including the excess of the number of Outstanding shares
of such series held by such Existing Holder over the sum of shares of
such series subject to valid Hold Orders referred to in clause (i) above
and valid Bids referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of a series of
Municipal Preferred is submitted to the Auction Agent by or on behalf of
any Potential Holder, each such Bid submitted shall be a separate Bid with
the rate and number of shares therein specified.
(f) 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.
3. Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate.
(a) Not earlier than the Submission Deadline on each Auction Date for
shares of a series of Municipal Preferred, the Auction Agent shall assemble
all valid Orders submitted or deemed submitted to it by the Broker-Dealers
in respect of shares of such series (each such Order as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to individually as
a "Submitted Holder Order," a "Submitted Bid" or a "Submitted Sell Order,"
as the case may be, or as a "Submitted Order" and collectively as
"Submitted Hold Orders," "Submitted Bids" or "Submitted Sell Orders," as
the case may be, or as "Submitted Orders") and shall determine for such
series:
(i) the excess of the number of Outstanding shares of such series
over the number of Outstanding shares of such series subject to
Submitted Hold Orders (such excess being hereinafter referred to as the
"Available Municipal Preferred" of such series);
(ii) from the Submitted Orders for shares of such series whether:
(A) the number of Outstanding shares of such series subject to
Submitted Bids of Potential Holders specifying one or more rates
equal to or lower than the Maximum Rate for shares of such series;
exceeds or is equal to the sum of:
(B) the number of Outstanding shares of such series subject to
Submitted Bids of Existing Holders specifying one or more rates
higher than the Maximum Rate for shares of such series; and
(C) the number of Outstanding shares of such series subject to
Submitted Sell Orders
(in the event such excess or such equality exists (other than
because the number of shares of such series in subclauses (B) and (C)
above is zero because all of the Outstanding shares of such series
are subject to Submitted Hold Orders), such Submitted Bids in
subclause (A) above being hereinafter referred to collectively as
"Sufficient Clearing Bids" for shares of such series); and
(iii) if Sufficient Clearing Bids for shares of such series exist,
the lowest rate specified in such Submitted Bids (the "Winning Bid Rate"
for shares of such series) which if:
(A) (I) each such Submitted Bid of Existing Holders specifying
such lowest rate and (II) all other such Submitted Bids of Existing
Holders specifying lower rates were rejected, thus entitling such
Existing Holders to continue to hold the shares of such series that
are subject to such Submitted Bids; and
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(B) (I) each such Submitted Bid of Potential Holders specifying
such lowest rate and (II) all other such Submitted Bids of Potential
Holders specifying lower rates were accepted;
would result in such Existing Holders described in subclause (A) above
continuing to hold an aggregate number of Outstanding shares of such series
which, when added to the number of Outstanding shares of such series to be
purchased by such Potential Holders described in subclause (B) above, would
equal not less than the Available Municipal Preferred of such series.
(b) Promptly after the Auction Agent has made the determinations
pursuant to subparagraph (a) of this paragraph 3, the Auction Agent shall
advise the Fund of the Maximum Rate for shares of the series of Municipal
Preferred for which an Auction is being held on the Auction Date and, based
on such determination, the Applicable Rate for shares of such series for
the next succeeding Rate Period thereof as follows:
(i) if Sufficient Clearing Bids for shares of such series exist,
that the Applicable Rate for all shares of such series for the next
succeeding Rate Period thereof shall be equal to the Winning Bid Rate
for shares of such series so determined;
(ii) if Sufficient Clearing Bids for shares of such series do not
exist (other than because all of the Outstanding shares of such series
are subject to Submitted Hold Orders), that the Applicable Rate for all
shares of such series for the next succeeding Rate Period thereof shall
be equal to the Maximum Rate for shares of such series; or
(iii) if all of the Outstanding shares of such series are subject
to Submitted Hold Orders, that the Applicable Rate for all shares of
such series for the next succeeding Rate Period thereof shall be as set
forth in subparagraph (c) of this paragraph 3.
(c) For purposes of subparagraph (b)(iii) of this paragraph 3, the
Applicable Rate for shares of such series for the next succeeding Rate
Period of shares of such series shall be equal to the lesser of the Kenny
Index (if such Rate Period consists of fewer than 183 Rate Period Days) or
the product of (A) (I) the "AA" Composite Commercial Paper Rate on such
Auction Date for such Rate Period, if such Rate Period consists of fewer
than 183 Rate Period Days; (II) the Treasury Bill Rate on such Auction Date
for such Rate Period, if such Rate Period consists of more than 182 but
fewer than 365 Rate Period Days; or (III) the Treasury Note Rate on such
Auction Date for such Rate Period, if such Rate Period is more than 364
Rate Period Days (the rate described in the foregoing clause (A)(I), (II)
or (III), as applicable, being referred to herein as the "Benchmark Rate")
and (B) 1 minus the greater of the maximum marginal regular federal
individual income tax rate applicable to ordinary income or the maximum
marginal regular federal corporate income tax rate applicable to ordinary
income; provided, however, that if the Fund has notified the Auction Agent
of its intent to allocate to shares of such series in such Rate Period any
net capital gains or other income taxable for federal income tax purposes
("Taxable Income"), the Applicable Rate for shares of such series for such
Rate Period will be (i) if the Taxable Yield Rate (as defined below) is
greater than the Benchmark Rate, then the Benchmark Rate, or (ii) if the
Taxable Yield Rate is less than or equal to the Benchmark Rate, then the
rate equal to the sum of (x) the lesser of the Kenny Index (if such Rate
Period consists of fewer than 183 Rate Period Days) or the product of the
Benchmark Rate multiplied by the factor set forth in the preceding clause
(B) and (y) the product of the greater of the maximum marginal regular
federal individual income tax rate applicable to ordinary income or the
maximum marginal regular federal corporate income tax applicable to
ordinary income, multiplied by the Taxable Yield Rate. For purposes of the
foregoing, Taxable Yield Rate means the rate determined by (a) dividing the
amount of Taxable Income available for distribution per such share of
Municipal Preferred by the number of days in the Dividend Period in respect
of which such Taxable Income is contemplated to be distributed, (b)
multiplying the amount determined in (a) above by 365 (in the case of a
Dividend Period of 7 Rate Period Days) or 360 (in the case of any other
Dividend Period), and (c) dividing the amount determined in (b) above by
$25,000.
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4. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares. Existing Holders shall continue to hold the shares of
Municipal Preferred that are subject to Submitted Hold Orders, and, based on the
determinations made pursuant to paragraph 3(a) herein, the Submitted Bids and
Submitted Sell Orders shall be accepted or rejected by the Auction Agent and the
Auction Agent shall take such other action as set forth below:
(a) If Sufficient Clearing Bids for shares of a series of Municipal
Preferred have been made, all Submitted Sell Orders with respect to shares
of such series shall be accepted and, subject to the provisions of
subparagraphs (d) and (e) of this paragraph 4, Submitted Bids with respect
to shares of such series shall be accepted or rejected as follows in the
following order of priority and all other Submitted Bids with respect to
shares of such series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is higher than the Winning Bid Rate for shares
of such series shall be accepted, thus requiring each such Existing
Holder to sell the shares of Municipal Preferred subject to such
Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares
of such series shall be rejected, thus entitling each such Existing
Holder to continue to hold the shares of Municipal Preferred subject to
such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares
of such series shall be accepted;
(iv) each Existing Holders' Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate for shares of
such series shall be rejected, thus entitling such Existing Holder to
continue to hold the shares of Municipal Preferred subject to such
Submitted Bid, unless the number of Outstanding shares of Municipal
Preferred subject to all such Submitted Bids shall be greater than the
number of shares of Municipal Preferred ("remaining shares") in the
excess of the Available Municipal Preferred of such series over the
number of shares of Municipal Preferred subject to Submitted Bids
described in clauses (ii) and (iii) of this paragraph (a), in which
event such Submitted Bid of such Existing Holder shall be rejected in
part, and such Existing Holder shall be entitled to continue to hold
shares of Municipal Preferred subject to such Submitted Bid, but only in
an amount equal to the number of shares of Municipal Preferred of such
series obtained by multiplying the number of remaining shares by a
fraction, the numerator of which shall be the number of Outstanding
shares of Municipal Preferred held by such Existing Holder subject to
such Submitted Bid and the denominator of which shall be the aggregate
number of Outstanding shares of Municipal Preferred subject to such
Submitted Bids may be all such Existing Holders that specified a rate
equal to the Winning Bid Rate for shares of such series; and
(v) each Potential Holder's Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate of shares of
such series shall be accepted but only in an amount equal to the number
of shares of such series obtained by multiplying the number of shares in
the excess of the Available Municipal Preferred of such series over the
number of shares of Municipal Preferred subject to Submitted Bids
described in clauses (ii) through (iv) of this subparagraph (a) by a
fraction, the numerator of which shall be the number of Outstanding
shares Municipal Preferred subject to such Submitted Bids made by all
such Potential Holders that specified a rate equal to the Winning Bid
Rate for shares of such series.
(b) If Sufficient Clearing Bids for shares of a series of Municipal
Preferred have not been made (other than because all of the Outstanding
shares of such series are subject to Submitted Hold Orders), subject to the
provisions of subparagraph (d) of this paragraph 4, Submitted Orders for
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shares of such series shall be accepted or rejected as follows in the
following orders of priority and all other Submitted Bids for shares of
such series shall be rejected:
(i) Existing Holder's Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Rate for
shares of such series shall be rejected, thus entitling such Existing
Holders to continue to hold the shares of Municipal Preferred subject to
such Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Rate for
shares of such series shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for shares of such
series specifying any rate that is higher than the Maximum Rate for
shares of such series and the Submitted Sell Orders for shares of such
series of each Existing Holder shall be accepted, thus entitling each
Existing Holder that submitted or on whose behalf was submitted any such
Submitted Bid or Submitted Sell Order to sell the shares of such series
subject to such Submitted Bid or Submitted Sell Order, but in both cases
only in an amount equal to the number of shares of such series obtained
by multiplying the number of shares of such series subject to Submitted
Bids described in clause (ii) of this subparagraph (b) by a fraction,
the numerator of which shall be the number of Outstanding shares of such
series held by such Existing Holder subject to such Submitted Bid or
Submitted Sell Order and the denominator of which shall be the aggregate
number of Outstanding shares of such series subject to all such
Submitted and Submitted Sell Orders.
(c) If all of the Outstanding shares of a series of Municipal
Preferred are subject to Submitted Hold Orders, all Submitted Bids for
shares of such series shall be rejected.
(d) If, as a result of the procedures described in clause (iv) or (v)
of subparagraph (a) or clause (iii) of subparagraph (b) of this paragraph
4, 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 a series of Municipal Preferred on any Auction Date, the Auction
Agent shall, in such manner as it shall determine in its sole discretion,
round up or down the number of shares of Municipal Preferred of such series
to be purchased or sold by any Existing Holder or Potential Holder on such
Auction Date as a result of such procedures so that the number of shares so
purchased or sold by each Existing Holder or Potential Holder on such
Auction Date shall be whole shares of Municipal Preferred.
(e) If, as a result of the procedures described in clause (v) of
subparagraph (a) of this paragraph 4, any Potential Holder would be
entitled or required to purchase less than a whole share of series of
Municipal Preferred on any Auction Date, the Auction Agent shall, in such
manner as it shall determine in its sole discretion, allocate shares of
Municipal Preferred of such series for purchase among Potential Holders so
that only whole shares of Municipal Preferred of such series are purchased
on such Auction Date as a result of such procedures by any Potential
Holder, even if such allocation results in one or more Potential Holders
not purchasing shares of Municipal Preferred of such series on such Auction
Date.
(f) Based on the results of each Auction for shares of a series of
Municipal Preferred, the Auction Agent shall determine the aggregate of
shares of such series to be purchased and the aggregate number of shares of
such series to be sold by Potential Holders and Existing Holders and, with
respect to each Potential Holder and Existing Holder, to the extent that
such aggregate number of shares to be purchased and such aggregate number
of shares to be sold differ, determine to which other Potential Holder(s)
or Existing Holder(s) they shall deliver, or from which other Potential
Holder(s) or Existing Holder(s) they shall receive, as the case may be,
shares of Municipal Preferred of such series. Notwithstanding any provision
of the Auction procedures or the Settlement Procedures to the contrary, in
the event an Existing Holder or Beneficial Owner of shares of a series of
Municipal Preferred with respect to whom a Broker-Dealer submitted a Bid to
the Auction Agent for such shares that was accepted in whole or in part, or
submitted or is deemed to have submitted a Sell
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Order for such shares that was accepted in whole or in part, fails to
instruct its Agent Member to deliver such shares against payment therefor,
partial deliveries of shares of Municipal Preferred that have been made in
respect of Potential Holders' or Potential Beneficial Owners' Submitted
Bids for shares of such series that have been accepted in whole or in part
shall constitute good delivery to such Potential Holders and Potential
Beneficial Owners.
(g) Neither the Fund nor the Auction Agent nor any affiliate of either
shall have any responsibility or liability with respect to the failure of
an Existing Holder, a Potential Holder, a Benefit Owner, a Potential
Beneficial Owner or its respective Agent Member to deliver shares of
Municipal Preferred of any series or to pay for shares of Municipal
Preferred of any series sold or purchased pursuant to the Auction
Procedures or otherwise.
5. Notification of Allocations. Whenever the Fund intends to include any
net capital gain or other income taxable for federal income tax purposes in any
dividend on shares of Municipal Preferred, the Fund shall, in the case of a
Minimum Rate Period or a Special Rate Period of 28 Rate Period Days or fewer,
and may, in the case of any other Special Rate Period, notify the Auction Agent
of the amount to be so included not later than the Dividend Payment Date next
preceding the Auction Date on which the Applicable Rate for such dividend is to
be established. Whenever the Auction Agent receives such notice from the Fund,
it will be required in turn to notify each Broker-Dealer, who, on or prior to
such Auction Date, in accordance with its Broker-Dealer Agreement, will be
required to notify its Beneficial Owners and Potential Beneficial Owners of
shares of Municipal Preferred believed by it to be interested in submitting an
Order in the Auction to be held on such Auction Date.
6. Auction Agent. For so long as any shares of Municipal Preferred are
outstanding, the Auction Agent, duly appointed by the Fund to so act, shall be
in each case a commercial bank, trust company or other financial institution
independent of the Fund and its affiliates (which however, may engage or have
engaged in business transactions with the Fund or its affiliates) and at no time
shall the Fund or any of its affiliates act as the Auction Agent in connection
with the Auction Procedures. If the Auction Agent resigns or for any reason its
appointment is terminated during any period that any shares of Municipal
Preferred are outstanding, the Board of Trustees shall use its best efforts
promptly thereafter to appoint another qualified commercial bank, trust company
or financial institution to act as the Auction Agent. The Auction Agent's
registry of Existing Holders of shares of a series of Municipal Preferred shall
be conclusive and binding on the Broker-Dealers. A Broker-Dealer may inquire of
the Auction Agent between 3:00 p.m. on the Business Day preceding an Auction for
shares of a series of Municipal Preferred and 9:30 a.m. on the Auction Date for
such Auction to ascertain the number of shares of a series in respect of which
the Auction Agent has determined such Broker-Dealer to be an Existing Holder. If
such Broker-Dealer believes it is the Existing Holder of fewer shares of such
series than specified by the Auction Agent in response to such Broker-Dealer's
inquiry, such Broker-Dealer may so inform the Auction Agent of that belief. Such
Broker-Dealer shall not, in its capacity as Existing Holder of shares of such
series, submit Orders in such Auction in respect of shares of such series
covering in the aggregate more than the number of shares of such series
specified by the Auction Agent in response to such Broker-Dealer's inquiry.
7. Transfer of Shares of Municipal Preferred. Unless otherwise permitted
by the Fund, a Beneficial Owner or an Existing Holder may sell, transfer or
otherwise dispose of shares of Municipal Preferred only in whole shares and only
pursuant to a Bid or Sell Order placed with the Auction Agent in accordance with
the procedures described herein or to a Broker-Dealer; provided, however, that
(a) a sale, transfer or other disposition of shares of Municipal Preferred from
a customer of a Broker-Dealer who is listed on the records of that Broker-Dealer
as the holder of such shares to that Broker-Dealer or another customer of that
Broker-Dealer shall not be deemed to be a sale, transfer or other disposition
for purposes of this paragraph 7 if such Broker-Dealer remains the Existing
Holder of the shares so sold, transferred or disposed of immediately after such
sale, transfer or disposition and (b) in the case of all transfers other than
pursuant to Auctions, the Broker-Dealer (or other Person, if permitted by the
Fund) to whom such transfer is made shall advise the Auction Agent of such
transfer.
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8. Global Certificate. Prior to the commencement of a Voting Period, (i)
all of the shares of a series of Municipal Preferred outstanding from time to
time shall be represented by one global certificate registered in the name of
the Securities Depository or its nominee and (ii) no registration of transfer of
shares of a series of Municipal Preferred shall be made on the books of the Fund
to any Person other than the Securities Depository or its nominee.
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APPENDIX C
SETTLEMENT PROCEDURES
Capitalized terms used herein have the respective meanings specified in the
forepart of the Statement of Additional Information or the Glossary included in
the Statement of Additional Information, as the case may be.
(a) On each Auction Date for shares of Municipal Preferred, the Auction
Agent shall notify by telephone the Broker-Dealers that participated in the
Auction held on such Auction Date and submitted an Order to the Auction Agent as
or on behalf of an Existing Holder or Potential Holder of:
(i) the Applicable Rate fixed for the next Rate Period;
(ii) whether Sufficient Clearing Bids existed for the determination of
the Applicable Rate;
(iii) if such Broker-Dealer submitted a Bid or a Sell Order to the
Auction Agent as or on behalf of an Existing Holder, whether such Bid or
Sell Order was accepted or rejected, in whole or in part, and the number of
shares, if any, of Municipal Preferred then outstanding to be sold by such
Existing Holder;
(iv) if such Broker-Dealer submitted a Bid to the Auction Agent as or
on behalf of a Potential Holder, whether such Bid was accepted or rejected,
in whole or in part, and the number of shares, if any, of Municipal
Preferred to be purchased by such Potential Holder;
(v) if the aggregate number of shares of Municipal Preferred to be
sold by all Existing Holders with respect to whom such Broker-Dealer or
Sell Orders to the Auction Agent is different than the aggregate number of
shares of Municipal Preferred to be purchased by all Potential Holders with
respect to whom such Broker-Dealer to the Auction Agent, the name or names
of one or more other Broker-Dealers (and the Agent Member, if any, of each
such other Broker-Dealer) and the number of shares of Municipal Preferred
to be (x) purchased from one or more Existing Holders with respect to whom
such other Broker-Dealers submitted Bids or Sell Orders to the Auction
Agent, or (y) sold to one or more Potential Holders with respect to whom
such other Broker-Dealers submitted Bids to the Auction Agent; and
(vi) the scheduled Auction Date of the next succeeding Auction for
shares of Municipal Preferred.
(b) On each Auction Date for shares of Municipal Preferred, each
Broker-Dealer that submitted an Order to the Auction Agent as or on behalf of
any Existing Holder or Potential Holder shall:
(i) advise each Existing Holder and Potential Holder (and each
Beneficial Owner and Potential Beneficial Owner) with respect to whom such
Broker-Dealer submitted a Bid or Sell Order to the Auction Agent whether
such Bid or Sell Order was accepted or rejected, in whole or in part;
(ii) instruct each Potential Holder (and each Potential Beneficial
Owner) with respect to whom such Broker-Dealer submitted a Bid to the
Auction Agent that was accepted, in whole or in part, to instruct such
Bidder'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 Municipal Preferred to be purchased pursuant to such
Bid against receipt of such shares;
(iii) instruct each Existing Holder (and each Beneficial Owner) with
respect to whom such Broker-Dealer submitted a Bid to the Auction Agent
that was accepted, in whole or in part, or a Sell Order that was accepted,
in whole or in part, to instruct such Bidder's Agent Member to deliver to
such Broker-Dealer (or its Agent Member) through the Securities Depository
the number of shares of Municipal Preferred to be sold pursuant to such Bid
or Sell Order against payment therefor;
(iv) advise each Existing Holder (and each Beneficial Owner) with
respect to whom such Broker-Dealer submitted an Order to the Auction Agent
and each Potential Holder (and each
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Potential Beneficial Owner) with respect to whom such Broker-Dealer
submitted a Bid to the Auction Agent of the Applicable Rate for the next
succeeding Rate Period;
(v) advise each Existing Holder (and each Beneficial Owner) with
respect to whom such Broker-Dealer submitted an Order to the Auction Agent
of the Auction Date of the next succeeding Auction; and
(vi) advise each Potential Holder (and each Potential Beneficial
Owner) with respect to whom such Broker-Dealer submitted a Bid to the
Auction Agent that was accepted, in whole or in part, of the Auction Date
of the next succeeding Auction for Municipal Preferred.
(c) On the basis of the information provided to it pursuant to paragraph
(a) above, each Broker-Dealer that submitted a Bid or Sell Order to the Auction
Agent for any shares of Municipal Preferred shall allocate any funds received by
it (or its Agent Member) in respect of such shares pursuant to paragraph (b)(ii)
above and any shares of Municipal Preferred received by it (or its Agent Member)
pursuant to paragraph (b)(iii) above among the Potential Holders and Potential
Beneficial Owners, if any, with respect to whom such Broker-Dealer submitted
Bids to the Auction Agent for such shares, the Existing Holders and Beneficial
Owners, if any, with respect to whom such Broker-Dealer submitted Bids or Sell
Orders to the Auction Agent for such shares, and any Broker-Dealers identified
to it by the Auction Agent pursuant to paragraph (a)(v) above.
(d) On the Business Day after the Auction Date, the Securities Depository
shall execute the transactions described above, debiting and crediting the
accounts of the respective Agent Members as necessary to effect the purchases
and sales of shares of Municipal Preferred as determined in the Auction for
shares of Municipal Preferred.
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APPENDIX D
RATING AGENCY FUTURES AND OPTIONS RESTRICTIONS
The following restrictions will be set forth in Paragraph 10(a) of Part I
of Section 12.1 of the Amended and Restated By-Laws (the "By-Laws") of the Fund.
The terms not defined below are defined in the Glossary, the Prospectus, the
Statement of Additional Information or the By-Laws, filed as an exhibit to the
Registration Statement of the Fund. Reference is made to the By-Laws for the
full text of the rating agency restrictions on futures and options transactions
and certain other actions or investments by the Fund.
(a) For so long as any Municipal Preferred are rated by Standard & Poor's
or Moody's, the Fund 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 Standard & Poor's or
Moody's, or both, as the case may be, that engaging in such transactions will
not impair the ratings then assigned to the Municipal Preferred by Standard &
Poor's or Moody's, or both, except that the Fund 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, "Hedging
Transactions"), subject to the following limitations:
(i) the Fund will not engage in any Hedging Transaction based on the
Municipal Index (other than transactions which terminate a futures contract
or option held by the Fund by the Fund's taking an opposite position
thereto ("Closing Transactions")), which would cause the Fund at the time
of such transaction to own or have sold the least of (i) more than 1,000
outstanding futures contracts based on the Municipal Index, (ii)
outstanding futures contracts based on the Municipal Index exceeding in
number 25% of the quotient of the Market Value of the Fund's total assets
divided by $1,000 or (iii) outstanding futures contracts based on the
Municipal Index exceeding in number 10% of the average number of daily
outstanding 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 Fund will not engage in any Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) which would cause the Fund
at the time of such transaction to own or have sold the lesser of (A)
outstanding futures contracts based on Treasury Bonds exceeding in number
50% of the quotient of the Market Value of the Fund'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 Fund will engage in Closing Transactions to close out any
outstanding futures contract which the Fund owns or has sold or any
outstanding option thereon owned by the Fund in the event (A) the Fund does
not have Standard & Poor's Eligible Assets or Moody's Eligible Assets, as
the case may be, with an aggregate Discounted Value equal to or greater
than the Municipal Preferred Basic Maintenance Amount on two consecutive
Valuation Dates and (B) the Fund is required to pay Variation Margin on the
second such Valuation Date;
(iv) the Fund 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 Fund holds the securities deliverable under such terms; and
(v) when the Fund 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 Standard & Poor's or Moody's, as the case may be),
fixed-income securities in a segregated account with the Fund'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 Fund'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 Fund writes a futures
contract or option
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<PAGE> 146
thereon which requires delivery of an underlying security, it shall hold
such underlying security in its portfolio.
For purposes of determining whether the Fund has Standard & Poor's Eligible
Assets or Moody's Eligible Assets, as the case may be, with a Discounted Value
that equals or exceeds the Municipal Preferred 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 Standard &
Poor's Eligible Assets or Moody's Eligible Assets, as the case may be, 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 Fund 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 Fund.
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PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
Included in Part A
Financial Highlights
Capitalization at November 30, 1999
Portfolio Composition
Included in Part B
Financial Statements
(2) Exhibits
(a)(1) Agreement and Declaration of Trust(1)
(a)(2) Amendment No. 1 to the Agreement and Declaration of Trust(1)
(b) Amended and Restated By-Laws(2)
(c) Not applicable
(d)(1) Portions of the Agreement and
Declaration of Trust, as amended, included as Exhibit (a)(1)
and (a)(2), and the Amended and Restated By-Laws of the
Registrant, included as Exhibit (b) (see Article III,
Sections 1, 2, 4 and 5; Article V; Article VIII, Section 4;
and Article IX, Sections 4 and 7 of the Agreement and
Declaration of Trust, as amended, and Articles 2, 7 and 8
and Sections 2-3, 4(c), 5 and 9-12 of Part I of Section 12.1
of Article 12 and Sections 1-5 and 7 of Part II of Section
12.1 of Article 12 of the Amended and Restated By-Laws)
(d)(2) Form of specimen certificate for the Municipal Auction Rate
Cumulative Preferred Shares
(e) Dividend Reinvestment Plan(1)
(f) Not applicable
(g) Management Agreement with Colonial Management Associates,
Inc.(1)
(h) Form of Underwriting Agreement(2)
(i) Not applicable
(j)(1) Global Custody Agreement with The Chase Manhattan Bank
(incorporated herein by reference to Item 24, Exhibit No. 8
to Post-Effective Amendment No. 13 to the Registration
Statement of Colonial Trust VI, Registration Nos. 33-45117 &
811-6529, filed with the Commission on or about October 24,
1997)
(j)(2) Amendment No. 8 to Schedule A of Global Custody Agreement
(incorporated herein by reference to Exhibit (j)(2) to the
Registration Statement of Colonial Insured Municipal Fund,
Registration Nos. 333-84997 and 811-09533, filed with the
Commission on or about October 26, 1999)
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(k)(1) Stock Transfer Agent Services Agreement between the
Registrant and BankBoston, N.A.(1)
(k)(2) Pricing and Bookkeeping Agreement with Colonial Management
Associates, Inc.(1)
(k)(3)(i) Fee Waiver Agreement with Colonial Management
Associates, Inc.(1)
(k)(3)(ii)Expense Reimbursement Agreement with Colonial Management
Associates, Inc.(1)
(k)(4) Form of Auction Agency Agreement
(k)(5) Form of Broker-Dealer Agreement
(l) Opinion and Consent of Ropes & Gray, counsel to Registrant(2)
(m) Not applicable
(n) Consent of independent accountants
(o) Not applicable
(p) Subscription Agreement with Colonial Management Associates,
Inc.(1)
(q) Not applicable
A copy of the Power of Attorney for each of Robert J. Birnbaum, Tom Bleasdale,
John V. Carberry, Lora S. Collins, James E. Grinnell, Richard W. Lowry,
Salvatore Macera, William E. Mayer, James L. Moody, Jr., John J. Neuhauser,
Thomas E. Stitzel, Robert L. Sullivan and Anne-Lee Verville is incorporated
herein by reference to Pre-Effective Amendment No. 3 to the Registration
Statement of Colonial Insured Municipal Fund, Registration Nos. 333-84997 and
811-09533, filed with the Commission on or about October 26, 1999.
- ----------------------------------
(1) Incorporated by reference to the Registration Statement filed with the
Commission via EDGAR on or about November 5, 1999.
(2) To be filed by amendment.
Item 25. Marketing Arrangements.
See Sections 5(1), 5(m) and 6(s) of Exhibit (h) of Item 24(2) of
this Registration Statement.
Item 26. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses to be incurred in
connection with the Offer described in this Registration Statement:
Registration fees(*) $10,370
Printing(*) 15,000
Accounting fees and expenses(*) 7,500
Legal fees and expenses(*) 31,000
Miscellaneous(*) 15,000
-------
Total(*) $78,870
=======
(*) Estimated.
Item 27. Persons Controlled by or under Common Control with Registrant.
None.
Item 28. Number of Holders of Securities
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Common Shares of Beneficial Interest -33-
Municipal Auction Rate Cumulative
Preferred Shares -0-
</TABLE>
Item 29. Indemnification.
The Agreement and Declaration of Trust, as amended, filed as Exhibit
(a)(1) and (a)(2) to this Registration Statement provides for
indemnification to each of the Registrant's Trustees and
officers against all liabilities and expenses incurred in
acting
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as Trustee or officer, except in the case of wilful misfeasance,
bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such Trustees and officers. The
Underwriting Agreement being filed as Exhibit (h) to this
Registration Statement provides for indemnification by the
Registrant and Colonial Management Associates, Inc. (the
"Advisor") of the group of underwriters led by Salomon Smith
Barney Inc. (the "Underwriters") and their controlling persons
and by the Underwriters of the Registrant, the Advisor and their
respective Trustees, directors, officers and controlling persons
against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, under certain circumstances.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers
and controlling persons of the Registrant pursuant 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 the 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 of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
The Registrant, Colonial Management Associates, Inc. and their
respective trustees, directors and officers are insured by a
directors and officers/errors and omissions liability policy.
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Item 30. Business and Other Connections of Investment Adviser
The following sets forth business and other connections of each
director and officer of Colonial Management Associates, Inc. (see
next page):
Registrant's investment advisor, Colonial Management Associates, Inc.
("Colonial"), is registered as an investment advisor under the Investment
Advisers Act of 1940 ("Advisers Act"). Colonial Advisory Services, Inc.
("CASI"), an affiliate of Colonial, is also registered as an investment advisor
under the 1940 Act. As of the end of the fiscal year, December 31, 1998, CASI
had four institutional, corporate or other accounts under management or
supervision, the total market value of which was approximately $227 million. As
of the end of the fiscal year, December 31, 1998, Colonial was the investment
advisor, sub-advisor and/or administrator to 57 mutual funds, including funds
sub-advised by Colonial, the total market value of which investment companies
was approximately $18,950.90 million. Liberty Funds Distributor, Inc., a
subsidiary of Colonial Management Associates, Inc., is the principal underwriter
and the national distributor of all of the funds in the Liberty Mutual Funds
complex, including the Registrant.
The following sets forth the business and other connections of each
director and officer of Colonial Management Associates, Inc.:
(1) (2) (3) (4)
Name and principal
business
addresses* Affiliation
of officers and with Period is through 11/30/99. Other
directors of investment business, profession, vocation or
investment adviser adviser employment connection Affiliation
- ------------------ ---------- -------------------------------- -----------
Allard, Laurie V.P.
Archer, Joseph A. V.P.
Ballou, William J. V.P., Liberty Funds Trust I through
Asst. IX Asst. Sec.
Sec., Colonial High Income
Counsel Municipal Trust Asst. Sec.
Colonial InterMarket Income
Trust I Asst. Sec.
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
AlphaTrade Inc. Asst. Clerk
Liberty Funds Distributor,
Inc. Asst. Clerk
Liberty Financial Advisers,
Inc. Asst. Sec.
Liberty Funds Group LLC Asst. Sec.
Liberty Variable Investment
Trust Asst. Sec.
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Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund,
Inc. Asst. Sec.
Colonial Insured Municipal Fund Asst. Sec
Colonial California Insured
Municipal Fund Asst. Sec
Colonial New York Insured
Municipal Fund Asst. Sec
Liberty-Stein Roe Advisor
Floating Rate Advantage Fund Asst. Sec
Barron, Suzan M. V.P., Liberty Funds Trust I through
Asst. IX Asst. Sec.
Sec., Colonial High Income
Counsel Municipal Trust Asst. Sec.
Colonial InterMarket Income
Trust I Asst. Sec.
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
AlphaTrade Inc. Asst. Clerk
Liberty Funds Distributor,
Inc. Asst. Clerk
Liberty Financial Advisers,
Inc. Asst. Sec.
Liberty Funds Group LLC Asst. Sec.
Liberty Variable Investment
Trust Asst. Sec.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund,
Inc. Asst. Sec.
Colonial Insured Municipal Fund Asst. Sec
Colonial California Insured
Municipal Fund Asst. Sec
Colonial New York Insured
Municipal Fund Asst. Sec
Liberty-Stein Roe Advisor
Floating Rate Advantage Fund Asst. Sec
Barsketis, Ophelia Sr.V.P. Stein Roe & Farnham Incorporated Snr. V.P.
Berliant, Allan V.P.
Bissonnette,
Michael Sr.V.P.
Boatman, Bonny E. Sr.V.P.; Colonial Advisory Services, Exec. V.P.
IPC Mbr. Inc.
Stein Roe & Farnham
Incorporated Exec. V.P.
Bunten, Walter V.P.
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Campbell, Kimberly V.P.
Carnabucci,
Dominick V.P.
Carome, Kevin M. Sr.V.P.; Liberty Funds Distributor,
IPC Mbr. Inc. Assistant Clerk
Liberty Funds Group LLC Sr. V.P.;
General Counsel
Stein Roe & Farnham General Counsel;
Incorporated Secretary
Stein Roe Services, Inc. Asst. Clerk
Liberty-Stein Roe Funds
Investment Trust Exec. V.P.;
Asst. Sec
Liberty-Stein Roe Funds Income
Trust Exec. V.P.;
Asst. Sec
Liberty-Stein Roe Funds
Institutional Trust Exec. V.P.;
Asst. Sec
Liberty-Stein Roe Funds Trust Exec. V.P.;
Asst. Sec
Liberty-Stein Roe Funds
Municipal Trust Exec. V.P.;
Asst. Sec
Liberty-Stein Roe Advisor Trust Exec. V.P.;
Asst. Sec
SR&F Base Trust Exec. V.P.;
Asst. Sec
Stein Roe Variable Investment
Trust Exec. V.P.;
Asst. Sec
Liberty-Stein Roe Advisor
Floating Rate Fund Exec. V.P.;
Asst. Sec
Liberty-Stein Roe Institutional
Floating Rate Income Fund Exec. V.P.;
Asst. Sec
Stein Roe Floating Rate
Limited Liability Company Exec. V.P.;
Asst. Sec
Carroll, Sheila A. Sr.V.P.
Citrone, Frank, Jr. Sr.V.P.
Conlin, Nancy L. Sr. V.P.; Liberty Funds Trust I through
Sec.; Clerk IX Secretary
IPC Mbr.; Colonial High Income
Dir; Gen. Municipal Trust Secretary
Counsel Colonial InterMarket Income
Trust I Secretary
Colonial Intermediate High
Income Fund Secretary
Colonial Investment Grade
Municipal Trust Secretary
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Colonial Municipal Income
Trust Secretary
Liberty Funds Distributor,
Inc. Dir.; Clerk
Liberty Funds Services, Inc. Clerk; Dir.
Liberty Funds Group LLC V.P.; Gen.
Counsel and
Secretary
Liberty Variable Investment
Trust Secretary
Colonial Advisory Services,
Inc. Dir.; Clerk
AlphaTrade Inc. Dir.; Clerk
Liberty Financial Advisors,
Inc. Dir.; Sec.
Liberty All-Star Equity Fund Secretary
Liberty All-Star Growth Fund,
Inc. Secretary
Colonial Insured Municipal Fund Secretary
Colonial California Insured
Municipal Fund Secretary
Colonial New York Insured
Municipal Fund Secretary
Liberty-Stein Roe Advisor
Floating Rate Advantage Fund Secretary
Connaughton, V.P. Liberty Funds Trust I through
J. Kevin VIII CAO; Controller
Liberty Variable Investment
Trust CAO; Controller
Colonial High Income
Municipal Trust CAO; Controller
Colonial Intermarket Income
Trust I CAO; Controller
Colonial Intermediate High
Income Fund CAO; Controller
Colonial Investment Grade
Municipal Trust CAO; Controller
Colonial Municipal Income
Trust CAO; Controller
Liberty All-Star Equity Fund Controller
Liberty All-Star Growth Fund,
Inc. Controller
Liberty Funds Trust IX Controller
Colonial Insured Municipal Fund CAO; Controller
Colonial California Insured
Municipal Fund CAO; Controller
Colonial New York Insured
Municipal Fund CAO; Controller
Liberty-Stein Roe Advisor
Floating Rate Advantage Fund CAO; Controller
Liberty-Stein Roe Funds
Investment Trust V.P.; Treasurer
Liberty-Stein Roe Funds Income
Trust V.P.; Treasurer
Liberty-Stein Roe Funds
Institutional Trust V.P.; Treasurer
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Liberty-Stein Roe Funds Trust V.P.; Treasurer
Liberty-Stein Roe Funds
Municipal Trust V.P.; Treasurer
Liberty-Stein Roe Advisor Trust V.P.; Treasurer
SR&F Base Trust V.P.; Treasurer
Stein Roe Variable Investment
Trust V.P.; Treasurer
Liberty-Stein Roe Advisor
Floating Rate Fund V.P.; Treasurer
Liberty-Stein Roe Institutional
Floating Rate Income Fund V.P.; Treasurer
Stein Roe Floating Rate
Limited Liability Company V.P.; Treasurer
Daniszewski, V.P.
Joseph J.
Dearborn, James V.P.
Desilets, Marian H. V.P. Liberty Funds Distributor,
Inc. V.P.
Liberty Funds Trust I through
IX Asst. Sec.
Colonial High Income
Municipal Trust Asst. Sec.
Colonial Intermarket Income
Trust I Asst. Sec.
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
Liberty Variable Investment
Trust Asst. Sec.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund,
Inc. Asst. Sec.
Colonial Insured Municipal Fund Asst. Sec
Colonial California Insured
Municipal Fund Asst. Sec
Colonial New York Insured
Municipal Fund Asst. Sec
Liberty-Stein Roe Advisor
Floating Rate Advantage Fund Asst. Sec
DiSilva-Begley, V.P. Colonial Advisory Services, Compliance
Linda IPC Mbr. Inc. Officer
Eckelman, Marilyn Sr.V.P.
Ericson, Carl C. Sr.V.P. Colonial Intermediate High
IPC Mbr. Income Fund V.P.
Colonial Advisory Services, Pres.; CEO
Inc. and CIO
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Evans, C. Frazier Sr.V.P. Liberty Funds Distributor,
Inc. Mng. Director
Feloney, Joseph L. V.P. Colonial Advisory Services,
Asst. Tres. Inc. Asst. Treas.
Liberty Funds Group LLC Asst. Treas.
Finnemore, Sr.V.P. Colonial Advisory Services,
Leslie W. Inc. Sr. V.P.
Franklin, Sr. V.P. AlphaTrade Inc. President
Fred J. IPC Mbr. Liberty Financial Companies, Chief
Inc. Compliance
Ofcr;
V.P.
Garrison, V.P. Stein Roe & Farnham
William M. Incorporated V.P.
Gibson, Stephen E. Dir.; Pres.; Liberty Funds Group LLC Dir.;
CEO; Pres.; CEO;
Chairman of Exec. Cmte.
the Board; Mbr.; Chm.
IPC Mbr. Liberty Funds Distributor,
Inc. Dir.; Chm.
Colonial Advisory Services,
Inc. Dir.; Chm.
Liberty Funds Services, Inc. Dir.; Chm.
AlphaTrade Inc. Dir.
Liberty Funds Trust I through
VIII President
Colonial High Income
Municipal Trust President
Colonial InterMarket Income
Trust I President
Colonial Intermediate High
Income Fund President
Colonial Investment Grade
Municipal Trust President
Colonial Municipal Income
Trust President
Liberty Financial Advisors,
Inc. Director
Stein Roe & Farnham Asst. Chairman;
Incorporated President
Liberty Variable Investment
Trust President
Colonial Insured Municipal Fund President
Colonial California Insured
Municipal Fund President
Colonial New York Insured
Municipal Fund President
Liberty-Stein Roe Advisor
Floating Rate Advantage Fund President
Liberty-Stein Roe Funds
Investment Trust President
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Liberty-Stein Roe Funds Income
Trust President
Liberty-Stein Roe Funds
Institutional Trust President
Liberty-Stein Roe Funds Trust President
Liberty-Stein Roe Funds
Municipal Trust President
Liberty-Stein Roe Advisor Trust President
SR&F Base Trust President
Stein Roe Variable Investment
Trust President
Liberty-Stein Roe Advisor
Floating Rate Fund President
Liberty-Stein Roe Institutional
Floating Rate Income Fund President
Stein Roe Floating Rate
Limited Liability Company President
Hansen, Loren A. Sr. V.P.; Stein Roe & Farnham
IPC Mbr. Incorporated Exec. V.P.
Liberty-Stein Roe Funds
Investment Trust Exec. V.P.
Liberty-Stein Roe Funds Income
Trust Exec. V.P.
Liberty-Stein Roe Funds
Institutional Trust Exec. V.P.
Liberty-Stein Roe Funds Trust Exec. V.P.
Liberty-Stein Roe Funds
Municipal Trust Exec. V.P.
Liberty-Stein Roe Advisor Trust Exec. V.P.
SR&F Base Trust Exec. V.P.
Stein Roe Variable Investment
Trust Exec. V.P.
Liberty-Stein Roe Advisor
Floating Rate Fund Exec. V.P.
Liberty-Stein Roe Institutional
Floating Rate Income Fund Exec. V.P.
Stein Roe Floating Rate
Limited Liability Company Exec. V.P.
Harasimowicz, V.P.
Stephen
Hartford, Brian Sr.V.P. Liberty-Stein Roe Funds
Municipal Trust V.P.
Haynie, James P. Sr.V.P. Colonial Advisory Services,
Inc. Sr. V.P.
Stein Roe & Farnham
Incorporated Sr. V.P.
Held, Dorothy V.P.
Hernon, Mary V.P.
Hounsell, Clare F. V.P. Stein Roe & Farnham
Incorporated V.P.
C-10
<PAGE> 157
Iudice, V.P.; Liberty Funds Group LLC Controller,
Philip J., Jr. Controller CAO, Asst.
Asst. Treas.
Treasurer Liberty Funds Distributor, CFO,
Inc. Treasurer
Colonial Advisory Services, Controller;
Inc. Asst. Treas.
AlphaTrade Inc. CFO, Treas.
Liberty Financial Advisors,
Inc. Asst. Treas.
Jacoby, Timothy J. Sr. V.P.; Liberty Funds Group LLC V.P., Treasr.,
CFO; CFO
Treasurer Liberty Funds Trust I through
VIII Treasr.,CFO
Colonial High Income
Municipal Trust Treasr.,CFO
Colonial InterMarket Income
Trust I Treasr.,CFO
Colonial Intermediate High
Income Fund Treasr.,CFO
Colonial Investment Grade
Municipal Trust Treasr.,CFO
Colonial Municipal Income
Trust Treasr.,CFO
Colonial Advisory Services,
Inc. CFO, Treasr.
Liberty Financial Advisors,
Inc. Treasurer
Stein Roe & Farnham
Incorporated Snr. V.P.
Liberty Variable Investment
Trust Treasurer, CFO
Liberty All-Star Equity Fund Treasurer
Liberty All-Star Growth Fund,
Inc. Treasurer
Liberty Funds Trust IX Treasurer
Colonial Insured Municipal Fund Treasr.; CFO
Colonial California Insured
Municipal Fund Treasr.; CFO
Colonial New York Insured
Municipal Fund Treasr.; CFO
Liberty-Stein Roe Advisor
Floating Rate Advantage Fund Treasr.; CFO
Liberty-Stein Roe Funds
Investment Trust Senior V.P.
Liberty-Stein Roe Funds Income
Trust Senior V.P.
Liberty-Stein Roe Funds
Institutional Trust Senior V.P.
Liberty-Stein Roe Funds Trust Senior V.P.
Liberty-Stein Roe Funds
Municipal Trust Senior V.P.
Liberty-Stein Roe Advisor Trust Senior V.P.
SR&F Base Trust Senior V.P.
Stein Roe Variable Investment
Trust Senior V.P.
C-11
<PAGE> 158
Liberty-Stein Roe Advisor
Floating Rate Fund Senior V.P.
Liberty-Stein Roe Institutional
Floating Rate Income Fund Senior V.P.
Stein Roe Floating Rate
Limited Liability Company Senior V.P.
Jansen, Deborah Sr.V.P. Stein Roe & Farnham
Incorporated Senior V.P.
Jersild, North T. V.P. Stein Roe & Farnham
Incorporated V.P.
Johnson, Gordon V.P.
Knudsen, Gail E. V.P. Liberty Funds Trust I through
IX Asst. Treas.
Colonial High Income
Municipal Trust Asst. Treas.
Colonial InterMarket Income
Trust I Asst. Treas.
Colonial Intermediate High
Income Fund Asst. Treas.
Colonial Investment Grade
Municipal Trust Asst. Treas.
Colonial Municipal Income
Trust Asst. Treas.
Liberty Variable Investment
Trust Asst. Treas.
Liberty All-Star Equity Fund Asst. Treas.
Liberty All-Star Growth Fund,
Inc. Asst. Treas.
Colonial Insured Municipal Fund Asst. Treas.
Colonial California Insured
Municipal Fund Asst. Treas.
Colonial New York Insured
Municipal Fund Asst. Treas.
Liberty-Stein Roe Advisor
Floating Rate Advantage Fund Asst. Treas.
Liberty-Stein Roe Funds
Investment Trust V.P.; Controller
Liberty-Stein Roe Funds Income
Trust V.P.; Controller
Liberty-Stein Roe Funds
Institutional Trust V.P.; Controller
Liberty-Stein Roe Funds Trust V.P.; Controller
Liberty-Stein Roe Funds
Municipal Trust V.P.; Controller
Liberty-Stein Roe Advisor Trust V.P.; Controller
C-12
<PAGE> 159
SR&F Base Trust V.P.; Controller
Stein Roe Variable Investment
Trust V.P.; Controller
Liberty-Stein Roe Advisor
Floating Rate Fund V.P.; Controller
Liberty-Stein Roe Institutional
Floating Rate Income Fund V.P.; Controller
Stein Roe Floating Rate
Limited Liability Company V.P.; Controller
Lapointe, Thomas V.P.
Lasman, Gary V.P.
Lennon, John E. Sr.V.P. Colonial Advisory Services,
Inc. V.P.
Lenzi, Sharon V.P.
Lessard, Kristen V.P.
Loring, William
C., Jr. Sr.V.P. Liberty-Stein Roe Funds
Municipal Trust V.P.
MacKinnon,
Donald S. Sr.V.P.
Marcus, Harold V.P.
Muldoon, Robert V.P.
Newman, Maureen Sr.V.P. Liberty-Stein Roe Funds
Municipal Trust V.P.
Liberty-Stein Roe Advisor Trust V.P.
SR&F Base Trust V.P.
O'Brien, David Sr.V.P.
Ostrander, Laura Sr.V.P. Colonial Advisory Services,
Inc. V.P.
Palombo, Joseph R. Dir.; Colonial Advisory Services,
Exe.V.P.; Inc. Dir.
IPC Mbr.; Colonial High Income
Municipal Trust V.P.
Colonial InterMarket Income
Trust I V.P.
Colonial Intermediate High
Income Fund V.P.
Colonial Investment Grade
Municipal Trust V.P.
C-13
<PAGE> 160
Colonial Municipal Income
Trust V.P.
Liberty Funds Trust I through
IX V.P.
Liberty Funds Services, Inc. Director
Liberty Funds Group LLC CAO; Ex. V.P.
Liberty Funds Distributor,
Inc. Director
AlphaTrade Inc. Director
Liberty Financial Advisors,
Inc. Director
Stein Roe & Farnham
Incorporated Exec. V.P.
Liberty Variable Investment
Trust V.P.
Liberty All-Star Equity Fund V.P.
Liberty All-Star Growth Fund,
Inc. V.P.
Colonial Insured Municipal Fund V.P.
Colonial California Insured
Municipal Fund V.P.
Colonial New York Insured
Municipal Fund V.P.
Liberty-Stein Roe Advisor
Floating Rate Advantage Fund V.P.
Peishoff, William V.P.
Peterson, Ann T. V.P. Colonial Advisory Services,
Inc. V.P.
Pielech, Mitchell V.P.
Pope, David V.P.
Reading, John V.P.; Liberty Funds Services, Inc. Asst. Clerk
Asst. Liberty Funds Group LLC Asst. Sec.
Sec.; Colonial Advisory Services,
Asst. Inc. Asst. Clerk
Clerk and Liberty Funds Distributor,
Counsel Inc. Asst. Clerk
AlphaTrade Inc. Asst. Clerk
Liberty Funds Trust I through
IX Asst. Sec.
Colonial High Income
Municipal Trust Asst. Sec.
Colonial InterMarket Income
Trust I Asst. Sec.
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
Liberty Financial Advisors,
Inc. Asst. Sec.
Liberty Variable Investment
Trust Asst. Sec.
C-14
<PAGE> 161
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund,
Inc. Asst. Sec.
Colonial Insured Municipal Fund Asst. Sec
Colonial California Insured
Municipal Fund Asst. Sec
Colonial New York Insured
Municipal Fund Asst. Sec
Liberty-Stein Roe Advisor
Floating Rate Advantage Fund Asst. Sec
Rega, Michael V.P. Colonial Advisory Services,
Inc. V.P.
Richards, Scott B. Sr. V.P. Colonial Advisory Services,
Inc. Senior V.P.
Schermerhorn, Scott Sr. V.P.
Seibel, Sandra L. V.P. Colonial Advisory Services,
Inc. V.P.
Shields, Yvonne B. V.P. Stein Roe & Farnham
Incorporated V.P.
Smalley, Gregg V.P.
Spanos, Gregory J. Sr. V.P. Colonial Advisory Services,
Inc. Exec. V.P.
Stevens, Richard V.P. Colonial Advisory Services,
Inc. V.P.
Stoeckle, Mark Sr.V.P. Colonial Advisory Services,
Inc. V.P.
Swayze, Gary Sr.V.P.
Thomas, Ronald V.P.
Turcotte,
Frederick J. V.P. Liberty Funds Services, Inc. V.P.
Liberty Funds Distributor, Inc. V.P.
Colonial Advisory Services,
Inc. V.P.
AlphaTrade Inc. V.P.
Liberty Funds Group LLC V.P.
Liberty Financial Services,
Inc. V.P.
Liberty Financial Companies,
Inc. V.P. and
Managing Dir
of Taxation
LREG, Inc. V.P.
Liberty Newport Holdings,
Limited V.P.
C-15
<PAGE> 162
Newport Pacific Management,
Inc. V.P.
Newport Fund Management, Inc. V.P.
Newport Private Equity Asia,
Inc. V.P.
Independent Holdings, Inc. V.P.
IFS Agencies, Inc. V.P.
IFMG Agencies of Maine, Inc. V.P.
IFMG of Oklahoma, Inc. V.P.
IFS Agencies of Alabama, Inc. V.P.
IFS Agencies of New Mexico,
Inc. V.P.
IFS Insurance Agencies of
Ohio, Inc. V.P.
IFS Insurance Agencies of
Texas, Inc. V.P.
Liberty Securities Corporation V.P.
Stein Roe Services, Inc. V.P.
Stein Roe & Farnham
Incorporated V.P.
Stein Roe Futures, Inc. V.P.
Progress Investment Management
Company V.P.
Crabbe Huson Group, Inc. V.P.
Wallace, John R. V.P. Colonial Advisory Services,
Asst.Tres. Inc. Asst. Treas.
Liberty Funds Group LLC Asst. Treas.
Ware, Elizabeth M. V.P.
Wiley, Christine V.P.
Wiley, Peter V.P.
- ------------------------------------------------
*The Principal address of all of the officers and directors of the investment
advisor is One Financial Center, Boston, MA 02111.
C-16
<PAGE> 163
Item 31. Location of Accounts and Records
Registrant: Colonial Insured Municipal Fund
One Financial Center
Boston, Massachusetts 02111-2621
Investment Advisor: Colonial Management Associates, Inc.
One Financial Center
Boston, Massachusetts 02111-2621
Custodian: The Chase Manhattan Bank
270 Park Avenue
New York, New York 10017-2070
Transfer Agent: EquiServe
150 Royall Street
Canton, Massachusetts 02021
Item 32. Management Services
Not Applicable
Item 33. Undertakings
The Registrant hereby undertakes:
(1) To suspend the offering of its common shares of beneficial
interest until it amends its prospectus if (i) subsequent to the
effective date of this Registration Statement, the net asset value
per share of beneficial interest declines more than 10 percent
from its net asset value per share of beneficial interest as of
the effective date of this Registration Statement or, (ii) its net
asset value per share of beneficial interest increases to an
amount greater than its net proceeds as stated in the prospectus
contained herein.
(2) Not Applicable
(3) Not Applicable
(4) Not Applicable
(5) (a) That, for the purpose of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as a part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant under 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; and
(b) That, 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 the securities at that time shall be deemed to
be the initial bona fide offering thereof.
(6) 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, any Statement of Additional Information.
C-17
<PAGE> 164
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Amendment to its Registration Statement on Form N-2 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Boston and the
Commonwealth of Massachusetts on the 10th day of December, 1999.
COLONIAL INSURED MUNICIPAL FUND
By: /s/ STEPHEN E. GIBSON
----------------------
Stephen E. Gibson
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in their capacities and
on the date indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/ STEPHEN E. GIBSON President (chief December 10, 1999
- ------------------------ executive officer)
Stephen E. Gibson
/s/ J. KEVIN CONNAUGHTON Controller and Chief December 10, 1999
- ------------------------ Accounting Officer
J. Kevin Connaughton
/s/ TIMOTHY J. JACOBY Treasurer and Chief December 10, 1999
- ------------------------ Financial Officer
Timothy J. Jacoby
C-18
<PAGE> 165
<TABLE>
<S> <C> <C>
ROBERT J. BIRNBAUM* Trustee
- -------------------
Robert J. Birnbaum
TOM BLEASDALE* Trustee
- --------------
Tom Bleasdale
JOHN CARBERRY* Trustee
- --------------
John Carberry
LORA S. COLLINS* Trustee
- ----------------
Lora S. Collins
JAMES E. GRINNELL* Trustee
- ------------------
James E. Grinnell
RICHARD W. LOWRY* Trustee By:*/s/ WILLIAM J. BALLOU
- ----------------- --------------------------
Richard W. Lowry William J. Ballou
Attorney-in-fact
For each Trustee
SALVATORE MACERA* Trustee December 10, 1999
- -----------------
Salvatore Macera
WILLIAM E. MAYER* Trustee
- -----------------
William E. Mayer
JAMES L. MOODY, JR.* Trustee
- ---------------------
James L. Moody, Jr.
JOHN J. NEUHAUSER* Trustee
- ------------------
John J. Neuhauser
THOMAS E. STITZEL* Trustee
- ------------------
Thomas E. Stitzel
ROBERT L. SULLIVAN* Trustee
- -------------------
Robert L. Sullivan
ANNE-LEE VERVILLE* Trustee
- ------------------
Anne-Lee Verville
</TABLE>
C-19
<PAGE> 166
EXHIBIT INDEX
(d)(2) Form of specimen certificate for the Municipal Auction Rate
Cumulative Preferred Shares
(k)(4) Form of Auction Agency Agreement
(k)(5) Form of Broker-Dealer Agreement
(n) Consent of independent accountants
<PAGE> 1
Exhibit (d)(2)
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED
SHARE(S) OF BENEFICIAL INTEREST, SERIES TH
NO PAR VALUE
$25,000 Liquidation Preference per Share
Number
1
THIS CERTIFICATE IS TRANSFERABLE CUSIP 195761 20 0
IN BOSTON OR IN NEW YORK CITY SEE REVERSE SIDE FOR
CERTAIN DEFINITIONS
COLONIAL INSURED MUNICIPAL FUND
SHARE CERTIFICATE
This certifies that Cede & Co. is the owner of *One Thousand Four Hundred
Ninety-Two* (1,492) fully paid and non-assessable Municipal Auction Rate
Cumulative Preferred Shares of Beneficial Interest, Series TH, No Par Value,
$25,000 Liquidation Preference Per Share, of Colonial Insured Municipal Fund,
the said shares being issued, received and held under and subject to the terms
and provisions of the Agreement and Declaration of Trust dated as of August 10,
1999, establishing Colonial Insured Municipal Fund, and all amendments thereto,
copies of which are on file with the Secretary of The Commonwealth of
Massachusetts, and to the terms and provisions of the Amended and Restated
By-Laws of Colonial Insured Municipal Fund, copies of which are on file with the
Secretary of the Fund. The said owner by accepting this certificate agrees to
and is bound by all of the said terms and provisions. The shares represented
hereby are transferable in writing by the owner thereof in person or by attorney
upon surrender of this certificate to the Trustees properly endorsed for
transfer. This certificate is executed on behalf of the Trustees of the Fund as
Trustees and not individually and the obligations hereof are not binding upon
any of the Trustees, officers or shareholders of the Fund individually but are
binding only upon the assets and property of the Fund. This certificate is not
valid until countersigned and registered by the Transfer Agent and Registrar.
Witness the seal of the Fund and the signatures of its duly authorized officers.
Dated:
Countersigned and Registered:
Bankers Trust Company
(New York, New York)
Transfer Agent and Registrar
BY:
_________________________ _________________________ ________________________
Authorized Signature Treasurer President
<PAGE> 2
Unless this certificate is presented by an authorized representative of The
Depository Trust Company, a New York corporation ("DTC"), to Issuer or its agent
for registration of transfer, exchange, or payment, and any certificate issued
is registered in the name of Cede & Co. or in such other name as is requested by
an authorized representative of DTC (and any payment is made to Cede & Co. or to
such other entity as is requested by an authorized representative of DTC), ANY
TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest
herein.
EXPLANATION OF ABBREVIATIONS
The following abbreviations when used in the form of ownership on the face
of this certificate shall be construed as though they were written out in full
according to applicable laws or regulations. Abbreviations in addition to those
appearing below, may be used.
<TABLE>
<CAPTION>
Abbreviation Equivalent Abbreviation Equivalent
- ------------ ---------- ------------ ----------
<S> <C> <C> <C>
JT TEN As joint tenants, with rights of survivorship TEN IN COM As tenants in common
and not as tenants in common TEN BY ENT As tenants by the entireties
UNIF TRANSFERS MIN ACT Uniform Transfers to Minors Act
</TABLE>
<TABLE>
<CAPTION>
Abbreviation Equivalent Abbreviation Equivalent
- ------------ ---------- ------------ ----------
<S> <C> <C> <C>
ADM Administrator(s) FDN Foundation
Administratrix PL Public Law
AGMT Agreement TR (As) trustee(s) for, of
CUST Custodian for UA Under Agreement
EST Estate, Of estate of UW Under will of, Of will of,
EX Executor(s), Executrix Under last will & testament
FBO For the benefit of
</TABLE>
Additional abbreviations may also be used though not in the above list.
TRANSFER FORM
For value received, ____________________ hereby sell, assign and transfer unto:
(I/We)
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE
_________________ ___________________________________________________________
Please Print or Typewrite Name and Address (including postal Zip Code of
Assignee)
________________________________________________________________________________
________________________________________________________________________________
________________________ shares represented by this Certificate, and do
hereby irrevocably constitute and appoint _____________________________________
Attorney, to transfer such beneficial interest on the books of the Fund named
therein with full power of substitution in the premises.
Dated _________________, _____
Signature(s)____________________________________
(The signature of this assignment
must correspond exactly with the
name as written upon the face of
this Certificate in every
particular, without alteration or
enlargement or any change
whatsoever. If more than one owner,
all must sign.)
___________________________________
(Signature must be guaranteed by a
commercial bank or trust company or
member firm of any national stock
exchange.)
IMPORTANT NOTICE
When you sign your name to the Transfer Form without filling in the name
of your "Assignee" this certificate becomes fully negotiable, similar to a check
endorsed in blank. Therefore, to safeguard a signed certificate, it is
recommended that you fill in the name of the new owner in the "Assignee" space.
Alternatively, instead of using this Transfer Form, you may sign a
separate "stock power" form and then mail the unsigned certificate and the
signed "stock power" in separate envelopes. For added protection, use registered
mail for a certificate.
This certificate is issued subject to the provisions restricting transfers of
the Municipal Auction Rate Cumulative Preferred Shares of Beneficial Interest,
Series TH, contained in the Amended and Restated By-Laws of Colonial Insured
Municipal Fund.
<PAGE> 1
Exhibit (k)(4)
Colonial Insured Municipal Fund
December __, 1999
Bankers Trust Company
Corporate Trust and Agency Group
Four Albany Street
New York, New York 10006
Attention: Auction Rate/Remarketed Securities
Ladies and Gentlemen:
Reference is made to the Colonial Auction Agency Agreement - Basic
Terms for Action as Auction Agent dated July 20, 1999 (the "Basic Terms"), which
Basic Terms are incorporated herein by reference and the receipt of which is
acknowledged by the undersigned. The Basic Terms, together with this Request and
Acceptance Letter, are sometimes referred to therein and herein as the "Auction
Agency Agreement" or the "Agreement." For purposes of the Basic Terms, you shall
be considered the Auction Agent and Colonial Insured Municipal Fund shall be
considered the Trust. Capitalized terms not defined herein shall have the
meanings ascribed to them in the Basic Terms.
We hereby request that you act as auction agent for the Series __
Municipal Auction Rate Cumulative Preferred Shares designated below (the
"Municipal Preferred"). You hereby accept such appointment as auction agent and
agree to act in accordance with the Agreement, including Basic Terms. The
following terms are to be added to the Basic Terms:
Bankers Trust Company
Corporate Trust and Agency Group
Four Albany Street
New York, New York 10006
Attention: Auction Rate/Remarketed Securities
Telecopier No.: (212) 250-6215
Telephone No.: (212) 250-6850
Attached hereto are the By-Laws that fix the rights and preferences
of Municipal Auction Rate Cumulative Preferred Stock.
If the foregoing terms are acceptable to you, please so indicate in
the space provided below. This Request and Acceptance Letter may be executed in
any number of counterparts, each of which shall be an original, but all of which
shall constitute one and the same instrument.
<PAGE> 2
2
COLONIAL INSURED MUNICIPAL FUND
By: ______________________________________
Name:
Title:
Accepted by and Agreed to as of the date first written above:
BANKERS TRUST COMPANY
By: ______________________________
Name:
Title:
<PAGE> 3
COLONIAL AUCTION AGENCY AGREEMENT
Basic Terms for Acting as Auction Agent
July 20, 1999
These basic terms ("Basic Terms") set forth the general terms and
conditions pursuant to which a bank or trust company identified in a Request and
Acceptance Letter will act as auction agent (an "Auction Agent") for Municipal
Auction Rate Cumulative Preferred Shares ("Municipal Preferred") issued by an
investment company registered under the Investment Company Act of 1940, as
amended, as further identified by such Request and Acceptance Letter (a
"Trust"), for which Colonial Management Associates, Inc. is the investment
adviser.
- --------------------------------------------------------------------------------
The Trust proposes to issue shares of Municipal Preferred pursuant
to its Agreement, Declaration of Trust and Bylaws. The Trust desires that the
Auction Agent perform certain duties in connection with the Municipal Preferred
upon the terms and subject to the conditions of the Agreement.
1. Definitions and Rules of Construction.
1.1 Terms Defined By Reference to Bylaws.
Capitalized terms not defined herein shall have the respective
meanings specified in the Bylaws.
1.2 Terms Defined Herein.
As used herein and in the Settlement Procedures, the following terms
shall have the following meanings, unless the context otherwise requires:
(a) "Agent Member" of any Person shall mean the member of, or
participant in, the Securities Depository that will act on behalf of a
Bidder.
(b) "Agreement" shall mean the Basic Terms, together with the
Request and Acceptance Letter relating to one or more series of Municipal
Preferred.
(c) "Auction" shall have the meaning specified in Section 2.1
hereof.
(d) "Auction Procedures" shall mean the auction procedures
constituting Part II of Section 12.1 of the Bylaws of any Trust as of the
adoption thereof.
(e) "Authorized Officer" of the Auction Agent shall mean each Senior
Vice President, Vice President, Assistant Vice President and Associate of
the
<PAGE> 4
2
Auction Agent assigned to its Corporate Trust and Agency Group and every
other officer or employee of the Auction Agent designated as an
"Authorized Officer" for purposes hereof in a communication to the Trust.
(f) "Broker-Dealer Agreement" shall mean each agreement among the
Trust, the Auction Agent and a Broker-Dealer substantially in the form
attached hereto as Exhibit A.
(g) "By-Laws," with respect to any Trust, shall mean the By-Laws, as
amended and restated, of such Trust, a copy of which will be attached to
the Request and Acceptance Letter of such Trust.
(h) "Declaration" means the Agreement and Declaration of Trust of
any Trust, as the same may be amended, supplemented or modified.
(i) "Municipal Preferred" shall mean the preferred shares, no par
value, of any Trust designated as its "Municipal Auction Rate Cumulative
Preferred Shares" and bearing such further designation as to series as the
Board of Trustees of such Trust or any committee thereof shall specify, as
set forth in the Request Letter.
(j) "Request and Acceptance Letter" shall mean the letter from the
Trust to the Auction Agent pursuant to which the Trust appoints the
Auction Agent and the Auction Agent accepts its appointment as auction
agent for the Municipal Preferred.
(k) "Settlement Procedures" shall mean the Settlement Procedures
attached hereto as Exhibit B.
(l) "Trust Officer" shall mean the Chairman of the Board of
Trustees, each Vice Chairman of the Board of Trustees (whether or not
designated by a number or word or words added before or after the title
"Vice Chairman"), the President, each Vice President (whether or not
designated by a number or word or words added before or after the title
"Vice President"), the Secretary, the Treasurer, each Assistant Vice
President and each Associate of the Trust and every other officer or
employee of the Trust designated as a "Trust Officer" for purposes hereof
in a notice to the Auction Agent.
1.3 Rules of Construction.
Unless the context or use indicates another or different meaning or
intent, the following rules shall apply to the construction of the Agreement:
(a) Words importing the singular number shall include the plural
number and vice versa.
<PAGE> 5
3
(b) The captions and headings herein are solely for convenience of
reference and shall not constitute a part of the Agreement nor shall they
affect its meaning, construction or effect.
(c) The words "hereof", "herein", "hereto" and other words of
similar import refer to the Agreement as a whole.
(d) All references herein to a particular time of day shall be to
New York City time.
2. The Auction.
2.1 Purpose; Incorporation by Reference of
Auction Procedures and Settlement Procedures.
(a) The Bylaws for each series of Municipal Preferred will provide
that the Applicable Rate for such series for each Subsequent Rate Period
thereof shall, except under certain conditions, be the rate per annum that
a bank or trust company appointed by the Trust advises results from
implementation of the Auction Procedures for such series. The Board of
Directors or Board of Trustees, as the case may be, of the Trust has
adopted a resolution appointing the Auction Agent as auction agent for
purposes of the Auction Procedures for each series of Municipal Preferred.
The Auction Agent accepts such appointment and agrees to follow the
procedures set forth in this Section 2 and the Auction Procedures for the
purpose of determining the Applicable Rate for each series of Municipal
Preferred for each Subsequent Rate Period thereof for which the Applicable
Rate is to be determined by an Auction. Each periodic implementation of
such procedures is hereinafter referred to as an "Auction."
(b) All of the provisions contained in the Auction Procedures and
the Settlement Procedures are incorporated herein by reference in their
entirety and shall be deemed to be a part hereof to the same extent as if
such provisions were fully set forth herein.
2.2 Preparation for Each Auction; Maintenance
of Registry of Beneficial Owners.
(a) Not later than seven days prior to the first Auction Date for
the first series of Municipal Preferred subject to an Auction, the Trust
shall provide the Auction Agent with a list of the Broker-Dealers. Not
later than seven days prior to any Auction Date for any series of
Municipal Preferred for which any change in such list of Broker-Dealers is
to be effective, the Trust will notify the Auction Agent in writing of
such change and, if any such change involves the addition of a
Broker-Dealer to such list, shall cause to be delivered to the Auction
Agent for execution by the Auction Agent a Broker-Dealer Agreement signed
by such Broker-Dealer;
<PAGE> 6
4
provided, however, that if the Trust proposes to designate any Special
Rate Period of any series of Municipal Preferred pursuant to Section 4 of
Part I of Section 12.1 of the Bylaws, not later than 11:00 A.M., New York
City time, on the Business Day next preceding the Auction next preceding
the first day of such Rate Period or by such later time or date, or both,
as may be agreed to by the Auction Agent, the Trust shall provide the
Auction Agent with a list of the Broker-Dealers for such series and a
manually signed copy of each Broker-Dealer Agreement or a new Schedule A
to a Broker-Dealer Agreement (which Schedule A shall replace and supersede
any previous Schedule A to such Broker-Dealer Agreement) with each
Broker-Dealer for such series. The Auction Agent and the Trust shall have
entered into a Broker-Dealer Agreement with each Broker-Dealer prior to
the participation of any such Broker-Dealer in any Auction.
(b) In the event that any Auction Date for any series of Municipal
Preferred shall be changed after the Auction Agent shall have given the
notice referred to in clause (vi) of paragraph (a) of the Settlement
Procedures, or after the notice referred to in Section 2.5(a) hereof, if
applicable, the Auction Agent, by such means as the Auction Agent deems
practicable, shall give notice of such change to the Broker-Dealers for
such series not later than the earlier of 9:15 A.M., New York City time,
on the new Auction Date or 9:15 A.M., New York City time, on the old
Auction Date.
(c) (i) The Auction Agent shall maintain a registry of the
beneficial owners of the shares of Municipal Preferred of each series who
shall constitute Existing Holders of shares of Municipal Preferred of such
series for purposes of Auctions and shall indicate thereon the identity of
the respective Broker-Dealer of each Existing Holder, if any, on whose
behalf such Broker-Dealer submitted the most recent Order in any Auction
which resulted in such Existing Holder continuing to hold or purchasing
shares of Municipal Preferred of such series. The Auction Agent shall keep
such registry current and accurate. The Trust shall provide or cause to be
provided to the Auction Agent at or prior to the Date of Original Issue of
the shares of Municipal Preferred of each series a list of the initial
Existing Holders of the shares of each such series of Municipal Preferred,
the number of shares purchased by each such Existing Holder and the
respective Broker-Dealer of each such Existing Holder or the affiliate
thereof through which each such Existing Holder purchased such shares. The
Auction Agent shall advise the Trust in writing whenever the number of
Existing Holders is 500 or more. The Auction Agent may rely upon, as
conclusive evidence of the identities of the Existing Holders of shares of
Municipal Preferred of any series (A) such list, (B) the results of
Auctions, (C) notices from any Broker-Dealer as described in the first
sentence of Section 2.2(c)(iii) hereof and (D) the results of any
procedures approved by the Trust that have been devised for the purpose of
determining the identities of Existing Holders in situations where shares
of Municipal Preferred may have been transferred without compliance with
any restriction on the transfer thereof set forth in the Auction
Procedures.
<PAGE> 7
5
(ii) In the event of any partial redemption of any series of
Municipal Preferred, the Auction Agent shall, at least two Business Days
prior to the next Auction for such series, request each Broker-Dealer to
provide the Auction Agent with a list of Persons who such Broker-Dealer
believes should remain Existing Holders after such redemption based upon
inquiries of those Persons such Broker-Dealer believes are Beneficial
Owners as a result of the most recent Auction and with respect to each
such Person, the number of shares of Municipal Preferred of such series
such Broker-Dealer believes are owned by such Person after such
redemption. In the absence of receiving any such information from any
Broker-Dealer, the Auction Agent may continue to treat the Persons listed
in its registry of Existing Holders as the beneficial owner of the number
of shares of Municipal Preferred of such series shown in such registry.
(iii) The Auction Agent shall be required to register a
transfer of shares of Municipal Preferred of any series from an Existing
Holder of such shares of Municipal Preferred only if such transfer is to
another Existing Holder, or other Person if permitted by the Trust, and
only if such transfer is made (A) pursuant to an Auction, (B) the Auction
Agent has been notified in writing (I) in a notice substantially in the
form of Exhibit C to the Broker-Dealer Agreements by a Broker-Dealer of
such transfer or (II) in a notice substantially in the form of Exhibit D
to the Broker-Dealer Agreements by the Broker-Dealer of any Existing
Holder, or other Person if permitted by the Trust, that purchased or sold
such shares of Municipal Preferred in an Auction of the failure of such
shares of Municipal Preferred to be transferred as a result of such
Auction or (C) pursuant to procedures approved by the Trust that have been
devised for the purpose of determining the identities of Existing Holders
in situations where shares of Municipal Preferred may have been
transferred without compliance with any restriction on the transfer
thereof set forth in the Auction Procedures. The Auction Agent is not
required to accept any such notice for an Auction unless it is received by
the Auction Agent by 3:00 P.M., New York City time, on the Business Day
preceding such Auction.
(d) The Auction Agent may request the Broker-Dealers, as set forth
in the Broker-Dealer Agreements, to provide the Auction Agent with a list
of Persons who such Broker-Dealer believes should be Existing Holders
based upon inquiries of those Persons such Broker-Dealer believes are
Beneficial Owners as a result of the most recent Auction and with respect
to each such Person, the number of shares of such series of Municipal
Preferred such Broker-Dealer believes to be owned by such Person. The
Auction Agent shall keep confidential such registry of Existing Holders
and shall not disclose the identities of the Existing Holders of such
shares of Municipal Preferred to any Person other than the Trust and the
Broker-Dealer that provided such information.
<PAGE> 8
6
2.3 Information Concerning Rates.
(a) The Rate Multiple on the date of the Agreement is set forth in
the Request and Acceptance Letter. If there is any change in the credit
rating of Municipal Preferred by either of the rating agencies (or
substitute or successor rating agencies) referred to in the definition of
"Rate Multiple" resulting in any change in the Rate Multiple for Municipal
Preferred after the date of the Request and Acceptance Letter, the Trust
shall notify the Auction Agent in writing of such change in the Rate
Multiple prior to 12:00 Noon, New York City time, on the Business Day
prior to the next Auction Date for any series of Municipal Preferred
succeeding such change. If the Trust designates all or a portion of any
dividend on shares of any series of Municipal Preferred to consist of net
capital gains or other income taxable for Federal income tax purposes, it
will indicate, in its notice in the form of Exhibit I hereto to the
Auction Agent pursuant to Section 2.6 hereof, the Rate Multiple for such
series to be in effect for the Auction Date on which the dividend rate for
such dividend is to be fixed. In determining the Maximum Rate for any
series of Municipal Preferred on any Auction Date as set forth in Section
2.3(b)(i) hereof, the Auction Agent shall be entitled to rely on the last
Rate Multiple for Municipal Preferred of which it has most recently
received notice from the Trust (or, in the absence of such notice, the
percentage set forth in the Request and Acceptance Letter), except that if
the Trust shall have notified the Auction Agent of a Rate Multiple to be
in effect for an Auction Date in accordance with the preceding sentence,
the Rate Multiple in effect for the next succeeding Auction Date of any
series of Municipal Preferred shall be, unless the Trust notifies the
Auction Agent of a change in the Rate Multiple for such succeeding Auction
Date pursuant to this Section 2.3(a), the Rate Multiple that was in effect
on the first preceding Auction Date for Municipal Preferred with respect
to which the dividend, the rate for which was fixed on such Auction Date,
did not include any net capital gains or other income taxable for Federal
income tax purposes.
(b) (i) On each Auction Date for any series of Municipal
Preferred, the Auction Agent shall determine the Maximum Rate for such
series. The Maximum Rate for any series of Municipal Preferred on any
Auction Date shall be:
(A) in the case of any Auction Date which is not the Auction
Date immediately prior to the first day of any proposed Special Rate
Period designated by the Trust pursuant to Section 4 of Part I of Section
12.1 of the Bylaws, the product of (1) the Reference Rate on such Auction
Date for the next Rate Period of such series and (2) the Rate Multiple on
such Auction Date, unless such series has or had a Special Rate Period
(other than a Special Rate Period of 28 Rate Period Days or fewer) and an
Auction at which Sufficient Clearing Bids existed has not yet occurred for
a Minimum Rate Period of such series after such Special Rate Period, in
which case the higher of:
<PAGE> 9
7
(1) the dividend rate on shares of such series for the
then-ending Rate Period; and
(2) the product of (x) the higher of (I) the Reference
Rate on such Auction Date for a Rate Period equal in length to
the then-ending Rate Period of such series, if such then
ending Rate Period was 364 Rate Period Days or fewer, or the
Treasury Note Rate on such Auction Date for a Rate Period
equal in length to the then-ending Rate Period of such series,
if such then ending Rate Period was more than 364 Rate Period
Days, and (II) the Reference Rate on such Auction Date for a
Rate Period equal in length to such Special Rate Period of
such series, if such Special Rate Period was 364 Rate Period
Days or fewer, or the Treasury Note Rate on such Auction Date
for a Rate Period equal in length to such Special Rate Period,
if such Special Rate Period was more than 364 Rate Period Days
and (y) the Rate Multiple on such Auction Date; or
(B) in the case of any Auction Date which is the Auction Date
immediately prior to the first day of any proposed Special Rate Period
designated by the Trust pursuant to Section 4 of Part I of Section 12.1 of
the Bylaws, the product of (1) the highest of (x) the Reference Rate on
such Auction Date for a Rate-Period equal in length to the then-ending
Rate Period of such series, if such then-ending Rate Period was 364 Rate
Period Days or fewer, or the Treasury Note Rate on such Auction Date for a
Rate Period equal in length to the then-ending Rate Period of such Rate
Period, if such then-ending Rate Period was more than 364 Rate Period
Days, (y) the Reference Rate on such Auction Date for the Special Rate
Period for which the Auction is being held if such Special Rate Period is
364 Rate Period Days or fewer or the Treasury Note Rate on such Auction
Date for the Special Rate Period for which the Auction is being held if
such Special Rate Period is more than 364 Rate Period Days, and (z) the
Reference Rate on such Auction Date for Minimum Rate Periods and (2) the
Rate Multiple on such Auction Date.
Not later than 9:30 A.M. on each Auction Date the Auction Agent shall notify the
Trust and the Broker-Dealers of the Maximum Rate so determined and the "AA"
Composite Commercial Paper Rate(s), the Taxable Equivalent of the Short-Term
Municipal Bond Rate(s), Treasury Note Rate(s) and Treasury Bill Rate(s), as the
case may be, used to make such determination.
(ii) From and after a Failure to Deposit by the Trust during
any Rate Period of any series of Municipal Preferred, until such failure
is cured and a Late Charge (as defined in paragraph (a) of Section 2.7),
is paid, in accordance with subparagraph (e)(i) of Section 2 of Part I of
Section 12.1 of the Bylaws, on the first day of each Rate Period of such
series the Auction Agent shall determine the Treasury Note Rate for such
Rate Period of more than 364 Rate Period Days and the Reference Rate for
Rate Periods of 364 Rate Period Days or fewer. Not later
<PAGE> 10
8
than 9:30 A.M. on each such first day, the Auction Agent shall notify the
Trust of the applicable Reference Rate and Treasury Note Rate.
(iii) If any "AA" Composite Commercial Paper Rate, Taxable
Equivalent of the Short-Term Municipal Bond Rate, Treasury Note Rate or
Treasury Bill Rate, as the case may be, is not quoted on an interest or
bond equivalent, as the case may be, basis, the Auction Agent shall
convert the quoted rate to the interest or bond equivalent thereof as set
forth in the definition of such rate in the Bylaws if the rate obtained by
the Auction Agent is quoted on a discount basis, or if such rate is quoted
on a basis other than an interest or bond equivalent or discount basis the
Auction Agent shall convert the quoted rate to an interest or bond
equivalent rate after consultation with the Trust as to the method of such
conversion.
(iv) If any "AA" Composite Commercial Paper Rate is to be
based on rates supplied by Commercial Paper Dealers and one or more of the
Commercial Paper Dealers shall not provide a quotation for the
determination of such "AA" Composite Commercial Paper Rate, the Auction
Agent shall immediately notify the Trust so that the Trust can determine
whether to select a Substitute Commercial Paper Dealer or Substitute
Commercial Paper Dealers to provide the quotation or quotations not being
supplied by any Commercial Paper Dealer or Commercial Paper Dealers. The
Trust shall promptly advise the Auction Agent of any such selection.
(v) If any Treasury Note Rate or Treasury Bill Rate is to be
based on rates supplied by U.S. Government Securities Dealers and one or
more of the U.S. Government Securities Dealers shall not provide a
quotation for the determination of such Treasury Rate, the Auction Agent
shall immediately notify the Trust so that the Trust can determine whether
to select a Substitute U.S. Government Securities Dealer or Substitute
U.S. Government Securities Dealers to provide the quotation or quotations
not being supplied by any U.S. Government Securities Dealer or U.S.
Government Securities Dealers. The Trust shall promptly advise the Auction
Agent of any such selection.
(c) The maximum marginal tax rate referred to in the definition of
"Rate Multiple" in the Bylaws is referred to in this Agreement as the
"Highest Marginal Rate." The Highest Marginal Rate on the date of the
Agreement is set forth in the Request and Acceptance Letter. If there is
any change in the Highest Marginal Rate, the Trust shall notify the
Auction Agent in writing of such change prior to 12:00 Noon, New York City
time, on the Business Day prior to the next Auction Date for Municipal
Preferred succeeding such change. In determining the Maximum Rate for any
series of Municipal Preferred on any Auction Date, the Auction Agent shall
be entitled to rely on the Highest Marginal Rate of which it has most
recently received notice from the Trust (or, in the absence of such
notice, the percentage set forth in the Request and Acceptance Letter).
<PAGE> 11
9
2.4 Auction Schedule.
The Auction Agent shall conduct Auctions in accordance with the
schedule set forth below. Such schedule may be changed by the Auction Agent with
the consent of the Trust, which consent shall not be unreasonably withheld. The
Auction Agent shall give written notice of any such change to each
Broker-Dealer. Such notice shall be given prior to the close of business on the
Business Day next preceding the first Auction Date on which any such change
shall be effective.
Time Event
By 9:30 A.M. Auction Agent advises the Trust and Broker-
Dealers of the applicable Maximum Rate and
the Reference Rate(s) and Treasury Note
Rate(s), as the case may be, used in
determining such Maximum Rate as set forth
in Section 2.3(b)(i) hereof.
9:30 A.M. - 1:30 P.M. Auction Agent assembles information
communicated to it by Broker-Dealers as
provided in Section 2(a) of the Auction
Procedures. Submission Deadline is 1:30
P.M.
Not earlier than 1:30 P.M. Auction Agent makes determinations pursuant
to Section 3(a) of the Auction Procedures.
By approximately 3:00 P.M. Auction Agent advises Trust of results of
Auction as provided in Section 3(b) of the
Auction Procedures.
Submitted Bids and Submitted Sell Orders are accepted and rejected and shares of
Municipal Preferred are allocated as provided in Section 4 of the Auction
Procedures. The Auction Agent gives notice of the Auction results as set forth
in paragraph (a) of the Settlement Procedures.
The Auction Agent shall follow the notification procedures set forth in
paragraph (a) of the Settlement Procedures.
2.5 Designation of Special Rate Period.
(a) The Bylaws will provide that, subject to the Trust's option to
designate a Special Rate Period as referred to in paragraph (b) of this
Section 2.5, (i) each Rate Period of any series of Municipal Preferred
will be a Minimum Rate
<PAGE> 12
10
Period (a duration of seven days, subject to certain exceptions) and (ii)
each Rate Period following a Rate Period of any series of Municipal
Preferred that is other than a Minimum Rate Period will be a Minimum Rate
Period. Not less than 10 nor more than 20 days prior to the last day of
any such Rate Period that is not a Minimum Rate Period, (i) the Trust
shall deliver to the Auction Agent a notice of the Auction Date of the
next succeeding Auction for such series in the form of Exhibit C hereto
and (ii) the Auction Agent shall deliver such notice by first-class mail,
postage prepaid, to each Existing Holder of shares of such series at the
address set forth for such Existing Holder in the records of the Auction
Agent and to the Broker-Dealers for such series as promptly as practicable
after its receipt of such notice from the Trust.
(b) Pursuant to the Bylaws, the Trust may, at its option, designate
a Special Rate Period for any series of Municipal Preferred in the manner
described in Section 4 of Part I of Section 12.1 of the Bylaws.
(i) If the Board of Trustees proposes to designate any
succeeding Subsequent Rate Period of any series of Municipal Preferred as
a Special Rate Period, (A) the Trust shall deliver to the Auction Agent a
notice of such proposed Special Rate Period in the form of Exhibit D
hereto not less than 20 (or such lesser number of days as may be agreed to
from time to time by the Auction Agent) nor more than 30 days prior to the
first day of such proposed Special Rate Period and (B) the Auction Agent
on behalf of the Trust shall deliver such notice by first-class mail,
postage prepaid, to each Existing Holder of shares of such series of
Municipal Preferred at the address set forth for such Existing Holder in
the records of the Auction Agent and to the Broker-Dealers for such series
as promptly as practicable after its receipt of such notice from the
Trust.
(ii) If the Board of Trustees determines to designate such
succeeding Subsequent Rate Period as a Special Rate Period, (A) the Trust
shall deliver to the Auction Agent a notice of such determination in the
form of Exhibit E hereto not later than 11:00 A.M., New York City time, on
the second Business Day next preceding the first day of such proposed
Special Rate Period (or such later time or date, or both, as may be agreed
to by the Auction Agent) and (B) the Auction Agent shall deliver such
notice to the Broker-Dealers for such series not later than 3:00 P.M., New
York City time, on such second Business Day (or, if the Auction Agent has
agreed to a later time or date, as promptly as practicable thereafter).
(iii) If the Trust shall deliver to the Auction Agent a notice
not later than 11:00 A.M., New York City time, on the second Business Day
next preceding the first day of such proposed Special Rate Period (or such
later time or date, or both, as may be agreed to by the Auction Agent)
stating that the Trust has determined not to exercise its option to
designate such succeeding Subsequent Rate Period as a Special Rate Period,
in the form of Exhibit F hereto, or shall fail to timely deliver either
such notice or a notice in the form of Exhibit E hereto, the
<PAGE> 13
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Auction Agent shall deliver a notice in the form of Exhibit F hereto to
the Broker-Dealers for such series not later than 3:00 P.M., New York City
time, on such second Business Day (or, if the Auction Agent has agreed to
a later time or date, as promptly as practicable thereafter).
Such change in the length of any Rate Period shall not occur if (1) an Auction
for shares of such series shall not be held on such Auction Date for any reason
or (2) an Auction for shares of such series shall be held on such Auction Date
but Sufficient Clearing Bids for shares of such series shall not exist in such
Auction.
2.6 Allocation of Taxable Income.
The Trust shall, in the case of a Minimum Rate Period or a Special
Rate Period of 28 Rate Period Days or fewer, and may, in the case of any other
Special Rate Period, designate all or a portion of any dividend on shares of any
series of Municipal Preferred to consist of net capital gains or other income
taxable for Federal income tax purposes by delivering to the Auction Agent a
notice in the form of Exhibit I hereto of such designation not later than the
Dividend Payment Date for such series next preceding the Auction Date on which
the dividend rate for such dividend is to be fixed. The Auction Agent will
deliver such notice to the Broker-Dealers for such series on the Business Day
following its receipt of such notice from the Trust. Within two Business Days
after any Auction Date involving the allocation of income taxable for Federal
income tax purposes, the Auction Agent shall notify each Broker-Dealer for the
related series as to the dollar amount per share of such taxable income and
income exempt from Federal income taxation included in the related dividend.
2.7 Failure to Deposit.
(a) If:
(i) any Failure to Deposit shall have occurred with respect to
shares of Municipal Preferred during any Rate Period thereof (other than
any Special Rate Period of more than 364 Rate Period Days or any Rate
Period succeeding any Special Rate Period of more than 364 Rate Period
Days during which a Failure to Deposit occurred that has not been cured),
but, prior to 12:00 Noon, New York City time, on the third Business Day
next succeeding the date on which such Failure to Deposit occurred, such
Failure to Deposit shall have been cured in accordance with Section 2.7(c)
hereof and the Trust shall have paid to the Auction Agent a late charge (a
"Late Charge") equal to the sum of (1) if such Failure to Deposit
consisted of the failure timely to pay to the Auction Agent the full
amount of dividends with respect to any Dividend Period on such shares, an
amount computed by multiplying (x) 200% of the Reference Rate for the Rate
Period during which such Failure to Deposit occurs on the Dividend Payment
Date for such Dividend Period by (y) a fraction, the numerator of which
shall be the number of days for which such Failure to Deposit has not been
cured in accordance with
<PAGE> 14
12
Section 2.7(c) hereof (including the day such Failure to Deposit occurs
and excluding the day such Failure to Deposit is cured) and the
denominator of which shall be 360, and applying the rate obtained against
the aggregate liquidation preference of the outstanding shares of
Municipal Preferred and (2) if such Failure to Deposit consisted of the
failure timely to pay to the Auction Agent the Redemption Price of the
shares of Municipal Preferred, if any, for which Notice of Redemption has
been given by the Trust, an amount computed by multiplying (x) 200% of the
Reference Rate for the Rate Period during which such Failure to Deposit
occurs on the redemption date by (y) a fraction, the numerator of which
shall be the number of days for which such Failure to Deposit is not cured
in accordance with Section 2.7(c) hereof (including the day such Failure
to Deposit occurs and excluding the day such Failure to Deposit is cured)
and the denominator of which shall be 360, and applying the rate obtained
against the aggregate liquidation preference of the outstanding shares of
Municipal Preferred to be redeemed,
then the Auction Agent shall deliver a notice in the form of Exhibit G hereto by
first-class mail, postage prepaid, to the Broker-Dealers for such series not
later than one Business Day after its receipt of the payment from the Trust
curing such Failure to Deposit and such Late Charge.
(b) If:
(i) any Failure to Deposit shall have occurred with respect to
shares of Municipal Preferred during any Rate Period thereof (other than
any Special Rate Period of more than 364 Rate Period Days or any Rate
Period succeeding any Special Rate Period of more than 364 Rate Period
Days during which a Failure to Deposit occurred but has not been cured),
and, prior to 12:00 Noon, New York City time, on the third Business Day
next succeeding the date on which such Failure to Deposit occurred, such
Failure to Deposit shall not have been cured in accordance with Section
2.7(c) hereof or the Trust shall not have paid the applicable Late Charge
to the Auction Agent; or
(ii) any Failure to Deposit shall have occurred with respect
to shares of Municipal Preferred during a Special Rate Period thereof of
more than 364 Rate Period Days, or during any Rate Period thereof
succeeding any Special Rate Period of more than 364 Rate Period Days
during which a Failure to Deposit occurred that has not been cured, and,
prior to 12:00 Noon, New York City time, on the fourth Business Day
preceding the Auction Date for the Rate Period subsequent to such Rate
Period, such Failure to Deposit shall not have been cured in accordance
with Section 2.7(c) hereof or the Trust shall not have paid the applicable
Late Charge to the Auction Agent in accordance with Section 2(e)(i)(D) of
Section 12.1 of the Bylaws (such Late Charge, for purposes of this clause
(b)(ii) of this Section 2.7, to be calculated by using, as the Reference
Rate, the Reference Rate applicable to a Rate Period (x) consisting of
more than 182 Rate Period Days and
<PAGE> 15
13
(y) commencing on the date on which the Rate Period during which Failure
to Deposit occurs commenced);
then the Auction Agent shall deliver a notice in the form of Exhibit H hereto to
the Broker-Dealers for such series not later than one Business Day after the
receipt of the payment from the Trust curing such Failure to Deposit and such
Late Charge.
(c) A Failure to Deposit with respect to shares of Municipal
Preferred shall have been cured (if such Failure to Deposit is not solely
due to the willful failure to the Trust to make the required payment to
the Auction Agent) with respect to any Rate Period if, within the
respective time periods described immediately above, the Trust shall have
paid to the Auction Agent (i) all accumulated and unpaid dividends on the
shares of Municipal Preferred and (ii) without duplication, the Redemption
Price for the shares of Municipal Preferred, if any, for which Notice of
Redemption has been mailed; provided, however, that the foregoing clause
(ii) shall not apply to the Trust's failure to pay the Redemption Price in
respect of shares of Municipal Preferred when the related Notice of
Redemption provides that redemption of such shares is subject to one or
more conditions precedent and each such condition precedent shall not have
been satisfied at the time or times and in the manner specified in such
Notice of Redemption.
2.8 Broker-Dealers.
(a) Not later than 12:00 Noon, New York City time, on each Auction
Date for any series of Municipal Preferred, the Trust shall pay to the
Auction Agent an amount in cash equal to the aggregate fees payable to the
Broker-Dealers for such series pursuant to Section 2.8 of the
Broker-Dealer Agreements for such series. The Auction Agent shall apply
such moneys as set forth in Section 2.8 of each such Broker-Dealer
Agreement.
(b) The Trust shall obtain the consent of the Auction Agent prior to
selecting any Person to act as a Broker-Dealer, which consent shall not be
unreasonably withheld.
(c) The Auction Agent shall terminate any Broker-Dealer Agreement as
set forth therein if so directed by the Trust, provided that at least one
Broker-Dealer Agreement would be in effect for each series of Municipal
Preferred after such termination.
(d) Subject to the Auction Agent's having consented to the selection
of the relevant Broker-Dealer pursuant to Section 2.8(b) hereof, the
Auction Agent shall from time to time enter into such Broker-Dealer
Agreements with one or more Broker-Dealers as the Trust shall request, and
shall enter into such schedules to any such Broker-Dealer Agreements as
the Trust shall request, which schedules, among
<PAGE> 16
14
other things, shall set forth the series of Municipal Preferred to which
such Broker-Dealer Agreement relates.
2.9 Ownership of Shares of Municipal Preferred.
The Trust shall notify the Auction Agent if the Trust or any
affiliate of the Trust acquires any shares of Municipal Preferred of any series.
Neither the Trust nor any affiliate of the Trust shall submit any Order in any
Auction for Municipal Preferred, except as set forth in the next sentence. Any
Broker-Dealer that is an affiliate of the Trust may submit Orders in Auctions,
but only if such Orders are not for its own account. For purposes of this
Section 2.9, a Broker-Dealer shall not be deemed to be an affiliate of the Trust
solely because one or more of the directors or executive officers of such
Broker-Dealer or of any Person controlled by, in control of or under common
control with such Broker-Dealer is also a director of the Trust. The Auction
Agent shall have no duty or liability with respect to enforcement of this
Section 2.9.
2.10 Access to and Maintenance of Auction Records.
The Auction Agent shall, upon the receipt of prior written notice
from the Trust, afford to the Trust access at reasonable times during normal
business hours to all books, records, documents and other information concerning
the conduct and results of Auctions. The Auction Agent shall maintain records
relating to any Auction for a period of six years after such Auction, and such
records shall, in reasonable detail, accurately and fairly reflect the actions
taken by the Auction Agent hereunder.
3. The Auction Agent as Dividend and
Redemption Price Disbursing Agent.
The Auction Agent, as dividend and redemption price disbursing
agent, shall pay to the Holders of shares of Municipal Preferred of any series
(i) on each Dividend Payment Date for such series, dividends on the shares of
Municipal Preferred of such series, (ii) on any date fixed for redemption of
shares of Municipal Preferred of any series, the Redemption Price of any shares
of such series called for redemption and (iii) any Late Charge related to any
payment of dividends or Redemption Price, in each case after receipt of the
necessary Trusts from the Trust with which to pay such dividends, Redemption
Price or Late Charge. The amount of dividends for any Rate Period for any series
of Municipal Preferred to be paid by the Auction Agent to the Holders of such
shares of such series will be determined by the Trust as set forth in Section 2
of Part I of Section 12.1 of the Bylaws with respect to such series. The
Redemption Price of any shares to be paid by the Auction Agent to the Holders
will be determined by the Trust as set forth in Section 11 of Part I of Section
12.1 of the Bylaws with respect to such series. The Trust shall notify the
Auction Agent in writing of a decision to redeem shares of any series of
Municipal Preferred at least five days prior to the date a Notice of Redemption
is required to be mailed to the Holders of the shares to be redeemed by
paragraph (c) of Section 11 of Part I of Section 12.1 of the
<PAGE> 17
15
Bylaws. Such notice by the Trust to the Auction Agent shall contain the
information required by paragraph (c) of Section 11 of Part I of Section 12.1 of
the Bylaws to be stated in the Notice of Redemption required to be mailed by the
Trust to such Holders.
4. The Auction Agent as Transfer Agent and Registrar.
4.1 Issue of Stock or Shares Certificates.
Upon the Date of Original Issue of each series of Municipal
Preferred, one or more certificates representing all of the shares of such
series issued on such date shall be issued by the Trust and, at the request of
the Trust, registered in the name of Cede & Co. and countersigned by the Auction
Agent.
4.2 Registration of Transfer of Shares.
Shares of each series of Municipal Preferred shall be registered
solely in the name of the Securities Depository or its nominee.
4.3 Removal of Legend on Restricted Shares.
All requests for removal of legends on shares of Municipal Preferred
of any series indicating restrictions on transfer shall be accompanied by an
opinion of counsel stating that such legends may be removed and such shares
freely transferred, such opinion to be delivered under cover of a letter from a
Trust Officer authorizing the Auction Agent to remove the legend on the basis of
said opinion.
4.4 Lost Stock or Share Certificates.
The Auction Agent shall issue and register replacement certificates
for certificates represented to have been lost, stolen or destroyed upon the
fulfillment of such requirements as shall be deemed appropriate by the Trust and
the Auction Agent, subject at all times to provisions of law, the Bylaws of the
Trust governing such matters and resolutions adopted by the Trust with respect
to lost securities. The Auction Agent may issue new certificates in exchange for
and upon the cancellation of mutilated certificates. Any request by the Trust to
the Auction Agent to issue a replacement or new certificate pursuant to this
Section 4.4 shall be deemed to be a representation and warranty by the Trust to
the Auction Agent that such issuance will comply with such provisions of law and
the Bylaws and resolutions of the Trust.
4.5 Disposition of Cancelled Certificates;
<PAGE> 18
16
Record Retention.
The Auction Agent shall retain all stock or share certificates
which have been cancelled in transfer or exchange and all accompanying
documentation in accordance with applicable rules and regulations of the
Securities and Exchange Commission for two calendar years. Upon the expiration
of this two-year period, the Auction Agent shall deliver to the Trust the
cancelled certificates and accompanying documentation. The Trust shall also
undertake to furnish to the Securities and Exchange Commission and to the Board
of Governors of the Federal Reserve System, upon demand, at either the principal
office or at any regional office, complete, correct and current hard copies of
any and all such records. Thereafter such records shall not be destroyed by the
Trust without the concurrence of the Auction Agent.
4.6 Stock or Record Books.
For so long as the Auction Agent is acting as the transfer agent
for any series of Municipal Preferred pursuant to the Agreement, it shall
maintain a stock or record book containing a list of the Holders of the shares
of Municipal Preferred of each such series. In case of any request or demand for
the inspection of the stock or record books of the Trust or any other books in
the possession of the Auction Agent, the Auction Agent will notify the Trust and
secure instructions as to permitting or refusing such inspection. The Auction
Agent reserves the right, however, to exhibit the stock or record books or other
books to any Person in case it is advised by its counsel that its failure to do
so would be unlawful.
4.7 Return of Funds.
Any funds deposited with the Auction Agent hereunder by the Trust
for any reason, including but not limited to redemption of shares of Municipal
Preferred of any series, that remain unpaid after ninety days shall be repaid to
the Trust upon the written request of the Trust, together with interest, if any,
earned thereon.
5. Representations and Warranties of the Trust.
The Trust represents and warrants to the Auction Agent that:
(a) the Trust is a duly organized and existing business trust in
good standing under the laws of the State of its incorporation or
organization and has full corporate power or all requisite power to
execute and deliver the Agreement and to authorize, create and issue the
shares of Municipal Preferred of each series, and the shares of
Municipal Preferred of each series when issued, will be duly authorized,
validly issued, fully paid and nonassessable;
(b) the Agreement has been duly and validly authorized, executed
and delivered by the Trust and constitutes the legal, valid and binding
obligation of the Trust;
<PAGE> 19
17
(c) the form of the certificate evidencing the shares of
Municipal Preferred of each series complies or will comply with all
applicable laws of the State of its incorporation or organization;
(d) when issued, the shares of Municipal Preferred of each series
will have been duly registered under the Securities Act of 1933, as
amended, and no further action by or before any governmental body or
authority of the United States or of any state thereof is required in
connection with the execution and delivery of the Agreement or will have
been required in connection with the issuance of the shares of Municipal
Preferred of each series;
(e) the execution and delivery of the Agreement and the issuance
and delivery of the shares of Municipal Preferred of each series do not
and will not conflict with, violate or result in a breach of the terms,
conditions or provisions of, or constitute a default under, the
Agreement and Declaration of Trust (as amended to date) or the Bylaws of
the Trust, any law or regulation, any order or decree of any court or
public authority having jurisdiction, or any mortgage, indenture,
contract, agreement or undertaking to which the Trust is a party or by
which it is bound the effect of which conflict, violation, default or
breach would be material to the Trust or the Trust and its subsidiaries
taken as a whole; and
(f) no taxes are payable upon or in respect of the execution of
the Agreement or the issuance of the shares of Municipal Preferred of
any series.
6. The Auction Agent.
6.1 Duties and Responsibilities.
(a) The Auction Agent is acting solely as agent for the Trust
hereunder and owes no fiduciary duties to any Person, other than the
Trust, by reason of the Agreement.
(b) The Auction Agent undertakes to perform such duties and only
such duties as are specifically set forth in the Agreement, and no
implied covenants or obligations shall be read into the Agreement
against the Auction Agent.
(c) In the absence of bad faith or negligence on its part, the
Auction Agent shall 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 Agreement. The Auction Agent shall 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.
<PAGE> 20
18
6.2 Rights of the Auction Agent.
(a) The Auction Agent may rely and shall be protected in acting
or refraining from acting upon any communication authorized hereby and
upon any written instruction, notice, request, direction, consent,
report, certificate, share certificate or other instrument, paper or
document believed in good faith by it to be genuine. The Auction Agent
shall not be liable for acting upon any telephone communication
authorized hereby which the Auction Agent believes in good faith to have
been given by the Trust or by a Broker-Dealer. The Auction Agent may
record telephone communications with the Trust or with the
Broker-Dealers or both.
(b) The Auction Agent may consult with counsel of its choice and
the advice of such counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in reliance thereon.
(c) The Auction Agent shall not be required to advance, expend or
risk its own funds or otherwise incur or become exposed to financial
liability in the performance of its duties hereunder.
(d) The Auction Agent may perform its duties and exercise its
rights hereunder either directly or by or through agents or attorneys
and shall not be responsible for any misconduct or negligence on the
part of any agent or attorney appointed by it with due care hereunder.
6.3 Auction Agent's Disclaimer.
The Auction Agent makes no representation as to the validity or
adequacy of the Agreement, the Broker-Dealer Agreements or the shares of
Municipal Preferred of any series except that the Auction Agent hereby
represents that the Agreement has been duly authorized, executed and delivered
by the Auction Agent and constitutes a legal and binding obligation of the
Auction Agent.
6.4 Compensation, Expenses and Indemnification.
(a) The Trust shall pay the Auction Agent from time to time
reasonable compensation for all services rendered by it under the
Agreement and the Broker-Dealer Agreements.
(b) The Trust shall reimburse the Auction Agent upon its request
for all reasonable out-of-pocket expenses, disbursements and advances
incurred or made by the Auction Agent in accordance with any provision
of the Agreement and the Broker-Dealer Agreements (including the
reasonable compensation and the
<PAGE> 21
19
expenses and disbursements of its agents and counsel), except any
expense or disbursement attributable to its negligence or bad faith.
(c) The Trust shall indemnify the Auction Agent for and hold it
harmless against any loss, liability or expense incurred without
negligence or bad faith on its part, arising out of or in connection
with its agency under the Agreement and the Broker-Dealer Agreements,
including the costs and expenses of defending itself against any such
claim or liability in connection with its exercise or performance of any
of its duties hereunder and thereunder.
7. Miscellaneous.
7.1 Term of Agreement.
(a) The term of the Agreement is unlimited unless it shall be
terminated as provided in this Section 7.1. The Trust may terminate the
Agreement at any time by so notifying the Auction Agent, provided that
the Trust has entered into an agreement in substantially the form of the
Agreement with a successor Auction Agent. The Auction Agent may
terminate the Agreement upon written notice to the Trust on the date
specified in such notice, which date shall be no earlier than 45 days
after the date of delivery of such notice.
(b) Except as otherwise provided in this paragraph (b), the
respective rights and duties of the Trust and the Auction Agent under
the Agreement with respect to any series of Municipal Preferred shall
cease upon termination of the Agreement with respect to such series. The
Trust's representations, warranties, covenants and obligations to the
Auction Agent under Sections 5 and 6.4 hereof shall survive the
termination of the Agreement with respect to any series of Municipal
Preferred. Upon termination of the Agreement with respect to any series
of Municipal Preferred, the Auction Agent shall, at the Trust's request,
promptly deliver to the Trust copies of all books and records maintained
by it with respect to Municipal Preferred in connection with its duties
hereunder.
7.2 Communications.
Except for (i) communications authorized to be by telephone
pursuant to the Agreement or the Auction Procedures and (ii) communications in
connection with Auctions (other than those expressly required to be in writing),
all notices, requests and other communications to any party hereunder shall be
in writing (including telecopy or similar writing) and shall be given to such
party, addressed to it, at its address or telecopy number set forth below:
If to the Trust, [Name of Trust]
One Financial Center
<PAGE> 22
20
Boston, MA 02111
Attention:
Telecopier No.: (617) 345-0919
Telephone No.: (617) 426-3750
If to the Auction Agent, to the address or telecopy
number set forth in the
Request and Acceptance Letter,
or such other address or telecopy number as such party may hereafter specify for
such purpose by notice to the other party. Each such notice, request or
communication shall be effective when delivered at the address specified herein.
Communications shall be given on behalf of the Trust by a Trust Officer and on
behalf of the Auction Agent by telephone (confirmed by telecopy or in writing)
by an Authorized Officer.
7.3 Entire Agreement.
The Agreement contains the entire agreement between the parties
relating to, and superseding any prior agreement between the parties relating
to, the subject matter hereof, and there are no other representations,
endorsements, promises, agreements or understandings, oral, written or implied,
between the parties relating to the subject matter hereof except for agreements
relating to the compensation of the Auction Agent.
7.4 Benefits.
Nothing herein, express or implied, shall give to any Person,
other than the Trust, the Auction Agent and their respective successors and
assigns, any benefit of any legal or equitable right, remedy or claim hereunder.
7.5 Amendment; Waiver.
(a) The Agreement shall not be deemed or construed to be
modified, amended, rescinded, cancelled or waived, in whole or in part,
except by a written instrument signed by a duly authorized
representative of the party to be charged.
(b) Failure of either party hereto to exercise any right or
remedy hereunder in the event of a breach hereof by the other party
shall not constitute a waiver of any such right or remedy with respect
to any subsequent breach.
7.6 Successors and Assigns.
The Agreement shall be binding upon, inure to the benefit of, and
be enforceable by, the respective successors and assigns of each of the Trust
and the Auction Agent.
<PAGE> 23
21
7.7 Severability.
If any clause, provision or section hereof shall be ruled invalid
or unenforceable by any court of competent jurisdiction, the invalidity or
unenforceability of such clause, provision or section shall not affect any of
the remaining clauses, provisions or sections hereof.
7.8 Governing Law.
The Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
If the Trust is a Massachusetts business trust, the following
provision is deemed to be included in the Basic Terms:
7.9 Declaration of Trust.
The Trust's Agreement and Declaration of Trust (as amended) is on
file with the Secretary of the Commonwealth of Massachusetts. This Agreement has
been executed on behalf of the Trust by the Vice President and Treasurer of the
Trust acting in such capacity and not individually, and the obligations of the
Trust set forth in this Agreement are not binding upon any of the Trust's
trustees, officers or shareholders individually, but are binding only upon the
assets and property of the Trust.
<PAGE> 24
EXHIBIT A
FORM OF
BROKER-DEALER AGREEMENT
<PAGE> 25
EXHIBIT B
SETTLEMENT PROCEDURES
<PAGE> 26
EXHIBIT C
[NAME OF TRUST]
NOTICE OF AUCTION DATE FOR
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
("Municipal Preferred")
NOTICE IS HEREBY GIVEN that the Auction Date of the next Auction for
Series __ of the Trust's Municipal Preferred is scheduled to be ____________,
19__ and the next Dividend Payment Date for Series __ of the Trust's Municipal
Preferred will be _____________, 19__.
[A Failure to Deposit in respect of the Series __ Municipal Preferred
currently exists. If, prior to 12:00 noon, New York City time, on the fourth
Business Day preceding the next scheduled Auction Date of the Series __
Municipal Preferred, such Failure to Deposit is not cured or the applicable Late
Charge is not paid, the next Auction will not be held. Notice of the next
Auction for the Series __ Municipal Preferred will be delivered when such
Failure to Deposit is cured and the applicable Late Charge is paid.(1/)]
[NAME OF TRUST]
- --------
(1/) Include this language if a Failure to Deposit exists.
<PAGE> 27
EXHIBIT D
[NAME OF TRUST]
NOTICE OF PROPOSED CHANGE OF
LENGTH OF RATE PERIOD OF
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED STOCK [SHARES]
("Municipal Preferred")
[Name of Trust] (the "Trust") may exercise its option to designate
the Rate Period of its Series __ Municipal Preferred commencing [the first day
of the Special Rate Period] as a Special Rate Period.
By 11:00 A.M., New York City time, on the second Business Day
preceding the first day of such proposed Special Rate Period, the Trust will
notify of either (a) its determination to exercise such option, designating the
length of such Special Rate Period for such series or (b) its determination not
to exercise such option.
[NAME OF TRUST]
Dated: ________ , 19__
<PAGE> 28
EXHIBIT E
[NAME OF TRUST]
NOTICE OF CHANGE OF LENGTH OF RATE PERIOD
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
("Municipal Preferred")
NOTICE IS HEREBY GIVEN that [NAME OF TRUST] (the "Trust") has
determined to designate the Rate Period of its Series __ Municipal Preferred
commencing on [the first day of the Special Rate Period] as a Special Rate
Period.
The Special Rate Period will be __________ [Rate Period Days].
The Auction Date for the Special Rate Period is [the Business Day
next preceding the first day of such Special Rate Period].
As a result of the Special Rate Period designation, the amount of
dividends payable on Series __ Municipal Preferred during the Special Rate
Period will be based on a 360-day year.
The Special Rate Period shall not commence if (a) an Auction for
shares of Municipal Preferred shall not be held on such Auction Date for any
reason or (b) an Auction for shares of Municipal Preferred shall be held on such
Auction Date but Sufficient Clearing Bids for such shares shall not exist in
such Auction.
The scheduled Dividend Payment Dates for such series of Municipal
Preferred during such Special Rate Period will be ______________.
[Special Redemption Provisions, if any]
Attached hereto is a Municipal Preferred Basic Maintenance Report
showing that, as of the third Business Day next preceding such proposed Special
Rate Period, Moody's Eligible Assets (if Moody's is rating such shares of
Municipal Preferred) and S&P Eligible Assets (if S&P is rating such shares of
Municipal Preferred) each have an aggregate Discounted Value at least equal to
the Municipal Preferred Basic Maintenance Amount as of such Business Day
(assuming for purposes of the foregoing calculation that (i) the Maximum Rate is
the Maximum Rate on such Business Day as if such Business Day were the Auction
Date for the proposed Special Rate Period, and (ii) the Moody's Discount
<PAGE> 29
2
Factors applicable to Moody's Eligible Assets are determined by reference to the
first Moody's Exposure Period longer than the Moody's Exposure Period then
applicable to the Trust.)
[NAME OF TRUST]
Dated: ____________ , 19__
<PAGE> 30
EXHIBIT F
[NAME OF TRUST]
NOTICE OF DETERMINATION NOT TO CHANGE
LENGTH OF RATE PERIOD OF
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
("Municipal Preferred")
NOTICE IS HEREBY GIVEN that [NAME OF TRUST] (the "Trust") has
determined not to exercise its option to designate a Special Rate Period of its
Series __ Municipal Preferred and the next succeeding Rate Period of such series
will be a Minimum Rate Period of ___ Rate Period Days.
[NAME OF TRUST]
Dated: __________ , 19__
<PAGE> 31
EXHIBIT G
[NAME OF TRUST]
NOTICE OF CURE OF
FAILURE TO DEPOSIT ON
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
("Municipal Preferred")
NOTICE IS HEREBY GIVEN that [NAME OF TRUST] (the "Trust") has cured
its Failure to Deposit and paid the applicable Late Charge with respect to its
Series __ Municipal Preferred. The dividend rate on the shares of Series __
Municipal Preferred for the current Dividend Period is ___% per annum, the
Dividend Payment Date for the current Dividend Period is scheduled to be
_________, 19__ and the next Auction Date is scheduled to be __________, 19__.
[NAME OF TRUST]
Dated: _____________ , 19__
<PAGE> 32
EXHIBIT H
[NAME OF TRUST]
NOTICE OF CURE OF
FAILURE TO DEPOSIT ON
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
("Municipal Preferred")
NOTICE IS HEREBY GIVEN that [NAME OF TRUST] (the "Trust") has cured
its Failure to Deposit and paid the applicable Late Charge with respect to its
Series __ Municipal Preferred. The next Auction Date for the Series __ Municipal
Preferred is scheduled to be on ____________ 19__.
[NAME OF TRUST]
Dated: _______________ , 19__
<PAGE> 33
EXHIBIT I
[NAME OF TRUST]
NOTICE OF
[CAPITAL GAINS] [AND] [TAXABLE ORDINARY INCOME](1/)
DIVIDEND FOR
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
("Municipal Preferred")
NOTICE IS HEREBY GIVEN that the amount of the dividend payable on
_______________, 19__ for Series __ of the Trust's Municipal Preferred will be
determined by the Auction to be held on _____________, 19__. Up to [$ (A) ](2/)
[$ (B) ](3/) per share of the dividend payable on such date as determined by
such Auction will consist of [capital gains](2/) [ordinary income taxable for
Federal income tax purposes](3/). If the dividend amount payable on such date as
determined by such Auction is less than [$ (A) ](2/) [$ (B) ](3/) per share, the
entire amount of the dividend will consist of [capital gains](2/) [ordinary
income taxable for Federal income tax purposes](3/). [To the extent such
dividend amount exceeds [$ (A) ] per share, any excess up to [$ (B) ] per share
will consist of ordinary income taxable for Federal income tax purposes.](4/)
Accordingly, the aforementioned composition of the dividend payable on
_______________, 19__ should be considered in determining Orders to be submitted
with respect to the Auction to be held on _______________, 19___. The Rate
Multiple in effect for such Auction will be ____%.
[NAME OF TRUST]
- --------
(1/) Include language with respect to capital gains, taxable ordinary income
or both, depending on the character of the designation to be made with
respect to the dividend(s).
(2/) Include bracketed material if a portion of the dividend will be
designated capital gains.
(3/) Include bracketed material if a portion of the dividend will be
designated ordinary income taxable for Federal income tax purposes and
no portion of the dividend will be designated capital gains.
(4/) Include bracketed material if a portion of the dividend will be
designated capital gains and a portion will be designated ordinary
income taxable for Federal income tax purposes.
<PAGE> 34
2
(Footnotes continued)
---------------------
(A) = the maximum amount of capital gains allocated to such series of Municipal
Preferred to be included in such dividend, divided by the number of
shares of Municipal Preferred.
(B) = the maximum amount of ordinary income taxable for Federal income tax
purposes allocated to such series of Municipal Preferred to be included
in such dividend, divided by the number of shares in such series.
<PAGE> 1
Exhibit (k)(5)
Colonial Management Associates, Inc.
December , 1999
Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10010
Ladies and Gentlemen:
Reference is made to the Colonial Broker-Dealer
Agreement-Basic Terms for Acting as a Broker-Dealer dated December 14, 1999,
receipt of which is hereby acknowledged by you (the "Basic Terms"). For purposes
of this letter ("Acceptance Letter"), (a) "Trust" shall mean any closed-end
investment company registered under the Investment Company Act of 1940, as
amended, for which Colonial Management Associates, Inc. acts as investment
adviser and which is listed on Exhibit A; and (b) the Basic Terms are
incorporated herein by reference, you shall be considered BD for all purposes
thereof, Bankers Trust Company shall be considered the Auction Agent for all
purposes thereof, and each Trust listed on Exhibit A hereto shall be considered
a Trust for all purposes thereof.
We hereby request that you act as a Broker-Dealer for the
Municipal Auction Rate Cumulative Preferred Shares ("Municipal Preferred") of
each series of each Trust that executes a letter, substantially in the form
attached hereto as Exhibit B, appointing you as a Broker-Dealer ("Request
Letter"). You hereby (a) accept such appointment as a Broker-Dealer for each
series of Municipal Preferred of each Trust identified in a Request Letter and
(b) agree to act as BD in accordance with the Basic Terms; provided, however,
that:
(1) for purposes of the Basic Terms, your address, telecopy
number and telephone number for communications pursuant to the Basic Terms shall
be as follows:
Salomon Smith Barney Inc.
338 Greenwich Street
New York, New York 10010
Telecopier No.:
Telephone No.:
<PAGE> 2
2
and the address, telecopy number and telephone number of the Auction Agent for
communications pursuant to the Basic Terms shall be as follows:
Bankers Trust Company
Corporate Trust and Agency Group
Four Albany Street
New York, New York 10006
Attention: Auction Rate/Remarketed Securities
Telecopier No.: (212) 250-6215
Telephone No.: (212) 250-6850
You hereby acknowledge that, notwithstanding any provision of
the Basic Terms to the contrary, the Trust may (a) upon five business days'
notice to the Auction Agent and you, amend, alter or repeal any of the
provisions contained in the Basic Terms, it being understood and agreed that you
shall be deemed to have accepted any such amendment, alteration or repeal if,
after the expiration of such five business day period, you submit an Order to
the Auction Agent in respect of the shares of Municipal Preferred of the Trust
or Trusts to which such amendment, alteration or repeal relates, and (b) subject
to Section 4.1 of the Basic Terms, upon two business days' notice to the Auction
Agent and you, exclude you from participating as a Broker-Dealer in any
particular Auction for any particular series of Municipal Preferred.
This Acceptance Letter shall be deemed to form part of the
Basic Terms.
Capitalized terms not defined in this Acceptance Letter shall
have the meanings ascribed to them in the Basic Terms, as the case may be.
<PAGE> 3
3
If the foregoing terms are acceptable to you, please so
indicate in the space provided below. This Acceptance Letter may be executed in
any number of counterparts, each of which shall be an original, but all of which
shall constitute one and the same instrument.
COLONIAL MANAGEMENT ASSOCIATES, INC.
By: __________________________
Name:
Title:
Accepted by and Agreed to as of the date first written above:
SALOMON SMITH BARNEY INC.
By: _______________________
Name:
Title:
<PAGE> 4
4
EXHIBIT A TO ACCEPTANCE LETTER
Colonial California Insured Municipal Fund
Colonial Insured Municipal Fund
Colonial New York Insured Municipal Fund
<PAGE> 5
1
EXHIBIT B TO ACCEPTANCE LETTER
[Form of Request Letter]
[Name(s) of Trust(s)]
________ __, 1999
Ladies and Gentlemen:
Reference is made to (a) the Colonial Broker-Dealer Agreement
- -- Basic Terms for Acting as a Broker-Dealer dated ___ __, 1999, receipt of
which is hereby acknowledged by you (the "Broker-Dealer Basic Terms") and (b)
the Colonial Auction Agency Agreement -- Basic Terms for Acting as Auction Agent
dated ______, 1999, receipt of which is hereby acknowledged by you (the "Auction
Agency Basic Terms"). For purposes of this letter ("Request Letter"), (a)
"Trust" shall mean each undersigned closed-end investment company registered
under the Investment Company Act of 1940, as amended, for which Colonial
Management Associates, Inc. acts as investment adviser; (b) the Broker-Dealer
Basic Terms are incorporated herein by reference, each Broker-Dealer listed on
Exhibit A hereto shall be considered BD for all purposes thereof, [insert
Auction Agent] shall be considered the Auction Agent for all purposes thereof,
and each Trust shall be considered a Trust for all purposes thereof; and (c) the
Auction Agency Basic Terms are incorporated herein by reference, [insert Auction
Agent] shall be considered the Auction Agent for all purposes thereof, and each
Trust shall be considered a Trust for all purposes thereof.
Each Trust hereby appoints the Broker-Dealers listed on
Exhibit A hereto as Broker-Dealers for each series of Municipal Auction Rate
Cumulative Preferred Shares "Municipal Preferred") of such Trust. Each such
Broker-Dealer will act as BD in respect of each such series in accordance with
the Broker-Dealer Basic Terms; provided, however, that for purposes of the
Broker-Dealer Basic Terms, [insert Auction Agent]'s address, telecopy number and
telephone number for communications pursuant to the Broker-Dealer Basic Terms
shall be as follows:
------------------------------------
------------------------------------
------------------------------------
------------------------------------
<PAGE> 6
2
Bankers Trust Company agrees to act as Auction Agent with
respect to shares of each series of Municipal Preferred of each Trust in
accordance with the Auction Agency Basic Terms.
This Request Letter shall be deemed to form part of the
Auction Agency Basic Terms.
Capitalized terms not defined in this Request Letter shall
have the meanings ascribed to them in the Broker-Dealer Basic Terms or Auction
Agency Basic Terms, as the case may be.
If the foregoing terms are acceptable to you, please so
indicate in the space provided below. This Request Letter may be executed in any
number of counterparts, each of which shall be an original, but all of which
shall constitute one and the same instrument.
[NAME(S) OF TRUST(S)]
By:
-----------------------------------
Name:
Title:
Accepted and Agreed to as of
the date first written above:
COLONIAL MANAGEMENT [NAME OF AUCTION AGENT]
ASSOCIATES, INC.
By: By:
---------------------------- -----------------------------------
Name: Name:
Title: Title:
cc: Broker-Dealers listed on Exhibit A
<PAGE> 7
3
EXHIBIT A TO REQUEST LETTER
[LIST OF BROKER-DEALERS]
<PAGE> 8
COLONIAL
Broker-Dealer Agreement
Basic Terms for Acting as a Broker-Dealer
July 20, 1999
These basic terms ("Basic Terms") set forth the general terms
and conditions pursuant to which a broker-dealer identified in an Acceptance
Letter (together with its successors and assigns, a "BD") will act as a
broker-dealer for Municipal Auction Rate Cumulative Preferred ("Municipal
Preferred") shares issued by investment companies, now or hereafter organized,
registered under the Investment Company Act of 1940, as amended, as further
identified by the Request Letters (the "Trusts"), for which Colonial Management
Associates, Inc. ("Adviser") is the investment adviser.
Each Trust has issued or may issue shares of Municipal
Preferred, pursuant to its Declaration of Trust and By-Laws. A bank or trust
company specified in the Request Letter will act as the auction agent (the
"Auction Agent") of such Trust pursuant to authority granted it in the Auction
Agency Agreement.
The By-Laws of each Trust shall provide that, for each
Subsequent Rate Period of any series of Municipal Preferred of such Trust then
outstanding, the Applicable Rate for such series for such Subsequent Rate Period
shall, except under certain conditions, be the rate per annum that the Auction
Agent of such Trust advises results from implementation of the Auction
Procedures for such series. The Board of Trustees of each Trust shall adopt a
resolution appointing the Auction Agent as auction agent for purposes of the
Auction Procedures for each series of Municipal Preferred of such Trust.
The Auction Procedures of each Trust will require the
participation of one or more Broker-Dealers for each series of Municipal
Preferred of such Trust. BD will act as a Broker-Dealer for each series of
Municipal Preferred of each Trust identified in a Request Letter.
1. Definitions and Rules of Construction.
1.1. Terms Defined by Reference to By-Laws.
Capitalized terms not defined herein shall have the respective
meanings specified in the By-Laws of the relevant Trust.
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1.2. Terms Defined Herein.
As used herein and in the Settlement Procedures, the following
terms shall have the following meanings, unless the context otherwise requires:
(a) "Acceptance Letter" shall mean the letter from Adviser to
BD pursuant to which the Adviser appoints BD as a Broker Dealer for
each series of Municipal Preferred issued by any Trust that has
executed a Request Letter.
(b) "Agreement", with respect to any Trust, shall mean the
Basic Terms, together with the Acceptance Letter and the Request Letter
relating to one or more series of Municipal Preferred of such Trust and
any other substantially similar agreement among such Trust, the
Adviser, any Auction Agent for such Trust and/or BD.
(c) "Auction" shall have the meaning specified in Section 2.1
hereof.
(d) "Auction Agency Agreement", with respect to any Trust,
shall mean the Auction Agency Agreement between such Trust and the
Auction Agent relating to one or more series of Municipal Preferred of
such Trust.
(e) "Auction Procedures", with respect to any Trust, shall
mean the auction procedures constituting Part II of Section 12.1 of the
By-Laws of such Trust as of the date of issuance of the Municipal
Preferred shares of such Trust.
(f) "Authorized Officer" of an Auction Agent shall mean each
Senior Vice President, Vice President, Assistant Vice President,
Assistant Treasurer and Assistant Secretary of such Auction Agent
assigned to its Corporate Trust and Agency Group and every other
officer or employee of such Auction Agent designated as an "Authorized
Officer" for purposes of the Agreement in a communication to BD.
(g) "BD Officer" shall mean each officer or employee of BD
designated as a "BD Officer" for purposes of the Agreement in a
communication to any Auction Agent.
(h) "By-Laws", with respect to any Trust, shall mean the
By-Laws, as amended and restated, of such Trust, a copy of which will
be attached to the Request Letter of such Trust.
(i) "Municipal Preferred" shall mean the preferred shares, no
par value, of any Trust designated as its "Municipal Auction Rate
Cumulative Preferred Shares" and bearing such further designation as to
series as the Board of Trustees of such Trust or any committee thereof
shall specify, as set forth in a Request Letter.
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(j) "Request Letter", with respect to any Trust, shall mean
the letter from such Trust to the Adviser and the Auction Agent for
such Trust pursuant to which such Trust appoints BD as a Broker-Dealer
for each series of Municipal Preferred of such Trust.
(k) "Settlement Procedures" shall mean the Settlement
Procedures attached hereto as Exhibit A.
1.3. Rules of Construction.
Unless the context or use indicates another or different
meaning or intent, the following rules shall apply to the construction of each
Agreement:
(a) Words importing the singular number shall include the
plural number and vice versa.
(b) The captions and headings herein are solely for
convenience of reference and shall not constitute a part of such
Agreement nor shall they affect its meaning, construction or effect.
(c) The words "hereof", "herein", "hereto", and other words of
similar import refer to such Agreement as a whole.
(d) All references herein to a particular time of day shall be
to New York City time.
2. The Auction.
2.1. Purpose; Incorporation by Reference of Auction Procedures
and Settlement Procedures.
(a) The provisions of the Auction Procedures of any Trust will
be followed by the Auction Agent of such Trust for the purpose of determining
the Applicable Rate for any Subsequent Rate Period of any series of Municipal
Preferred of such Trust for which the Applicable Rate is to be determined by an
Auction. Each periodic operation of such procedures is hereinafter referred to
as an "Auction."
(b) All of the provisions contained in the Auction Procedures
and the Settlement Procedures are incorporated herein by reference in their
entirety and shall be deemed to be a part hereof to the same extent as if such
provisions were fully set forth herein.
(c) BD agrees to act as, and assumes the obligations of, and
limitations and restrictions placed upon, a Broker-Dealer under each Agreement
for each series of Municipal Preferred. BD understands that other Persons
meeting the requirements specified in the definition of "Broker-Dealer"
contained in the Auction Procedures may execute Agreements and participate as
Broker-Dealers in Auctions.
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2.2. Preparation for Each Auction.
(a) Not later than 9:30 A.M. on each Auction Date for any
series of Municipal Preferred, the Auction Agent for such series shall advise
the Broker-Dealers for such series by telephone of the Maximum Rate therefor and
the Reference Rate(s) and Treasury Note Rate(s), as the case may be, used in
determining such Maximum Rate.
(b) In the event that any Auction Date for any series of
Municipal Preferred shall be changed after the Auction Agent for such series has
given the notice referred to in clause (vi) of paragraph (a) of the Settlement
Procedures, or after the notice referred to in Section 2.5(a) hereof, if
applicable, such Auction Agent, by such means as such Auction Agent deems
practicable, shall give notice of such change to BD, if it is a Broker-Dealer
for such series, not later than the earlier of 9:15 A.M. on the new Auction Date
or 9:15 A.M. on the old Auction Date.
(c) For purposes of maintaining its list of Existing Holders,
the Auction Agent for any series of Municipal Preferred from time to time may
request any Broker-Dealer to provide such Auction Agent with a list of Persons
who such Broker-Dealer believes should be Existing Holders based upon inquiries
of those Persons such Broker-Dealer believes are Beneficial Owners as a result
of the most recent Auction and with respect to each such Person, the number of
shares of such series of Municipal Preferred such Broker-Dealer believes are
owned by such Person. BD shall comply with any such request relating to a series
of Municipal Preferred in respect of which BD was named a Broker-Dealer, and the
Auction Agent shall keep confidential any such information so provided by BD and
shall not disclose any information so provided by BD to any Person other than
the Trust and BD.
(d) BD agrees to maintain a list of customers relating to a
series of Municipal Preferred and to use its best efforts, subject to existing
laws and regulations, to contact the customers on such list whom BD believes may
be interested in participating in the Auction on each Auction Date, as a
Potential Holder or a Potential Beneficial Owner, for the purposes set forth in
the Auction Procedures. Nothing herein shall require BD to submit an Order for
any customer in any Auction.
(e) The Auction Agent's registry of Existing Holders of shares
of a series of Municipal Preferred shall be conclusive and binding on BD. BD may
inquire of the Auction Agent between 3:00 P.M. on the Business Day preceding an
Auction for shares of a series of Municipal Preferred and 9:30 A.M. on the
Auction Date for such Auction to ascertain the number of shares of such series
in respect of which the Auction Agent has determined BD to be an Existing
Holder. If BD believes it is the Existing Holder of fewer shares of such series
than specified by the Auction Agent in response to BD's inquiry, BD may so
inform the Auction Agent of that belief. BD shall not, in its capacity as
Existing Holder of shares of such series, submit Orders in such Auction in
respect of shares of such series covering in the aggregate more than the number
of shares of such series specified by the Auction Agent in response to BD's
inquiry.
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2.3. Auction Schedule; Method of Submission of Orders.
(a) Each Trust and the Auction Agent for such Trust shall
conduct Auctions for Municipal Preferred in accordance with the schedule set
forth below. Such schedule with respect to any series of Municipal Preferred of
any Trust may be changed by the Auction Agent for such series with the consent
of such Trust, which consent shall not be unreasonably withheld. Such Auction
Agent shall give written notice of any such change to each Broker-Dealer of such
series. Such notice shall be given prior to the close of business on the
Business Day next preceding the first Auction Date on which such change shall be
effective.
Time Event
By 9:30 A.M. Auction Agent for such series
advises such Trust and the
Broker-Dealers for such series of
the applicable Maximum Rate and the
Reference Rate(s) and Treasury Note
Rate(s), as the case may be, used in
determining such Maximum Rate as set
forth in Section 2.2(a) hereof.
9:30 A.M. - 1:30 P.M. Auction Agent assembles information
communicated to it by Broker-Dealers
as provided in Section 2(a) of the
Auction Procedures of such Trust.
Submission Deadline is 1:30 P.M.
Not earlier than 1:30 P.M. Auction Agent makes determinations
pursuant to Section 3(a) of the
Auction Procedures of such Trust.
By approximately 3:00 P.M. Auction Agent advises Trust of
results of Auction as provided in
Section 3(b) of the Auction
Procedures of such Trust.
Submitted Bids and Submitted Sell
Orders are accepted and rejected and
shares of such series of Municipal
Preferred allocated as provided in
Section 4 of the Auction Procedures
of such Trust.
Auction Agent gives notice of
Auction results as set forth in
Section 2.4(a) hereof.
(b) BD shall submit Orders to the appropriate Auction Agent in
writing substantially in the form attached hereto as Exhibit B. BD shall submit
a separate Order to such Auction Agent for each Potential Holder or Existing
Holder with respect to whom BD is submitting an Order and shall not otherwise
net or aggregate such Orders prior to their submission to such Auction Agent.
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(c) BD shall deliver to the appropriate Auction Agent (i) a
written notice in substantially the form attached hereto as Exhibit C of
transfers of shares of Municipal Preferred to BD from another Person other than
pursuant to an Auction and (ii) a written notice substantially in the form
attached hereto as Exhibit D, of the failure of any shares of Municipal
Preferred to be transferred to or by any Person that purchased or sold shares of
Municipal Preferred through BD pursuant to an Auction. Such Auction Agent is not
required to accept any such notice described in clause (i) for an Auction unless
it is received by the Auction Agent by 3:00 P.M. on the Business Day preceding
such Auction.
(d) BD and other Broker-Dealers may submit Orders in Auctions
for their own accounts (including Orders for their own accounts where the Order
is placed beneficially for a customer) unless the relevant Trust shall have
notified BD and all other Broker-Dealers that they may no longer do so, in which
case Broker-Dealers may continue to submit Hold Orders and Sell Orders for their
own accounts.
(e) BD agrees to handle its customers' orders in accordance
with its duties under applicable securities laws and rules.
(f) To the extent that pursuant to Section 4 of the Auction
Procedures of any Trust, BD continues to hold, sells, or purchases a number of
shares that is fewer than the number of shares in an Order submitted by BD to
the Auction Agent in which BD designated itself as an Existing Holder or
Potential Holder in respect of customer Orders, BD shall make appropriate pro
rata allocations among its customers for which it submitted Orders of similar
tenor. If as a result of such allocations, any Beneficial Owner would be
entitled or required to sell, or any Potential Beneficial Owner would be
entitled or required to purchase, a fraction of a share of Municipal Preferred
on any Auction Date, BD shall, in such manner as it shall determine in its sole
discretion, round up or down the number of shares of Municipal Preferred to be
purchased or sold on such Auction Date by any Beneficial Owner or Potential
Beneficial Owner on whose behalf BD submitted an Order so that the number of
shares so purchased or sold by each such Beneficial Owner or Potential
Beneficial Owner on such Auction Date shall be whole shares of Municipal
Preferred.
2.4. Notices.
(a) On each Auction Date for any series of Municipal
Preferred, the Auction Agent for such series shall notify BD, if BD is a
Broker-Dealer of such series, by telephone of the results of the Auction as set
forth in paragraph (a) of the Settlement Procedures. By approximately 11:30 A.M.
on the Business Day next succeeding such Auction Date, the relevant Auction
Agent shall confirm to BD in writing the disposition of all Orders submitted by
BD in such Auction.
(b) BD shall notify each Existing Holder, Potential Holder,
Beneficial Owner or Potential Beneficial Owner of shares of Municipal Preferred
with respect to whom BD has submitted an Order as set forth in paragraph (b) of
the Settlement Procedures and take such other action as is required of BD
pursuant to the Settlement Procedures.
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2.5. Designation of Special Rate Period.
(a) If any Trust delivers to its Auction Agent a notice of the
Auction Date for any series of Municipal Preferred of such Trust for a Rate
Period thereof that next succeeds a Rate Period that is not a Minimum Rate
Period in the form of Exhibit C to the Auction Agency Agreement, and BD is a
Broker-Dealer of such series, the Auction Agent shall deliver such notice to BD
as promptly as practicable after its receipt of such notice from such Trust.
(b) If the Board of Trustees of any Trust proposes to
designate any succeeding Subsequent Rate Period of any series of Municipal
Preferred of such Trust as a Special Rate Period and such Trust delivers to its
Auction Agent a notice of such proposed Special Rate Period in the form of
Exhibit D to the Auction Agency Agreement, and BD is a Broker-Dealer for such
series, such Auction Agent shall deliver such notice to BD as promptly as
practicable after its receipt of such notice from the Trust.
(c) If the Board of Trustees of any Trust determines to
designate such succeeding Subsequent Rate Period as a Special Rate Period, and
such Trust delivers to its Auction Agent a notice of such Special Rate Period in
the form of Exhibit E to the Auction Agency Agreement not later than 11:00 A.M.
on the second Business Day next preceding the first day of such Rate Period (or
by such later time or date, or both, as may be agreed to by such Auction Agent),
and BD is a Broker-Dealer for such series, such Auction Agent shall deliver such
notice to BD not later than 3:00 P.M. on such second Business Day (or, if such
Auction Agent has agreed to a later time or date, as promptly as practicable
thereafter).
(d) If any Trust shall deliver to its Auction Agent a notice
not later than 11:00 A.M. on the second Business Day next preceding the first
day of any Rate Period (or by such later time or date, or both, as may be agreed
to by such Auction Agent) stating that such Trust has determined not to exercise
its option to designate such succeeding Subsequent Rate Period as a Special Rate
Period, in the form of Exhibit F to the Auction Agency Agreement, or shall fail
to timely deliver either such notice or a notice in the form of Exhibit E to the
Auction Agency Agreement, and BD is a Broker-Dealer for such series, such
Auction Agent shall deliver a notice in the form of Exhibit F to the Auction
Agency Agreement to BD not later than 3:00 P.M. on such second Business Day (or,
if such Auction Agent has agreed to a later time or date, as promptly as
practicable thereafter).
2.6. Allocation of Taxable Income.
If any Trust delivers to its Auction Agent a notice in the
form of Exhibit I to the Auction Agency Agreement designating all or a portion
of any dividend on shares of any series of Municipal Preferred of such Trust to
consist of net capital gains or other income taxable for Federal income tax
purposes, and BD is a Broker-Dealer for such series, such Auction Agent shall
deliver such notice to BD on the Business Day following its receipt of such
notice from such Trust. On or prior to the Auction Date referred to in such
notice, BD will contact each of its customers that is a Beneficial Owner of
shares of such series of Municipal Preferred or a
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Potential Beneficial Owner of shares of such series of Municipal Preferred
interested in submitting an Order in the Auction to be held on such Auction
Date, and BD will notify such Beneficial Owners and Potential Beneficial Owners
of the contents of such notice. BD will be deemed to have notified such
Beneficial Owners and Potential Beneficial Owners if, for each of them, (i) BD
makes a reasonable effort to contact such Beneficial Owner or Potential
Beneficial Owner by telephone, and (ii) upon failing to contact such Beneficial
Owner or Potential Beneficial Owner by telephone BD mails written notification
to such Beneficial Owner or Potential Beneficial Owner at the mailing address
indicated in the account records of BD.
The Auction Agent for any series of Municipal Preferred shall
be required to notify BD if it is a Broker-Dealer for such series within two
Business Days after each Auction of such series that involves an allocation of
income taxable for Federal income tax purposes as to the dollar amount per share
of such taxable income and income exempt from Federal income taxation included
in the related dividend.
2.7. Failure to Deposit.
(a) If:
(i) any Failure to Deposit shall have occurred with respect to
shares of any series of Municipal Preferred of any Trust during any
Rate Period thereof (other than any Special Rate Period of more than
364 Rate Period Days or any Rate Period succeeding any Special Rate
Period of more than 364 Rate Period Days during which a Failure to
Deposit occurred that has not been cured), but, prior to 12:00 Noon,
New York City time, on the third Business Day next succeeding the date
on which such Failure to Deposit occurred, such Failure to Deposit
shall have been cured in accordance with Section 2.7 of the Auction
Agency Agreement and such Trust shall have paid to the Auction Agent
for such series the applicable Late Charge as described in Section 2.7
of the Auction Agency Agreement,
then, if BD is a Broker-Dealer for such series, such Auction Agent shall deliver
a notice in the form of Exhibit G to the Auction Agency Agreement by first-class
mail, postage prepaid, to BD not later than one Business Day after its receipt
of the payment from such Trust curing such Failure to Deposit and such Late
Charge.
(b) If:
(i) any Failure to Deposit shall have occurred with respect to
shares of any series of Municipal Preferred of any Trust during any
Rate Period thereof (other than any Special Rate Period of more than
364 Rate Period Days or any Rate Period succeeding any Special Rate
Period of more than 364 Rate Period Days during which a Failure to
Deposit occurred but has not been cured), and, prior to 12:00 Noon, New
York City time, on the third Business Day next succeeding the date on
which such Failure to Deposit occurred, such Failure to Deposit shall
not have been cured as described in Section 2.7 of the Auction Agency
Agreement or such Trust shall not have paid to the Auction Agent
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for such series the applicable Late Charge described in Section 2.7 of
the Auction Agency Agreement; or
(ii) any Failure to Deposit shall have occurred with respect
to shares of any series of Municipal Preferred of any Trust during a
Special Rate Period thereof of more than 364 Rate Period Days, or
during any Rate Period thereof succeeding any Special Rate Period of
more than 364 Rate Period Days during which a Failure to Deposit
occurred that has not been cured, and, prior to 12:00 noon, New York
City time, on the fourth Business Day preceding the Auction Date for
the Rate Period subsequent to such Rate Period, such Failure to Deposit
shall not have been cured as described in Section 2.7 of the Auction
Agency Agreement or such Trust shall not have paid to the Auction Agent
for such series the applicable Late Charge described in Section 2.7 of
the Auction Agency Agreement;
then such Auction Agent shall deliver a notice in the form of Exhibit H to the
Auction Agency Agreement to the Broker-Dealers for such series not later than
one Business Day after the receipt of the payment from such Trust curing such
Failure to Deposit and such Late Charge.
2.8. Service Charge to be Paid to BD.
On the Business Day next succeeding each Auction Date for any
series of Municipal Preferred specified in, or on Exhibit A to, the Request
Letter of any Trust, the Auction Agent for such series shall pay to BD from
moneys received from such Trust an amount equal to the product of (a) (i) in the
case of any Auction Date immediately preceding a Rate Period of such series
consisting of 364 Rate Period Days or fewer, 1/4 of 1%, or (ii) in the case of
any Auction Date immediately preceding a Rate Period of such series consisting
of more than 364 Rate Period Days, such percentage as may be agreed upon by such
Trust and BD with respect to such Rate Period, times (b) a fraction, the
numerator of which is the number of Rate Period Days in the Rate Period therefor
beginning on such Business Day and the denominator of which is 365 if such Rate
Period consists of 7 Rate Period Days and 360 for all other Rate Periods, times
(c) $25,000 times (d) the sum of (i) the aggregate number of shares of such
series placed by BD in such Auction that were (A) the subject of Submitted Bids
of Existing Holders submitted by BD and continued to be held as a result of such
submission and (B) the subject of Submitted Bids of Potential Holders submitted
by BD and purchased as a result of such submission plus (ii) the aggregate
number of shares of such series subject to valid Hold Orders (determined in
accordance with paragraph (d) of Section 2 of the Auction Procedures) submitted
to the Auction Agent by BD plus (iii) the number of shares of Municipal
Preferred deemed to be subject to Hold Orders of Existing Holders pursuant to
paragraph (c) of Section 2 of the Auction Procedures of such Trust that were
acquired by BD for its own account or were acquired by BD for its customers who
are Beneficial Owners.
For purposes of subclause (d)(iii) of the foregoing paragraph,
if any Existing Holder or Beneficial Owner who acquired shares of any series of
Municipal Preferred through BD transfers those shares to another Person other
than pursuant to an Auction, then the Broker-Dealer for the shares so
transferred shall continue to be BD; provided, however, that if
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the transfer was effected by, or if the transferee is, a Broker-Dealer other
than BD, then such Broker-Dealer shall be the Broker-Dealer for such shares.
2.9. Settlement.
(a) If any Existing Holder or Beneficial Owner with respect to
whom BD has submitted a Bid or Sell Order for shares of Municipal Preferred of
any series that was accepted in whole or in part fails to instruct its Agent
Member to deliver the shares of Municipal Preferred subject to such Bid or Sell
Order against payment therefor, BD, if it knows the identity of such Agent
Member, shall instruct such Agent Member to deliver such shares against payment
therefor and, if such Agent Member fails to comply with such instructions, BD
may deliver to the Potential Holder or Potential Beneficial Owner with respect
to whom BD submitted a Bid for shares of Municipal Preferred of such series that
was accepted in whole or in part a number of shares of Municipal Preferred of
such series that is less than the number of shares of Municipal Preferred of
such series specified in such Bid to be purchased by such Potential Holder or
Potential Beneficial Owner.
(b) Neither the Auction Agent nor the Trust shall have any
responsibility or liability with respect to the failure of an Existing Holder,
Beneficial Owner, Potential Holder or Potential Beneficial Owner or its
respective Agent Member to deliver shares of Municipal Preferred of any series
or to pay for shares of Municipal Preferred of any series sold or purchased
pursuant to the Auction Procedures or otherwise.
(c) Notwithstanding any provision of the Auction Procedures or
the Settlement Procedures to the contrary, in the event BD is an Existing Holder
with respect to shares of a series of Municipal Preferred and the Auction
Procedures provide that BD shall be deemed to have submitted a Sell Order in an
Auction with respect to such shares if BD fails to submit an Order in that
Auction with respect to such shares, BD shall have no liability to any Person
for failing to sell such shares pursuant to such a deemed Sell Order if (i) such
shares were transferred by the beneficial owner thereof without notification of
such transfer in compliance with the Auction Procedures or (ii) BD has indicated
to the Auction Agent pursuant to Section 2.2(e) of this Agreement that,
according BD's records, BD is not the Existing Holder of such shares.
(d) Notwithstanding any provision of the Auction Procedures or
the Settlement Procedures to the contrary, in the event an Existing Holder or
Beneficial Owner of shares of a series of Municipal Preferred with respect to
whom a Broker-Dealer submitted a Bid to the Auction Agent for such shares that
was accepted in whole or in part, or submitted or is deemed to have submitted a
Sell Order for such shares that was accepted in whole or in part, fails to
instruct its Agent Member to deliver such shares against payment therefor,
partial deliveries of shares of Municipal Preferred that have been made in
respect of Potential Holders' or Potential Beneficial Owners' Submitted Bids for
shares of such series that have been accepted in whole or in part shall
constitute good delivery to such Potential Holders and Potential Beneficial
Owners.
(e) Notwithstanding the foregoing terms of this Section, any
delivery or non-delivery of shares of Municipal Preferred of any series which
represents any departure from the
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results of an Auction for shares of such series, as determined by the Auction
Agent, shall be of no effect for purposes of the registry of Existing Holders
maintained by the Auction Agent pursuant to the Auction Agency Agreement unless
and until the Auction Agent shall have been notified of such delivery or
non-delivery.
(f) The Auction Agent shall have no duty or liability with
respect to enforcement of this Section 2.9.
3. The Auction Agent.
3.1. Duties and Responsibilities.
(a) Each Auction Agent is acting solely as agent for the
Trusts with whom such Auction Agent has entered into Request Letters and owes no
fiduciary duties to any other Person, other than such Trusts, by reason of the
Agreements to which such Auction Agent is a party.
(b) Each Auction Agent undertakes to perform such duties and
only such duties as are specifically set forth in the Agreements to which it is
a party, and no implied covenants or obligations shall be read into such
Agreements against such Auction Agent.
(c) In the absence of bad faith or negligence on its part,
each Auction Agent shall 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 Agreements to which it is a party. Each Auction Agent shall not be
liable for any error of judgment made in good faith unless such Auction Agent
shall have been negligent in ascertaining the pertinent facts.
3.2. Rights of the Auction Agents.
(a) Each Auction Agent may rely and shall be protected in
acting or refraining from acting upon any communication authorized hereby and
upon any written instruction, notice, request, direction, consent, report,
certificate, share certificate or other instrument, paper or document believed
in good faith by it to be genuine. Each Auction Agent shall not be liable for
acting upon any telephone communication authorized by the Agreements to which it
is a party that such Auction Agent believes in good faith to have been given by
the appropriate Trust, by the Adviser or by a Broker-Dealer. Each Auction Agent
may record telephone communications with the Broker-Dealers.
(b) Each Auction Agent may consult with counsel of its choice
and the advice of such counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it hereunder
in good faith and in reliance thereon.
(c) Each Auction Agent shall not be required to advance,
expend or risk its own funds or otherwise incur or become exposed to financial
liability in the performance of its duties hereunder.
3.3. Auction Agents' Disclaimers.
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Each Auction Agent makes no representation as to the validity
or adequacy of the Agreements to which it is a party, the Auction Agency
Agreements to which it is a party or the shares of Municipal Preferred of any
series.
4. Miscellaneous.
4.1. Termination.
Any party to any Agreement may terminate such Agreement at any
time on five days' notice to the other parties to such Agreement, provided that
the Trust party to such Agreement shall not terminate the Agreement unless at
least one Broker-Dealer Agreement would be in effect for each series of
Municipal Preferred of such Trust after such termination. Each Agreement shall
automatically terminate with respect to any series of Municipal Preferred with
respect to which the relevant Auction Agency Agreement has terminated.
4.2. Participant in Securities Depository; Payment of
Dividends in Same-Day Funds.
(a) BD is, and shall remain for the term of the Agreements, a
member of, or participant in, the Securities Depository (or an affiliate of such
a member or participant).
(b) BD represents that it (or if BD does not act as Agent
Member, one of its affiliates) shall make all dividend payments on the Municipal
Preferred available in same-day funds on each Dividend Payment Date to customers
that use BD or affiliate as Agent Member.
4.3. Communications.
Except for (i) communications authorized to be by telephone by
the Agreement of any Trust or the Auction Procedures of such Trust and (ii)
communications in connection with Auctions (other than those expressly required
to be in writing), all notices, requests and other communications to any party
under such Agreement shall be in writing (including telecopy or similar writing)
and shall be given to such party, addressed to it, at its address or telecopy
number set forth below:
If to a Trust, [Name of Trust]
addressed: One Financial Center
Boston, MA 02111
Attention: Secretary
Telecopier No.: (617) 345-0919
Telephone No.: (617) 426-3750
<PAGE> 20
13
If to the Adviser, Colonial Management Associates, Inc.
addressed: One Financial Center
Boston, MA 02111
Attention: Secretary
If to BD, to the address or telecopy number as set forth in the
Acceptance Letter.
If to an Auction Agent, to the address or telecopy number as set forth
in the Request Letter, or such other address or telecopy number as such party
may hereafter specify for such purpose by notice to the other parties. Each such
notice, request or communication shall be effective when delivered at the
address specified herein. Communications shall be given on behalf of BD by a BD
Officer and on behalf of an Auction Agent by an Authorized Officer of such
Auction Agent. BD may record telephone communications with any Auction Agent.
4.4. Entire Agreement.
Each Agreement contains the entire agreement among the parties
thereto relating to the subject matter thereof, and there are no other
representations, endorsements, promises, agreements or understandings, oral,
written or implied, among the parties thereto relating to the subject matter
thereof. Each Agreement supersedes any prior agreement to which BD was a party
in respect of any Trust.
4.5. Benefits.
Nothing in any Agreement, express or implied, shall give to
any person, other than the Trust party to such Agreement, the Adviser, the
Auction Agent party to such Agreement and BD and their respective successors and
assigns, any benefit or any legal or equitable right, remedy or claim under such
Agreement.
4.6. Amendment; Waiver.
(a) Each Agreement shall not be deemed or construed to be
modified, amended, rescinded, canceled or waived, in whole or in part, except by
a written instrument signed by a duly authorized representative of the party to
be charged.
(b) Failure of any party to any Agreement to exercise any
right or remedy thereunder in the event of a breach thereof by any other party
shall not constitute a waiver of any such right or remedy with respect to any
subsequent breach.
4.7. Successors and Assigns.
Each Agreement shall be binding upon, inure to the benefit of,
and be enforceable by, the respective successors and assigns of the Trust party
to such Agreement, the Adviser, the Auction Agent party to such Agreement and
BD.
<PAGE> 21
14
4.8. Severability.
If any clause, provision or section hereof shall be ruled
invalid or unenforceable by any court of competent jurisdiction, the invalidity
or unenforceability of such clause, provision or section shall not affect any of
the remaining clauses, provisions or sections hereof.
4.9. GOVERNING LAW.
EACH AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
4.10. Declaration of Trust.
The Declaration of each Trust is on file with the Secretary of
State of the Commonwealth of Massachusetts. Each Agreement to which a Trust that
is a Massachusetts business trust is a party has been duly executed on behalf of
such Trust by an officer of such Trust acting in such capacity and not
individually, and the obligations of such Trust set forth in such Agreement are
not binding upon any of such Trust's trustees, officers or shareholders
individually, but are binding only upon the assets and property of such Trust.
<PAGE> 22
EXHIBIT A
SETTLEMENT PROCEDURES
<PAGE> 23
EXHIBIT B
[Name of Trust]
$_______ Municipal Auction Rate Cumulative Preferred
Shares, Series ___
AUCTION DATE:__________
ISSUE:__________________________________ SERIES:_______
THE UNDERSIGNED Broker-Dealer SUBMITS THE FOLLOWING ORDERS ON BEHALF OF THE
BIDDER(S) LISTED BELOW:
<TABLE>
<CAPTION>
ORDERS BY EXISTING HOLDERS- NUMBER OF SHARES OF MUNICIPAL PREFERRED
EXISTING HOLDER HOLD BID/RATE SELL
<S> <C> <C> <C>
1.______________________________ ________ _________/________ ________
2.______________________________ ________ _________/________ ________
3.______________________________ ________ _________/________ ________
4.______________________________ ________ _________/________ ________
5.______________________________ ________ _________/________ ________
6.______________________________ ________ _________/________ ________
7.______________________________ ________ _________/________ ________
8.______________________________ ________ _________/________ ________
9.______________________________ ________ _________/________ ________
10._____________________________ ________ _________/________ ________
</TABLE>
<TABLE>
<CAPTION>
ORDERS BY POTENTIAL HOLDERS- NUMBER OF SHARES OF MUNICIPAL
PREFERRED
POTENTIAL HOLDER
BID/RATE
<S> <C>
1.______________________________ _____________/_______
2.______________________________ _____________/_______
3.______________________________ _____________/_______
4.______________________________ _____________/_______
5.______________________________ _____________/_______
6.______________________________ _____________/_______
7.______________________________ _____________/_______
8.______________________________ _____________/_______
9.______________________________ _____________/_______
10._____________________________ _____________/_______
11._____________________________ _____________/_______
12._____________________________ _____________/_______
13._____________________________ _____________/_______
14._____________________________ _____________/_______
15._____________________________ _____________/_______
</TABLE>
NOTES:
1. If one or more Orders covering in the aggregate more than the number of
outstanding shares of Municipal Preferred held by any Existing Holder
are submitted, such Orders shall be considered valid in the order of
priority set forth in the Auction Procedures.
2. A Hold Order or Sell Order may be placed only by an Existing Holder
covering a number of shares of Municipal Preferred not greater than the
number of shares of Municipal Preferred currently held by such Existing
Holder.
3. Potential Holders may make Bids only, each of which must specify a
rate. If more than one Bid is submitted on behalf of any Potential
Holder, each Bid submitted shall be a separate Bid with the rate
specified.
4. Bids may contain no more than three figures to the right of the decimal
point (.001 of 1%).
1
<PAGE> 24
[AUCTION AGENT] AUCTION BID FORM
Submit to:
NAME OF Broker-Dealer:_______________________________________________
AUTHORIZED
SIGNATURE:_________________________________________________________
TOTAL NUMBER OF ORDERS ON THIS BID FORM: __________
2
<PAGE> 25
1
EXHIBIT C
(To be used only for transfers made to a
Broker-Dealer other than pursuant to an Auction)
[NAME OF TRUST]
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES,
SERIES __
TRANSFER FORM
We are the Broker-Dealer to whom the Existing Holder or Beneficial Owner named
below transferred shares of the above series of Municipal Preferred other than
pursuant to an Auction. We hereby notify you that such Existing Holder or
Beneficial Owner has transferred ______ shares of the above series of Municipal
Preferred to us.
-------------------------------------------
(Name of Existing Holder or
Beneficial Owner )
-------------------------------------------
(Name of Broker-Dealer)
By:
--------------------------------------
Printed Name:
Title:
1
<PAGE> 26
1
EXHIBIT D
(To be used only for failures to deliver shares of
Municipal Preferred sold pursuant to an Auction)
[NAME OF TRUST]
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES,
SERIES __
NOTICE OF A FAILURE TO DELIVER
Complete either I or II
I. We are a Broker-Dealer for _____ (the "Purchaser"), which purchased
_____ shares of the above series of Municipal Preferred in the Auction
held on _____ from the seller of such shares.
II. We are a Broker-Dealer for _____ (the "Seller"), which sold _____
shares of the above series of Municipal Preferred in the Auction held
on _____ to the purchaser of such shares.
We hereby notify you that (check one)--
_____ the Seller failed to deliver such shares of Municipal
Preferred to the Purchaser
_____ the Purchaser failed to make payment to the Seller upon
delivery of such shares of Municipal Preferred
Name:
---------------------------------
(Name of Broker-Dealer)
By:
---------------------------------
Printed Name:
Title:
<PAGE> 27
1
EXHIBIT E
[Form of Broker-Dealer Acceptance Letter]
Colonial Management Associates, Inc.
[Date]
[Broker-Dealer]
[Address]
Ladies and Gentlemen:
Reference is made to the Colonial Broker-Dealer
Agreement-Basic Terms for Acting as a Broker-Dealer dated ____________, receipt
of which is hereby acknowledged by you (the "Basic Terms"). For purposes of this
letter ("Acceptance Letter"), (a) "Trust" shall mean any closed-end investment
company registered under the Investment Company Act of 1940, as amended, for
which Colonial Management Associates, Inc. acts as investment adviser and which
is listed on Exhibit A; and (b) the Basic Terms are incorporated herein by
reference, you shall be considered a BD for all purposes thereof, [Insert
Auction Agent] shall be considered the Auction Agent for all purposes thereof,
and each Trust listed on Exhibit A hereto shall be considered a Trust for all
purposes thereof.
We hereby request that you act as a Broker-Dealer for the
Municipal Auction Rate Cumulative Preferred Shares ("Municipal Preferred") of
each series of each Trust that executes a letter, substantially in the form
attached hereto as Exhibit B, appointing you as a Broker-Dealer ("Request
Letter"). You hereby (a) accept such appointment as a Broker-Dealer for each
series of Municipal Preferred of each Trust identified in a Request Letter and
(b) agree to act as BD in accordance with the Basic Terms; provided, however,
that:
(1) for purposes of the Basic Terms, your address, telecopy
number and telephone number for communications pursuant to the Basic Terms shall
be as follows:
-----------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
<PAGE> 28
2
2
and the address, telecopy number and telephone number of the Auction Agent for
communications pursuant to the Basic Terms shall be as follows:
-----------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
You hereby acknowledge that, notwithstanding any provision of
the Basic Terms to the contrary, the Trust may (a) upon five business days'
notice to the Auction Agent and you, amend, alter or repeal any of the
provisions contained in the Basic Terms, it being understood and agreed that you
shall be deemed to have accepted any such amendment, alteration or repeal if,
after the expiration of such five business day period, you submit an Order to
the Auction Agent in respect of the shares of Municipal Preferred of the Trust
or Trusts to which such amendment, alteration or repeal relates, and (b) upon
two business days' notice to the Auction Agent and you, exclude you from
participating as a Broker-Dealer in any particular Auction for any particular
series of Municipal Preferred.
This Acceptance Letter shall be deemed to form part of the
Basic Terms.
Capitalized terms not defined in this Acceptance Letter shall
have the meanings ascribed to them in the Basic Terms, as the case may be.
<PAGE> 29
3 3
If the foregoing terms are acceptable to you, please so
indicate in the space provided below. This Acceptance Letter may be executed in
any number of counterparts, each of which shall be an original, but all of which
shall constitute one and the same instrument.
COLONIAL MANAGEMENT ASSOCIATES, INC.
By: __________________________
Name: [ ]
Title: [ ]
Accepted by and Agreed to as of the date first written above:
[Broker-Dealer]
By: _______________________
Name:
Title:
<PAGE> 30
4
EXHIBIT A TO ACCEPTANCE LETTER
<PAGE> 31
1
EXHIBIT B TO ACCEPTANCE LETTER
[Form of Request Letter]
[Name(s) of Trust(s)]
[Date]
Ladies and Gentlemen:
Reference is made to (a) the Colonial Broker-Dealer Agreement
- -- Basic Terms for Acting as a Broker-Dealer dated ____________, receipt of
which is hereby acknowledged by you (the "Broker-Dealer Basic Terms") and (b)
the Colonial Auction Agency Agreement -- Basic Terms for Acting as Auction Agent
dated ___________, receipt of which is hereby acknowledged by you (the "Auction
Agency Basic Terms"). For purposes of this letter ("Request Letter"), (a)
"Trust" shall mean each undersigned closed-end investment company registered
under the Investment Company Act of 1940, as amended, for which Colonial
Management Associates, Inc. acts as investment adviser; (b) the Broker-Dealer
Basic Terms are incorporated herein by reference, each Broker-Dealer listed on
Exhibit A hereto shall be considered BD for all purposes thereof, [insert
Auction Agent] shall be considered the Auction Agent for all purposes thereof,
and each Trust shall be considered a Trust for all purposes thereof; and (c) the
Auction Agency Basic Terms are incorporated herein by reference, [insert Auction
Agent] shall be considered the Auction Agent for all purposes thereof, and each
Trust shall be considered a Trust for all purposes thereof.
Each Trust hereby appoints the Broker-Dealers listed on
Exhibit A hereto as Broker-Dealers for each series of Municipal Auction Rate
Cumulative Preferred Shares "Municipal Preferred") of such Trust. Each such
Broker-Dealer will act as a BD in respect of each such series in accordance with
the Broker-Dealer Basic Terms; provided, however, that for purposes of the
Broker-Dealer Basic Terms, [insert Auction Agent]'s address, telecopy number and
telephone number for communications pursuant to the Broker-Dealer Basic Terms
shall be as follows:
-----------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
<PAGE> 32
2
[Insert Auction Agent] agrees to act as Auction Agent with
respect to shares of each series of Municipal Preferred of each Trust in
accordance with the Auction Agency Basic Terms.
This Request Letter shall be deemed to form part of the
Auction Agency Basic Terms.
Capitalized terms not defined in this Request Letter shall
have the meanings ascribed to them in the Broker-Dealer Basic Terms or Auction
Agency Basic Terms, as the case may be.
If the foregoing terms are acceptable to you, please so
indicate in the space provided below. This Request Letter may be executed in any
number of counterparts, each of which shall be an original, but all of which
shall constitute one and the same instrument.
[NAME(S) OF TRUST(S)]
By:
----------------------------------
Name:
Title:
Accepted and Agreed to as of
the date first written above:
COLONIAL MANAGEMENT [NAME OF AUCTION AGENT]
ASSOCIATES, INC.
By: By:
---------------------------- -----------------------------
Name: Name:
Title: Title:
cc: Broker-Dealers listed on Exhibit A
<PAGE> 33
3
EXHIBIT A TO REQUEST LETTER
[LIST OF BROKER-DEALERS]
<PAGE> 1
Exhibit (n)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-Effective Amendment No. 1 to the registration
statement on Form N-2 (the "Registration Statement") of our report dated
October 26, 1999, relating to the financial statements of Colonial Insured
Municipal Fund, which appears in such Statement of Additional Information, and
to the incorporation by reference of our report into the Prospectus which
constitutes part of this Registration Statement. We also consent to the
references to us under the headings "Independent Accountants" and "Financial
Statements" in such Statement of Additional Information and to the reference to
us under the heading "Experts" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 10, 1999
