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AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 5, 1999
SECURITIES ACT FILE NO. 333-
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. [ ]
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Post-Effective Amendment No. [ ]
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 5 [X]
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COLONIAL CALIFORNIA 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
William J. Ballou, Esq. John M. Loder, Esq.
Colonial Management Associates, Inc. Ropes & Gray
One Financial Center One International Place
Boston, Massachusetts 02111-2621 Boston, Massachusetts 02110-2624
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
<TABLE>
<CAPTION>
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 800 $25,000 $20,000,000 $5,560
Rate Cumulative
Preferred Shares
No Par Value
Per Share
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA.
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.
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COLONIAL CALIFORNIA INSURED MUNICIPAL FUND
CROSS REFERENCE SHEET
ITEMS REQUIRED BY FORM N-2
<TABLE>
<CAPTION>
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; Description
and Other Securities 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 Information Statement of Additional 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>
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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 NOVEMBER 5, 1999
PROSPECTUS $__________
COLONIAL CALIFORNIA INSURED MUNICIPAL FUND
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED ("MUNICIPAL PREFERRED") SHARES
_____ SHARES, SERIES __
LIQUIDATION PREFERENCE $25,000 PER SHARE
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Colonial California Insured Municipal Fund is selling _____ Series __
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 and California state personal income tax. The Fund will
invest its assets in a nondiversified portfolio of bonds and notes that
generally are issued by or on behalf of California 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 and California
state personal income tax ("California Municipal Obligations"). At least 80% of
the Fund's net assets will normally be invested in California 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. At least 65% of the Fund's total assets will normally be
invested in California Municipal Obligations that are covered by insurance
guaranteeing the timely payment of principal at maturity and interest. The Fund
may invest up to 20% of its net assets in California 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 California
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. The Fund is designed for
individual investors who are residents of
(continued on following page)
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INVESTING IN MUNICIPAL PREFERRED SHARES INVOLVES RISKS. SEE THE "RISK
FACTORS AND SPECIAL CONSIDERATIONS" SECTION BEGINNING ON PAGE 8 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.
------------------------
PER SHARE TOTAL
Public Price $25,000 $______
Sales Load $ _____ $______
Proceeds to Fund (before expenses) $ _____ $______
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.
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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.
------------------
__________ __, 1999
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(continued from previous page)
California for tax purposes. 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 "CCA".
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
47 of this prospectus for a table of contents of the Statement of Additional
Information.
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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.
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TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY.............................................................2
RISK FACTORS AND SPECIAL CONSIDERATIONS........................................8
FINANCIAL HIGHLIGHTS..........................................................14
THE FUND .....................................................................15
USE OF PROCEEDS...............................................................15
CAPITALIZATION AT __________ __, 1999.........................................16
PORTFOLIO COMPOSITION.........................................................16
INVESTMENT OBJECTIVE AND POLICIES.............................................17
MANAGEMENT OF THE FUND........................................................28
THE AUCTION...................................................................29
DETERMINATION OF NET ASSET VALUE..............................................32
DESCRIPTION OF MUNICIPAL PREFERRED............................................33
RATING AGENCY GUIDELINES......................................................39
DESCRIPTION OF COMMON SHARES..................................................40
CERTAIN PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST..................40
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND......................41
TAX MATTERS...................................................................42
CUSTODIAN, DIVIDEND DISBURSING AGENT, TRANSFER AGENT AND REGISTRAR............45
UNDERWRITING..................................................................45
LEGAL OPINIONS................................................................46
REPORTS TO SHAREHOLDERS.......................................................46
EXPERTS .....................................................................46
FURTHER INFORMATION...........................................................46
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION......................47
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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 California Insured Municipal Fund (the
"Fund") is offering a total of _____ shares of Series
__ 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 _________________________ 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 California 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 "CCA".
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 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
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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 _______.
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 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 (_______________) will determine the
dividend rate on the Municipal Preferred shares
through an auction.
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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 __________ __, 1999, the
asset coverage of the Municipal Preferred shares as
measured pursuant to the Investment Company Act of
1940 would be approximately ___% if the Fund were to
issue all Municipal Preferred shares offered in this
prospectus, representing approximately ___% 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 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
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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 and California state
personal 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 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 and California state personal income tax.
INVESTMENT STRATEGIES The Fund will invest its assets in a nondiversified
portfolio of municipal bonds issued by or on behalf
of the State of California or its political
subdivisions, agencies, authorities or
instrumentalities. Under normal circumstances, the
Fund will invest substantially all (at least 80%) of
its total assets in debt securities, 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 and California state
personal income tax ("California Municipal
Obligations"). The term "Municipal Obligations" is
used throughout this prospectus to describe debt
securities 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 California Municipal
Obligations that are covered by insurance
guaranteeing the timely payment of principal at
maturity and interest. Each insured California
Municipal Obligation in the Fund's portfolio
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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 California 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 California 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
California Municipal Obligations (i.e., those with
maturities over 10 years). The Fund may, however,
invest in California Municipal Obligations without
regard to maturity or duration.
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 Broker-dealers may, but are not obligated to,
TRADING 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
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auctions only to a broker-dealer or such other
persons who may be permitted by the Fund.
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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.
CERTAIN RISKS ASSOCIATED WITH INVESTMENTS IN CALIFORNIA MUNICIPAL
OBLIGATIONS. Since the Fund will invest primarily in California Municipal
Obligations, the performance of the Fund is especially affected by factors
pertaining to the California economy and other factors specifically affecting
the ability of issuers of California Municipal Obligations to meet their
obligations. As a result, the value of the Fund's shares may fluctuate more
widely than the value of shares of a fund investing in a number of different
states. The ability of state, county, or local governments or other issuers of
California Municipal Obligations to meet their obligations will depend primarily
on the availability of tax and other revenues to those entities and on their
fiscal conditions generally. The amounts of tax and other revenues available to
issuers of California Municipal Obligations may be affected from time to time by
economic, political and demographic conditions. In addition, constitutional or
statutory restrictions may limit an issuer's power to raise revenues or increase
taxes. The availability of federal, state and local aid to issuers of California
Municipal Obligations may also affect their ability to meet their obligations.
Payments of principal of and interest on revenue bonds will depend on the
economic condition of the facility or specific revenue source from whose
revenues the payments will be made, which in turn could be affected by economic,
political and demographic conditions in California or elsewhere. Any reduction
in the actual or perceived ability of an issuer of California Municipal
Obligations to meet its obligations (including a reduction in the rating of its
outstanding securities) would likely affect adversely the market value and
marketability of its obligations and could adversely affect the values of other
California Municipal Obligations as well.
The State of California and other California public bodies have in the
past experienced financial difficulties and may continue to do so. Such
difficulties could have an adverse effect on the ability (or the perceived
ability) of issuers of certain California Municipal Obligations to meet their
obligations on such securities. If that were the case, the ratings of certain
California Municipal Obligations held by the Fund could be downgraded and the
values of such securities could decline. In recent years, the ratings of a
number of California Municipal Obligations have been downgraded in response to
fiscal and economic factors affecting their issuers.
After suffering from a recession in the early 1990s, the California
economy has largely recovered. The State's financial condition improved markedly
during the 1995-1998 fiscal years. The State's cash position also improved in
those years, erasing deficits that were amassed during the late 1980s and early
1990s. The State has enjoyed numerous upgrades of its credit ratings, with the
most recent coming from Standard & Poor's in August 1999. The Asian economic
crisis, which began in 1997, has had some dampening effects on the State's
economic growth (particularly in high technology manufacturing), however, and
the pace of growth in the State's economy is projected to slow.
At various times over the past 21 years, California voters have
approved constitutional amendments that restrict State and/or local taxing or
spending authority. The most notable of these provisions is Proposition 13,
approved in 1978, which limits ad valorem taxes on real property and restricts
the ability of taxing entities to increase real property and other taxes. In
1996, California voters passed Proposition 218, which requires that local
governments obtain voter approval for many new and existing taxes and fees.
These and other future amendments could limit State and local governments'
financial flexibility and ultimately impair their ability to repay their debt
obligations.
For a more detailed description of these and other risks affecting
investment in California Municipal Obligations, see "Appendix E--Special
Considerations Relating to California" in the Statement of Additional
Information.
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
-8-
<PAGE> 13
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 California 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
California 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 California
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.
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.
-9-
<PAGE> 14
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 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
-10-
<PAGE> 15
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 normally will invest 80% or more of its total
assets in California Municipal Obligations. This may make the Fund more
susceptible to adverse economic, political or regulatory occurrences affecting
California. See "--Certain Risks Associated with Investments in California
Municipal Obligations" above and "Appendix E--Special Considerations Relating to
California" in the Statement of Additional Information. For example, health
care-related issuers are susceptible to Medicaid reimbursement policies and the
possible enactment of national and state health care legislation. As
concentration increases, so does the potential for fluctuation of the net asset
value of 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
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 come at
some cost. For example, the Fund must pay for the option, and the price of the
security may not in fact drop. In large part, the success of the Fund's hedging
activities depends on the Advisor's
-11-
<PAGE> 16
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.
ZERO COUPON SECURITIES. 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.
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.
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
-12-
<PAGE> 17
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.
-13-
<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
__________ __, 1999. Since the Fund was recently organized and commenced
operations on October 29, 1999, the table covers less than _____ 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.
October 29, 1999 to
________ __, 1999
-------------------
Net asset value -- beginning of period...... $
------
Net investment income....................... (a)
Net realized and unrealized gain (loss).....
------
Total from investment operations........
------
Distributions:
From net investment income................
In excess of net investment income........ --
------
Total distributions.....................
Expenses incurred from initial public
offering..................................
------
Net asset value -- end of period........... $
======
Per share market value -- end of period.....
======
Total return based on net asset value (b)... (d)
======
Total return based on market value (c)...... %(d)
======
Ratio of operating
expenses to average net
assets (e)................................ -- (a)
Ratio of net investment
income to average net
assets (e)................................ % (a)(f)
Portfolio turnover rate..................... % (f)
Net assets at end of period (000) $
- ----------
(a) Net of fees and expenses waived or borne by the Advisor, which amounted
to $_____ and a ratio of fees and expenses waived or borne by the
Advisor to average net assets of ____%.
(b) Total return at net asset value assuming all distributions reinvested.
(c) Total return at market value assuming all distributions reinvested and
excluding brokerage commissions.
(d) Not annualized.
(e) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
(f) Annualized.
-14-
<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 "CCA". 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 $___________,
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.
-15-
<PAGE> 20
CAPITALIZATION
AT __________, 1999
The following table sets forth the unaudited capitalization of the Fund
at __________, 1999, and as adjusted to give effect to the issuance of the
Series __ Municipal Preferred shares offered hereby (including estimated
offering expenses and sales loads of $________).
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Shareholders' Equity:
Preferred Shares, no par value per share; _____ shares
authorized (no shares issued; _____ shares of Municipal
Auction Rate Cumulative Preferred Shares issued,
as adjusted, at $25,000 per share liquidation preference)........ $ -- $
Common Shares, no par value per share; unlimited shares
authorized; __________ shares outstanding*....................... --
Paid-in surplus..................................................... 0
Undistributed (overdistributed) net investment income...............
Net realized gain (loss) from investment transactions...............
Net unrealized appreciation of investments..........................
----------- -----------
Net Assets....................................................... $ $
=========== ===========
</TABLE>
- ---------------
*No outstanding shares are held by or for the account of the Fund.
PORTFOLIO COMPOSITION
As of __________ __, 1999, approximately ____% of the market value of the
Fund's portfolio was invested in long- and intermediate-term Municipal
Obligations and approximately ____% of the market value of the Fund's portfolio
was invested in short-term securities. For purposes of the foregoing sentence,
futures in which the Fund has invested are not included as long- and
intermediate-term Municipal Obligations or as short-term securities and are not
included in the market valuation of the Fund's portfolio. The following table
sets forth information with respect to the composition of the Fund's investment
portfolio (excluding short-term securities) as of __________ __, 1999.
<TABLE>
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 $ % Aaa $ %
AA Aa
A A
BBB Baa
Ba
NR** NR**
- ----------------------------------------------------------------------------------------------------------------
Total $ 100.00% Total $ 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.
-16-
<PAGE> 21
** Many 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 $__________, which represents
____% of the Fund's portfolio.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide current income exempt
from regular federal income tax and California state personal income tax. This
income will be earned by investing primarily in investment grade Municipal
Obligations issued by or on behalf of the State of California or its political
subdivisions, agencies, authorities and instrumentalities. 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. The Fund is designed for investors who are residents of
California for tax purposes.
During normal market conditions, substantially all of the Fund's total
assets (at least 80%) will be invested 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 and California state personal
income taxes ("California Municipal Obligations"). At least 80% of the Fund's
net assets will normally be invested in California 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. At least 65% of the Fund's total assets will
normally be invested in California Municipal Obligations that are covered by
insurance guaranteeing the timely payment of principal at maturity and interest.
Each insured California 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. 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 California Municipal Obligations (i.e., those with maturities over 10
years). The Fund may, however, invest in California Municipal Obligations
without regard to maturity or duration.
The Fund may invest up to 20% of its net assets in California Municipal
Obligations rated Ba or B by Moody's or BB or B by Standard & Poor's and unrated
California 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 California 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 California Municipal
Obligations, it may be more dependent on the Advisor's research capabilities
than when it invests in investment grade California 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 Advisor may consider such factors as the Advisor's assessment of the
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<PAGE> 22
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 85% of its initial portfolio will consist of investment grade
California 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 10% in Baa/BBB). Subject to market availability, the Fund
would likely seek to invest approximately 5% of its initial portfolio in
California 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 10% in California Municipal Obligations that are not rated by any Rating
Agency.
Municipal Obligations, including California Municipal Obligations,
include bonds, notes and commercial paper issued by municipalities for a wide
variety of both public and private purposes, the interest on which is, in the
opinion of issuer's counsel (or on the basis of other reliable authority),
exempt from regular federal income tax. Public purpose municipal bonds include
general obligation and revenue bonds. General obligation bonds are backed by the
taxing power of the issuing municipality. Revenue bonds are backed by the
revenues of a project or facility or from the proceeds of a specific revenue
source. Some revenue bonds are payable solely or partly from funds which are
subject to annual appropriations by a state's legislature. Municipal notes
include bond anticipation, tax anticipation and revenue anticipation notes.
Bond, tax and revenue anticipation notes are short-term obligations that will be
retired with the proceeds from an anticipated bond issue, tax revenue or
facility revenue, respectively.
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
California Municipal Obligations. Except for this policy and the other
fundamental investment policies listed in the Statement of Additional
Information under "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.
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<PAGE> 23
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 ("AMT")). (For a description of the federal AMT, see
"Tax Matters--Federal Taxation of Shareholders.") The term "California Municipal
Obligations" refers to Municipal Obligations the interest on which is also
exempt from California state personal income tax. California Municipal
Obligations include debt obligations issued by the State of California or any
political subdivision thereof, or any other municipal debt obligations the
interest on which is exempt from federal income tax and California state
personal income tax, 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
and/or California state personal income taxes, 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 AMT). 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 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
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<PAGE> 24
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 AMT for individual investors.
Distributions to corporate investors of exempt interest income may also be
indirectly subject to the AMT. The Fund may not be suitable for investors
currently or who may become subject to the AMT.
MUNICIPAL OBLIGATION INSURANCE
At least 65% of the Fund's total assets will normally be invested in
California 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.
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
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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 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.
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<PAGE> 26
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 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.
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<PAGE> 27
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.
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
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<PAGE> 28
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 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.
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.
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<PAGE> 29
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;
- 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
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<PAGE> 30
- 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 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
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<PAGE> 31
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.
ZERO COUPON SECURITIES (ZEROS)
The Fund may invest in zero coupon tax-exempt bonds. Such bonds are
debt obligations that do not entitle the holder to any periodic payments of
interest either for the entire life of the obligation or for an initial period
after the issuance of the obligation. See "Investment Objective and
Policies--Description of Municipal Obligations." Zero coupon bonds are issued
and traded at a discount from their face amounts. The amount of the discount
varies depending on, among others, the following factors:
- the time remaining until maturity of the bonds;
- prevailing interest rates;
- the liquidity of the security; and
- the perceived credit quality of the issuer.
The market prices of zero coupon bonds generally are more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than are the market
prices of non-zero coupon bonds having similar maturities and credit quality. In
order to satisfy a requirement for qualification as a "regulated investment
company" under the Internal Revenue Code of 1986, the Fund must distribute each
year at least 90% of its net investment income, including the original issue
discount accrued on zero coupon bonds. See "Tax Matters--Federal Income Tax
Matters--Federal Taxation of the Trust" in the Statement of Additional
Information. Because the Fund will not receive on a current basis cash payments
from the issuer of a zero coupon bond in respect of accrued original issue
discount, in some years the Fund may have to distribute cash obtained from other
sources in order to satisfy the 90% distribution requirement under the Internal
Revenue Code. Such cash might be obtained from selling other portfolio holdings
of the Trust. In some circumstances, such sales might be necessary in order to
satisfy cash distribution requirements even though investment considerations
might otherwise make it undesirable for the Fund to sell such securities at such
time.
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 invested in securities exempt
from regular federal income tax and California state personal income tax.
However, if such securities are not available or if they 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
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<PAGE> 32
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 tax or California state personal income
tax. 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.
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 the date of this prospectus, the Advisor serves as
investment advisor or sub-advisor for __ open-end and __ closed-end management
investment companies and manages over $____ 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.
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<PAGE> 33
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, 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 Percentage
Waived Waived
(as a (as a
percentage percentage
Year of average Year of average
Ending weekly total Ending weekly total
November 30, net assets)* November 30, net assets)*
- ------------ ------------ ------------ ------------
<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 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
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<PAGE> 34
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, 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.
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<PAGE> 35
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.
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
_______, _________ ___, 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 _______, and each subsequent rate
period will normally begin on the following _______.
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:
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<TABLE>
<S> <C> <C>
Current Shareholder A Owns 500 shares, wants to sell Bid order of 3.5% rate for all 500
all 500 shares if auction rate is shares
less than 3.5%
Current Shareholder B Owns 300 shares, wants to hold Hold order -- will take the auction rate
Current Shareholder C Owns 200 shares, wants to sell Bid order of 3.3% rate for all 200
all 200 shares if auction rate is shares
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.
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<PAGE> 37
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 it delegate, the Advisor.
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 _____
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
authorize the issuance of up to _____ shares of Series __ 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 [before/after] the rate period ends. If the _______ 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/after] that _______.
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, _______________, 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 an initial Broker-Dealer, or
one of its affiliates, should contact his or her Broker-Dealer or another
broker-dealer 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
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<PAGE> 38
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. _______________, 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 Dividend Rates. 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 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
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<PAGE> 39
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."
PREVAILING RATING PERCENTAGE
----------------- ----------
"aa3"/AA- or higher...........................110%
"a3"/A-.......................................125%
"baa3"/BBB-...................................150%
"ba3"/BB-.....................................200%
Below "ba3"/BB-...............................250%
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 and/or California individual income tax rate
applicable to ordinary income or the maximum marginal regular federal and/or
California 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 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, no auction will be
held for Municipal Preferred shares for that subsequent
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<PAGE> 40
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 and/or California 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.
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 and/or California 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
or California alternative minimum tax with respect to dividends received from
the Fund; and (iii) assuming that each Municipal Preferred shareholder is
taxable at the greater of the maximum marginal regular federal individual income
tax rate applicable to ordinary income or net capital gain, as applicable, or
the maximum marginal regular federal corporate income tax rate applicable to
ordinary income or net capital gain, as the case may be, and/or the greater of
the maximum marginal regular California individual income tax rate applicable to
ordinary income or net capital gain, as the case may be, or the maximum marginal
regular California corporate income tax rate applicable to ordinary income or
net capital gain, as the case may be, in effect at the time such Gross-up
Payment is made, and disregarding, in each case, the effect on any other state
or local taxes and the phase-out of, or provisions limiting, personal
exemptions, itemized deductions, or the benefit of lower tax brackets, but
including any federal tax benefit resulting from the payment of California state
taxes.
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 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
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<PAGE> 41
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 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 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 _______, 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),
voting together as a single class.
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
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<PAGE> 42
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 Fund
outstanding after any such issuance, exclusive of accumulated and unpaid
dividends, may not exceed $__________. 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 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.
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 ByLaws 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.
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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
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.
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 _____________, 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
offered hereby and after giving effect to the deduction of the sales load and
offering costs relating thereto estimated at $________, would be computed as
follows:
Value of Fund assets less liabilities
not constituting senior securities $___________
----------------------------------- = ------------ = _____%
Senior securities representing $___________
indebtedness plus liquidation value
of the Municipal Preferred shares
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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 "CCA".
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.
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.
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<PAGE> 45
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 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 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.
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<PAGE> 46
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. Internal Revenue Code 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
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,
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<PAGE> 47
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.
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 (except for certain California state 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 and/or California 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
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<PAGE> 48
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 (other than certain California state
income 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.
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. However, the Fund intends
to invest substantially all of its total assets (at least 80%) 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 California state personal
income tax. See Appendix E to the Statement of Additional Information --
"Special Tax Considerations Relating to California." In addition, some other
states also 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.
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<PAGE> 49
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.
_______________, whose principal business address is _______________,
________, ________ _____, 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 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 _________________________ (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 __ Municipal Preferred set forth opposite the name of such
Underwriter.
Name Number of Shares
---- ----------------
Total.....................
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 _________________________ is
__________________________________________.
-45-
<PAGE> 50
LEGAL OPINIONS
Certain legal matters in connection with the Series __ Municipal
Preferred offered hereby will be passed upon for the Fund by Ropes & Gray,
Boston, Massachusetts, and for the Underwriters by __________________________.
__________________________ 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.
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.
-46-
<PAGE> 51
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
PAGE
Use of Proceeds............................................................ B-2
Investment Objectives and Policies......................................... B-2
Fund Charges and Expenses.................................................. B-4
Management of the Fund..................................................... B-4
Portfolio Transactions..................................................... B-11
Net Asset Value............................................................ B-12
The Auction................................................................ B-12
Description of Municipal Preferred......................................... B-23
Repurchase of Common Shares................................................ B-40
Miscellaneous Investment Practices......................................... B-41
Tax Matters................................................................ B-50
Shareholder Liability...................................................... B-53
Custodian.................................................................. B-54
Independent Accountants.................................................... B-54
Miscellaneous Matters...................................................... B-54
Glossary................................................................... B-55
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
Appendix E--Special Considerations Relating to California.................. E-1
-47-
<PAGE> 52
================================================================================
$----------
COLONIAL CALIFORNIA INSURED
MUNICIPAL FUND
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
_____ SHARES, SERIES __
--------------
PROSPECTUS
________________, 1999
--------------
================================================================================
-48-
<PAGE> 53
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 NOVEMBER 5, 1999
COLONIAL CALIFORNIA INSURED MUNICIPAL FUND
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") relating to the Series __
Municipal Auction Rate Cumulative Preferred Shares ("Municipal Preferred")
offered by Colonial California 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
USE OF PROCEEDS..............................................................B-2
INVESTMENT OBJECTIVE AND POLICIES............................................B-2
FUND CHARGES AND EXPENSES....................................................B-4
MANAGEMENT OF THE FUND.......................................................B-4
PORTFOLIO TRANSACTIONS......................................................B-11
NET ASSET VALUE.............................................................B-12
THE AUCTION.................................................................B-12
DESCRIPTION OF MUNICIPAL PREFERRED..........................................B-23
REPURCHASE OF COMMON SHARES.................................................B-40
MISCELLANEOUS INVESTMENT PRACTICES..........................................B-41
TAX MATTERS.................................................................B-50
SHAREHOLDER LIABILITY.......................................................B-53
CUSTODIAN...................................................................B-54
INDEPENDENT ACCOUNTANTS.....................................................B-54
MISCELLANEOUS MATTERS.......................................................B-54
GLOSSARY....................................................................B-55
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
APPENDIX E--Special Considerations Relating to California....................E-1
<PAGE> 54
USE OF PROCEEDS
The net proceeds of the offering of shares of Municipal Preferred will be
approximately $_________ after payment of the sales load to ____________ (the
"Underwriters") 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")). The term "California Municipal Obligations" refers to Municipal
Obligations the interest on which is also, in the opinion of issuer's counsel
(or on the basis of other reliable authority) exempt from California state
personal income tax.
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;
B-2
<PAGE> 55
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.);
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 issued by or on behalf of the State of California or
its 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 and California state personal 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 &
B-3
<PAGE> 56
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.
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
Year of average Year of average
Ending weekly total Ending weekly total
November 30, net assets)* November 30, net assets)*
- ------------ ------------ ------------ ------------
<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.
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.
NAME (AGE) POSITIONS AND PRINCIPAL OCCUPATIONS
AND ADDRESS OFFICES WITH FUND DURING PAST FIVE YEARS
- ----------- ------------------ ----------------------
B-4
<PAGE> 57
Robert J. Birnbaum (71) Trustee Consultant (formerly Special
313 Bedford Road Counsel, Dechert Price & Rhoads
Ridgewood, NJ 07450 (law firm) from 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,
1175 Hill Road Kramer, Levin, Naftalis & Frankel
Southold, NY 11971 (law firm) from September, 1986 to
November, 1996).
James E. Grinnell (69) Trustee Private Investor since November,
22 Harbor Avenue 1988.
Marblehead, MA 01945
Richard W. Lowry* (63) Trustee Private Investor since August,
Seven Winter Street 1987.
Nantucket, MA 02554
Salvatore Macera (67) Trustee Private Investor (formerly
26 Little Neck Lane Executive Vice President and
New Seabury, MA 02649 Director of Itek 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).
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).
B-5
<PAGE> 58
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
45 Sankaty Avenue Peat Marwick LLP, from July, 1966
Siasconset, MA 02564 to June, 1985).
Anne-Lee Verville (53) Trustee Consultant (formerly General
359 Stickney Hill Road Manager, Global Education Industry
Hopkinton, NH 03229 from 1994 to 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
of Stein Roe & Farnham Incorporated
("SR&F") since August, 1998
(formerly Managing Director of
Marketing of Putnam Investments
from June, 1992 to July, 1996).
J. Kevin Connaughton (34) Controller Officer Controller and Chief
and Chief Accounting Officer of the Fund and
Accounting 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).
B-6
<PAGE> 59
Timothy J. Jacoby (45) Treasurer Treasurer and Chief Financial
and Chief Officer of the Fund and the Liberty
Financial Funds, except Liberty Funds Trust
Officer 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).
* 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 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 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").
B-7
<PAGE> 60
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.
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.
B-8
<PAGE> 61
(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 Growth Fund, Inc. and Liberty
Funds Trust IX (formerly known as LAMCO Trust I) (together, the "Liberty
All-Star Funds"). (m)
Total Compensation from the
Liberty All-Star Funds for the
Trustee Calendar Year Ended December 31, 1998 (n)
- ------- -----------------------------------------
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
(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.
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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 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.
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<PAGE> 63
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.
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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<PAGE> 64
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.
THE AUCTION
GENERAL
The Amended and Restated By-Laws of Colonial California 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
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<PAGE> 65
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 _______________ (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
_______________, and may enter into 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 __ Municipal Preferred will be
held on _______, __________, 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 _______, and each Subsequent Rate Period will normally
begin on the following _______, 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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<PAGE> 66
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 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.
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<PAGE> 67
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 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
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<PAGE> 68
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 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
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(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.
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
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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:
PREVAILING RATING PERCENTAGE
----------------- ----------
"aa3"/AA- or higher............................. 110%
"a3"/A-......................................... 125%
"baa3"/BBB-..................................... 150%
"ba3"/BB-....................................... 200%
Below "ba3"/BB-................................. 250%
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 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. 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
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, 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.
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<PAGE> 71
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;
(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).
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<PAGE> 72
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 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:
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(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 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.
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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 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.
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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 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.
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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 _______, ________ __, 1999, and thereafter on each _______;
provided, however, that (1) if the _______ 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/after] such _______
and (2) the Fund in its discretion may 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
_______, would be the following _______ 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
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<PAGE> 77
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 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 (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
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<PAGE> 78
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.
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 and/or California 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 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 and/or California
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 or California 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 greater of the maximum marginal regular
federal individual income tax rate applicable to ordinary income or net capital
gain, as the case may be, or the maximum marginal regular federal corporate
income tax rate applicable to ordinary income or net capital gain, as the case
may be, and/or the greater of the maximum marginal regular California individual
income tax rate applicable to ordinary income or net capital gain, as the case
may be, or the maximum marginal regular California corporate income tax rate
applicable to ordinary income or net capital gain, as the case may be, in effect
at the time such Gross-up Payment is made, and disregarding, in each case, the
effect on any other state or local taxes and the phase-out of, or provisions
limiting, personal exemptions, itemized deductions, or the benefit of lower tax
brackets, but including any federal tax benefit resulting from the payment of
California state taxes.
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).
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<PAGE> 79
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 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
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<PAGE> 80
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
_______ 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 _______ that is followed by a _______ 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 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
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<PAGE> 81
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.
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 $__________);
(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
B-29
<PAGE> 82
holders thereof (provided, however, that a division of a share of
Municipal 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 and (ii)
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 662/3% 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
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
B-30
<PAGE> 83
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 331/3% 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 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:
B-31
<PAGE> 84
(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
(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 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.
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.
B-32
<PAGE> 85
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 _______,
_______, _______ and _______ 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.
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 the Standard & Poor's rating on such Municipal Obligation. 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
B-33
<PAGE> 86
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 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
B-34
<PAGE> 87
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.
(3) Municipal Obligations not rated at least BBB or not rated
by Standard & Poor's or not rated at least A by another nationally
recognized credit rating agency 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, however, that if the
Market Value of such Municipal Obligations exceeds 50% 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 50% 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.
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***** Municipal Obligations not rated or rated lower than Baa3 by
Moody's and not rated or rated lower than BBB by Standard &
Poor's.
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. "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.
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.
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<PAGE> 89
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-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
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<PAGE> 90
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.
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
B-38
<PAGE> 91
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 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
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<PAGE> 92
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 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
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<PAGE> 93
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 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.
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 California 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 California 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.
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<PAGE> 94
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
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
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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 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
acquisition of an offsetting purchase commitment, the Fund realizes a gain or
loss on the commitment without regard to any unrealized gain or loss
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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.
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
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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.
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
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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
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.
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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.
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.
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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.
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
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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 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.
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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.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL OBLIGATIONS
Factors pertaining to the Fund's investment in California Municipal
Obligations are set forth in Appendix E -- "Special Considerations Relating to
California."
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 must 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
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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.
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
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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 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 net capital
gain) 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.
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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 from the excess 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 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.
SPECIAL TAX CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL OBLIGATIONS
Information regarding the California tax consequences of investing in
the Fund are set forth in Appendix E -- "Special Considerations Relating to
California."
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.
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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, 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-16 to B-17 of this Statement of Additional Information.
"Advisor" means Colonial Management Associates, Inc.
"Affected Series" has the meaning set forth on page B-30 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 Tax Anticipation Notes (TANs), Revenue
Anticipation Notes (RANs), Tax and Revenue Anticipation Notes (TRANs), Grant
Anticipation Notes (GANs) that are rated by Standard & Poor's and Bond
Anticipation Notes (BANs).
"Applicable Rate" has the meaning set forth on page B-12 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-13 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-19
of this Statement of Additional Information.
"Benchmark Rate" has the meaning set forth on page B-20 of this
Statement of Additional Information.
"Beneficial Owner" has the meaning set forth on page B-12 of this
Statement of Additional Information.
"Bid" has the meaning set forth on page B-14 of this Statement of
Additional Information.
"Bidder" and "Bidders" have the respective meanings set forth on page
B-14 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.
"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.
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<PAGE> 108
"Business Day" has the meaning set forth on page B-12 of this Statement
of Additional Information.
"By-Laws" means the Amended and Restated By-Laws of Colonial California
Insured Municipal Fund on file with the Secretary of the Commonwealth of
Massachusetts.
"California Municipal Obligations" has the meaning set forth on page
B-2 of this Statement of Additional Information.
"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-46 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-17 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-12 of this
Statement of Additional Information.
"Declaration" means the Agreement and Declaration of Trust of Colonial
California 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-12 of this
Statement of Additional Information.
"Dividend Period" has the meaning set forth on page B-12 of this
Statement of Additional Information.
"DTC" has the meaning set forth on page B-13 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 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-12 of this
Statement of Additional Information.
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<PAGE> 109
"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 California 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-26 of this
Statement of Additional Information.
"Hold Order" has the meaning set forth on page B-14 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-12 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-16 of this Statement
of Additional Information.
"Late Charge" has the meaning set forth on page B-25 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.
"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.
B-57
<PAGE> 110
"Maximum Potential Gross-up Payment Liability" has the meaning set
forth on page B-32 of this Statement of Additional Information.
"Maximum Rate" has the meaning set forth on pages B-15 to B-16 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-35 of
this Statement of Additional Information.
"Moody's Eligible Assets" has the meaning set forth on page B-35 of
this Statement of Additional Information.
"Moody's Exposure Period" has the meaning set forth on page B-35 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
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:
Federal Volatility
Tax Rate Increase Factor
----------------- ----------
5% 295%
10% 317%
15% 341%
20% 369%
25% 400%
30% 436%
35% 477%
40% 525%
"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 pages B-31 to B-32 of this Statement of Additional Information.
"Municipal Preferred Basic Maintenance Cure Date" has the meaning set
forth on page B-31 of this Statement of Additional Information.
"Municipal Preferred Basic Maintenance Report" has the meaning set
forth on page B-33 of this Statement of Additional Information.
B-58
<PAGE> 111
"1940 Act" means the Investment Company Act of 1940, as amended.
"1940 Act Cure Date" has the meaning set forth on page B-31 of this
Statement of Additional Information.
"1940 Act Municipal Preferred Asset Coverage" has the meaning set forth
on page B-31 of this Statement of Additional Information.
"Notice of Redemption" has the meaning set forth on page B-38 of this
Statement of Additional Information.
"Notice of Special Rate Period" has the meaning set forth on page B-28
of this Statement of Additional Information.
"Order" and "Orders" have the respective meanings set forth on page
B-14 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.
"Potential Beneficial Owner" has the meaning set forth on page B-12 of
this Statement of Additional Information.
"Potential Holder" has the meaning set forth on page B-12 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-18 of this
Statement of Additional Information.
"Rate Period" has the meaning set forth on page B-12 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-36 and B-34 of this Statement
of Additional Information, respectively.
"Redemption Price" has the meaning set forth on page B-38 of this
Statement of Additional Information.
"Reference Rate" has the meaning set forth on page B-16 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-14 of this Statement
of Additional Information.
B-59
<PAGE> 112
"Special Rate Period" has the meaning set forth on page B-13 of this
Statement of Additional Information.
"Special Redemption Provisions" has the meaning set forth on page B-37
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-33 of this Statement of Additional Information.
"Standard & Poor's Eligible Assets" has the meaning set forth on page
B-33 of this Statement of Additional Information.
"Standard & Poor's Exposure Period" has the meaning set forth on page
B-33 of this Statement of Additional Information.
"Standard & Poor's Volatility Factor" means, as of any Valuation Date,
a multiplicative factor equal to (i) 305% in the case of any Minimum Rate Period
or any Special Rate Period of 28 Rate Period Days or fewer, (ii) 268% in the
case of any Special Rate Period of more than 28 Rate Period Days but fewer than
183 Rate Period Days, and (iii) 204% 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.
"Submitted Bid" and "Submitted Bids" have the respective meanings set
forth on page B-19 of this Statement of Additional Information.
"Submitted Hold Order" and "Submitted Hold Orders" have the respective
meanings set forth on page B-19 of this Statement of Additional Information.
"Submitted Order" and "Submitted Orders" have the respective meanings
set forth on page B-19 of this Statement of Additional Information.
"Submitted Sell Order" and "Submitted Sell Orders" have the respective
meanings set forth on page B-19 of this Statement of Additional Information.
"Subsequent Rate Period" has the meaning set forth on page B-12 of this
Statement of Additional Information.
"Substitute Commercial Paper Dealer" has the meaning set forth on page
B-17 of this Statement of Additional Information.
"Substitute U.S. Government Securities Dealer" has the meaning set
forth on page B-18 of this Statement of Additional Information.
"Sufficient Clearing Bids" has the meaning set forth on page B-19 of
this Statement of Additional Information.
"Taxable Allocation" has the meaning set forth on page B-26 of this
Statement of Additional Information.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" has the
meaning set forth on page B-16 of this Statement of Additional
Information.
"Taxable Income" has the meaning set forth on page B-20 of this
Statement of Additional Information.
"Taxable Yield Rate" has the meaning set forth on page B-20 of this
Statement of Additional Information.
"Treasury Bill" has the meaning set forth on page B-17 of this
Statement of Additional Information.
B-60
<PAGE> 113
"Treasury Bill Rate" has the meaning set forth on page B-17 of this
Statement of Additional Information.
"Treasury Note" has the meaning set forth on page B-17 of this
Statement of Additional Information.
"Treasury Note Rate" has the meaning set forth on page B-17 of this
Statement of Additional Information.
"U.S. Government Securities Dealer" has the meaning set forth on pages
B-17 to B-18 of this Statement of Additional Information.
"Valuation Date" has the meaning set forth on page B-31 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-20 of this
Statement of Additional Information.
B-61
<PAGE> 114
FINANCIAL STATEMENTS
[SUBSTANCE OF THIS SECTION TO COME]
F-1
<PAGE> 115
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
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.
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 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.
A-1
<PAGE> 116
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.
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.
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.
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
A-2
<PAGE> 117
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.
NR Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
MUNICIPAL NOTES
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:
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.
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:
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-l."
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.
A-3
<PAGE> 118
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.
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 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
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
A-4
<PAGE> 119
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.
SHORT-TERM LOANS
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.
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.
A-5
<PAGE> 120
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;
B-1
<PAGE> 121
(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;
(iii) to the extent that such Bidder is an Existing Holder
of shares of such series:
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(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
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(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) 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," "" 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
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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
(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
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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.
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
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:
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(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 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.
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(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.
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 Prospectus or the Glossary included in the Prospectus, 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;
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(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 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 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
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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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APPENDIX E
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA
The Fund's concentration on municipal bonds issued by the State of
California (the "State"), its agencies, or its political subdivisions means that
investors are subject to risks of default or change in value of the securities
owned by the Fund deriving from certain unique factors affecting California
issuers. The information presented below has been derived from official
statements and other public reports of the State, but does not purport to be
comprehensive. In addition, the financial strength of local governments in
California is not directly related to the State's financial strength, and
factors not listed below may affect an individual local government.
During the early 1990's, the State experienced significant financial
difficulties, which reduced its credit standing. The State's finances have
improved significantly since 1994, with credit ratings increases since 1996. The
ratings of certain related debt of other issuers for which the State has an
outstanding lease purchase, guarantee or other contractual obligation (such as
for state-insured hospital bonds) are generally linked directly to the State's
credit rating. Should the State's financial condition deteriorate again, its
credit ratings could be reduced, and the market value and marketability of all
outstanding notes and bonds issued by the State, its agencies or its local
governments could be adversely affected.
ECONOMIC FACTORS
California's economy is the largest in the nation and one of the
largest in the world. The State's July 1, 1998, population of over 33.4 million
represented over 12% of the total United States population. Total personal
income in California, at an estimated $904 billion in 1998, accounts for almost
13% of all personal income in the nation. Total employment is over 15 million,
the majority of which is in the service, trade and manufacturing sectors.
From mid-1990 to late 1993, the State suffered a recession with the
worst economic, fiscal and budget conditions since the 1930s. Construction,
manufacturing (especially aerospace), and financial services, among others, were
all severely affected, particularly in Southern California. Employment levels
stabilized by late 1993 and pre-recession job levels were reached in 1996.
Unemployment has come down to under six percent in June 1999. Economic
indicators show a steady and strong recovery underway in California since the
start of 1994. The Asian economic crisis starting in 1997 has dampened the
State's economic growth, particularly in high technology manufacturing. Several
key export industries, such as electronics and aerospace manufacturing,
agriculture, and motion picture production, are struggling, due in part to
weakness in foreign demand. Conversely, the demand for high technology services,
including software, internet applications, and biotechnology, is strong and
construction activity continues to surge. Current forecasts predict continued
strong growth of the State's economy in 1999, with a slowdown predicted in 2000
and beyond. Any delay or reversal of the recovery may create new shortfalls in
State revenues.
CONSTITUTIONAL LIMITATIONS ON TAXES, OTHER CHARGES AND APPROPRIATIONS
Limitation on Property Taxes. Certain California municipal bonds may be
obligations of issuers which rely in whole or in part, directly or indirectly,
on ad valorem property taxes as a source of revenue. The taxing powers of
California local governments and districts are limited by Article XIII A of the
California Constitution, enacted by the voters in 1978 and commonly known as
"Proposition 13." Briefly, Article XIII A limits to one percent of "full cash
value" the rate of ad valorem property taxes on real property and generally
restricts the increase in the assessed value of real property to two percent per
year, except when new construction or a change in ownership occurs (subject to a
number of exemptions). Taxing entities may, however, increase the permissible ad
valorem tax rate above one percent to pay debt service on voter-approved bonded
indebtedness.
Under Article XIII A, the basic one percent tax rate applies to the
assessed value of property, determined as of the owner's date of acquisition (or
as of March 1, 1975, if acquired before that date), subject to certain
adjustments. This system has resulted in widely varying amounts of tax on
similarly situated properties. Although several lawsuits have been filed
challenging Proposition 13's acquisition value-based system, it was upheld by
the U.S. Supreme Court in 1992.
Article XIII A also requires the voters of any city, county or special
district to approve any "special tax" by a two-thirds vote. Court decisions,
however, allowed a non-voter approved levy of "general taxes" which were not
dedicated to a specific use.
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Limitations on Other Taxes, Fees and Charges. In November 1996,
California voters approved Proposition 218, which added Articles XIII C and XIII
D to the State Constitution. These provisions affect significantly the ability
of local governments (including special districts) to levy and collect existing
and future taxes, assessments, fees and charges.
Article XIII C requires that all new, extended or increased local taxes
be submitted to the electorate before they become effective; taxes for general
governmental purposes require a majority vote and taxes for specific purposes
require a two-thirds vote. Further, any general purpose tax which was imposed,
extended or increased, without voter approval, after 1994 and before Proposition
218's approval, must be approved by a majority vote within two years of the date
Proposition 218 was approved.
Article XIII D contains several provisions making it generally more
difficult for local governments (including special districts) to levy and
maintain "assessments" for municipal services and programs. Article XIII D also
contains several provisions affecting "fees" and "charges," defined to mean "any
levy other than an ad valorem tax, a special tax, or an assessment, imposed by a
[local government] upon a parcel or upon a person as an incident of property
ownership, including user fees or charges for a property related service." All
new, extended or increased property-related fees and charges must conform to
requirements prohibiting, among other things, the generation of revenues
exceeding the funds required to provide the property-related service, and the
use of the revenues for unrelated purposes. Notice, hearing and protest
procedures are provided for levying or increasing fees and charges and, except
for fees or charges for sewer, water and refuse collection services (or fees for
electrical and gas service, which are not treated as "property related" for
purposes of Article XIII D), no property related fee or charge may be imposed or
increased without majority approval by the property owners subject to the fee or
charge or, at the option of the local agency, two-thirds voter approval by the
electorate residing in the affected area.
In addition to the provisions described above, Article XIII C removes
limitations on the initiative power in matters of reducing or repealing local
taxes, assessments, fees and charges. Consequently, local voters could, by
future initiative, repeal, reduce or prohibit the future imposition or increase
of any local tax, assessment, fee or charge. It is unclear how this right of
local initiative may be used in cases where taxes or charges have been or will
be specifically pledged to secure debt issues.
The interpretation and application of Proposition 218 will ultimately
be determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainty the outcome of such
determinations. Proposition 218 is generally viewed as restricting the fiscal
flexibility of local governments, and for this reason, some credit ratings of
California cities and counties have been, and others may be, reduced.
Appropriations Limits. The State and its local governments are also
subject to an annual "appropriations limit" imposed by Article XIII B of the
California Constitution, enacted by the voters in 1979 and significantly amended
by Propositions 98 and 111 in 1988 and 1990, respectively. Article XIII B
prohibits the State or any covered local government from spending
"appropriations subject to limitation" in excess of the appropriations limit
imposed on that entity. "Appropriations subject to limitation" are
authorizations to spend "proceeds of taxes," which consist of tax revenues and
certain other funds (including proceeds from regulatory licenses, user charges
or other fees, to the extent that such proceeds exceed the cost of providing the
product or service), but "proceeds of taxes" exclude many State subventions to
local governments. Each entity's appropriations limit is adjusted annually to
reflect changes in cost of living and population, and transfers of service
responsibilities between governmental units.
Article XIII B does not limit appropriations of funds which are not
"proceeds of taxes," such as reasonable user charges or fees, and certain other
non-tax funds, including bond proceeds. Among the expenditures not included in
the Article XIII B appropriations limit are (1) the debt service cost of bonds
issued or authorized prior to January 1, 1979, or subsequently authorized by the
voters, (2) appropriations arising from certain emergencies declared by the
Governor, and (3) appropriations for certain capital outlay projects.
A governmental entity that receives "excess" revenues, measured over a
two-year cycle, must dispose of the excess amount. Local governments must return
any excess to taxpayers by rate reductions. The State must refund to taxpayers
half of any excess, with the other half paid to schools and community colleges.
With more liberal annual adjustment factors since 1988, and depressed revenues
since 1990 because of the recession, few governments are currently operating
near their spending limits, but this condition may change over time. State
appropriations were $5 billion under the limit for fiscal year 1998-99. Local
governments may, by voter approval, exceed their spending limits for up to four
years.
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Because of the complex nature of Articles XIII A through XIII D of the
California Constitution, the ambiguities and possible inconsistencies in their
terms, the impossibility of predicting future appropriations or changes in
population and cost of living, and the probability of continuing legal
challenges, it is not currently possible to determine fully the impact of these
Articles on California municipal bonds or on the ability of the State or local
governments to pay debt service on such California municipal bonds. It is not
possible, at the present time, to predict the outcome of any pending litigation
with respect to the ultimate scope, impact or constitutionality of these
Articles upon the State's or any local government's ability to pay debt service
on, or repay, their obligations. Future voter action may also affect the ability
of the State or local governments to repay their obligations.
OBLIGATIONS OF THE STATE OF CALIFORNIA
Under the California Constitution, debt service on outstanding general
obligation bonds is the second charge to the General Fund (the State's principal
operating fund) after support of the public school system and public
institutions of higher education. As of August 1, 1999, the State had
outstanding approximately $19.8 billion of long-term general obligation bonds,
$687 million of general obligation commercial paper, and $6.7 billion of
lease-purchase debt supported by the General Fund. The State also had about
$14.8 billion of authorized and unissued long-term general obligation bonds and
lease-purchase debt. In the 1998-99 fiscal year, debt service on general
obligation bonds and lease purchase debt was approximately 4.4% of General Fund
revenues.
RECENT FINANCIAL RESULTS
The principal sources of General Fund revenues are the California
personal income tax, the sales and use tax, bank and corporation taxes, and the
gross premium tax on insurance. The State also maintains a Special Fund for
Economic Uncertainties (the "SFEU"), derived from General Fund revenues, as a
reserve to meet cash needs of the General Fund, and which is required to be
replenished as soon as sufficient revenues are available. Year-end balances in
the SFEU are included for financial reporting purposes in the General Fund
balance. Because of the recession and an accumulated budget deficit, no reserve
was budgeted in the SFEU from 1992-93 to 1995-96. The California Department of
Finance estimates year-end balances in the SFEU of about $1.932 billion for
1998- 99 and $880 million for 1999-00.
General. Throughout the 1980's, State spending increased rapidly as the
State's population and economy also grew rapidly, including increased spending
for many assistance programs to local governments, which were constrained by
Proposition 13 and other laws. The largest State program is assistance to local
public and community college school districts. In 1988, Proposition 98 was
enacted, which generally guarantees local school districts and community college
districts a minimum share of State General Fund revenues (currently about 35%).
Recent Budgets. As a result of the severe economic recession from
1990-94 and other factors, the State experienced substantial revenue shortfalls
and greater than anticipated social service costs in the early and mid- 1990's.
The State accumulated and sustained a budget deficit in the budget reserve, the
SFEU, approaching $2.8 billion at its peak on June 30, 1993. The Legislature and
Governor agreed on a number of different steps to respond to the adverse
financial conditions and produce Budget Acts in the fiscal years 1991-92 to
1994-95 (although not all of these actions were taken in each year).
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. The State's cash condition became so serious that from
late spring 1992 until 1994, the State had to rely on issuance of short-term
notes which matured in a subsequent fiscal year to finance its ongoing deficit
and pay current obligations. For a two-month period beginning in the Summer of
1992, pending adoption of the annual Budget Act, the State was forced to issue
registered warrants (IOUs) to some of its suppliers, employees and other
creditors. The last of these deficit notes was repaid in April 1996.
The State's financial condition improved markedly during the 1995-96,
1996-97 and 1997-98 fiscal years, with a combination of better than expected
revenues, slowdown in growth of social welfare programs, and continued spending
restraint based on the actions taken in earlier years. The State's cash position
also improved, and no external deficit borrowing has occurred over the end of
these three fiscal years.
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The State economy grew strongly during the fiscal years starting in
1995-96, and the General Fund took in substantially greater tax revenues (around
$2.2 billion in 1995-96, $1.6 billion in 1996-97, $2.4 billion in 1997-98 and $1
billion in 1998-99) than were initially planned when the budgets were enacted.
These additional funds were largely directed to school spending as mandated by
Proposition 98, to make up shortfalls from reduced federal health and welfare
aid in 1995-96 and 1996-97 and, particularly in 1998-99, to fund new program
incentives. The accumulated budget deficit from the recession years was finally
eliminated.
FY 1997-98 Budget. In May 1997, the California Supreme Court ruled that
the State acted illegally in 1993 and 1994 by using a deferral of payments to
the Public Employees Retirement Fund to help balance earlier budgets. In
response to this court decision, the Governor ordered an immediate repayment to
the Retirement Fund of about $1.228 billion, which substantially "used up" the
then- expected additional General Fund revenues for the fiscal year. The 1997-98
Budget Act provided another year of rapidly increasing funding for K-14 public
education. Support for higher education units in the State also increased by
about six percent. Because of the pension repayment, most other State programs
were funded at levels consistent with prior years, and several initiatives had
to be dropped. The final results for 1997-98 showed General Fund revenues and
transfers of $54.9 billion and expenditures of $52.9 billion.
Part of the 1997-98 Budget Act was completion of State welfare reform
legislation to implement the federal welfare reform law passed in 1996. The new
State program became effective January 1, 1998, and emphasizes programs to bring
aid recipients into the workforce. As required by federal law, new time limits
are placed on receipt of welfare aid.
FY 1998-99 Budget. The 1998-99 Budget Act was signed on August 21,
1998. The Budget Act assumed General Fund revenues and transfers in 1998-99 of
$57.0 billion. After giving effect to line-item vetoes made by the Governor, the
Budget Act authorized spending of about $57.3 billion from the General Fund and
$14.7 billion from Special Funds. After enactment of the Budget Act, a number of
additional fiscal bills were enacted, but the Administration also raised its
estimate of revenues from the 1997-98 fiscal year.
As has been the case in the last several years, spending on K-14
education increased significantly, by a total of $1.7 billion over revised
1997-98 levels. Funding to support higher education was also increased
significantly (more than 15% for the University of California and more than 14%
for the California State University system). The Budget included some increases
in health and welfare programs, including the first increase in the monthly
welfare grant in nine years.
One of the most important elements of the 1998-99 Budget Act was
agreement on $1.4 billion of tax cuts. The largest of these is a cut in the
Vehicle License Fee (an annual tax on the value of cars registered in the State,
the "VLF"). Starting in 1999, the VLF is reduced by 25%, and then increasing to
67.5%. Because VLF funds are automatically transferred to cities and counties,
the new legislation provides for the General Fund to make up the reductions in
VLF funds. If State General Fund revenues continue to grow above certain
targeted levels in future years, the cut could reach as much as 67.5% by the
year 2003. The initial 25% VLF cut will be offset by about $500 million in
General Fund money in 1998-99, and $1 billion annually for future years. Other
tax cuts in 1998-99 include an increase in the dependent exemption credit for
personal income tax filers, restoration of a renter's tax credit for individual
taxpayers, and a variety of business tax relief measures.
New projections for the balance of 1998-99 were released on May 14,
1999 as part of the May Revision to the Governor's Proposed Budget for 1999-00
(the "May Revision"). The May Revision revealed that the State's economy was
much stronger in late 1998 and into 1999 than the Administration had thought
when it made its first 1999-00 Budget Proposal in January 1999. As a result, the
May Revision updates 1998-99 General Fund revenues to be about $57.9 billion,
almost $1 billion above the 1998-99 Budget Act, and $1.6 billion above the
Administration's January 1999 estimate. This increase is from personal income
taxes, reflecting stronger wage employment than previously estimated, and
extraordinary growth in capital gain realizations resulting from the stock
market's rise. The May Revision projects the SFEU will have a balance of almost
$1.9 billion at June 30, 1999.
Although the Administration projects a budget reserve in the SFEU of
about $1.9 billion on June 30, 1999, the General Fund balance on that date also
reflects $1.76 billion of "loans" which the General Fund made to local schools
in the recession years, representing cash outlays above the mandatory minimum
funding level. A July 1996 settlement of litigation over these transactions
calls for repayment of these loans over an eight-year period ending in 2001-02,
about equally split between outlays from the General Fund and from schools'
entitlements. The 1998-99 Budget Act contained a $250 million appropriation from
the General Fund toward this settlement.
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FY 1999-00 Budget. The Governor's proposed 1999-00 Budget was released
in January 1999. The proposed budget projected somewhat lower General Fund
revenues for 1999-00 than earlier projections. The May Revision sharply
increased the revenue estimates, by over $2.7 billion, to a total of almost
$63.0 billion, which would represent a nine percent increase above 1998-99. The
January Governor's Budget proposed $60.5 billion of expenditures in 1999-00,
with a $415 million SFEU reserve at June 30, 2000.
The 1999-00 Budget Act was the first State budget since 1993 to be
signed into law by the June 30 deadline. The 1999-00 Budget Act projects General
Fund reserves and transfers of almost $63 billion and General Fund expenditures
of $63.7 billion. The 1999-00 Budget Act projects a June 30, 2000 balance in the
SFEU of approximately $880 million.
The principal features of the 1999-00 Budget Act include:
- - A $1.6 billion increase over revised 1998-99 levels in Proposition 98
funding for K-12 schools, which is $108.6 million higher than the
minimum Proposition 98 guarantee;
- - A substantial increase above the actual 1998-99 level in funding for
higher education;
- - Increased funding of almost $600 million for health and human services;
- - $800 million in expenditures for infrastructure costs;
- - An additional one-year reduction in the VLF, at a cost of about $500
million; and
- - More than $200 million in appropriations to cities and counties.
Although the State's strong economy is producing record revenues to the
State government, the State's budget continues to be under stress from mandated
spending on education, a rising prison population, and social needs of a growing
population with many immigrants. These factors which limit State spending growth
also put pressure on local governments. There can be no assurances that, if
economic conditions weaken, or other factors intercede, the State will not
experience budget gaps in the future.
BOND RATINGS
The ratings on the State's long-term general obligation bonds were
reduced in the early 1990's from the "AAA" levels which existed prior to the
recession. Beginning in 1996, the three major rating agencies raised their
ratings of the State's general obligation bonds, which as of September 1999 were
assigned ratings of "AA-" from Standard & Poor's, "Aa3" from Moody's and "AA-"
from Fitch.
There can be no assurance that such ratings will be maintained in the
future. It should be noted that the creditworthiness of obligations issued by
local California issuers may be unrelated to the creditworthiness of obligations
issued by the State, and that there is no obligation on the part of the State to
make payment on such local obligations in the event of default.
LEGAL PROCEEDINGS
The State is involved in certain legal proceedings (described in the
State's recent financial statements) that, if decided against the State, may
require the State to make significant future expenditures or may substantially
impair revenues. Trial courts have recently entered tentative decisions or
injunctions which would overturn several parts of the State's recent budget
compromises. The matters covered by these lawsuits also include reductions in
welfare payments, the use of certain cigarette tax funds for health costs, and
the State's liability for property damage incurred in 1997 floods in Northern
California. All of these cases are subject to further proceedings and appeals,
and if the State eventually loses, the final remedies may not have to be
implemented in one year.
YEAR 2000 PREPARATIONS
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The State and California local governments, along with all other public
and private institutions in the nation, face a major challenge to ensure that
their computer systems, including microchips embedded into existing machinery,
will not fail prior to or at January 1, 2000, which date may not be recognized
properly by software utilizing only two digits to identify a year. The State
Department of Information Technology ("DOIT"), created in 1995, coordinates
activities, provides technical assistance to State agencies and local
governments, and reports on the status of remediation efforts by over 100 State
departments and agencies.
In July 1999 DOIT reported that 97% of about 556 "mission critical"
information technology systems in State government had been remediated. The DOIT
estimates total Y2K costs identified by those departments under the DOIT's
supervision at about $357 million. This amount is part of much larger overall
information technology costs incurred annually by the State, including costs
incurred by certain independent State entities, such as the judiciary, the
Legislature, the University of California and the California State University
System. Moreover, the DOIT's cost estimates for "embedded systems" apply only to
the embedded systems posing the highest risk to essential programs. For fiscal
year 1999-00, the Legislature created a fund of $33.5 million ($13.5 million
from the General Fund) for unanticipated Y2K costs, which fund can be increased
if necessary.
In addition to hardware and software changes, State agencies are
preparing business contingency plans in case of computer problems at January 1,
2000, and are actively coordinated with outside agencies, vendors, contractors
and others with whom computer data is shared. The State Treasurer (responsible
for bond payments) and State Controller (responsible for State fiscal controls)
have reported that the systems for bond payments and the State fiscal and
accounting system, respectively, were fully remediated by December 31, 1998, and
that they will complete the final steps of testing during 1999.
The State has expended, and plans to spend, many hundreds of millions
of dollars on year 2000 projects. There is no survey of local government costs
or the overall status of their activities, however. It is likely that larger
government agencies are better prepared at this time than smaller ones. Both the
State and local governments are preparing emergency plans for year 2000 computer
difficulties similar to their normal planning for nature emergencies, such as
floods or earthquakes.
While substantial progress has been made by the State toward Y2K
compliance, the task is quite large and will likely encounter some unexpected
difficulties. The State cannot guarantee that all "mission critical" systems
will be ready and tested by late 1999, or what the impact failure of any
particular information technology system(s) or of outside interfaces with
information technology systems might have.
OBLIGATIONS OF OTHER ISSUERS
Other Issuers of California Municipal Obligations. There are a number
of State agencies, instrumentalities and political subdivisions that issue
Municipal Obligations, some of which may be conduit revenue obligations that
derive payments from private borrowers. These entities are subject to various
economic risks and uncertainties, and the credit quality of the securities
issued by them may vary considerable from the credit quality of obligations
backed by the full faith and credit of the State.
State Assistance. Property tax revenues received by local governments
declined substantially following passage of Proposition 13. Subsequently, to
assist municipal issuers the California Legislature enacted measures to provide
for the redistribution of the State's General Fund surplus to local agencies,
the reallocation of certain State revenues to local agencies, and the assumption
of certain governmental functions by the State, including the principal
responsibility for funding K-12 schools and community colleges. During the
recession, the State caused local governments to transfer some of their property
tax revenues to school districts, representing the loss of the post-Proposition
13 "bailout" aid. (Litigation has been brought against the State challenging the
legality of these property tax revenues shifts.) Local governments have in
return received greater revenues and greater flexibility to operate health and
welfare programs. However, except for agreement in 1997 on a new program for the
State to substantially take over funding for local trial courts (saving cities
and counties some $400 million annually), there has been no large-scale reversal
of the property tax shift to help local governments.
The 1999-00 Budget Act includes a $150 million one-time subvention to
local agencies for relief from 1992 and 1993 property tax shifts. Legislation
has been passed, subject to voter approval in November 2000, to provide a more
permanent payment to local governments to offset the property tax shift. In
addition, the Governor has proposed a review and "accounting" of State-local
fiscal relationships, with the goal of ultimately restoring local government
finances to a fiscal condition equivalent to the period prior to the
recession-induced tax shifts.
E-6
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To the extent the State is constrained by its Article XIII B
appropriations limit (described above), or its obligation to conform to
Proposition 98, or other fiscal considerations, the absolute level, or the rate
of growth, of State assistance to local governments may continue to be reduced.
Any such reductions in State aid could compound the serious fiscal constraints
already experienced by many local governments, particularly counties. Orange
County, which emerged from Federal Bankruptcy Court protection in June 1996, has
significantly reduced county services and personnel, and faces strict financial
conditions following large investment fund losses in 1994 which resulted in
bankruptcy. As described above, Article XIII B and Proposition 218 affect
significantly the ability of local governments to raise revenue.
Counties and cities may face further budgetary pressures as a result of
changes in welfare and public assistance programs, which were enacted in August
1997 in order to comply with the federal welfare reform law. Generally, counties
play a large role in the new system, and are given substantial flexibility to
develop and administer programs to bring aid recipients into the workforce.
Counties are also given financial incentives if either at the county or
statewide level, the "Welfare-to-Work" programs exceed minimum targets; counties
are also subject to financial penalties for failure to meet such targets.
Counties remain responsible to provide "general assistance" to certain persons
who cannot obtain welfare from other programs. The long-term financial impact of
the new welfare system on local governments is still unknown.
Assessment Bonds. California Municipal Obligations which are assessment
bonds may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are secured by
land which is undeveloped at the time of issuance but which is anticipated to be
developed within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments or taxes
securing these bonds are not the personal liability of the owners of the
property assessed, the lien on the property is the only security for the bonds.
Moreover, in most cases the issuer of these bonds is not required to make
payments on the bonds in the event of delinquency in the payment of assessments
or taxes, except from amounts, if any, in a reserve fund established for the
bonds.
California Long-Term Lease Obligations. Based on a series of court
decisions, certain long-term lease obligations, though typically payable from
the general fund of the State or a municipality, are not considered
"indebtedness" requiring voter approval. Such leases, however, are subject to
"abatement" in the event the facility being leased is unavailable for beneficial
use and occupancy by the municipality during the term of the lease. Abatement is
not a default, and there may be no remedies available to the holders of the
certificates evidencing the lease obligation in the event abatement occurs. The
most common causes of abatement are failure to complete construction of the
facility before the end of the period during which lease payments have been
capitalized and uninsured casualty losses to the facility (e.g., due to
earthquake). If abatement occurs with respect to a lease obligation, lease
payments may be interrupted (if all available insurance proceeds and reserves
are exhausted) and the certificates may not be paid when due. Although
litigation is brought from time to time challenging the constitutionality of
such lease arrangements, the California Supreme Court issued a ruling in August
1998 which reconfirmed the legality of these financing methods.
OTHER CONSIDERATIONS
The repayment of industrial development bonds and other securities
secured by real property may be affected by California laws limiting foreclosure
rights of creditors. Securities backed by health care and hospital revenues may
be affected by changes in State regulations governing cost reimbursements to
health care providers under Medi-Cal (the State's Medicaid program), including
the risks related to the policy of awarding exclusive contracts to certain
hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g., because of a major
earthquake), the tax increment revenue may be insufficient to make principal and
interest payments on these bonds. Both Moody's and S&P suspended ratings on
California tax allocation bonds after the enactment of Articles XIII A and XIII
B, and only resumed such ratings on a selective basis.
The effect of these various constitutional and statutory changes upon
the ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been or
may be introduced which would
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modify existing taxes or other revenue-raising measures or which either would
further limit or, alternatively, would increase the abilities of the state and
local governments to impose new taxes or increase existing taxes. It is not
possible, at present, to predict the extent to which any such legislation will
be enacted. Nor is it possible, at present, to determine the impact of any such
legislation on California Municipal Obligations in which the Fund may invest,
future allocations of state revenues to local governments or the abilities of
the State or local governments to pay the interest on, or repay the principal
of, such California Municipal Obligations.
Most of California is within an active geologic region subject to major
seismic activity. Northern California in 1989 and Southern California in 1994
experienced major earthquakes causing billions of dollars in damages. The
federal government provided more than $13 million in aid after these
earthquakes, and neither earthquake is expected to have any long-term negative
economic impact. The value of any California municipal obligation held by the
Fund could be affected by an interruption of revenues because of damaged
facilities, or, consequently, income tax deductions for casualty losses or
property tax assessment reductions. Compensatory financial assistance could be
constrained by the inability of (i) an issuer to have obtained earthquake
insurance coverage rates; (ii) an insurer to perform on its contracts of
insurance in the event of widespread losses; or (iii) the federal or State
government to appropriate sufficient funds within their respective budget
limitations.
CALIFORNIA TAX MATTERS
The following is based upon the advice of Heller Ehrman White &
McAuliffe, special California counsel to the Fund.
The following is a general, abbreviated summary of certain provisions
of the applicable California State tax law as presently in effect as it directly
governs the taxation of Common Shareholders of the Fund who are either
California resident individuals or corporations subject to the California
franchise tax. This summary does not address the taxation of other shareholders
nor does it discuss any local taxes that may be applicable. These provisions are
subject to change by legislative or administrative action, and any such change
may be retroactive with respect to transactions of the Fund.
The following is based on the assumptions that the Fund will qualify
under Subchapter M of the Code as a regulated investment company, that it will
satisfy the conditions which will cause distributions of the Fund (to the extent
derived by the Fund from interest on California Municipal Obligations) to
qualify as exempt-interest dividends to shareholders for federal and California
purposes, and that it will distribute all interest and dividends it receives to
the shareholders.
The Fund will be subject to the California corporate franchise and
corporation income tax only if it has a sufficient nexus with California. If it
is subject to the California franchise or corporation income tax, the Fund does
not expect to pay a material amount of such tax.
If at the close of each quarter of the Fund's taxable year at least 50%
of the value of its total assets consists of obligations that, when held by an
individual, pay interest that is exempt under California or federal law from tax
by California, then distributions by the Fund that are attributable to interest
on any such obligation will not be subject to the California personal income
tax. All other distributions, including distributions attributable to dividends
and capital gains, will be includable in gross income for purposes of the
California personal income tax.
Interest on "private activity bonds" is not included in an individual's
income for purposes of the California alternative minimum tax. In addition,
California does not impose personal income tax on Social Security or Railroad
Retirement benefits.
Interest on indebtedness incurred or continued for the purpose of
acquiring or maintaining an investment in the Common Shares will not be
deductible for purposes of the California personal income tax.
All distributions of the Fund, regardless of source, to corporate
Common Shareholders that are subject to the California corporate franchise tax
will be included in gross income for purposes of such tax.
Gain on the sale, exchange, or other disposition of Common Shares will
be subject to the California personal income and corporate franchise tax. Any
loss realized by a holder of Common Shares upon the sale of shares held for six
months or less may be disallowed to the extent of any exempt interest dividends
received with respect to such shares. Moreover, any loss realized upon the sale
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of Common Shares within 30 days before or after the acquisition of other Common
Shares (including through a distribution from the Fund) may be disallowed under
the "wash sale" rules.
Common Shareholders are advised to consult with their own tax advisers
for more detailed information concerning California tax matters.
TAX RATE COMPARISONS
The table below gives the approximate yield a taxable security must
earn at various income brackets to produce after-tax yields equivalent to those
of tax-exempt bonds yielding from 4.75% to 5.50% under the Code and the
California state personal income tax law, applying tax rates applicable to
individuals for 1999.
<TABLE>
<CAPTION>
COMBINED TAX EXEMPT
(TAXABLE INCOME*) FEDERAL AND
CA STATE 4.75% 5.00% 5.25% 5.50%
SINGLE RETURN JOINT RETURN TAX BRACKET IS EQUIVALENT TO A FULLY TAXABLE YIELD OF:
------------- ------------ ----------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$0 - $5,264 Up to $10,528 15.85% 5.64% 5.94% 6.24% 6.54%
$5,265 - $12,477 $10,529 - $24,954 16.70% 5.70% 6.00% 6.30% 6.60%
$12,478 - $19,692 $24,955 - $39,384 18.40% 5.82% 6.13% 6.43% 6.74%
$19,693 - $25,750 $39,385 - $43,050 20.10% 5.94% 6.26% 6.57% 6.88%
$25,751 - $27,337 $43,051 - $54,674 32.32% 7.02% 7.39% 7.76% 8.13%
$27,338 - $34,548 $54,675 - $69,096 33.76% 7.17% 7.55% 7.93% 8.30%
$34,549 - $62,450 $69,097 - $104,050 34.70% 7.27% 7.66% 8.04% 8.42%
$62,451 - $130,250 $104,051 - $158,550 37.42% 7.59% 7.99% 8.39% 8.79%
$130,251 - $283,150 $158,551 - $283,150 41.95% 8.18% 8.61% 9.04% 9.47%
over $283,150 over $283,150 45.22% 8.67% 9.13% 9.58% 10.04%
</TABLE>
- ---------------------
* Net amount subject to federal and California personal income tax after
deductions and exemptions. Although the federal income tax brackets for
1999 have been released, the California personal income tax brackets
for 1999 have not been released.
Consequently, the table above uses the combined brackets for 1998.
The above-indicated federal income tax brackets do not take into
account the effect of a reduction in the deductibility of itemized deductions
for individual taxpayers with adjusted gross income in excess of $126,600. The
tax brackets also do not show the effects of phaseout of personal exemptions for
single filers with adjusted gross income in excess of $126,600 and joint filers
with adjusted gross income in excess of $189,950. The effective tax brackets and
equivalent taxable yields of those taxpayers will be higher than those indicated
above.
The combined tax brackets assume that California taxes are itemized
deductions for federal income tax purposes. Investors who do not itemize
deductions on their federal income tax return will have a higher combined
bracket and higher taxable equivalent yield than those indicated above. The
applicable federal tax rates within the brackets are 15%, 28%, 31%, 36% and
39.6%.
Yields shown are for illustration purposes only and are not meant to
represent the Trust's actual yield. No assurance can be given that the Trust
will achieve any specific tax-exempt yield. While it is expected that the Trust
will invest principally in obligations the interest from which is exempt from
the regular federal income tax and California state personal income taxes, other
income received by the Trust may be taxable. It should also be noted that the
interest earned on certain "private activity bonds," while exempt from the
regular federal income tax, is treated as a tax preference item which could
subject the recipient to the federal alternative minimum tax ("AMT"). The
illustrations assume that the AMT is not applicable and do not take into account
any tax credits that may be available.
The information set forth above is as of the date of this Statement of
Additional Information. Subsequent tax law changes could result in prospective
or retroactive changes in the tax brackets, tax rates, and tax equivalent yields
set forth above. Investors should consult their tax adviser for additional
information.
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<PAGE> 141
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
Included in Part A
Financial Highlights
Capitalization at November 3, 1999
Portfolio Composition
Included in Part B
Financial Statements
(2) Exhibits
(a)(1) Agreement and Declaration of Trust
(a)(2) Amendment No. 1 to the Agreement and Declaration of Trust
(b) Amended and Restated By-Laws(1)
(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 Sections 2, 7 and 8 of the Amended and
Restated By-Laws).
(d)(2) Form of specimen certificate for the Municipal Auction Rate
Cumulative Preferred Shares(1)
(e) Dividend Reinvestment Plan
(f) Not applicable
(g) Management Agreement with Colonial Management Associates,
Inc.
(h) Form of Underwriting Agreement(1)
(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 California Insured
Municipal Fund, Registration Nos. 333-84993 and 811-09537,
filed with the Commission on or about October 26, 1999)
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<PAGE> 142
(k)(1) Stock Transfer Agent Services Agreement between the
Registrant and BankBoston, N.A.
(k)(2) Pricing and Bookkeeping Agreement with Colonial
Management Associates, Inc.
(k)(3)(i) Fee Waiver Agreement with Colonial Management
Associates, Inc.
(k)(3)(ii) Expense Reimbursement Agreement with Colonial
Management Associates, Inc.
(k)(4) Form of Auction Agency Agreement(1)
(k)(5) Form of Broker-Dealer Agreement(1)
(l) Opinion and Consent of Ropes & Gray, counsel to
Registrant(1)
(m) Not applicable
(n) Consent of independent accountants(1)
(o) Not applicable
(p) Subscription Agreement with Colonial Management
Associates, Inc.
(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. Girnnell, 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 California Insured Municipal Fund, Registration Nos.
333-84993 and 811-09537, filed with the Commission on or about October 26,
1999.
- ----------------------------------
(1) To be filed by amendment.
Item 25. Marketing Arrangements.
See Sections 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(2) $
Printing(2)
Accounting fees and expenses(2)
Legal fees and expenses(2)
Miscellaneous(2)
--------
Total(2) $
========
(2) To be filed by amendment.
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 -7-
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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<PAGE> 143
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 filed as Exhibit (h) to this Registration
Statement provides for indemnification by the Registrant and
Colonial Management Associates, Inc. (the "Advisor") of Salomon
Smith Barney Inc. (the "Underwriter") and its controlling
persons and by the Underwriter 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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<PAGE> 144
Item 30. Business and Other Connections of Investment Adviser
The description of the business of Colonial Management Associates,
Inc., the Registrant's Investment Adviser, is set forth under the
caption "The Advisor" in the Prospectus forming part of this
Registration Statement. The following sets forth business and other
connections of each director and officer of Colonial Management
Associates, Inc.
Registrant's investment adviser/administrator, Colonial Management Associates,
Inc. ("Colonial"), is registered as an investment adviser under the Investment
Advisers Act of 1940 ("Advisers Act"). Colonial Advisory Services, Inc.
("CASI"), an affiliate of Colonial, is also registered as an investment adviser
under the Advisers Act. As of the end of the fiscal year, December 31, 1998,
CASI had four institutional, corporate or other accounts under management
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<PAGE> 145
or supervision, the market value of which was approximately $227 million. As of
the end of the fiscal year, December 31, 1998, Colonial was the investment
adviser, sub-adviser 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 open-end funds in the Liberty Mutual
Funds complex.
The following sets forth the business and other connections of each director and
officer of Colonial Management Associates, Inc.:
<TABLE>
<CAPTION>
(1) (2) (3) (4)
Name and principal
business
addresses* Affiliation
of officers and with Period is through 06/30/99. Other
directors of investment business, profession, vocation or
investment adviser adviser employment connection Affiliation
- ------------------ ---------- -------------------------------- -----------
<S> <C> <C> <C>
Allard, Laurie V.P.
Archer, Joseph A. V.P.
Ballou, William J. V.P., Liberty Funds Trusts I through IX Asst. Sec.
Asst. Colonial High Income
Sec., Municipal Trust Asst. Sec.
Counsel Colonial InterMarket Income
Trust I Asst. Sec.
Colonial Intermediate High
</TABLE>
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<PAGE> 146
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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.
Barron, Suzan M. V.P., Liberty Funds Trusts I through IX Asst. Sec.
Asst. Colonial High Income
Sec., Municipal Trust Asst. Sec.
Counsel 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.
</TABLE>
C-6
<PAGE> 147
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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,
IPC Mbr. Inc. Exec. V.P.
Stein Roe & Farnham Incorporated Exec. V.P.
Bunten, Walter V.P.
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
Stein Roe & Farnham Counsel
Incorporated General Counsel;
Secretary
Stein Roe Services, Inc. Asst. Clerk
Carroll, Sheila A. Sr.V.P.
Citrone, Frank, Jr. Sr.V.P.
Conlin, Nancy L. Sr. V.P.; Liberty Funds Trusts I through IX Secretary
Sec.; Clerk Colonial High Income
IPC Mbr.; Municipal Trust Secretary
Dir; Gen. Colonial InterMarket Income
Counsel Trust I Secretary
Colonial Intermediate High
Income Fund Secretary
Colonial Investment Grade
Municipal Trust Secretary
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
</TABLE>
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<PAGE> 148
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
Connaughton, V.P. Liberty Funds Trusts I through VIII CAO; Controller
J. Kevin 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 Trust IX Controller
Daniszewski, V.P.
Joseph J.
Dearborn, James V.P.
Desilets, Marian H. V.P. Liberty Funds Distributor,
Inc. V.P.
Liberty Funds Trusts 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
</TABLE>
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<PAGE> 149
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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.
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
Evans, C. Frazier Sr.V.P. Liberty Funds Distributor,
Inc. Mng. Director
Feloney, Joseph L. V.P. Colonial Advisory Services,
Asst. Treas. 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
Officer; V.P.
Garrison,
William M. V.P. Stein Roe & Farnham
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.
</TABLE>
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<PAGE> 150
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Liberty Funds Services, Inc. Dir.; Chm.
AlphaTrade Inc. Dir.
Liberty Funds Trusts 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
Incorporated Asst. Chairman;
Exec. V.P.
Liberty Variable Investment
Trust President
Hansen, Loren Sr. V.P.;
IPC Mbr.
Harasimowicz, V.P.
Stephen
Hartford, Brian Sr.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.
Iudice, V.P.; Liberty Funds Group LLC Controller,
Philip J., Jr. Controller CAO, Asst.
</TABLE>
C-10
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<TABLE>
<CAPTION>
<S> <C> <C> <C>
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 Trusts 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
Jansen, Deborah Sr.V.P. Stein Roe & Farnham
Incorporated Sr. V.P.
Jersild, North T. V.P. Stein Roe & Farnham
Incorporated V.P.
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C>
Johnson, Gordon V.P.
Knudsen, Gail E. V.P. Liberty Funds Trusts 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.
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.
MacKinnon,
Donald S. Sr.V.P.
Marcus, Harold V.P.
Muldoon, Robert V.P.
Newman, Maureen Sr.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
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C>
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.
Colonial Municipal Income
Trust V.P.
Liberty Funds Trusts 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.
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 Trusts I through IX Asst. Sec.
Colonial High Income
Municipal Trust Asst. Sec.
Colonial InterMarket Income
Trust I Asst. Sec.
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C>
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.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund,
Inc. 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.
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 Agencies 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.Treas. Inc. Asst. Treas.
Liberty Funds Group LLC Asst. Treas.
Ware, Elizabeth M. V.P.
Wiley, Christine V.P.
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C>
Wiley, Peter V.P.
</TABLE>
- -----------------------------------------------
*The Principal address of all of the officers and directors of the investment
adviser is One Financial Center, Boston, MA 02111.
Item 31. Location of Accounts and Records
Registrant: Colonial California 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.
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<PAGE> 156
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
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 5th day of November, 1999.
COLONIAL CALIFORNIA 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 November 5, 1999
- ---------------------- executive officer)
Stephen E. Gibson
/s/ J. KEVIN CONNAUGHTON Controller and Chief November 5, 1999
- ------------------------ Accounting Officer
J. Kevin Connaughton
/s/ TIMOTHY J. JACOBY Treasurer and Chief November 5, 1999
- ------------------------ Financial Officer
Timothy J. Jacoby
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<PAGE> 157
<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
November 5, 1999
SALVATORE MACERA* Trustee
- -----------------
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>
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<PAGE> 158
EXHIBIT INDEX
(a)(1) Agreement and Declaration of Trust
(a)(2) Amendment No. 1 to the Agreement and Declaration of Trust
(e) Dividend Reinvestment Plan
(g) Management Agreement with Colonial Management Associates, Inc.
(k)(1) Stock Transfer Agent Services Agreement between the Registrant and
BankBoston, N.A.
(k)(2) Pricing and Bookkeeping Agreement with Colonial Management
Associates, Inc.
(k)(3)(i) Fee Waiver Agreement with Colonial Management Associates, Inc.
(k)(3)(ii) Expense Reimbursement Agreement with Colonial Management Associates,
Inc.
(p) Subscription Agreement with Colonial Management Associates, Inc.
<PAGE> 1
EXHIBIT (a)(1)
PREMIER CALIFORNIA MUNICIPAL INCOME FUND
AGREEMENT AND DECLARATION OF TRUST
----------------------------------
AUGUST 10, 1999
---------------
<PAGE> 2
PREMIER CALIFORNIA MUNICIPAL INCOME FUND
------------------------
AGREEMENT AND DECLARATION OF TRUST
------------------------
AGREEMENT AND DECLARATION OF TRUST made at Boston, Massachusetts, this
10th day of August, 1999, by the Trustees hereunder, and by the holders of
shares of beneficial interest to be issued hereunder as hereinafter provided.
WITNESSETH that
WHEREAS, this Trust has been formed to carry on the business of an
investment company; and
WHEREAS, the Trustees have agreed to manage all property coming into
their hands as trustees of a Massachusetts business trust in accordance with the
provisions hereinafter set forth.
NOW, THEREFORE, the Trustees hereby declare that they will hold all
cash, securities and other assets which they may from time to time acquire in
any manner as Trustees hereunder IN TRUST to manage and dispose of the same upon
the following terms and conditions for the pro rata benefit of the holders from
time to time of Shares in this Trust as hereinafter set forth.
ARTICLE I
NAME AND DEFINITIONS
NAME
SECTION 1. This Trust shall be known as "Premier California Municipal
Income Fund" and the Trustees shall conduct the business of the Trust under that
name or any other name as they may from time to time determine.
-2-
<PAGE> 3
DEFINITIONS
SECTION 2. Whenever used herein, unless otherwise required by the
context or specifically provided:
(a) The "Trust" refers to the Massachusetts business trust
established by this Agreement and Declaration of Trust, as amended from
time to time;
(b) "Trustees" refers to the Trustees of the Trust named
herein or elected in accordance with Article IV;
(c) "Shares" means the equal proportionate transferable units
of interest into which the beneficial interest in the Trust shall be
divided from time to time or, if more than one class or series of
Shares is authorized by the Trustees, the equal proportionate
transferable units into which each class or series of shares shall be
divided from time to time;
(d) "Shareholder" means a record owner of Shares;
(e) The "1940 Act" refers to the Investment Company Act of
1940 and the Rules and Regulations thereunder, all as amended from time
to time;
(f) The terms "Affiliated Person", "Assignment", "Commission",
"Interested Person", "Principal Underwriter" and "Majority Shareholder
Vote" (the 67% or 50% requirement of the third sentence of Section
2(a)(42) of the 1940 Act, whichever may be applicable) shall have the
applicable meanings given them in the 1940 Act;
(g) "Declaration of Trust" shall mean this Agreement and
Declaration of Trust as amended or restated from time to time;
(h) "By-Laws" shall mean the By-Laws of the Trust as amended
from time to time;
(i) The term "class" or "class of Shares" refers to the
division of Shares into two or more classes as provided in Article III,
Section 1 hereof; and
(j) The term "series" or "series of Shares" refers to the
division of Shares representing any class into two or more series as
provided in Article III, Section 1 hereof.
-3-
<PAGE> 4
ARTICLE II
PURPOSE
The purpose of the Trust is to provide investors a managed investment
primarily in securities, commodities and debt instruments and other securities
and rights of a financial character.
ARTICLE III
SHARES
DIVISION OF BENEFICIAL INTEREST
SECTION 1. The Trustees may, without Shareholder approval, authorize
one or more classes of Shares (which classes may be divided into two or more
series), Shares of each such class or series having such preferences, voting
powers, terms of redemption, if any, and special or relative rights or
privileges (including conversion rights, if any) as the Trustees may determine
and as shall be set forth in the By-Laws. The number of Shares of each class or
series authorized shall be unlimited, except as the By-Laws may otherwise
provide, and the Shares so authorized may be represented in part by fractional
shares. The Trustees may from time to time divide or combine the Shares of any
class or series into a greater or lesser number without thereby changing the
proportionate beneficial interest in the class or series.
OWNERSHIP OF SHARES
SECTION 2. The ownership of Shares shall be recorded on the books of
the Trust or its transfer or similar agent. No certificates certifying the
ownership of Shares shall be issued except as the Trustees may otherwise
determine from time to time. The Trustees may make such rules as they consider
appropriate for the issuance of Share certificates, the transfer of Shares and
similar matters. The record books of the Trust as kept by the Trust or any
transfer or similar agent of the Trust, as the case may be, shall be conclusive
as to who are the Shareholders of each class or series and as to the number of
Shares of each class or series held from time to time by each Shareholder.
INVESTMENTS IN THE TRUST
SECTION 3. The Trustees shall accept investments in the Trust from such
persons and on such terms and, subject to any requirements of law, for such
consideration, which may consist of cash or tangible or intangible property or a
combination thereof, as they or the ByLaws from time to time authorize.
-4-
<PAGE> 5
NO PREEMPTIVE RIGHTS
SECTION 4. Shareholders shall have no preemptive or other right to
receive, purchase or subscribe for any additional Shares or other securities
issued by the Trust.
STATUS OF SHARES AND LIMITATION OF PERSONAL LIABILITY
SECTION 5. Shares shall be deemed to be personal property giving only
the rights provided in this Declaration of Trust or the By-Laws. Every
Shareholder by virtue of having become a Shareholder shall be held to have
expressly assented and agreed to the terms of this Declaration of Trust and the
By-Laws and to have become a party hereto and thereto. The death of a
Shareholder during the continuance of the Trust shall not operate to terminate
the same nor entitle the representative of any deceased Shareholder to an
accounting or to take any action in court or elsewhere against the Trust or the
Trustees, but only to the rights of said decedent under this Trust. Ownership of
Shares shall not entitle the Shareholder to any title in or to the whole or any
part of the Trust property or right to call for a partition or division of the
same or for an accounting, nor shall the ownership of Shares constitute the
Shareholders partners. Neither the Trust nor the Trustees, nor any officer,
employee or agent of the Trust, shall have any power to bind personally any
Shareholder, nor except as specifically provided herein to call upon any
Shareholder for the payment of any sum of money or assessment whatsoever other
than such as the Shareholder may at any time personally agree to pay.
ARTICLE IV
THE TRUSTEES
NUMBER OF TRUSTEES AND TERM OF OFFICE
SECTION 1. Subject to the voting powers of one or more classes or
series of Shares as set forth in the By-Laws, the number of Trustees shall be
such number as shall be fixed from time to time by a written instrument signed
by a majority of the Trustees, provided, however, that the number of Trustees
shall in no event be less than three (3). No reduction in the number of Trustees
shall have the effect of removing any Trustee from office prior to the
expiration of his or her term unless the Trustee is specifically removed
pursuant to Section 2 of this Article at the time of the decrease. The Board of
Trustees shall be divided into three classes. The number of Trustees in each
class shall be determined by resolution of the Board of Trustees. The initial
Trustees, each of whom shall serve until the first meeting of Shareholders at
which Trustees are elected and until his or her successor is elected and
qualified, or until he or she sooner dies, resigns or is removed, shall be John
V. Carberry and such other persons as the Trustee or Trustees then in office
shall, prior to any sale of Shares pursuant to a public offering, appoint. The
term of office of all of the initial Trustees shall expire on the date of the
first annual meeting of Shareholders or special meeting in lieu thereof, which
annual or special meeting shall be called to be held not more than fifteen
-5-
<PAGE> 6
months after Shares are first sold pursuant to a public offering. The term of
office of the first class shall expire on the date of the second annual meeting
of Shareholders or any special meeting in lieu thereof. The term of office of
the second class shall expire on the date of the third annual meeting of
Shareholders or any special meeting in lieu thereof. The term of office of the
third class shall expire on the date of the fourth annual meeting of
Shareholders or any special meeting in lieu thereof. Upon expiration of the term
of office of each class as set forth above, the number of Trustees in such
class, as determined by the Board of Trustees, shall be elected for a term
expiring on the date of the third annual meeting of Shareholders or any special
meeting in lieu thereof following such expiration to succeed the Trustees whose
terms of office expire. The Trustees shall be elected at an annual meeting of
the Shareholders or a special meeting in lieu thereof, except as provided in
Section 2 of this Article.
VACANCIES; REMOVAL
SECTION 2. Subject to the voting powers of one or more classes or
series of Shares as set forth in the By-Laws, any vacancies occurring in the
Board of Trustees may be filled by the Trustees if, immediately after filling
any such vacancy, at least two-thirds of the Trustees then holding office shall
have been elected to such office by the Shareholders. In the event that at any
time less than a majority of the Trustees then holding office were elected to
such office by the Shareholders, the Trustees shall call a meeting of
Shareholders for the purpose of electing Trustees. At any meeting called for
such purpose and subject to the voting powers of one or more classes or series
of Shares as set forth in the By-Laws, a Trustee may be removed, with or without
cause, by vote of seventy-five percent (75%) of the outstanding Shares of the
classes or series entitled to vote for the election of such Trustee. By vote of
seventy-five percent (75%) of the Trustees then in office, the Trustees may
remove a Trustee with or without cause.
EFFECT OF DEATH, RESIGNATION, ETC. OF A TRUSTEE
SECTION 3. The death, declination, resignation, retirement, removal, or
incapacity of the Trustees, or any one of them, shall not operate to annul the
Trust or to revoke any existing agency created pursuant to the terms of this
Declaration of Trust.
POWERS
SECTION 4. Subject to the provisions of this Declaration of Trust, the
business of the Trust shall be managed by the Trustees, and they shall have all
powers necessary or convenient to carry out that responsibility. Without
limiting the foregoing, the Trustees may adopt By-Laws not inconsistent with
this Declaration of Trust providing for the conduct of the business of the Trust
and may amend and repeal them to the extent that such By-Laws do not reserve
that right to the Shareholders of one or more classes or series. Subject to the
voting power of one or more classes or series of shares as set forth in the
By-Laws, the Trustees may fill vacancies in or add to their number, including
vacancies resulting from increases in their
-6-
<PAGE> 7
number, and may elect and remove such officers and appoint and terminate such
agents as they consider appropriate; they may appoint from their own number, and
terminate, any one or more committees consisting of two or more Trustees,
including an executive committee which may, when the Trustees are not in
session, exercise some or all of the power and authority of the Trustees as the
Trustees may determine; they may appoint an advisory board, the members of which
shall not be Trustees and need not be Shareholders, they may employ one or more
custodians of the assets of the Trust and may authorize such custodians to
employ subcustodians and to deposit all or any part of such assets in a system
or systems for the central handling of securities, retain a transfer agent or a
Shareholder services agent, or both, provide for the distribution of Shares by
the Trust, through one or more principal underwriters or otherwise, set record
dates for the determination of Shareholders with respect to various matters, and
in general delegate such authority as they consider desirable to any officer of
the Trust, to any committee of the Trustees and to any agent or employee of the
Trust or to any such custodian or underwriter.
Without limiting the foregoing, the Trustees shall have power and
authority:
(a) To invest and reinvest cash, and to hold cash uninvested;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate,
write options on and lease any or all of the assets of the Trust;
(c) To vote or give assent, or exercise any rights of
ownership, with respect to stock or other securities or property; and
to execute and deliver proxies or powers of attorney to such person or
persons as the Trustees shall deem proper, granting to such person or
persons such power and discretion with relation to securities or
property as the Trustees shall deem proper;
(d) To exercise powers and rights of subscription or otherwise
which in any manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating
any trust, whether in bearer, unregistered or other negotiable form, or
in the name of the Trustees or of the Trust or in the name of a
custodian, subcustodian or other depository or a nominee or nominees or
otherwise;
(f) To the extent necessary or appropriate to give effect to
the preferences, special or relative rights and privileges of any
classes or series of Shares, to allocate assets, liabilities, income
and expenses of the Trust to a particular class or classes or series of
Shares or to apportion the same among two or more classes or series;
(g) To consent to or participate in any plan for the
reorganization, consolidation or merger of any corporation or issuer,
any security of which is or was
-7-
<PAGE> 8
held in the Trust; to consent to any contract, lease, mortgage,
purchase or sale of property by such corporation or issuer, and to pay
calls or subscriptions with respect to any security held in Trust;
(h) To join with other security holders in acting through a
committee, depositary, voting trustee or otherwise, and in that
connection to deposit any security with, or transfer any security to,
any such committee, depositary or trustee, and to delegate to them such
power and authority with relation to any security (whether or not so
deposited or transferred) as the Trustees shall deem proper, and to
agree to pay, and to pay, such portion of the expenses and compensation
of such committee, depositary or trustee as the Trustees shall deem
proper;
(i) To compromise, arbitrate or otherwise adjust claims in
favor of or against the Trust on any matter in controversy, including
but not limited to claims for taxes;
(j) To enter into joint ventures, general or limited
partnerships, limited liability companies, and any other combinations
or associations;
(k) To borrow funds;
(l) To endorse or guarantee the payment of any notes or other
obligations of any person; to make contracts of guaranty or suretyship,
or otherwise assume liability for payment thereof; and to mortgage and
pledge the Trust property or any part thereof to secure any of or all
of such obligations;
(m) To purchase and pay for entirely out of Trust property
such insurance as they may deem necessary or appropriate for the
conduct of the business of the Trust, including, without limitation,
insurance policies insuring the assets of the Trust and payment of
distributions and principal on its portfolio investments, and insurance
policies insuring the Shareholders, Trustees, officers, employees,
agents, investment advisors or managers, principal underwriters or
independent contractors of the Trust individually against all claims
and liabilities of every nature arising by reason of holding, being or
having held any such office or position, or by reason of any action
alleged to have been taken or omitted by any such person as
Shareholder, Trustee, officer, employee, agent, investment adviser or
manager, principal underwriter or independent contractor, including any
action taken or omitted that may be determined to constitute
negligence, whether or not the Trust would have the power to indemnify
such person against such liability; and
(n) To pay pensions for faithful service, as deemed
appropriate by the Trustees, and to adopt, establish and carry out
pension, profit-sharing, share bonus, share purchase, savings, thrift
and other retirement, incentive and benefit plans, trusts
-8-
<PAGE> 9
and provisions, including the purchasing of life insurance and annuity
contracts as a means of providing such retirement and other benefits,
for any or all of the Trustees, officers, employees and agents of the
Trust.
(o) To purchase or otherwise acquire Shares.
The Trustees shall not in any way be bound or limited by any present or
future law or custom in regard to investments by Trustees. Except as otherwise
provided herein or from time to time in the By-Laws, any action to be taken by
the Trustees may be taken by a majority of the Trustees present at a meeting of
the Trustees (a quorum being present), within or without Massachusetts. Except
as otherwise provided herein or from time to time in the By-Laws, any action to
be taken by the Trustees may be taken at a meeting held by means of a conference
telephone or other communications equipment by means of which all persons
participating in the meeting can hear each other at the same time and
participation by such means shall constitute a presence in person at a meeting,
or by written consents of a majority of the Trustees then in office (or such
greater number as may be required by this Declaration of Trust or otherwise).
PAYMENT OF EXPENSE BY TRUST
SECTION 5. The Trustees are authorized to pay, or to cause to be paid
out of the principal or income of the Trust, or partly out of principal and
partly out of income, as they deem fair, all expenses, fees, charges, taxes and
liabilities incurred or arising in connection with the Trust, or in connection
with the management thereof, including, but not limited to, the Trustees'
compensation and such expenses and charges for the services of the Trust's
officers, employees, investment adviser, or manager, principal underwriter,
auditor, counsel, custodian, transfer agent, Shareholder servicing agent, and
such other agents or independent contractors and such other expenses and charges
as the Trustees may deem necessary or proper to incur.
OWNERSHIP OF ASSETS OF THE TRUST
SECTION 6. Title to all of the assets of the Trust shall at all times
be considered as vested in the Trustees.
ADVISORY, MANAGEMENT AND DISTRIBUTION
SECTION 7. Subject to a favorable Majority Shareholder Vote, the
Trustees may, at any time and from time to time, contract for exclusive or
nonexclusive advisory and/or management services with any corporation, trust,
association or other organization (the "Adviser"), every such contract to comply
with such requirements and restrictions as may be set forth in the By-Laws; and
any such contract may contain such other terms interpretive of or in addition to
said requirements and restrictions as the Trustees may determine, including,
without limitation, authority to determine from time to time what investments
shall be
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purchased, held, sold or exchanged and what portion, if any, of the assets of
the Trust shall be held uninvested and to make changes in the Trust's
investments. The Trustees may also, at any time and from time to time, contract
with the Adviser or any other corporation, trust, association or other
organization, appointing it exclusive or nonexclusive distributor or principal
underwriter for the Shares, every such contract to comply with such requirements
and restrictions as may be set forth in the By-Laws; and any such contract may
contain such other terms interpretive of or in addition to said requirements and
restrictions as the Trustees may determine.
The fact that:
(i) any of the Shareholders, Trustees or officers of
the Trust is a shareholder, director, officer, partner,
trustee, employee, manager, adviser, principal underwriter or
distributor or agent of or for any corporation, trust,
association or other organization, or of or for any parent or
affiliate of any organization, with which an advisory or
management contract, or principal underwriter's or
distributor's contract, or transfer, Shareholder services or
other agency contract may have been or may hereafter be made
or that any such organization, or any parent or affiliate
thereof, is a Shareholder or has an interest in the Trust, or
that
(ii) any corporation, trust, association or other
organization with which an advisory or management contract or
principal underwriter's or distributor's contract or transfer,
Shareholder services or other agency contract may have been or
may hereafter be made also has an advisory or management
contract, or principal underwriter's or distributor's contract
or transfer, Shareholder services or other agency contract
with one or more other corporations, trusts, associations or
other organizations, or has other business or interests
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same or create any liability or accountability to the Trust or its Shareholders.
ARTICLE V
SHAREHOLDERS' VOTING POWERS AND MEETINGS
VOTING POWERS
SECTION 1. Subject to the voting powers of one or more classes or
series of Shares as set forth in the By-Laws, the Shareholders shall have power
to vote only (i) for the election or removal of Trustees as provided in Article
IV, Section 1 or Section 2, (ii) with respect to
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any Adviser as provided in Article IV, Section 7, (iii) with respect to any
termination of this Trust to the extent and as provided in Article IX, Section
4,(iv) with respect to any amendment of this Declaration of Trust to the extent
and as provided in Article IX, Section 7, (v) to the same extent as the
stockholders of a Massachusetts business corporation as to whether or not a
court action, proceeding or claim should or should not be brought or maintained
derivatively or as a class action on behalf of the Trust or the Shareholders,
and (vi) with respect to such additional matters relating to the Trust as may be
required by law, this Declaration of Trust, the By-Laws or any registration of
the Trust with the Securities and Exchange Commission (or any successor agency)
or any state, or as the Trustees may consider necessary or desirable. Each whole
Share shall be entitled to one vote as to any matter on which it is entitled to
vote and each fractional Share shall be entitled to a proportionate fractional
vote, except as otherwise provided in the By-Laws. Notwithstanding any other
provision of this Declaration of Trust, on any matter submitted to a vote of
Shareholders, all Shares of the Trust then entitled to vote shall, except as
otherwise provided in the By-Laws or required by law, be voted in the aggregate
as a single class without regard to classes or series of Shares. There shall be
no cumulative voting in the election of Trustees. Shares may be voted in person
or by proxy. A proxy with respect to Shares held in the name of two or more
persons shall be valid if executed by any one of them unless at or prior to
exercise of the proxy the Trust receives a specific written notice to the
contrary from any one of them. A proxy purporting to be executed by or on behalf
of a Shareholder shall be deemed valid unless challenged at or prior to its
exercise and the burden of proving invalidity shall rest on the challenger.
Until Shares of a particular class or series are issued, the Trustees may
exercise all rights of Shareholders and may take any action required by law,
this Declaration of Trust or the By-Laws to be taken by Shareholders as to such
class or series.
VOTING POWER AND MEETINGS
SECTION 2. There shall be an annual meeting of the Shareholders on the
date fixed in the By-Laws at the office of the Trust in Boston, Massachusetts,
or at such other place as may be designated in the call thereof, which call
shall be made by the Trustees. In the event that such meeting is not held in any
year on the date fixed in the By-Laws, whether the omission be by oversight or
otherwise, a subsequent special meeting may be called by the Trustees and held
in lieu of the annual meeting with the same effect as though held on such date.
Special meetings of Shareholders of any or all classes or series may also be
called by the Trustees from time to time for the purpose of taking action upon
any matter requiring the vote or authority of the Shareholders of such class or
series as herein provided or upon any other matter deemed by the Trustees to be
necessary or desirable. Written notice of any meeting of Shareholders shall be
given or caused to be given by the Trustees by mailing such notice at least
seven days before such meeting, postage prepaid, stating the time, place and
purpose of the meeting, to each Shareholder entitled to vote at such meeting at
the Shareholder's address as it appears on the records of the Trust. If the
Trustees shall fail to call or give notice of any meeting of Shareholders for a
period of 30 days after written application by Shareholders holding at least 10%
of the Shares then outstanding of all classes and series entitled to vote at
such meeting
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requesting a meeting to be called for a purpose requiring action by the
Shareholders as provided herein or in the By-Laws, then Shareholders holding at
least 10% of the Shares then outstanding of all classes and series entitled to
vote at such meeting may call and give notice of such meeting, and thereupon the
meeting shall be held in the manner provided for herein in case of call thereof
by the Trustees. Notice of a meeting need not be given to any Shareholder if a
written waiver of notice, executed by him or her before or after the meeting, is
filed with the records of the meeting, or to any Shareholder who attends the
meeting without protesting prior thereto or at its commencement the lack of
notice to him or her.
QUORUM AND REQUIRED VOTE
SECTION 3. Thirty percent (30%) of the Shares entitled to vote on a
particular matter shall be a quorum for the transaction of business at a
Shareholders' meeting, except that where the By-Laws require that holders of any
class or series shall vote as an individual class or series, then thirty percent
(30%) of the aggregate number of Shares of that class or series entitled to vote
shall be necessary to constitute a quorum for the transaction of business by
that class or series. Any lesser number, however, shall be sufficient for
adjournments. Any adjourned session or sessions may be held within a reasonable
time after the date set for the original meeting without the necessity of
further notice. Except when a different vote is required by any provision of
this Declaration of Trust or the By-Laws, a majority of the Shares voted shall
decide any questions and a plurality shall elect a Trustee, provided that where
the By-Laws require that the holders of any class or series shall vote as an
individual class or series a majority of the Shares of that class or series
voted on the matter (or a plurality with respect to the election of a Trustee)
shall decide that matter insofar as that class or series is concerned.
CONVERSION
SECTION 4. Notwithstanding any other provision of this Declaration of
Trust, the conversion of the Trust from a "closed-end company" to an "open-end
company," as those terms are defined in Sections 5(a)(2) and 5(a)(1),
respectively, of the 1940 Act as in effect on August 1, 1999, together with any
necessary amendments to the Declaration of Trust to permit such a conversion,
shall require the affirmative vote or consent of the holders of at least 66 2/3%
of the Shares of each class entitled to vote. Such affirmative vote or consent
shall be in addition to the vote or consent of the holders of the Shares
otherwise required by law or by any agreement between the Trust and any national
securities exchange.
ACTION BY WRITTEN CONSENT
SECTION 5. Any action taken by Shareholders may be taken without a
meeting if a majority of Shareholders entitled to vote on the matter (or such
larger proportion thereof as shall be required by any express provision of this
Declaration of Trust or the By-Laws) consent to the action in writing and such
written consents are filed with the records of the meetings of
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Shareholders. Such consent shall be treated for all purposes as a vote taken at
a meeting of Shareholders.
ADDITIONAL PROVISIONS
SECTION 6. The By-Laws may include further provisions, not inconsistent
with this Declaration of Trust, regarding Shareholders' voting powers, the
conduct of meetings and related matters.
ARTICLE VI
DISTRIBUTIONS AND DETERMINATION OF NET ASSET VALUE
DISTRIBUTIONS
SECTION 1. The Trustees may, but need not, each year distribute to the
Shareholders of any or all classes or series such income and gains, accrued or
realized, as the Trustees may determine, after providing for actual and accrued
expenses and liabilities (including such reserves as the Trustees may establish)
determined in accordance with good accounting practices and subject to the
preferences, special or relative rights and privileges of the various classes or
series of Shares. The Trustees shall have full discretion to determine which
items shall be treated as income and which items as capital and their
determination shall be binding upon the Shareholders. Distributions of each
year's income, if any be made, may be made in one or more payments, which shall
be in Shares, in cash or otherwise and on a date or dates and as of a record
date or dates determined by the Trustees. At any time and from time to time in
their discretion, the Trustees may distribute to the Shareholders as of a record
date or dates determined by the Trustees, in Shares, in cash or otherwise, all
or part of any gains realized on the sale or disposition of property or
otherwise, or all or part of any other principal of the Trust. Each distribution
pursuant to this Section 1 to the Shareholders of a particular class or series
shall be made ratably according to the number of Shares of such class or series
held by the several Shareholders on the applicable record date thereof, provided
that no distribution need be made on Shares purchased pursuant to orders
received, or for which payment is made, after such time or times as the Trustees
may determine. Any such distribution paid in Shares will be paid at the net
asset value thereof as determined in accordance with Section 2 of this Article
VI, or at such other value as may be specified by the By-Laws or as the Trustees
may from time to time determine, subject to applicable laws and regulations then
in effect.
DETERMINATION OF NET ASSET VALUE
SECTION 2. At such times as the Trust shall have outstanding only one
class or series of Shares, the term "net asset value" of the Shares shall mean:
(i) the value of all the assets of the Trust; (ii) less the total liabilities of
the Trust; (iii) divided by the number of Shares outstanding, in each case at
the time of each determination. Any fractions involved in the
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computation of net asset value per share shall be adjusted to the nearer cent
unless the Trustees shall determine to adjust such fractions to a fraction of a
cent. At such times as the Trust shall have outstanding more than one class or
series of Shares, the term "net asset value" of the Shares shall have such
meaning, with respect to the Shares of any particular class or series of Shares,
as shall from time to time be specified in the By-Laws.
The Trustees, or any officer or officers or agent of the Trust
designated for the purpose by the Trustees, shall determine the net asset value
of the Shares, and the Trustees shall fix the times as of which the net asset
value of the Shares shall be determined and shall fix the periods during which
any such net asset value shall be effective as to sales and other transactions
in the Shares, except as such times and periods for any such transaction may be
fixed by other provisions of this Declaration of Trust or by the By-Laws.
In valuing the portfolio investments for determination of net asset
value per share, securities for which market quotations are readily available
shall be valued at prices which, in the opinion of the Trustees, or any officer
or officers or agent of the Trust designated for the purpose by the Trustees,
most nearly represent the market value of such securities, which may, but need
not, be the most recent bid price obtained from one or more of the market makers
for such securities; other securities and assets shall be valued at fair value
as determined by or pursuant to the direction of the Trustees. Notwithstanding
the foregoing, short-term debt obligations, commercial paper and repurchase
agreements may be, but need not be, valued on the basis of quoted yields for
securities of comparable maturity, quality and type, or on the basis of
amortized cost. In determination of net asset value, dividends receivable and
accounts receivable for investments sold and for Shares sold shall be stated at
the amounts to be received therefor; and income receivable accrued daily on
bonds and notes owned shall be stated at the amount to be received. Any other
assets shall be stated at fair value as determined by the Trustees or such
officer, officers or agent pursuant to the Trustees' authority, except that no
value shall be assigned to goodwill, furniture, lists, reports, statistics or
other noncurrent assets other than real estate. Liabilities for accounts payable
for investments purchased shall be stated at the amounts payable therefor. In
determining net asset value of the Trust, the person or persons making such
determination on behalf of the Trust may include in liabilities such reserves,
estimated accrued expenses and contingencies as such person or persons may in
its, his, her or their best judgment deem fair and reasonable under the
circumstances. Any income, dividends and gains distributions payable by the
Trust shall be deducted as of such time or times on the record date therefor as
the Trustees shall determine.
The manner of determining the net assets of the Trust or of determining
the net asset value of the Shares may from time to time be altered as necessary
or desirable in the judgment of the Trustees to conform to any other method
prescribed or permitted by any applicable law or regulation.
Determinations under this Section 2 made in good faith and in
accordance with the provisions of the 1940 Act shall be binding on all parties
concerned.
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ARTICLE VII
COMPENSATION AND LIMITATION
OF LIABILITY OF TRUSTEES
COMPENSATION
SECTION 1. The Trustees as such shall be entitled to reasonable
compensation from the Trust; they may fix the amount of their compensation.
Nothing herein shall in any way prevent the employment of any Trustee for
advisory, management, legal, accounting, investment banking or other services
and payment for the same by the Trust.
LIMITATION OF LIABILITY
SECTION 2. The Trustees shall not be responsible or liable in any event
for any neglect or wrongdoing of any officer, agent, employee, adviser or
principal underwriter of the Trust, nor shall any Trustee be responsible for the
act or omission of any other Trustee, but nothing herein contained shall protect
any Trustee against any liability to which he or she would otherwise be subject
by reason of wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office.
Every note, bond, contract, instrument, certificate, Share or
undertaking and every other act or thing whatsoever executed or done by or on
behalf of the Trust or the Trustees or any of them in connection with the Trust
shall be conclusively deemed to have been executed or done only in or with
respect to their or his or her capacity as Trustees or Trustee, and such
Trustees or Trustee shall not be personally liable thereon.
ARTICLE VIII
INDEMNIFICATION
TRUSTEES, OFFICERS ETC.
SECTION 1. The Trust shall indemnify each of its Trustees and officers
(including persons who serve at the Trust's request as directors, officers or
trustees of another organization in which the Trust has any interest as a
shareholder, creditor or otherwise) (hereinafter referred to as a "Covered
Person") against all liabilities and expenses, including but not limited to
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and counsel fees reasonably incurred by any Covered Person in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or otherwise or with which such person may be or may have been
threatened, while in office or thereafter, by reason of being or having been
such a
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Covered Person, except with respect to any matter as to which such Covered
Person shall have been finally adjudicated in a decision on the merits in any
such action, suit or other proceeding not to have acted in good faith in the
reasonable belief that such Covered Person's action was in the best interests of
the Trust and except that no Covered Person shall be indemnified against any
liability to the Trust or its Shareholders to which such Covered Person would
otherwise be subject by reason of wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such
Covered Person's office. Expenses, including counsel fees so incurred by any
such Covered Person (but excluding amounts paid in satisfaction of judgments, in
compromise or as fines or penalties), may be paid from time to time by the Trust
in advance of the final disposition of any such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such Covered Person to repay
amounts so paid to the Trust if it is ultimately determined that indemnification
of such expenses is not authorized under this Article, PROVIDED, THAT (a) such
Covered Person shall provide security for his or her undertaking, (b) the Trust
shall be insured against losses arising by reason of such Covered Person's
failure to fulfil his or her undertaking, or (c) a majority of the Trustees who
are disinterested persons and who are not Interested Persons (provided that a
majority of such Trustees then in office act on the matter), or independent
legal counsel in a written opinion shall determine, based on a review of readily
available facts (but not a full trial-type inquiry), that there is reason to
believe such Covered Person ultimately will be entitled to indemnification.
COMPROMISE PAYMENT
SECTION 2. As to any matter disposed of (whether by a compromise
payment, pursuant to a consent decree or otherwise) without an adjudication in a
decision on the merits by a court, or by any other body before which the
proceeding was brought, that such Covered Person either (a) did not act in good
faith in the reasonable belief that such Covered Person's action was in the best
interests of the Trust or (b) is liable to the Trust or its Shareholders by
reason of wilful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such Covered Person's office,
indemnification shall be provided if (a) approved as in the best interest of the
Trust, after notice that it involves such indemnification, by at least a
majority of the Trustees who are disinterested persons and are not Interested
Persons (provided that a majority of such Trustees then in office act on the
matter), upon a determination, based upon a review of readily available facts
(but not a full trial-type inquiry) that such Covered Person acted in good faith
in the reasonable belief that such Covered Person's action was in the best
interests of the Trust and is not liable to the Trust or its Shareholders by
reason of wilful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such Covered Person's office, or (b)
there has been obtained an opinion in writing of independent legal counsel,
based upon a review of readily available facts (but not a full trial-type
inquiry), to the effect that such Covered Person appears to have acted in good
faith in the reasonable belief that such Covered Person's action was in the best
interests of the Trust and that such indemnification would not protect such
Covered Person against any liability to the Trust to which such Covered Person
would
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otherwise be subject by reason of wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office. Any approval pursuant to this Section shall not prevent the recovery
from any Covered Person of any amount paid to such Covered Person in accordance
with this Section as indemnification if such Covered Person is subsequently
adjudicated by a court of competent jurisdiction not to have acted in good faith
in the reasonable belief that such Covered Person's action was in the best
interests of the Trust or to have been liable to the Trust or its Shareholders
by reason of wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such Covered Person's office.
INDEMNIFICATION NOT EXCLUSIVE
SECTION 3. The right of indemnification hereby provided shall not be
exclusive of or affect any other rights to which any such Covered Person may be
entitled. As used in this Article VIII, the term "Covered Person" shall include
such person's heirs, executors and administrators, and a "disinterested person"
is a person against whom none of the actions, suits or other proceedings in
question or another action, suit or other proceeding on the same or similar
grounds is then or has been pending. Nothing contained in this Article shall
affect any rights to indemnification to which personnel of the Trust, other than
Trustees and officers, and other persons may be entitled by contract or
otherwise under law, nor the power of the Trust to purchase and maintain
liability insurance on behalf of such person.
SHAREHOLDERS
SECTION 4. In case any Shareholder or former Shareholder shall be held
to be personally liable solely by reason of his or her being or having been a
Shareholder and not because of his or her acts or omissions or for some other
reason, the Shareholder or former Shareholder (or his or her heirs, executors,
administrators or other legal representatives or, in the case of a corporation
or other entity, its corporate or other general successor) shall be entitled to
be held harmless from and indemnified against all loss and expense arising from
such liability.
ARTICLE IX
MISCELLANEOUS
TRUSTEES, SHAREHOLDERS ETC. NOT PERSONALLY LIABLE; NOTICE
SECTION 1. All persons extending credit to, contracting with or having
any claim against the Trust shall look only to the assets of the Trust for
payment under such credit, contract or claim; and neither the Shareholders nor
the Trustees, nor any of the Trust's officers, employees or agents, whether
past, present or future, shall be personally liable therefor. Nothing in this
Declaration of Trust shall protect any Trustee against any liability to
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which such Trustee would otherwise be subject by reason of wilful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee.
Every note, bond, contract, instrument, certificate or undertaking made
or issued by the Trustees or by any officers or officer shall give notice that
this Declaration of Trust is on file with the Secretary of State of The
Commonwealth of Massachusetts and shall recite that the same was executed or
made by or on behalf of the Trust or by them as Trustees or Trustee or as
officers or officer and not individually and that the obligations of such
instrument are not binding upon any of them or the Shareholders individually but
are binding only upon the assets and property of the Trust, and may contain such
further recital as he or she or they may deem appropriate, but the omission
thereof shall not operate to bind any Trustee or officers or officer or
Shareholders or Shareholder individually.
TRUSTEE'S GOOD FAITH ACTION, EXPERT ADVICE, NO BOND OR SURETY
SECTION 2. The exercise by the Trustees of their powers and discretions
hereunder shall be binding upon everyone interested. A Trustee shall be liable
for his or her own wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the office of Trustee, and
for nothing else, and shall not be liable for errors of judgment or mistakes of
fact or law. The Trustees may take advice of counsel or other experts with
respect to the meaning and operation of this Declaration of Trust, and shall be
under no liability for any act or omission in accordance with such advice or for
failing to follow such advice. The Trustees shall not be required to give any
bond as such, nor any surety if a bond is required.
LIABILITY OF THIRD PERSONS DEALING WITH TRUSTEES
SECTION 3. No person dealing with the Trustees shall be bound to make
any inquiry concerning the validity of any transaction made or to be made by the
Trustees or to see to the application of any payments made or property
transferred to the Trust or upon its order.
DURATION AND TERMINATION OF TRUST
SECTION 4. Unless terminated as provided herein, the Trust shall
continue without limitation of time. Subject to the voting powers of one or more
classes or series of Shares as set forth in the By-Laws, the Trust may be
terminated at any time by vote of Shareholders holding at least 66 2/3% of the
Shares entitled to vote or by the Trustees by written notice to the
Shareholders.
Upon termination of the Trust, after paying or otherwise providing for
all charges, taxes, expenses and liabilities, whether due or accrued or
anticipated as may be determined by the Trustees, the Trust shall in accordance
with such procedures as the Trustees consider
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appropriate reduce the remaining assets to distributable form in cash or shares
or other securities, or any combination thereof, and distribute the proceeds to
the Shareholders, ratably according to the number of Shares held by the several
Shareholders on the date of termination, except to the extent otherwise required
or permitted by the preferences and special or relative rights and privileges of
any classes or series of Shares.
FILING OF COPIES, REFERENCES, HEADINGS
SECTION 5. The original or a copy of this instrument and of each
amendment hereto shall be kept at the office of the Trust, where it may be
inspected by any Shareholder. A copy of this instrument and of each amendment
hereto shall be filed by the Trust with the Secretary of The Commonwealth of
Massachusetts and with the Clerk of the City of Boston, as well as any other
governmental office where such filing may from time to time be required. Anyone
dealing with the Trust may rely on a certificate by an officer of the Trust as
to whether or not any such amendments have been made and as to any matters in
connection with the Trust hereunder; and, with the same effect as if it were the
original, may rely on a copy certified by an officer of the Trust to be a copy
of this instrument or of any such amendments. In this instrument and in any such
amendment, references to this instrument, and all expressions like "herein",
"hereof" and "hereunder", shall be deemed to refer to this instrument as amended
or affected by any such amendments. Headings are placed herein for convenience
of reference only and shall not be taken as a part hereof or control or affect
the meaning, construction or effect of this instrument. This instrument may be
executed in any number of counterparts, each of which shall be deemed an
original.
APPLICABLE LAW
SECTION 6. This Declaration of Trust is made in The Commonwealth of
Massachusetts, and it is created under and is to be governed by and construed
and administered according to the laws of said Commonwealth. The Trust shall be
of the type commonly called a Massachusetts business trust, and without limiting
the provisions hereof, the Trust may exercise all powers which are ordinarily
exercised by such a trust.
AMENDMENTS
SECTION 7. (a) Except to the extent that the By-Laws or applicable law
may require a higher vote or the separate vote of one or more classes or series
of Shares, and except as provided in paragraph (b) of this Section 7, this
Declaration of Trust may be amended at any time by an instrument in writing
signed by a majority of the then Trustees (1) when authorized so to do by a vote
of Shareholders holding a majority of the Shares entitled to vote or (2) without
Shareholder approval as may be necessary or desirable in order to authorize one
or more classes or series of Shares as in Section 1 of Article III. Amendments
having the purpose of changing the name of the Trust or of supplying any
omission, curing any ambiguity or
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curing, correcting or supplementing any defective or inconsistent provision
contained herein shall not require authorization by Shareholder vote.
(b) Except to the extent that the By-Laws or applicable law may require
a higher vote or the separate vote of one or more classes or series of Shares,
no amendment may be made under this Section 7 which shall amend, alter, change
or repeal any of the provisions of Article IV, Section 1, Article V, Section 4
or this paragraph (b) unless the amendment effecting such amendment, alteration,
change or repeal shall receive the affirmative vote or consent of at least
66 2/3% of the Shares entitled to vote. Such affirmative vote or consent shall
be in addition to the vote or consent of the holders of Shares otherwise
required by law or by the terms of any agreement between the Trust and any
national securities exchange.
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IN WITNESS HEREOF, all of the Trustees as aforesaid do hereto set their
hands this 10th day of August, 1999.
/s/ John V. Carberry
----------------------------------------
John V. Carberry
COMMONWEALTH OF MASSACHUSETTS )
)
COUNTY OF SUFFOLK ) ss.
Then personally appeared before me John V. Carberry, who acknowledged
the foregoing instrument to be his free act and deed.
/s/ Mary P. Mahoney
----------------------------------------
Notary Public
My commission expires on: February 22, 2002
August 10, 1999
Trustee and Address
-------------------
John V. Carberry
c/o Ropes & Gray
One International Place
Boston, Massachusetts 02110
Trust Address
-------------
Premier California Municipal Income Fund
c/o Ropes & Gray
One International Place
Boston, Massachusetts 02110
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Exhibit (a)(2)
AMENDMENT NO. 1
TO THE
AGREEMENT AND DECLARATION OF TRUST
OF
PREMIER CALIFORNIA MUNICIPAL INCOME FUND
WHEREAS, Section 1 of Article 1 of the Agreement and Declaration of Trust
(the "Declaration of Trust") dated August 10, 1999 of Premier California
Municipal Income Fund (the "Trust"), a copy of which is on file in the Office of
the Secretary of The Commonwealth of Massachusetts authorizes the Trustees of
the Trust to amend the Declaration of Trust to change the name of the Trust
without authorization by vote of shareholders of the Trust.
I, being the sole Trustee of Premier California Municipal Income Fund, do
hereby certify that the undersigned has determined to conduct the business of
the Trust under the name "Colonial California Insured Municipal Fund" and has
authorized the following amendment to said Declaration of Trust:
Section 1 of Article 1 is hereby amended to read in its entirety as
follows:
SECTION 1. This Trust shall be known as "Colonial California Insured
Municipal Fund" and the Trustees shall conduct the business of the Trust under
that name or any other name as they may from time to time determine.
The foregoing Amendment shall become effective as of August 16, 1999.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand in the City
of Boston, Massachusetts, for himself and his assigns, as of this August 16,
1999.
/s/ John V. Carberry
-----------------------------------
John V. Carberry
Commonwealth of Massachusetts )
)ss.
County of Suffolk )
Then personally appeared the above-named Trustee and executed Amendment No.
1 to the Agreement and Declaration of Trust of Premier California Municipal
Income Fund as his free act and deed, before me, this August 16, 1999.
/s/ Mary P. Mahoney
-----------------------------------
Notary Public
My Commission Expires: 2/22/2002
------------
<PAGE> 1
Exhibit (e)
COLONIAL INSURED MUNICIPAL FUND
COLONIAL CALIFORNIA INSURED MUNICIPAL FUND
COLONIAL NEW YORK INSURED MUNICIPAL FUND
TERMS AND CONDITIONS OF DIVIDEND REINVESTMENT PLAN
1) You, The First National Bank of Boston, will act as Agent for me, and will
open an account for me under the Dividend Reinvestment Plan with the same
registration as my shares of Fund are currently registered. You will effect
the dividend reinvestment option on my behalf as of the first record date
for an income dividend or capital gain distribution ("distribution"),
separately or collectively, after you receive the Authorization duly
executed by me.
2) Whenever the Fund declares a distribution payable in the Fund's shares of
beneficial interest ("shares") or cash at the option of the shareholder, I
hereby elect to take such distribution entirely in shares, subject to the
terms of this Plan. If on the valuation date the Fund's net asset value per
share is less than the market price (including estimated brokerage
commissions), you shall on the payable date automatically receive for my
account from the Fund that number of newly-issued shares that the cash
otherwise receivable by me would purchase if the purchase price per share
equaled the higher of: (a) net asset value per share on the valuation date,
or (b) 95% of market price (not including estimated brokerage commission)
on the payable date; except if the market price (not including estimated
brokerage commissions) on the payable date is less than 95% of the net
asset value per share on the valuation date, you shall receive a
distribution of cash from the Fund and shall apply the amount of such
distribution to the purchase in the open market of shares of my account,
commencing on the business day after the payable date, subject to the
condition that such purchases must be made at a "discount" during the
remainder of the "buying period." "Discount" is defined as a market price
per share (including estimated brokerage commissions) which is lower than
the most recently determined net asset value per share (as calculated from
time to time). "Buying period" shall mean the period commencing the first
business day after the valuation date and ending at the close of business
on the business day preceding the "ex" date for the next distribution. The
valuation date will be the last business day of the week preceding the week
of the payable date.
3) Should the Fund's net asset value per share exceed the market price
(including estimated brokerage commissions) on the valuation date for a
distribution, you shall receive for my account a distribution in cash from
the Fund and shall apply the amount of such distribution on my shares to
the purchase in the open market of shares for my account commencing on the
first business day after the valuation date, subject to the condition that
such purchases must be made at a discount during the buying period.
4) In the event you are instructed to purchase shares in the open market
pursuant to paragraph 2 or 3 hereof, and you are unable for any reason to
invest the full amount of the distribution in shares acquired in
open-market purchases at a discount during the buying period, you will
invest the uninvested portion of such distribution in newly-issued shares
at the close of business at the end of such buying period at the higher of:
(a) net asset value determined at such close, and (b) 95% of the market
price (not including estimated brokerage commissions) at such close.
<PAGE> 2
5) You may not acquire newly-issued shares after the valuation date unless you
have received a legal opinion that registration of such shares is not
required under the Securities Act of 1993, as amended, or unless the shares
to be issued are registered under such Act.
6) For all purposes of the Plan: (a) the market price of the shares on a
particular date shall be the last sales price on the New York Stock
Exchange on that date, or if there is no sale on such Exchange on that
date, then the mean between the closing bid and asked quotations for such
shares on such Exchange on such date (in either case including or not
including estimated brokerage commissions as provided above) and (b) net
asset value per share of the shares on a particular date shall be as
determined by or on behalf of the Fund.
7) Open-market purchases provided for above may be made on any securities
exchange where the shares are traded, in the over-the-counter market or in
negotiated transactions and may be on such terms as to price, delivery and
otherwise as you shall determine. My cash funds held by you uninvested will
not bear interest, and it is understood that, in any event, you shall have
no liability in connection with any inability to purchase shares within 30
days after the initial date of such purchase as herein provided, or with
the timing of any purchases effected. You shall have no responsibility as
to the value of the shares acquired for my account. For the purposes of
open-market purchases with respect to the Plan you may commingle my funds
with those of other shareholders of the Fund for whom you similarly act as
Agent, and the average price (including brokerage commissions) of all
shares purchased by you as Agent shall be the price per share allocated to
me in connection therewith.
8) You may hold my shares acquired pursuant to my authorization, together with
the shares of other shareholders of the Fund acquired pursuant to similar
authorizations, in non-certificate form in your name or that of you
nominee. You will forward to me any proxy solicitation material and will
vote any shares so held for me only in accordance with the proxy returned
by me to the Fund. Upon my written request, you will deliver to me, without
charge, a certificate or certificates for the full shares.
9) You will confirm to me each investment made for my account as soon as
practicable but not later than 60 days after the date thereof. Although I
may from time to time have an undivided fractional interest (computed to
four decimal places) in a share, no certificates for a fractional share
will be issued. However, distributions on fractional shares will be
credited to my account. In the event of termination of my account under the
Plan, you will sell such undivided fractional interests at the market value
of the shares at the time of termination and send the net proceeds to me.
10) Any stock dividends or split shares distributed by the Fund on shares held
by you for me will be credited to my account. In the event that the Fund
makes available to its shareholders rights to purchase additional shares or
other securities, the shares held for me under the Plan will be added to
other shares held by me in calculating the number of rights to be issued to
me.
11) Your fee for service described in this Plan will be paid by the Fund. I
will be charged a pro rata share of brokerage commission on all open-market
purchases
12) I may terminate my account under the Plan by notifying you in writing. Such
termination will be effective immediately if my notice is received by you
prior to any subsequent distribution. The Plan may be terminated by you or
the Fund upon notice in writing mailed to me at least 30 days prior to any
record date for the payment of any distribution of the Fund. Upon any
<PAGE> 3
termination you will cause a certificate or certificates for the full
shares held for me under the Plan and the proceeds from the sales of any
fractional shares to be delivered to me without charge. If I elect by
notice to you in writing in advance of such termination to have you sell
part or all of my shares and remit the proceeds to me, you are authorized
to deduct brokerage commission for this transaction from the proceeds.
If I decide to terminate my account under the Plan, I may request that all
my Plan shares, both full and fractional, be sold. The per share price may
fall during the period between my request for sale and the sale in the open
market which will be made within ten trading days after the Agent receives
my request. The proceeds of the sale less a $2.50 service fee, plus any
brokerage commission will be mailed to me after the settlement of funds
from the brokerage firm. The settlement is five business days after the
sale of shares
13) These Terms and Conditions may be amended or supplemented by you or the
Fund at any time or times but, except when necessary or appropriate to
comply with applicable law or the rules or policies of Securities and
Exchange Commission or any other regulatory authority, only by mailing to
me appropriate written notice at least 30 days prior to the effective date
thereof. The amendment or supplement shall be deemed to be accepted by me
unless, prior to the effective date thereof, you receive written notice of
the termination of my account under the Plan. Any such amendment may
include an appointment by you in your place and stead of successor Agent
under these Terms and Conditions, with full power and authority to perform
all or any of the acts to be performed by the Agent under these Terms and
Conditions. Upon any such appointment of any Agent for the purpose of
receiving distributions, the Fund will be authorized to pay to such
successor Agent, for my account, all distributions payable on shares held
in my name or under the Plan for retention or application by such successor
Agent as provided in these Terms and Conditions.
14) You shall at all times act in good faith and agree to use your best efforts
within reasonable limits to insure the accuracy of all services performed
under this Agreement and to comply with applicable law, but assume no
responsibility and shall not be liable for loss or damage due to errors
unless such error is caused by your negligence, bad faith, or willful
misconduct or that of your employees.
15) These Terms and Conditions shall be governed by the laws of the
Commonwealth of Massachusetts.
<PAGE> 1
Exhibit (g)
MANAGEMENT AGREEMENT
AGREEMENT dated as of October 25, 1999, between COLONIAL CALIFORNIA INSURED
MUNICIPAL FUND, a Massachusetts business trust (Fund), and COLONIAL MANAGEMENT
ASSOCIATES, INC., a Massachusetts corporation (Advisor).
In consideration of the promises and covenants herein, the parties agree as
follows:
1. The Advisor will manage the investment of the assets of the Fund in
accordance with its investment policies and will perform the other
services herein set forth, subject to the supervision of the Board of
Trustees of the Fund.
2. In carrying out its investment management obligations, the Advisor
shall:
(a) evaluate such economic, statistical and financial information and
undertake such investment research as it shall believe advisable; (b)
purchase and sell securities and other investments for the Fund in
accordance with the procedures approved by the Board of Trustees; and
(c) report results to the Board of Trustees.
3. The Advisor shall furnish at its expense the following:
(a) office space, supplies, facilities and equipment; (b) executive and
other personnel for managing the affairs of the Fund (including
preparing financial information of the Fund and reports and tax returns
required to be filed with public authorities, but exclusive of those
related to custodial, transfer, dividend and plan agency services,
determination of net asset value and maintenance of records required by
Section 31(a) of the Investment Company Act of 1940, as amended, and the
rules thereunder (1940 Act)); and (c) compensation of Trustees who are
directors, officers, partners or employees of the Advisor or its
affiliated persons (other than a registered investment company).
4. The Advisor shall be free to render similar services to others so long
as its services hereunder are not impaired thereby.
5. The Fund shall pay the Advisor monthly a fee at the annual rate of 0.65%
of the average weekly net assets of the Fund.
6. If the operating expenses of the Fund for any fiscal year exceed the
most restrictive applicable expense limitation for any state in which
shares are sold, the Advisor's fee shall be reduced by the
Page 1
<PAGE> 2
excess but not to less than zero.
Operating expenses shall not include brokerage, interest, taxes,
deferred organization expenses and extraordinary expenses, if any. The
Advisor may waive its compensation (and, bear expenses of the Fund) to
the extent that expenses of the Fund exceed any expense limitation the
Advisor declares to be effective.
7. This Agreement shall become effective as of the date of its execution,
and
(a) unless otherwise terminated, shall continue until two years from its
date of execution and from year to year thereafter so long as approved
annually in accordance with the 1940 Act; (b) may be terminated without
penalty on sixty days' written notice to the Advisor either by vote of
the Board of Trustees of the Fund or by vote of a majority of the
outstanding voting securities of the Fund; (c) shall automatically
terminate in the event of its assignment; and (d) may be terminated
without penalty by the Advisor on sixty days' written notice to the
Fund.
8. This Agreement may be amended in accordance with the 1940 Act.
9. For the purpose of the Agreement, the terms "vote of a majority of the
outstanding voting securities", "affiliated person" and "assignment"
shall have their respective meanings defined in the 1940 Act and
exemptions and interpretations issued by the Securities and Exchange
Commission under the 1940 Act.
Page 2
<PAGE> 3
10. In the absence of willful misfeasance, bad faith or gross negligence on
the part of the Advisor, or reckless disregard of its obligations and
duties hereunder, the Advisor shall not be subject to any liability to
the Fund, to any shareholder of the Fund or to any other person, firm or
organization, for any act or omission in the course of, or connected
with, rendering services hereunder.
COLONIAL CALIFORNIA INSURED MUNICIPAL FUND
By: /s/ J. Kevin Connaughton
--------------------------------------
Title: Controller
-----------------------------
COLONIAL MANAGEMENT ASSOCIATES, INC.
By: /s/ Nancy L. Conlin
--------------------------------------
Title: Senior Vice President
-------------------------------
A copy of the document establishing the Fund is filed with the Secretary of The
Commonwealth of Massachusetts. This Agreement is executed by officers not as
individuals and is not binding upon any of the Trustees, officers or
shareholders of the Fund individually but only upon the assets of the Fund.
Page 3
<PAGE> 1
Exhibit (k)(1)
BANKBOSTON, N.A.
STOCK TRANSFER AGENT SERVICES AGREEMENT FOR:
COLONIAL CALIFORNIA INSURED MUNICIPAL FUND
This Agreement sets forth the terms and conditions under which BankBoston, N.A.
(hereinafter referred to as "BankBoston") will serve as sole Transfer Agent,
Registrar, Dividend Disbursement and Dividend Reinvestment Agent for the Common
Stock of Colonial California Insured Municipal Fund (hereinafter referred to as
"CCIMF").
A. TERM
The term of this Agreement shall be for a period of three (3) years,
commencing from the effective date of this Agreement, October 25, 1999.
B. FEE FOR STANDARD SERVICES
For the standard services as stated in Section C provided by BankBoston
under this Agreement, CCIMF will be charged as follows:
$2,000.00 Monthly Administrative Fee
$2,500.00 One-Time Project Fee To Establish New Fun
Escalation: This Agreement shall be self renewing for additional three
year term and the fees to be paid under this agreement after the initial
three year term shall be readjusted upon agreement by both parties taking
into account a number of factors, including service mix, volumes and the
accumulated change in the National Employment Cost Index for Service
Producing Industries (Finance, Insurance, Real Estate) for the preceding
years of the contract, as published by the Bureau of Labor Statistics of
the United States Department of Labor. Fees will be increased or decreased
on this basis on each successive contract anniversary thereafter.
Open Accounts: The terms of this Agreement will cover up to 2,000 Open
Accounts per annum. Excess to be billed at $12.00 per Open Account.
C. STANDARD SERVICES
BankBoston agrees to provide the following services to CCIMF in accordance
with the standard fee set forth in Section B.
Account Maintenance:
1. Establish New Fund and annual services as Transfer Agent, Registrar,
Dividend Disbursement and Dividend Reinvestment Agent.
2. Maintaining shareholder accounts, including the processing of new
accounts, preparation and mailing W-9 certifications to new accounts
and closing accounts.
3. Posting and acknowledging address changes, tax ID number changes and
W-9 certification, and all other routine file maintenance
adjustments.
4. On-line remote access to shareholder and Fund database.
5. Posting all transactions, including routine and non-routine debit
and credit certificates. To include all book or unissued shareholder
transfer activity.
6. Issuance and registration of stock certificates annually. *
7. Researching and responding to all written shareholder and broker
inquiries and phone inquiries.
Colonial California Insured Municipal Fund
<PAGE> 2
Page 2
8. Daily Transfer Activity Journals reflecting ownership changes to be
mailed to CCIMF at the close of each week if required.
9. Processing all New York Window items, mail items and legal
transfers.
10. Processing Indemnity Bonds, placing certificate stop transfer orders
and replacing lost certificates.
11. Coding multiple accounts at a single household to suppress duplicate
report mailings.
12. Maintaining closed accounts.
Mailing & Report Production Services:
1. Addressing and mailing four (4) registered shareholder reports or
letters via First Class Mail per annum.
2. Preparing two (2) full or partial shareholder reports (including
Statistical Reports) per annum.
3. Preparing twelve (12) sets of shareholder labels per annum.
4. Abandoned Property Reports provided at $1,000 per report and $3.00
per respondent.
Annual Meeting Services:
1. Preparing one (1) full stockholder list as of the Annual Meeting
record date.
2. Addressing proxy cards for registered shareholders.
3. Enclosing and mailing proxy cards with proxy statement, annual
report and postage paid return envelope to all registered
shareholders.
4. Preparing one (1) set of registered broker labels and one (1) list
of registered brokers for the Broker Search.
5. Receiving, opening and examining returned proxies.
6. Writing in connection with unsigned or improperly executed proxies.
7. Tabulating returned proxies to include an unlimited number of
proposals.
8. Providing summary reports on the Proxy Vote Tabulation status as
requested.
9. Interface with Solicitor appointed by CCIMF.
10. Preparing one (1) final Annual Meeting list reflecting how each
account has voted on each proposal.
11. Attending the Annual Meeting as Inspector of Election.
12. Respondent Bank Services to include:
- Processing each respondent bank omnibus proxy received.
- Mailing respondent bank search cards.
Colonial California Insured Municipal Fund
<PAGE> 3
Page 3
Note: all out-of-pocket expenses including overprinting proxy cards, card
stock, envelopes, postage and telecopy charges will be billed as incurred.
Dividend Disbursement Services:
As Dividend Disbursing and Paying Agent, BankBoston will perform the
dividend related services listed, pursuant to the following terms and
conditions:
* All funds must be received by 1:00 p.m. Eastern Time on the Mail Date
via Federal Funds Wire or BankBoston Bank Demand Deposit account debit.
1. Preparing and mailing monthly dividend checks with an additional
enclosure.
2. Providing Automated Clearinghouse Funds (ACH) services.
3. Replacing lost dividend checks.
4. Providing photo copies of cashed dividend checks if requested.
5. Processing and record keeping of accumulated uncashed dividends.
6. Reconciling paid and outstanding dividend checks.
7. Coding RPO/SAUK accounts to suppress mailing dividend checks to
undeliverable addresses.
8. Effecting wire transfer of funds to Depository Trust Company on
payable date.
9. Preparing and filing Federal Information Returns (Form 1099-DIV) of
dividends paid during the year and mailing Forms 1099-DIV to each
shareholder.
10. Preparing and filing State Information Returns of dividends paid
during the year to shareholders resident within such State in
accordance with current State Filing regulations.
11. Preparing and filing annual withholding return (Form 1042) and
payments to the government of income taxes withheld from
Non-resident Aliens and mailing Forms 1042 to each foreign
shareholder.
12. Performing the following duties as required by the Interest and
Dividend Tax Compliance Act of 1983:
* Withholding tax from shareholder accounts not in
compliance with the provisions of the Act.
* Reconciling and reporting taxes withheld, including
additional 1099 reporting requirements, to the Internal
Revenue Service.
* Responding to shareholders regarding the regulations.
* Mailing to new accounts which have had taxes withheld,
to inform them of procedures to be followed to cease
future back-up withholding.
* Annual mailing to pre-1984 accounts for which Tax
Identification Numbers (TIN) have not yet been
certified.
* Performing shareholder file adjustments to reflect TIN
certifications.
Note: Depository Wire charges required to fund dividend payments will be
billed to CCIMF as an expense.
Colonial California Insured Municipal Fund
<PAGE> 4
Page 4
Dividend Reinvestment Services:
1. As Administrator for the Open Market and/or Original Issue Dividend
Reinvestment Plans ("DRP"), BankBoston will perform the listed DRP
related services:
2. Reinvestment and/or optional cash investment transactions of DRP
participants. *
3. Processing DTC quarterly reinvestments at $250 per investment.
4. Preparing and mailing a year-to-date dividend reinvestment statement
with an additional enclosure to DRP participants upon completion of
each reinvestment.
5. Preparing and mailing a year-to-date optional cash investment
statement to participants upon the completion of each investment.
6. Maintaining DRP accounts and establishing new DRP accounts.
7. Processing sale/termination requests. *
8. Processing withdrawal requests.
9. Providing CCIMF with a Dividend Reinvestment Investment Summary
Report for each reinvestment and/or optional cash investment.
10. Providing Safekeeping for DRP participant stock certificates.
11. Researching and responding to shareholder inquiries regarding the
Plan.
12. Preparing and mailing Forms 1099 and Forms 1042 to DRP participants
and completing related filings with the IRS.
13. Preparing, mailing and filing Form 1099B relating to DRP sales.
D. LIMITATIONS
The fees as stated in Section B include:
* The issuance and registration of 2,000 stock certificates per
annum. Excess to be billed at $1.50 per stock certificate.
* A total of 20,000 DRP transactions (defined as a dividend
reinvestment and/or cash investment), per annum. Excess to be
billed at $1.25 each.
* ACH $250 per investment, per fund.
* DRP Redemptions (sales or withdrawals) to be billed at $10.00
each (shareholder paid)
Colonial California Insured Municipal Fund
<PAGE> 5
Page 5
E. SERVICES NOT COVERED
Items not included in the fees set forth in this Agreement for "Standard
Services" Section B such as payment of stock dividends or splits or any
other services associated with a special project will be billed separately
on an appraisal basis.
Services required by legislation or regulatory fiat which become effective
after the date of this Agreement shall not be a part of the Standard
Services and shall be billed by appraisal.
All out-of-pocket expenses such as telephone line charges associated with
toll free telephone calls, overprinting, insurance, stationary, envelopes,
telecopy charges, excess material storage and disposal will be billed to
CCIMF as incurred.
F. OTHER TERMS & CONDITIONS
Good funds to cover postage expenses in relation to the mailing of Annual
Meeting materials by BankBoston by 1:00 p.m. Eastern Time on the scheduled
mailing date.
Overtime charges will be assessed in the event material is delivered late
for shareholder mailings unless the mail date is rescheduled to a later
date. Such material includes, but is not limited to: proxy statements,
annual, semi and quarterly reports, dividend enclosures and news releases.
Receipt of material for mailing to shareholders must be received three (3)
full business days in advance of the scheduled mail date.
G. BILLING DEFINITION OF ACCOUNT MAINTENANCE
For billing purposes, number of accounts will be based on open accounts on
file at the beginning of each billing period, plus any new accounts added
during the billing period.
H. TERMINATION
This Agreement may be terminated by either party upon sixty (60) days
written notice to the other. However, BankBoston may terminate this
Agreement upon written notice to CCIMF if CCIMF has breached its
obligation as described in Section I set forth below by failing to make
payment of invoices for a period of three (3) consecutive months and CCIMF
has failed to cure such breach within five (5) business days of receipt of
such notice.
Should CCIMF or BankBoston exercise its right to terminate this Agreement,
all reasonable out-of-pocket expenses associated with the transfer of
records and material will be borne by CCIMF. Out-of-pocket expenses may if
required, include costs associated with any year-end Federal and/or State
tax reporting responsibilities.
I. PAYMENT FOR SERVICES
It is agreed that invoices will be rendered and payable on a monthly
basis. Each billing period will, therefore, be for a one (1) month
duration. CCIMF agrees to pay all fees and reimbursable expenses within
thirty (30) days following the receipt of the respective billing invoice.
Interest charges may begin to accrue on unpaid balances for more than
forty-five (45) days.
Colonial California Insured Municipal Fund
<PAGE> 6
Page 6
J. NON-ASSIGNABILITY
This Agreement, and duties, obligations and services to be provided
herein, may not be assigned or otherwise transferred without prior written
consent of CCIMF.
K. CONFIDENTIALITY
The information contained in this Agreement is confidential and
proprietary in nature. By receiving this Agreement, both parties agree
that none of its directors, officers, employees, or agents without the
prior written consent of the other party will divulge, furnish or make
accessible to any third party, except as permitted by the next sentence,
any part of this Agreement or information in connection therewith which
has been or may be made available to it. In this regard, both parties
agree that they will limit their access to the Agreement and such
information to only those officers and employees with responsibilities for
analyzing the Agreement and to such independent consultants hired
expressly for the purpose of assisting in such analysis. In addition, both
parties agree that any persons to whom such information is properly
disclosed shall be informed on the confidential nature of the Agreement
and the information relating thereto, and shall be directed to treat the
same appropriately.
L. CONTRACT ACCEPTANCE
In witness whereof, the parties hereto have caused this Agreement to be
executed by their respective officers, hereunto duly agreed and
authorized, as of the effective date of this Agreement.
M. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS (RIDER)
A copy of the Agreement and Declaration of Trust of the Fund is on file
with the Secretary of The Commonwealth of Massachusetts, and notice is
hereby given that this Agreement is executed on behalf of the Trustees of
the Fund as Trustees and not individually and that the obligations of this
Agreement are not binding upon any of the Trustees, officers or
shareholders individually but are binding only upon the assets and
property of the fund.
BANKBOSTON, N.A. COLONIAL CALIFORNIA INSURED MUNICIPAL FUND
By: /s/ David D. Dixon By: /s/ Nancy L. Conlin
------------------------ ---------------------------
Title: Vice President Title: Secretary
<PAGE> 1
Exhibit (k)(2)
PRICING AND BOOKKEEPING AGREEMENT
AGREEMENT dated as of October 26, 1999, between Colonial California Insured
Municipal Fund (Fund) and Colonial Management Associates, Inc. (Colonial), a
Massachusetts corporation. The Fund and Colonial agree as follows:
1. APPOINTMENT. The Fund appoints Colonial as agent to perform the services
described below, such appointment to take effect October 26, 1999.
2. SERVICES. Colonial shall (i) determine and timely communicate to persons
designated by the Fund the Fund's net asset value and offering prices per share;
and (ii) maintain and preserve in a secure manner the accounting records of the
Fund. All records shall be the property of the Fund. Colonial will provide
disaster planning to minimize possible service interruption.
3. AUDIT, USE AND INSPECTION. Colonial shall make available on its premises
during regular business hours all records of a Fund for reasonable audit, use
and inspection by the Fund, its agents and any regulatory agency having
authority over the Fund.
4. COMPENSATION. The Fund will pay Colonial 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.
5. COMPLIANCE. Colonial shall comply with applicable provisions relating to
pricing and bookkeeping of the prospectus and statement of additional
information of the Fund and applicable laws and rules in the provision of
services under this Agreement.
6. LIMITATION OF LIABILITY. In the absence of willful misfeasance, bad
faith or gross negligence on the part of Colonial, or reckless disregard of its
obligations and duties hereunder, Colonial shall not be subject to any liability
to the Fund, to any shareholder of the Fund or to any other person, firm or
organization, for any act or omission in the course of, or connected with,
rendering services hereunder.
7. AMENDMENTS. The Fund shall submit to Colonial a reasonable time in
advance of filing with the Securities and Exchange Commission copies of any
changes in its Registration Statements. If a change in documents or procedures
materially increases the cost to Colonial of performing its obligations,
Colonial shall be entitled to receive reasonable additional compensation.
8. DURATION AND TERMINATION, ETC. This Agreement may be changed only by
writing executed by each party. This Agreement: (a) shall continue in effect
from year to year so long as approved annually by vote of a majority of the
Trustees who are not affiliated with Colonial; (b) may be terminated at any time
without penalty by sixty days' written notice to either party; and (c) may be
terminated at any time
<PAGE> 2
for cause by either party if such cause remains unremedied for a reasonable
period not to exceed ninety days after receipt of written specification of such
cause. Paragraph 6 of this Agreement shall survive termination. If the Fund
designates a successor to any of Colonial's obligations, Colonial shall, at the
expense and direction of the Fund, transfer to the successor all Fund records
maintained by Colonial.
9. MISCELLANEOUS. This Agreement shall be governed by the laws of The
Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first above.
COLONIAL CALIFORNIA INSURED MUNICIPAL FUND
By: /s/ J. KEVIN CONNAUGHTON, CONTROLLER
------------------------------------
J. Kevin Connaughton, Controller
COLONIAL MANAGEMENT ASSOCIATES, INC.
By: /s/ NANCY L. CONLIN, SENIOR VICE PRESIDENT
------------------------------------------
Nancy L. Conlin, Senior Vice President
A copy of the document establishing the Fund is filed with the Secretary of The
Commonwealth of Massachusetts. This Agreement is executed by officers not as
individuals and is not binding upon any of the Trustees, officers or
shareholders of the Fund individually but only upon the assets of the Fund.
<PAGE> 1
Exhibit (k)(3)(i)
FEE WAIVER AGREEMENT
-------------------------------
AGREEMENT made this 25th day of October, 1999, by and between COLONIAL
CALIFORNIA INSURED MUNICIPAL FUND, a Massachusetts business trust (the "Fund"),
and COLONIAL MANAGEMENT ASSOCIATES, INC., a Massachusetts corporation (the
"Adviser").
WHEREAS, the Fund and the Adviser have separately entered into an Investment
Management Agreement of even date herewith (the "Management Agreement");
In consideration of the mutual covenants hereinafter contained, and in
connection with the establishment and commencement of operations of the Fund, it
is hereby agreed by and between the parties hereto as follows:
1. For the period from the commencement of the Fund's operations through
November 30, 1999 and for the 12 month periods ending November 30 in each
indicated year during the term of the Management Agreement (including any
continuation done in accordance with Section 15(c) of the Investment Company Act
of 1940), the Adviser agrees to waive management fees in the amounts determined
by applying the following annual rates to the average daily net assets of the
Fund:
<TABLE>
<CAPTION>
Period Ending Period Ending
November 30 Waiver November 30 Waiver
------------- ------ ------------- ------
<S> <C> <C> <C>
1999 .30%
2000 .30% 2005 .25%
2001 .30% 2006 .20%
2002 .30% 2007 .15%
2003 .30% 2008 .10%
2004 .30% 2009 .05%
</TABLE>
2. This Agreement, and the Adviser's obligation to so waive expenses
hereunder, shall terminate on the earlier of (a) November 30, 2009 or (b)
termination of the Management Agreement.
3. Except as provided in paragraph 2 above, this Agreement may be
terminated only by the vote of (a) the Board of Trustees of the Fund, including
the vote of the members of the Board who are not "interested persons" within the
meaning of the Investment Company Act of 1940, and (b) a majority of the
outstanding voting securities of the Fund.
4. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule, or otherwise, the remainder shall not be thereby
affected.
<PAGE> 2
5. The Fund's Declaration of Trust is on file with the Secretary of the
Commonwealth of Massachusetts. This Agreement is executed on behalf of the Fund
by the Fund's officers as officers and not individually and the obligations
imposed upon the Fund by this Agreement are not binding upon any of the Fund's
Trustees, officers or shareholders individually but are binding only upon the
assets and property of the Fund.
IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to be
executed on the day and year above written.
COLONIAL CALIFORNIA INSURED
MUNICIPAL FUND
By: /s/ J. Kevin Connaughton
---------------------------------
Attest: /s/ William J. Ballou
-----------------------------
Assistant Secretary
COLONIAL MANAGEMENT ASSOCIATES, INC.
By: /s/ Nancy L. Conlin
---------------------------------
Attest: /s/ William J. Ballou
-----------------------------
Assistant Secretary
2
<PAGE> 1
Exhibit (k)(3)(ii)
EXPENSE REIMBURSEMENT AGREEMENT
AGREEMENT made this 25th day of October, 1999, by and between COLONIAL
CALIFORNIA INSURED MUNICIPAL FUND, a Massachusetts business trust (the "Fund"),
and COLONIAL MANAGEMENT ASSOCIATES, INC., a Massachusetts corporation (the
"Adviser").
WHEREAS, the Fund and the Adviser have separately entered into an Investment
Management Agreement of even date herewith (the "Management Agreement"), and a
Fee Waiver Agreement of even date herewith (the "Fee Waiver Agreement");
In consideration of the mutual covenants hereinafter contained, and in
connection with the establishment and commencement of operations of the Fund,
it is hereby agreed by and between the parties hereto as follows:
1. For the period from the commencement of the Fund's operations through
October 31, 2000, the Adviser agrees to reimburse the Fund for expenses (other
than Management Fees payable pursuant to the terms of the Management Agreement
and the Fee Waiver Agreement) incurred by the Fund in excess of an annual rate
of 0.20% of the average weekly net assets of the Fund.
2. This Agreement, and the Adviser's obligation to so waive expenses hereunder,
shall terminate on the earlier of (a) October 31, 2000 or (b) termination of
the Management Agreement.
3. Except as provided in paragraph 2 above, this Agreement may be terminated
only by the vote of (a) the Board of Trustees of the Fund, including the vote
of the members of the Board who are not "interested persons" within the meaning
of the Investment Company Act of 1940, and (b) a majority of the outstanding
voting securities of the Fund.
4. If any provision of this Agreement shall be held or made invalid by a court
decision, statute, rule, or otherwise, the remainder shall not be thereby
affected.
<PAGE> 2
5. The Fund's Declaration of Trust is on file with the Secretary of the
Commonwealth of Massachusetts. This Agreement is executed on behalf of the Fund
by the Fund's officers as officers and not individually and the obligations
imposed upon the Fund by this Agreement are not binding upon any of the Fund's
Trustees, officers or shareholders individually but are binding only upon the
assets and property of the Fund.
IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to be
executed on the day and year above written.
COLONIAL CALIFORNIA INSURED
MUNICIPAL FUND
By: /s/ Nancy L. Conlin
------------------------------------
Name: Nancy L. Conlin
Title: Secretary
Attest: /s/ William J. Ballou
--------------------------------
Name: William J. Ballou
Title: Assistant Secretary
COLONIAL MANAGEMENT ASSOCIATES, INC.
By: /s/ Nancy L. Conlin
------------------------------------
Name: Nancy L. Conlin
Title: Senior Vice President
Attest: /s/ William J. Ballou
--------------------------------
Name: William J. Ballou
Title: Assistant Secretary
-2-
<PAGE> 1
Exhibit (p)
COLONIAL CALIFORNIA INSURED MUNICIPAL FUND
SUBSCRIPTION AGREEMENT
This Agreement made this 25th day of October, 1999 by and between Colonial
California Insured Municipal Fund, a Massachusetts business trust (the "Fund"),
and Colonial Management Associates, Inc., a Massachusetts corporation (the
"Subscriber");
WITNESSETH:
WHEREAS, the Fund has been formed for the purposes of carrying on business
as a closed-end non-diversified management investment company; and
WHEREAS, the Subscriber has been selected by the Fund's Board of Trustees
to serve as investment adviser to the Fund; and
WHEREAS, the Subscriber wishes to subscribe for and purchase, and the Fund
wishes to sell to the Subscriber, 6,667 common shares of beneficial interest for
a purchase price of $15.00 per share;
NOW THEREFORE, IT IS AGREED:
1. The Subscriber subscribes for and agrees to purchase from the Fund
6,667 common shares of beneficial interest for a purchase price of $15.00 per
share. Subscriber agrees to make payment for these shares at such time as demand
for payment may be made by an officer of the Fund.
2. The Fund agrees to issue and sell said shares to Subscriber promptly
upon its receipt of the purchase price.
3. To induce the Fund to accept its subscription and issue the shares
subscribed for, the Subscriber represents that it is informed as follows:
(a) That the shares being subscribed for have not been and will not
be registered under the Securities Act of 1933 ("Securities Act");
(b) That the shares will be sold by the Fund in reliance on an
exemption from the registration requirements of the Securities Act;
(c) That the Fund's reliance upon an exemption from the registration
requirements of the Securities Act is predicated in part on the representations
and agreements contained in this Subscription Agreement;
<PAGE> 2
(d) That when issued, the shares will be "restricted securities" as
defined in paragraph (a)(3) of Rule 144 of the General Rules and Regulations
under the Securities Act ("Rule 144") and cannot be sold or transferred by
Subscriber unless they are subsequently registered under the Securities Act or
unless an exemption from such registration is available;
(e) That there do not appear to be any exemptions from the
registration provisions of the Securities Act available to the Subscriber for
resale of the shares. In the future, certain exemptions may possibly become
available, including an exemption for limited sales including an exemption for
limited sales in accordance with the conditions of Rule 144.
The Subscriber understands that a primary purpose of the information
acknowledged in subparagraphs (a) through (e) above is to put it on notice as to
restrictions on the transferability of the shares.
4. To further induce the Fund to accept its subscription and issue the
shares subscribed for, the Subscriber:
(a) Represents and warrants that the shares subscribed for are being
and will be acquired for investment for its own account and not on behalf of any
other person or persons and not with a view to, or for sale in connection with,
any public distribution thereof; and
(b) Agrees that any certificates representing the shares subscribed
for may bear a legend substantially in the following form:
The shares represented by this certificate have been acquired for
investment and have not been registered under the Securities Act of
1933 or any other federal or state securities law. These shares may
not be offered for sale, sold or otherwise transferred unless
registered under said securities laws or unless some exemption from
registration is available.
5. This Subscription Agreement and all of its provisions shall be binding
upon the legal representatives, heirs, successors and assigns of the parties
hereto.
6. The Fund's Declaration of Trust is on file with the Secretary of the
Commonwealth of Massachusetts. This Agreement is executed on behalf of the Fund
by the Fund's officers as officers and not individually and the obligations
imposed upon the Fund by this Agreement are not binding upon any of the Fund's
Trustees, officers or shareholders individually but are binding only upon the
assets and property of the Fund.
-2-
<PAGE> 3
IN WITNESS WHEREOF, this Subscription Agreement has been executed by the
parties hereto as of the day and date first above written.
COLONIAL CALIFORNIA INSURED MUNICIPAL
FUND
By: /s/ William J. Ballou
\ ----------------------------
Title: Assistant Secretary
COLONIAL MANAGEMENT ASSOCIATES, INC.
By: /s/ William J. Ballou
----------------------------
Title: Assistant Secretary
-3-
