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AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 16, 1999
SECURITIES ACT FILE NO. 333-84991
INVESTMENT COMPANY ACT FILE NO. 811-09539
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. 4 [X]
-----------
Post-Effective Amendment No. [ ]
-----------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 4 [X]
---------------
COLONIAL NEW YORK INSURED MUNICIPAL FUND
(Exact Name of Registrant as Specified in Charter)
ONE FINANCIAL CENTER, BOSTON, MA 02111
(Address of Principal Executive Offices)
(617) 426-3750
(Registrant's Telephone Number, including Area Code)
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Name and Address of
Agent for Service Copies to
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William J. Ballou, Esq. John M. Loder, Esq. Gary Schpero, Esq.
Colonial Management Associates, Inc. Ropes & Gray Simpson Thacher & Bartlett
One Financial Center One International Place 425 Lexington Avenue
Boston, Massachusetts 02111-2621 Boston, Massachusetts 02110-2624 New York, New York 10017-3954
</TABLE>
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [ ]
It is proposed that this filing will become effective (check appropriate box):
[ ] when declared effective pursuant to Section 8(c)
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED (1) UNIT (1) PRICE (1) REGISTRATION FEE (2)
- ---------------------- -------------------- --------------------- --------------------- --------------------
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Common Shares, 2,000,000 $15.00 $30,000,000 $8,340
No Par Value
Per Share
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) $6,255 of the fee was previously paid.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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COLONIAL NEW YORK INSURED MUNICIPAL FUND
CROSS REFERENCE SHEET
ITEMS REQUIRED BY FORM N-2
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PART A
ITEM NO. ITEM CAPTION PROSPECTUS CAPTION
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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 Prospectus Summary; Summary of Fund
Expenses
4................. Financial Highlights Not Applicable
5................. Plan of Distribution Front Cover Page; Prospectus Summary;
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; The Fund;
Investment Objective and Policies; Use
of Leverage and Related Risks; Additional
Risk Considerations; How the Fund Manages
Risk; Management of the Fund; Description
of Shares; Certain Provisions in the
Declaration of Trust
9................. Management Management of the Fund; Custodian,
Transfer Agent, Dividend Disbursing Agent
and Registrar
10 ............... Capital Stock, Long-Term Debt, Net Asset Value; Distributions; Dividend
and Other Securities Reinvestment Plan; Description of
Shares; 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 for the
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 Objectives 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 16, 1999
PROSPECTUS
1,000,000 SHARES
COLONIAL NEW YORK INSURED MUNICIPAL FUND
COMMON SHARES
$15.00 PER SHARE
-------------------------
Investment Objective. The Fund is a newly organized, closed-end,
nondiversified management investment company. The Fund's investment objective is
to provide current income generally exempt from regular federal income tax and
New York State and City personal income taxes.
Portfolio Contents. The Fund will invest its assets in a nondiversified
portfolio of bonds and notes that generally are issued by or on behalf of New
York 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 New York State and City personal income taxes
("New York Municipal Obligations"). At least 80% of the Fund's net assets will
normally be invested in New York 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 New York 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 New York 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
(continued on following page)
THESE SECURITIES INVOLVE RISKS. SEE "ADDITIONAL RISK CONSIDERATIONS"
BEGINNING ON PAGE 31.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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TOTAL ASSUMING TOTAL ASSUMING
NO EXERCISE OF FULL EXERCISE OF
PER SHARE OVERALLOTMENT OPTION OVERALLOTMENT OPTION
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Public Offering Price $15.000 $ $
Sales Load $ 0.675 $ $
Proceeds to the Fund $14.325 $ $
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The underwriters are offering the common shares subject to various
conditions. The underwriters may purchase up to an additional common
shares at the initial public offering price, less the sales load, within 45 days
from the date of this prospectus to cover overallotments. The underwriters
expect to deliver the common shares to purchasers on or about ,
1999.
-------------------------
SALOMON SMITH BARNEY
A.G. EDWARDS & SONS, INC.
PAINEWEBBER INCORPORATED
, 1999
<PAGE> 4
(continued from previous page)
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
New York municipal issuers. Fluctuations in net asset value may be magnified as
a result of the Fund's use of leverage, which may be considered a speculative
investment technique. An investment in the Fund is not appropriate for all
investors. The Fund is designed for individual investors who are residents of
New York for tax purposes. The Fund cannot assure you that it will achieve its
investment objective. See "Investment Objective and Policies." 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."
No Prior History. Because the Fund is newly organized, its common shares
have no history of public trading. Shares of closed-end investment companies
frequently trade at a discount from their net asset value. This risk may be
greater for investors expecting to sell their shares in a relatively short
period after completion of this initial public offering. We have applied for
listing of the common shares on the American Stock Exchange, subject to notice
of issuance, under the trading or "ticker" symbol "CNM".
Municipal Preferred Shares. In a separate offering, the Fund intends to
offer preferred shares, called "Municipal Preferred Shares," for which potential
investors in that offering will receive a different prospectus. The Municipal
Preferred Shares are not being offered in this prospectus. The Fund expects that
the Municipal Preferred Shares will represent about 38% of the Fund's capital.
The issuance of Municipal Preferred Shares will leverage your common shares,
meaning that the issuance of the Municipal Preferred Shares may cause you to
receive a larger return or loss on your common shares than you would have
received without the issuance of the Municipal Preferred Shares. Leverage
involves special risks, but also affords an opportunity for greater return.
There is no assurance that the Fund's leveraging strategy will succeed. See "Use
of Leverage and Related Risks" and "Description of Shares."
The underwriters named in this prospectus may purchase up to
additional common shares from the Fund under certain
circumstances.
Colonial Management Associates, Inc., the Fund's investment advisor, has
agreed to pay (i) all organizational expenses and (ii) offering costs (other
than sales loads) that exceed $0.03 per common share.
This prospectus contains important information about the Fund. You should
read this prospectus before deciding whether to invest and you should retain it
for future reference. A Statement of Additional Information, dated ,
1999, containing additional information about the Fund, has been filed with the
Securities and Exchange Commission and is hereby incorporated by reference in
its entirety into this prospectus. You can review the table of contents of the
Statement of Additional Information on page 51 of this prospectus. You may
request a free copy of the Statement of Additional Information by calling
1-800-426-3750. You may also obtain the Statement of Additional Information on
the Securities and Exchange Commission web site (http://www.sec.gov).
The Fund's common shares do not represent a deposit or obligation of, and
are not guaranteed or endorsed by, any bank or other insured depository
institution, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
NEITHER THE FUND NOR THE UNDERWRITERS HAVE AUTHORIZED ANY OTHER PERSON TO
PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR
INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. NEITHER THE FUND NOR THE
UNDERWRITERS ARE MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION
WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION
APPEARING IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON THE FRONT COVER ONLY.
2
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 4
Summary of Fund Expenses.................................... 13
The Fund.................................................... 15
Use of Proceeds............................................. 15
Investment Objective and Policies........................... 15
Use of Leverage and Related Risks........................... 28
Additional Risk Considerations.............................. 31
How the Fund Manages Risk................................... 36
Management of the Fund...................................... 38
Net Asset Value............................................. 39
Distributions............................................... 40
Dividend Reinvestment Plan.................................. 40
Description of Shares....................................... 42
Certain Provisions in the Declaration of Trust.............. 44
Repurchase of Common Shares; Conversion to Open-End Fund.... 44
Tax Matters................................................. 45
Underwriting................................................ 48
Custodian, Dividend Disbursing Agent, Transfer Agent and
Registrar................................................. 50
Legal Opinions.............................................. 50
Table of Contents for the Statement of Additional
Information............................................... 51
</TABLE>
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Until , 1999 (25 days after the date of this prospectus), all
dealers that buy, sell or trade the common shares, whether or not participating
in this offering, may be required to deliver a prospectus. This is in addition
to the dealers' obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
3
<PAGE> 6
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 FUND....................... Colonial New York Insured Municipal Fund is a
newly organized, closed-end, nondiversified
management investment company. Throughout this
prospectus, we refer to Colonial New York
Insured Municipal Fund simply as the "Fund" or
as "we," "us" or "our." See "The Fund."
THE OFFERING................... The Fund is offering common shares
of beneficial interest at $15.00 per share
through a group of underwriters (the
"Underwriters") led by Salomon Smith Barney
Inc. The common shares of beneficial interest
are called "Common Shares" in the rest of this
prospectus. You must purchase at least 100
Common Shares. The Fund has given the
Underwriters an option to purchase up to
additional Common Shares to
cover orders in excess of
Common Shares. See "Underwriting."
INVESTMENT OBJECTIVE........... The Fund's investment objective is to provide
current income generally exempt from regular
federal income tax and New York State and City
personal income taxes. The Fund will invest
its assets in a nondiversified portfolio of
municipal bonds issued by or on behalf of the
State of New York 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 New York State
and City personal income taxes ("New York
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 other reliable
authority), exempt from regular federal income
tax. At least 65% of the Fund's total assets
will normally be invested in New York
Municipal Obligations that are covered by
insurance guaranteeing the timely payment of
principal at maturity and interest. Each
insured New York Municipal Obligation in the
Fund's portfolio will be covered by specific
insurance (either original issue insurance or
secondary market insurance) or portfolio
insurance purchased by the Fund.
At least 80% of the Fund's net assets will
normally be invested in New York 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 &
4
<PAGE> 7
Poor's") or comparably rated by any other
nationally recognized credit rating agency
("Rating Agency")), or, if unrated, determined
by the Fund's investment advisor to be of at
least investment grade quality. The Fund may
invest up to 20% of its net assets in New York
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 New
York Municipal Obligations considered to be of
comparable quality by the Fund's investment
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 New York
Municipal Obligations (i.e., over 10 years).
The Fund may, however, invest in New York
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 the completion of the offering),
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."
SPECIAL CONSIDERATIONS......... The Fund expects that a portion of its
investments will pay interest that is taxable
under the federal alternative minimum tax. If
you are, or as a result of investment in the
Fund would become, subject to the federal
alternative minimum tax, the Fund may not be a
suitable investment for you. In addition,
distributions of capital gain and taxable
income will be subject to tax. See "Tax
Matters."
5
<PAGE> 8
PROPOSED OFFERING OF MUNICIPAL
PREFERRED SHARES............. Subject to market conditions, approximately
one to three months after completion of this
offering, the Fund intends to offer preferred
shares of beneficial interest ("Municipal
Preferred Shares") representing approximately
38% of the Fund's capital after their
issuance. The issuance of Municipal Preferred
Shares will leverage your investment in the
Common Shares. Leverage involves special
risks. There is no assurance that the Fund's
leveraging strategy will be successful. The
money the Fund obtains by selling the
Municipal Preferred Shares will be invested in
long-term municipal bonds which will generally
pay fixed rates of interest over the life of
the bond. The Municipal Preferred Shares will
pay dividends based on shorter-term rates,
which will be reset frequently. So long as the
rate of return, net of applicable Fund
expenses, on the long-term bonds purchased by
the Fund exceeds Municipal Preferred Share
dividend rates as reset periodically, the
investment of the proceeds of the Municipal
Preferred Shares will generate more income
than will be needed to pay dividends on the
Municipal Preferred Shares. If so, the excess
will be used to pay higher dividends to
holders of Common Shares ("Common
Shareholders"). However, the Fund cannot
assure you that the issuance of Municipal
Preferred Shares will result in a higher yield
on your Common Shares. Once Municipal
Preferred Shares are issued, the net asset
value and market price of the Common Shares
and the yield to Common Shareholders will be
more volatile. See "Use of Leverage and
Related Risks" and "Description of
Shares -- Municipal Preferred Shares."
INVESTMENT ADVISOR............. Colonial Management Associates, Inc. (the
"Advisor") is the Fund's investment advisor.
The Advisor will receive 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). For the period from the
commencement of the Fund's operations through
January 1, 2001, the Advisor has agreed to
waive all of its management fees. In addition,
the Advisor has agreed to waive the Fund's
management fees in the amount of 0.30% of the
Fund's average weekly total net assets from
January 2, 2001 through November 30, 2001 (on
an annualized basis) and for the remaining
fiscal years through November 30, 2004. For
the next five fiscal years (through November
30, 2009), the Advisor has agreed to waive its
management fees in a declining amount. The
Advisor has also agreed through at least
November 30, 2000 to reimburse any of the
Fund's other expenses in excess of 0.20% of
average total weekly net assets per annum. 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."
6
<PAGE> 9
DISTRIBUTIONS.................. The Fund's policy will be to make monthly
distributions to Common Shareholders.
Distributions to Common Shareholders cannot be
assured, and the amount of each monthly
distribution will vary. The initial
distribution to Common Shareholders is
expected to be paid approximately 60 days
after the completion of this offering. See
"Distributions," "Dividend Reinvestment Plan"
and "Use of Proceeds."
DIVIDEND REINVESTMENT PLAN..... The Fund has established a Dividend
Reinvestment Plan (the "Plan"). Under the
Plan, all distributions will be automatically
reinvested in additional Common Shares, unless
the Common Shareholder elects to receive cash.
Common Shares issued under the Plan will
either be purchased in the open market or, if
the Common Shares are trading at or above
their net asset value, newly issued by the
Fund. Common Shareholders who intend to hold
their Common Shares through a broker or
nominee should contact their broker or nominee
to determine whether or how they may
participate in the Plan. See "Dividend
Reinvestment Plan."
LISTING........................ We have applied for listing of the Common
Shares on the American Stock Exchange under
the trading or "ticker" symbol of "CNM". See
"Description of Shares -- Common Shares."
CUSTODIAN, DIVIDEND DISBURSING
AGENT, TRANSFER AGENT AND
REGISTRAR.................... The Chase Manhattan Bank will serve as
custodian of the Fund's assets. EquiServe,
servicing agent for BankBoston, N.A., will
serve as the Fund's dividend disbursing agent,
transfer agent and registrar. See "Custodian,
Dividend Disbursing Agent, Transfer Agent and
Registrar."
MARKET PRICE OF SHARES......... Shares of closed-end investment companies
frequently trade at prices lower than their
net asset value. 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 Fund cannot
assure you that the Common Shares will trade
at a price higher than net asset value in the
future. Net asset value will be reduced
immediately following the offering by the
sales load and the amount of the organization,
if any, and offering expenses paid by the
Fund. See "Use of Proceeds." In addition to
net asset value, market price may be affected
by such factors as dividend levels (which are
in turn affected by expenses), call
protection, dividend stability, portfolio
credit quality and liquidity, and market
supply and demand. See "Use of Leverage and
Related Risks," "Additional Risk
Considerations," "Description of Shares,"
"Repurchase of Fund Shares; Conversion to
Open-End Fund" and the Statement of Additional
Information under "Repurchase of Fund Shares;
Conversion to Open-End Fund." The Common
Shares
7
<PAGE> 10
are designed primarily for long-term
investors, and you should not view the Fund as
a vehicle for trading purposes.
SPECIAL RISK CONSIDERATIONS.... NO OPERATING HISTORY. The Fund is a newly
organized closed-end investment company with
no history of operations.
INTEREST RATE AND MARKET RISK. When market
interest rates fall, bond prices generally
rise, and vice versa. Interest rate risk is
the risk that the municipal bonds in the
Fund's portfolio will decline in value because
of increases in market interest rates. The
prices of longer-term bonds fluctuate more
than prices of shorter-term bonds as interest
rates change. Conversely, the values of
lower-rated and comparable unrated securities
are less likely than those of investment grade
or comparable unrated debt securities to
fluctuate inversely with changes in interest
rates. Because the Fund will invest primarily
in long-term bonds (i.e., over 10 years), the
Common Share net asset value and market price
per share will fluctuate more in response to
changes in market interest rates than if the
Fund invested primarily in shorter-term bonds.
Market risk is often greater among certain
types of debt 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. Because
the Fund may invest in these types of debt
securities, it may be subject to greater
market risk than a fund that invests only in
current interest-paying securities. The Fund's
use of leverage, as described below, will tend
to increase Common Share interest rate risk.
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 will not protect against
fluctuations in the value of the Municipal
Obligations held by the Fund or the value of
the Fund's shares caused by changes in
interest rates or other factors.
LOWER-RATED SECURITIES. The Fund may invest
in municipal bonds rated Ba or B by Moody's or
BB or B by Standard & Poor's or comparably
rated by another Rating Agency or unrated but
judged by the Advisor to be of comparable
quality. These bonds generally involve greater
risk of nonpayment of principal and interest
than securities in higher rating categories.
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. Municipal bonds rated Ba/BB or below
are regarded as predominantly speculative in
character. While such securities may have some
quality and protective characteristics, large
uncertainties or major risk exposures to
adverse conditions
8
<PAGE> 11
are expected to outweigh such characteristics.
With respect to lower-rated or unrated
tax-exempt securities, the Fund may 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
security, 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.
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 could drop over time as well if the
Fund purchases securities paying lower rates
of interest. This risk is magnified when
prevailing short-term interest rates increase
or when the Fund holds residual interest
municipal bonds.
CALL RISK. If interest rates fall, it is
possible that issuers of callable bonds with
high interest coupons will "call" (or prepay)
their bonds before their maturity date. If a
call were exercised by the issuer during a
period of declining interest rates, the 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. Credit risk is the risk that one
or more municipal bonds in the Fund's
portfolio will decline in price, or fail to
pay interest or principal when due, because
the issuer of the bond experiences a decline
in its financial status. The Fund expects to
invest in lower-rated or unrated municipal
bonds. The prices of these lower-rated bonds
are more sensitive to negative developments,
such as a decline in the issuer's revenues or
a general economic downturn, than are the
prices of higher-rated securities.
LIQUIDITY RISK. The Fund may invest in
securities for which there is no readily
available trading market or which are
otherwise illiquid. The Fund may not be able
to readily dispose of such securities at
prices that approximate those at which the
Fund could sell them if they were more widely
traded and, as a result of such illiquidity,
the Fund may have to sell other investments or
engage in borrowing transactions if necessary
to raise cash to meet its obligations. In
addition, this limited
9
<PAGE> 12
liquidity could affect the market price of the
securities, thereby adversely affecting the
Fund's net asset value and ability to make
dividend distributions.
LEVERAGE RISK. The proposed use of leverage
through a future issuance of preferred shares
by the Fund could create an opportunity for
increased net income, but could also create
special risks. The Fund intends to use
leverage to provide the holders of Common
Shares with a potentially higher return, but
its leveraging strategy may not be successful.
Leverage creates risks for holders of Common
Shares, including the likelihood of greater
volatility of the net asset value and market
price of the Common Shares.
The use of leverage also entails the risk that
fluctuations in dividend rates on any
preferred shares may affect the return to
Common Shareholders. The Fund anticipates that
preferred share dividends will be based on the
yields of short-term Municipal Obligations,
while the proceeds of any preferred share
offering will be invested in longer-term
Municipal Obligations, which typically have
higher yields. If the income derived from the
purchased securities exceeds the cost of
leverage (i.e., the dividends paid on the
Municipal Preferred Shares), the Fund's return
would be greater than if leverage had not been
used. Conversely, if the income from the
purchased securities is not sufficient to
cover the cost of leverage, the return to the
Fund would be less than if leverage had not
been used. A decrease in the Fund's returns
would reduce the amounts available for
distribution to Common Shareholders as
dividends and other distributions. The Advisor
in its best judgment may determine to maintain
the Fund's leveraged position, even if the
Fund's distributions to Common Shareholders
are reduced, if it deems such action to be
appropriate under the circumstances.
The Fund is required to allocate a portion of
any capital gains or other taxable income to
holders of preferred shares. The Fund intends
to pay to any preferred shareholders
additional dividends intended to compensate
them for federal income taxes payable on any
capital gains or other taxable income
allocated to the preferred shares. The Fund
may also pay such preferred shareholders
additional dividends intended to compensate
them for state and city taxes payable on such
capital gains or other taxable income. These
additional dividends will reduce the amount
available for distribution to the Common
Shareholders. Also, as discussed under
"Management of the Fund," the fee paid to the
Advisor will be calculated on the basis of the
Fund's average daily net assets, including
proceeds from the issuance of preferred
shares. Therefore, these fees will be higher
when leverage is utilized. See "Use of
Leverage and Related Risks."
10
<PAGE> 13
The Fund currently intends to seek an
investment grade rating on any preferred
shares it may issue from one or more Rating
Agencies. The Fund may be subject to
investment restrictions of one or more Rating
Agencies as a result. These restrictions may
impose asset coverage or portfolio composition
requirements that are more stringent than
those imposed on the Fund by the Investment
Company Act of 1940 (the "Investment Company
Act" or "1940 Act"). The Advisor does not
anticipate that these covenants or guidelines
will impede it in managing the Fund's
portfolio in accordance with the Fund's
investment objective and policies. See
"Description of Shares -- Municipal Preferred
Shares."
HEDGING AND OTHER INVESTMENTS. The Fund may
attempt to hedge against changes in interest
rates by engaging in transactions involving
interest rate futures contracts, or "financial
futures," index futures and options on
financial futures, tax-exempt indices and
index futures. The costs of and possible
losses incurred from these transactions may
reduce the Fund's current return. There can be
no assurance that the Fund will engage in
hedging transactions or that suitable hedging
transactions will be available or, if
available, effective. See "Investment
Objective and Policies -- Hedging Activities."
The Fund's use of residual interest municipal
bonds, or "inverse floaters," exposes the Fund
to special risks and may amplify the effects
of leverage. For example, during periods of
rising short-term interest rates, the Fund's
investment in inverse floaters may decrease
the Fund's income and distributions to Common
Shareholders. In addition, such transactions
may result in the Fund earning taxable income
or gains. The Fund does not, however, expect
to invest in inverse floaters once the Fund is
fully invested (approximately two to three
months after completion of the offering). See
"Investment Objective and Policies."
MUNICIPAL BOND MARKET RISK. The amount of
public information available about the
municipal bonds in the Fund's portfolio is
generally less than that for corporate
equities or bonds, and the investment
performance of the Fund may therefore be more
dependent on the analytical abilities of the
Advisor than would be a stock fund or taxable
bond fund. The secondary market for municipal
bonds, particularly the below investment grade
bonds in which the Fund may invest, also tends
to be less well-developed or liquid than many
other securities markets, which may adversely
affect the Fund's ability to sell its bonds at
attractive prices.
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. It is not
anticipated that these guidelines will
11
<PAGE> 14
impede the Advisor from managing the Fund's
portfolio in accordance with the Fund's
investment objective and policies.
CONCENTRATION IN NEW YORK ISSUERS. The Fund's
policy of investing primarily in New York
Municipal Obligations makes the Fund more
susceptible to adverse economic, political or
regulatory occurrences affecting such issuers.
See "Additional Risk Considerations -- Certain
Risks Associated with Investments in New York
Municipal Obligations" in this prospectus and
"Appendix B -- Special Considerations Relating
to New York" in the Statement of Additional
Information.
NONDIVERSIFICATION. The Fund has registered
as a "nondiversified" investment company under
the 1940 Act. This means that, as limited by
federal income tax considerations, the Fund,
with respect to up to 50% of its total assets,
will be able to invest more than 5% (but not
more than 25%) of the value of its total
assets in the obligations of any single
issuer. To the extent the Fund invests a
relatively high percentage of its assets in
obligations of a limited number of issuers,
the Fund may be more susceptible than a more
widely diversified investment company to any
single economic, political or regulatory
occurrence.
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 ("AMT"). In
addition, for corporations, interest on all
tax-exempt obligations is taken into account
in the computation of income subject to the
federal AMT. 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 the Fund
may not be appropriate for investors who are
already subject to the federal AMT or who
would become subject thereto as a result of
owning Common Shares. Moreover, distributions
of any taxable net investment income and net
short-term capital gain are taxable as
ordinary income and capital gain distributions
will be taxable as long-term capital gain. See
"Distributions" and "Tax Matters."
ANTI-TAKEOVER PROVISIONS. The Agreement and
Declaration of Trust of the Fund (the
"Declaration of Trust") includes provisions
that could limit the ability of other entities
or persons to acquire control of the Fund or
convert the Fund to open-end status. These
provisions of the Declaration of Trust could
have the effect of depriving the Common
Shareholders of opportunities to sell their
Common Shares at a premium over their then
current market price.
12
<PAGE> 15
SUMMARY OF FUND EXPENSES
The following table assumes the issuance of Municipal Preferred Shares in
an amount equal to 38% of the Fund's capital (after their issuance), and shows
Fund expenses both as a percentage of net assets attributable to Common Shares
and as a percentage of total net assets:
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
NET ASSETS
----------
<S> <C>
Shareholder Transaction Expenses
Sales Load (as a percentage of offering price).............. 4.50%
Dividend Reinvestment Plan Fees............................. None
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE
NET ASSETS ATTRIBUTABLE OF TOTAL
TO COMMON SHARES NET ASSETS
----------------------- ----------
<S> <C> <C>
Annual Expenses
Management Fees............................................. 1.05% 0.65%
Fee Waiver (Year 1)....................................... (1.05)% (0.65)%
----- -----
Net Management Fees......................................... 0.00% 0.00%
Other Expenses.............................................. 1.52% 0.88%
Expense Reimbursement (Year 1)............................ (1.20)% (0.68)%
===== =====
Total Net Annual Expenses................................... 0.32% 0.20%
===== =====
</TABLE>
The Advisor has agreed to waive the Fund's management fees in the following
amounts, expressed as a percentage of average weekly total net assets (on an
annualized basis): 0.65% from the commencement of the Fund's operations through
January 1, 2001, 0.30% for the period from January 2, 2001 through the end of
the Fund's fifth full fiscal year (November 30, 2004), 0.25% in year 6, 0.20% in
year 7, 0.15% in year 8, 0.10% in year 9 and 0.05% in year 10. Expressed as a
percentage of average weekly total net assets attributable to Common Shares, the
Advisor's waivers of the Fund's management fees are as follows: 1.05% from the
commencement of the Fund's operations through January 1, 2001, 0.48% for the
period from January 2, 2001 through the end of the Fund's fifth full fiscal year
(November 30, 2004), 0.40% in year 6, .032% in year 7, 0.24% in year 8, 0.16% in
year 9 and 0.08% in year 10. In addition, the Advisor has agreed at least
through November 30, 2000 to reimburse any of the Fund's Other Expenses in
excess of 0.20% per annum (0.32% per annum expressed as a percentage of average
weekly net assets attributable to Common Shares). Without the waiver and
reimbursement, "Total Net Annual Expenses" would be estimated to be 1.53% of
average weekly total net assets and 2.57% of average weekly net assets
attributable to Common Shares. The Advisor has agreed to pay (i) all
organizational expenses and (ii) offering costs (other than sales loads) that
exceed $0.03 per Common Share (0.2% of offering price).
The purpose of the table above is to help you understand all fees and
expenses that you, as a Common Shareholder, would bear directly or indirectly.
The expenses shown in the table are based on estimated amounts for the Fund's
first year of operations and assume that the Fund issues 1,500,000 Common
Shares. See "Management of the Fund" and "Dividend Reinvestment Plan."
13
<PAGE> 16
The following example illustrates the expenses (including the sales load of
$45) that you would pay on a $1,000 investment in Common Shares assuming (1)
total net annual expenses of 0.20% of total net assets and 0.32% of net assets
attributable to Common Shares in year 1 and total net annual expenses of 1.23%
and 2.09%, respectively, in years 2 through 5, increasing to 1.48% and 2.49%,
respectively, in year 10 and (2) a 5% annual return: (1)
Expenses Based on a Percentage Of
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS (2)
------ ------- ------- ------------
<S> <C> <C> <C> <C>
Total Net Assets......................................... $47 $73 $100 $188
Net Assets Attributable to Common Shares................. $49 $92 $138 $278
</TABLE>
- ---------------
(1) The example should not be considered a representation of future expenses.
The example assumes that the estimated Other Expenses set forth in the
Annual Expenses table are accurate, that the waiver of fees and expenses
decrease as described in note 2 below and that all dividends and
distributions are reinvested at net asset value. Actual expenses may be
greater or less than those assumed. Moreover, the Fund's actual rate of
return may be greater or less than the hypothetical 5% return shown in the
example.
(2) Assumes waiver of management fees and expenses of 0.25% of average weekly
net assets in year 6, 0.20% in year 7, 0.15% in year 8, 0.10% in year 9 and
0.05% in year 10 and a reimbursement of 0.68% per annum of Other Expenses in
year 1, but no expense reimbursement in years 2 through 10. The Advisor has
not agreed to waive any portion of the Fund's management fees beyond
November 30, 2009 and has not agreed to reimburse any portion of the Fund's
expenses beyond November 30, 2000.
14
<PAGE> 17
THE FUND
The Fund is a recently organized, closed-end, nondiversified management
investment company registered under the 1940 Act. The Fund was organized as a
Massachusetts business trust on August 10, 1999, pursuant to a Declaration of
Trust governed by the laws of the Commonwealth of Massachusetts. As a newly
organized entity, the Fund has no operating history. 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 the offering of Common Shares will be approximately
$ ($ if the Underwriters exercise the overallotment option in
full) after payment of the estimated organization and offering costs. The
Advisor has agreed to pay (i) all organizational expenses and (ii) offering
costs (other than sales loads) that exceed $0.03 per Common Share. The Fund will
invest the net proceeds of the offering in accordance with the Fund's investment
objective and policies as stated below. It is presently anticipated that the
Fund will be able to invest substantially all of the net proceeds in municipal
bonds that meet its investment objective and policies within three months after
the completion of the offering. Pending such investment, it is anticipated that
the proceeds will be invested in short-term, tax-exempt securities.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide current income exempt from
regular federal income tax and New York State and City personal income taxes.
This income will be earned by investing primarily in investment grade municipal
obligations issued by or on behalf of the State of New York 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
New York for personal income 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 New York State and City
personal income taxes ("New York Municipal Obligations"). At least 80% of the
Fund's net assets will normally be invested in New York 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.
At least 65% of the Fund's total assets will normally be invested in New York
Municipal Obligations that are covered by insurance guaranteeing the timely
payment of principal at maturity and interest. Each insured New York 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 New York Municipal Obligations
(i.e., over 10 years). The Fund may, however, invest in New York Municipal
Obligations without regard to maturity or duration.
The Fund may invest up to 20% of its net assets in New York Municipal
Obligations rated Ba or B by Moody's or BB or B by Standard & Poor's and unrated
New York Municipal Obligations considered to be
15
<PAGE> 18
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 New York 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 New York Municipal Obligations, it may be more dependent on the
Advisor's research capabilities than when it invests in investment grade New
York Municipal Obligations. See "Additional Risk 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) 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 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 New York 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 New York 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 New
York Municipal Obligations that are not rated by any Rating Agency.
Municipal Obligations, including New York 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.
16
<PAGE> 19
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 this offering), 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 New York 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, as a hedge against
changes in interest rates. See "Investment Objective and Policies -- Hedging
Activities." The costs of and possible losses incurred from such transactions
may reduce the Fund's current return.
The Fund may also purchase securities on a "when-issued" basis, enter into
repurchase agreements and invest in other taxable instruments, subject to
certain limitations. See "Investment Objective and Policies -- Forward
Commitments," "Investment Objective and Policies -- Repurchase Agreements" and
"Investment Objective and Policies -- Temporary and Defensive Investments."
The Advisor utilizes a top-down investment strategy that seeks to strike a
balance between investment performance potential and avoiding undue credit risk.
The Advisor first analyzes the various factors that
17
<PAGE> 20
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 AMT). (For a
description of the federal AMT, see "Tax Matters -- Federal Income Tax
Matters.") The term "New York Municipal Obligations" refers to Municipal
Obligations the interest on which is also exempt from New York State and City
personal income taxes. New York Municipal Obligations include debt obligations
issued by the State of New York or any political subdivision thereof, or any
other municipal debt obligations the interest on which is exempt from federal
income tax and New York State and City personal income taxes, to obtain funds
for various public purposes, including the construction of a wide range of
public facilities such as airports, bridges, highways, housing, mass
transportation, roads, schools and water and sewer works or for other public
purposes. Interest on industrial development bonds used to fund the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities may also be exempt from federal income tax and/or New
York State and City 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.
18
<PAGE> 21
The ratings of Moody's, Standard & Poor's and other Rating Agencies
represent their opinions and are not absolute standards of quality. Municipal
Obligations with the same maturity, interest rate and rating may have different
yields while Municipal Obligations of the same maturity and interest rate with
different ratings may have the same yield.
Obligations of issuers of Municipal Obligations are subject to the
provisions of bankruptcy, insolvency and other laws, such as the Federal
Bankruptcy Reform Act of 1978, affecting the rights and remedies of creditors.
Congress or state legislatures may seek to extend the time for payment of
principal or interest, or both, or to impose other constraints upon enforcement
of such obligations. There is also the possibility that, as a result of
litigation or other conditions, the power or ability of issuers to meet their
obligations to pay interest on and principal of their Municipal Obligations may
be materially impaired or their obligations may be found to be invalid or
unenforceable. Such litigation or conditions may from time to time have the
effect of introducing uncertainties in 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 New
York 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 which may issue ratings for any preferred shares which may be issued by
the Fund in the future 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
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Obligation will, effectively, be of the same credit quality as a Municipal
Obligation covered by a specific insurance policy issued by the same insurance
company.
The Fund's policy of generally buying Municipal Obligations insured by
insurers whose claims-paying ability is rated "Aaa" or "AAA" applies only at the
time the Fund buys the Municipal Obligation. If a Rating Agency downgrades an
insurer's claims-paying ability, the Fund is not required to sell Municipal
Obligations covered by that insurer's policies. If a Rating Agency downgrades
its rating of an insurer, it would probably downgrade its rating of a Municipal
Obligation covered by that insurer's original issue insurance or secondary
market insurance. Municipal Obligations in the Fund's portfolio covered by that
insurer's portfolio insurance would also probably be downgraded. Moody's and
Standard & Poor's continually assess the claims-paying ability of insurers and
the creditworthiness of Municipal Obligation issuers, and there can be no
assurance that Moody's and Standard & Poor's will not downgrade their ratings.
The value of Municipal Obligations covered by portfolio insurance that are in
default or in significant risk of default will be determined by separately
establishing a value for the Municipal Obligation and a value for the portfolio
insurance.
ORIGINAL ISSUE INSURANCE. Original issue insurance is insurance purchased
by the issuer of Municipal Obligations or a third party to cover a particular
issue of Municipal Obligations at the time those Municipal Obligations are
issued. Under this insurance, the insurer unconditionally guarantees to the
holder of the Municipal Obligation the timely payment of principal and interest
when and as these payments become due if the issuer does not pay them. However,
if the due date of the principal is accelerated because of mandatory or optional
redemption (other than acceleration because of a mandatory sinking fund
payment), default or otherwise, the payments guaranteed may be made in the
amounts and at the times as principal payments would have been due had there not
been any acceleration. The insurer is responsible for these payments less any
amounts the holders receive from any trustee for the Municipal Obligation issuer
or from any other source. Original issue insurance does not guarantee the
payment of any redemption premium (except for certain premium payments for
certain small issue industrial development and pollution control Municipal
Obligations), the value of the Fund's shares or the market value of Municipal
Obligations, or payments of any tender purchase price upon the tender of the
Municipal Obligations. Original issue insurance also does not insure against
nonpayment of principal or interest on Municipal Obligations resulting from the
insolvency, negligence, or any other act or omission of the trustee or other
paying agent for these Municipal Obligations.
Original issue insurance remains in effect as long as the Municipal
Obligations it covers remain outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of these Municipal
Obligations. Consequently, original issue insurance may be considered to
represent an element of market value of the Municipal Obligations so insured,
but the exact effect, if any, of this insurance on the market value cannot be
estimated.
SECONDARY MARKET INSURANCE. Secondary market insurance is insurance that
is purchased by the purchaser of a Municipal Obligation (such as the Fund),
rather than the issuer, to cover that security. Secondary market insurance
generally provides the same type of coverage as original issue insurance and, as
with original issue insurance, secondary market insurance remains in effect as
long as the Municipal Obligations it covers remain outstanding and the insurer
remains in business, regardless of whether the Fund ultimately disposes of these
Municipal Obligations.
One of the purposes of acquiring secondary market insurance for a
particular Municipal Obligation is to enable the Fund to enhance the value of
that security. The Fund, for example, might seek to buy a particular Municipal
Obligation and obtain secondary market insurance for it if, in the Advisor's
opinion, the market value of the security, as insured, would exceed the current
value of the security without
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<PAGE> 23
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 covered Municipal
Obligation that has been redeemed or that the Fund has sold on the date of
redemption or the settlement date of sale. A portfolio insurer will have no
liability after such date under the relevant portfolio insurance policy for any
such Municipal Obligation, except that if the redemption date or settlement date
occurs after a record date and before the related payment date for any Municipal
Obligation, the policy will terminate for that Municipal Obligation on the
business day immediately following the payment date.
One or more portfolio insurance policies purchased by the Fund may provide
the Fund, under an irrevocable commitment of the insurer, with an option to
obtain permanent insurance for a Municipal Obligation upon the sale of that
Municipal Obligation by the Fund. The Fund would exercise the right to obtain
permanent insurance upon payment of a single, predetermined insurance premium
payable from the sale proceeds of the Municipal Obligation. The Fund expects to
exercise any such option only if, in the Advisor's opinion, the net proceeds
from the sale of a given Municipal Obligation, as insured, would exceed the
proceeds from the sale of that security without insurance.
The permanent insurance premium for each Municipal Obligation is determined
based upon the insurability of each security as of the date the Fund originally
bought the security. This premium will not be increased or decreased for any
change in the security's creditworthiness, unless the security is in default as
to payment of principal or interest, or both. If this happens, the permanent
insurance premium will be subject to an increase predetermined at the date of
the Fund's purchase.
The Fund generally intends to retain any insured Municipal Obligations
covered by portfolio insurance that are in default or in significant risk of
default and to place a value on the insurance, which value ordinarily will be
the difference between the market value of the defaulted Municipal Obligation
and the market value of similar Municipal Obligations of minimum investment
grade (that is, rated "Baa" or "BBB") that are not in default. In certain
circumstances, however, the Advisor may determine that an alternative value for
the insurance, such as the difference between the market value of the defaulted
Municipal Obligation and either its par value or the market value of similar
Municipal Obligations that are not in default or in significant risk of default,
is more appropriate. To the extent that the Fund holds defaulted Municipal
Obligations, it may be limited in its ability to manage its investment portfolio
and to purchase other Municipal Obligations. Except as described above for
Municipal Obligations covered by
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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. 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.
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 or changes in the market value of Municipal Obligations that are
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 prevailing market conditions, the composition of
the Fund's portfolio and the availability of suitable transactions. Accordingly,
there can be no assurance that the Fund will engage in hedging transactions at
any given time or from time to time or that such transactions, if available,
will be effective.
Income earned by the Fund from its hedging activities will be treated as
capital gain in the Fund's hands and, if not offset by net realized capital
losses, will be distributed to shareholders in taxable distributions. See "Tax
Matters -- Federal Income Tax Matters."
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 the writing of call or put options thereon by the
Fund, an amount of cash or liquid high-grade
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<PAGE> 25
debt 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
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<PAGE> 26
sold a financial future and the price of the underlying debt security has
increased, the position would be less valuable, and the Fund would be required
to make a maintenance margin payment to the broker. At any time prior to
expiration of the financial future, the Fund may elect to close the position by
taking an opposite position in the financial future. A final determination of
maintenance margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain. While financial
futures based on debt securities do provide for the delivery and acceptance of
securities, such deliveries and acceptances are very seldom made. Generally, the
financial future is terminated by entering into an offsetting transaction. An
offsetting transaction for a financial future sale is effected by the Fund
entering into a financial future purchase for the same aggregate amount of the
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 markets 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 Fund's investment 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
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<PAGE> 27
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 and sell 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 exposure to market
appreciation at limited risk.
The Fund may write call options on futures contracts, which constitutes a
partial hedge against any declining price of long-term debt securities. If the
futures price at expiration is below the exercise price, the Fund will retain
the full amount of the option premium, which provides a partial hedge against
any decline that may have occurred in the Fund's holdings of debt securities. If
the futures price at expiration exceeds the exercise price, the Fund will
ordinarily realize a loss equal to the amount of such excess.
The Fund may write put options on futures contracts, which constitutes a
partial hedge against an increase in the price of long-term debt securities when
the Fund is not fully invested. If the futures price at expiration is above the
exercise price, the Fund will retain the full amount of the option premium,
which provides a partial hedge against any increase in the market price of
long-term debt securities. If the futures price at expiration is less than the
exercise price, the Fund will ordinarily realize a loss equal to the difference
between the futures price and the exercise price.
An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account which represents the
amount by which the market price of the futures contract, at exercise, exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. If an option is exercised on the last
trading day prior to the expiration date of the option, the settlement will be
made entirely in cash in an amount equal to the difference between the exercise
price of the option and the closing price of the futures contract on the
expiration date. Currently options can be purchased or written with respect to
futures contracts on U.S. Treasury bonds and notes on the Chicago Board of
Trade. The holder or writer of an option may terminate his 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
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<PAGE> 28
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
- 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 a
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.
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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
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 certain 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.
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INVESTMENT COMPANY SECURITIES
The Fund may purchase common shares of closed-end investment companies that
have a similar investment objective and 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 indirectly.
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 New York State and City personal income
taxes. 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 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 or New York
State and City income taxes. Notwithstanding the foregoing, the Fund may
temporarily invest more than 20% of its assets in such taxable obligations for
defensive purposes. The ability of the Fund to invest in securities other than
tax-exempt securities (as well as its ability to enter into repurchase
agreements) is limited, however, by a requirement of the Internal Revenue Code
of 1986, as amended (the "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.
USE OF LEVERAGE AND RELATED RISKS
The Fund expects to use leverage primarily through the future issuance of
Municipal Preferred Shares. The Fund initially intends to use leverage of
approximately 38% of its total assets (including the amount obtained through
leverage). The Fund generally will not use leverage if the Advisor anticipates
that it would result in a lower return to Common Shareholders for any
significant amount of time. The Fund also may borrow money as a temporary
measure for extraordinary or emergency purposes, including the payment of
dividends and the settlement of securities transactions which otherwise might
require untimely dispositions of Fund securities.
The use of leverage creates risks for holders of the Common Shares,
including the likelihood of greater volatility of the net asset value and market
price of the Common Shares. There is a risk that fluctuations in the dividend
rates on any Municipal Preferred Shares may adversely affect the return to the
holders of the Common Shares. If the income from the securities purchased with
such funds is not sufficient to cover the cost of leverage (i.e., the dividends
paid on the Municipal Preferred Shares), the return on the Fund would be less
than if leverage had not been used, and therefore the amount available for
distribution to Common Shareholders as dividends and other distributions would
be reduced or eliminated. The Advisor in its best judgment nevertheless may
determine to maintain the Fund's leveraged position, even if the Fund's
distribution to Common Shareholders is reduced, if it deems such action to be
appropriate in the circumstances. Investment by the Fund in inverse floaters may
amplify the effects of leverage and, during periods of rising short-term
interest rates, may adversely affect the Fund's income and distributions to
Common Shareholders. During periods in which the Fund is using leverage, the
fees paid to the Advisor for
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<PAGE> 31
investment advisory and administrative services will be higher than if the Fund
did not use leverage because the fees paid will be calculated on the basis of
the Fund's total net assets, including proceeds from the issuance of preferred
shares.
Capital raised through leverage would be subject to dividend payments which
may exceed the income and appreciation on the assets purchased. The issuance of
preferred shares would involve offering expenses and other costs and may limit
the Fund's freedom to pay dividends on Common Shares or to engage in other
activities. The issuance of a class of preferred shares having priority over the
Fund's Common Shares could create an opportunity for greater return per Common
Share, but at the same time such leveraging is a speculative technique in that
it could increase the Fund's exposure to capital risk. Unless the income and
appreciation, if any, on assets acquired with the proceeds of any offering of
preferred shares exceed the cost of issuing an additional class of securities
(and other Fund expenses), the use of leverage will diminish the investment
performance of the Fund's Common Shares compared with what it would have been
without leverage.
The Fund may be subject to certain restrictions on investments imposed by
guidelines of one or more Rating Agencies which may issue ratings for any
preferred shares issued by the Fund. These guidelines may impose asset coverage
and Fund composition requirements that are more stringent than those imposed on
the Fund by the 1940 Act. It is not anticipated that these covenants or
guidelines will impede the Advisor from managing the Fund's portfolio in
accordance with the Fund's investment objective and policies.
Under the 1940 Act, the Fund is not permitted to issue preferred shares
unless, immediately after such issuance, the net asset value of the Fund's
portfolio is at least 200% of the liquidation value of the outstanding preferred
shares (i.e., such liquidation value may not exceed 50% of the Fund's total
assets). In addition, the Fund is not permitted to declare any cash dividend or
other distribution on its Common Shares unless, at the time of such declaration,
the net asset value of the Fund's portfolio (determined after deducting the
amount of such dividend or other distribution) is at least 200% of such
liquidation value. If preferred shares are issued, the Fund intends, to the
extent possible, to purchase or redeem preferred shares from time to time to
maintain asset coverage of any preferred shares of at least 200%. In addition,
under current federal income tax law, the Fund is required to allocate a portion
of any capital gains or other taxable income to holders of preferred shares. The
terms of any preferred shares are expected to require the Fund to pay to any
preferred shareholders additional dividends intended to compensate the preferred
shareholders for federal taxes payable on any capital gains or other taxable
income allocated to the preferred shares, and may require the Fund to pay such
preferred shareholders additional dividends intended to compensate them for
state and city taxes payable on such allocated capital gains or other taxable
income. Any such additional dividends will reduce the amount available for
distribution to the Common Shareholders. If the Fund has preferred shares
outstanding, two of the Fund's Trustees will be elected by the holders of
preferred shares voting as a separate class. The remaining Trustees will be
elected by holders of Common Shares and preferred shares voting together as a
single class. In the event the Fund failed to pay dividends on its preferred
shares for two years, preferred shareholders would be entitled to elect a
majority of the Trustees until the dividends were paid.
The Fund is required to meet certain distribution requirements in order to
qualify for federal income taxation as a "regulated investment company" and in
order to avoid corporate level income and excise tax. To the extent dividends on
any preferred shares do not meet these requirements, the remainder must be
distributed to the holders of the Common Shares. If the Fund is precluded from
making distributions on the Common Shares because of any applicable asset
coverage requirements, the Fund may be liable for an excise tax or an income
tax, and may also fail to qualify for federal income tax treatment as a
regulated investment company.
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<PAGE> 32
The Fund's willingness to issue new securities for investment purposes, and
the amount the Fund will issue, will depend on many factors, the most important
of which are market conditions and interest rates. Successful use of a
leveraging strategy may depend on the Advisor's ability to correctly predict
interest rates and market movements, and there is no assurance that a leveraging
strategy will be successful during any period in which it is employed.
Assuming the utilization of leverage in the amount of 38% of the Fund's
total assets and an annual dividend rate on preferred shares of 3.65% payable on
such leverage based on market rates as of the date of this prospectus, the
additional income that the Fund must earn (net of expenses) in order to cover
such dividend payments would be 1.39%. The Fund's actual cost of leverage will
be based on market rates at the time the Fund undertakes a leveraging strategy,
and such actual cost of leverage may be higher or lower than that assumed in the
previous example.
The following table is designed to illustrate the effect on the return to a
holder of the Fund's Common Shares of leverage in the amount of approximately
38% of the Fund's total assets, assuming hypothetical annual returns on the
Fund's portfolio of minus 10% to plus 10%. As the table shows, leverage
generally increases the return to Common Shareholders when portfolio return is
positive and greater than the cost of leverage and decreases the return when the
portfolio return is negative or less than the cost of leverage. The figures
appearing in the table are hypothetical and actual returns may be greater or
less than those appearing in the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assuming Portfolio Return (net of expenses)...... (10%) (5%) 0% 5% 10%
Corresponding Share Return Assuming 38%
Leverage....................................... (18.37%) (10.30%) (2.24%) 5.83% 13.89%
</TABLE>
If the Fund issues Municipal Preferred Shares, the ability of the Fund to
take certain actions or enter into certain transactions, such as transactions in
which other entities or persons acquire control of the Fund or convert the Fund
to open-end status, may be limited. See "Description of Shares -- Municipal
Preferred Shares."
Unless and until the Fund issues preferred shares, the Common Shares will
not be leveraged, and the risks and special considerations related to leverage
described in this prospectus will not apply. Such leveraging of the Shares
cannot be achieved until the proceeds resulting from the use of leverage have
been invested in accordance with the Fund's investment objective and policies.
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<PAGE> 33
ADDITIONAL RISK CONSIDERATIONS
CERTAIN RISKS ASSOCIATED WITH INVESTMENTS IN NEW YORK MUNICIPAL
OBLIGATIONS. Since the Fund will invest primarily in New York Municipal
Obligations, the performance of the Fund is especially affected by factors
pertaining to the New York economy and other factors specifically affecting the
ability of issuers of New York 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, public authorities or other issuers of
New York 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 New York 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 issue debt, raise revenues
or increase taxes. The availability of federal, state and local aid to issuers
of New York 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 New York or elsewhere. Any reduction in
the actual or perceived ability of an issuer of New York Municipal Obligations
to meet its obligations (including a reduction in the rating of its outstanding
securities) would likely adversely affect the market value and marketability of
its obligations and could adversely affect the values of other New York
Municipal Obligations as well.
In past years, New York State, New York City, and other New York public
entities have had financial problems that could adversely affect the performance
of the State's municipal bonds. In the last few years, however, New York's
economy has improved, although growth has remained below the national average.
Moody's and Standard & Poor's currently rate New York City's general obligation
bonds A3 and A-, respectively, which are in each agency's third highest rating
category. Moody's and Standard & Poor's currently rate the State of New York's
general obligation bonds A2 and A, respectively, which are in the middle of each
agency's third highest rating category. The value of New York Municipal
Obligations generally may be affected by uncertainties in the municipal markets
as a result of legislation or litigation changing the taxation of New York
Municipal Obligations or the rights of New York Municipal Obligation holders in
the event of a bankruptcy. Municipal bankruptcies are rare, and certain
provisions of the U.S. Bankruptcy Code governing such bankruptcies are unclear.
These uncertainties could have a significant impact on the prices of the
Municipal Obligations or the New York Municipal Obligations in which the Fund
invests.
The two principal classifications of New York Municipal Obligations are
"general obligation" bonds and "revenue" bonds, which latter category includes
private activity bonds ("PABs"), which are issued by public authorities to
finance various privately operated facilities, and, for bonds issued on or
before August 15, 1986, industrial development bonds or "IDBs". General
obligation bonds are secured by the issuer's pledge of faith, credit and taxing
power for the repayment of principal and the payment of interest. Revenue or
special obligation 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 tax or other specific revenue source such as from the user
of the facility being financed. PABs are in most cases revenue bonds and do not
generally constitute the pledge of the credit or taxing power of the issuer of
such bonds. The repayment of principal and the payment of interest on revenue
bonds depends solely on the ability of the user of the facility financed by the
bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment. New York Municipal
Obligations may also include "moral obligation" bonds, which are normally issued
by special purpose public authorities. If an issuer of
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<PAGE> 34
moral obligation bonds is unable to meet its obligations, the repayment of such
bonds becomes a moral commitment but not a legal obligation of the state or
municipality in question.
For a more detailed description of these and other risks affecting
investments in New York Municipal Obligations, see "Appendix B -- Special
Considerations Relating to New York" 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, which could adversely affect the
trading price of the Fund's Common Shares. This risk is usually greater among
Municipal Obligations with longer maturities or durations and when 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. This means that the Fund will be
subject to greater market risk (other things being equal) than a fund investing
solely in shorter-term securities. Market risk is often greater among certain
types of income securities, such as zero-coupon bonds, which do not make regular
interest payments. As interest rates change, these bonds often fluctuate in
price more than bonds that make regular interest payments. Conversely, the
values of lower-quality securities are less likely than higher-quality
securities to fluctuate inversely with changes in interest rates. Because the
Fund may invest in these types of income securities, it may be subject to
greater market risk than a fund that invests only in current interest-paying
securities.
Until such time as the Fund is fully invested (approximately two to three
months after the completion of the offering), the Fund may invest to a
significant extent in residual interest municipal bonds known as 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 New York 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 New
York 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 New York 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 higher-rated securities. Municipal
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<PAGE> 35
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 for 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.
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") and may also be subject to price volatility due to
such factors as interest rate sensitivity, market perception of the
creditworthiness of the issuer and general market liquidity ("market risk"). The
prices of lower-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
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<PAGE> 36
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
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 1940 Act. 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 assurance to that effect.
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<PAGE> 37
CONCENTRATION. The Fund normally will invest 80% or more of its total
assets in New York Municipal Obligations. This may make the Fund more
susceptible to adverse economic, political or regulatory occurrences affecting
New York. As concentration increases, so does the potential for fluctuation of
the net asset value of Fund Common Shares.
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 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, and the Common Shares may likewise
trade at a discount from net asset value. The trading price of the Fund's Common
Shares may be less than the initial public offering price, creating a risk of
loss for investors purchasing in the initial public offering of the Common
Shares. This market price risk may be greater for investors who sell their
Common Shares within a relatively short period after completion of this
offering.
NONDIVERSIFICATION. The Fund has registered as a "nondiversified"
investment company under the 1940 Act so that, subject to its investment
restrictions and applicable federal income tax diversification requirements,
with respect to 50% of its total assets, it will be able to invest more than 5%
(but not more than 25%) of the value of its total assets in the obligations of
any single issuer. To the extent the Fund invests a relatively high percentage
of its assets in obligations of a limited number of issuers, the Fund will be
more susceptible than a more widely diversified investment company to any single
corporate, economic, political or regulatory occurrence.
35
<PAGE> 38
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.
HOW THE FUND MANAGES RISK
INVESTMENT LIMITATIONS
The Fund has adopted certain investment limitations designed to limit
investment risk and maintain portfolio diversification. These limitations are
fundamental and may not be changed without the approval of the holders of a
majority of the outstanding Common Shares and Municipal Preferred Shares, if
any, voting together as a single class, and the approval of the holders of a
majority of the Municipal Preferred Shares voting as a separate class. The Fund
may not invest more than 25% of total Fund assets in securities of issuers in
any one industry; except that this limitation does not apply to municipal bonds
backed by the assets and revenues of governments or political subdivisions of
governments.
The Fund may become subject to guidelines which are more limiting than the
investment restrictions set forth above in order to obtain and maintain ratings
from Moody's or Standard & Poor's on the Municipal Preferred Shares that it
intends to issue. The Fund does not anticipate that such guidelines would have a
material adverse effect on the Fund's Common Shareholders or the Fund's ability
to achieve its investment objective. See "Investment Objective and
Policies -- Investment Restrictions" in the Statement of Additional Information
for information about these guidelines and additional fundamental and
nonfundamental investment policies of the Fund.
LIMITED ISSUANCE OF MUNICIPAL PREFERRED SHARES
Under the 1940 Act, the Fund could issue Municipal Preferred Shares having
a total liquidation value (the liquidation of the original purchase price of the
shares plus any accrued and unpaid dividends) of up to one-half of the value of
the total net assets of the Fund. If the total liquidation value of the
Municipal Preferred Shares was ever more than one-half of the value of the
Fund's total net assets, the Fund would not be able to declare dividends on the
Common Shares until the liquidation value, as a percentage of the Fund's assets,
was reduced. The Fund intends to issue Municipal Preferred Shares representing
about 38% of the Fund's total capital at the time of issuance, if the Fund sells
all the Common Shares offered in this prospectus and all the Municipal Preferred
Shares which may be offered in the future through a different prospectus. This
higher than required margin of net asset value provides a cushion against later
fluctuations in the value of the Fund's portfolio and will subject Common
Shareholders to less income and net asset value volatility than if the Fund were
more leveraged. The Fund intends to purchase or redeem Municipal
36
<PAGE> 39
Preferred Shares, if necessary, to keep the liquidation value of the Municipal
Preferred Shares below one-half of the value of the Fund's total net assets.
MANAGEMENT OF INVESTMENT PORTFOLIO AND CAPITAL STRUCTURE TO LIMIT LEVERAGE RISK
The Fund may take certain actions if short-term rates increase or market
conditions otherwise change (or the Fund anticipates such an increase or change)
and the Fund's leverage begins (or is expected) to adversely affect Common
Shareholders. In order to attempt to offset such a negative impact of leverage
on Common Shareholders, the Fund may shorten the average maturity of its
investment portfolio (by investing in short-term, high-quality securities) or
may extend the maturity of any outstanding Municipal Preferred Shares. The Fund
may also attempt to reduce the leverage by redeeming or otherwise purchasing
Municipal Preferred Shares. As explained above under "Use of Leverage and
Related Risks," the success of any such attempt to limit leverage risk depends
on the Advisor's ability to accurately predict interest rate or other market
changes. Because of the difficulty of making such predictions, the Fund may
never attempt to manage its capital structure in the manner described above.
If market conditions suggest that additional leverage would be beneficial,
the Fund may sell previously unissued Municipal Preferred Shares or Municipal
Preferred Shares that the Fund previously issued but later repurchased.
HEDGING STRATEGIES
The Fund may use various investment strategies designed to manage the
"duration" of the Fund's portfolio. The duration of a bond measures the
sensitivity of the bond's price to changes in interest rates. Generally, the
shorter the duration of the Fund's portfolio, the less its net asset value will
change when interest rates change. These hedging strategies include using
financial futures contracts, including index futures, options on financial
futures or options based on either an index of long-term municipal securities or
on taxable debt securities whose prices, in the opinion of the Advisor,
correlate with the prices of the Fund's investments. The Fund may use
over-the-counter options, which are considered to be less marketable than
options traded on an exchange or board of trade. Successful implementation of
most hedging strategies would generate taxable income.
37
<PAGE> 40
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 (as defined below) with the Fund. There are 13 trustees
of the Fund, four of whom are "interested persons" (as defined in the 1940 Act).
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
Colonial Management Associates, Inc. (the "Advisor") is 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"). The Advisor has been an investment advisor since 1931. As of
October 31, 1999, the Advisor was serving as investment advisor, sub-advisor or
administrator for 62 open-end and 9 closed-end management investment company
portfolios and managing over $20.5 billion in assets.
The Advisor's mutual funds and institutional investment advisory businesses
are part of a larger business unit that includes several separate legal entities
known as Liberty Funds Group LLC ("LFG"). 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 at
the Advisor, will manage the Fund. Messrs. Loring and Hartford have managed
various other Colonial tax-exempt funds 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 1940 Act, 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 1940 Act.
The Advisor provides the Fund with accounting, bookkeeping and pricing
services and other services and office facilities (the expenses of which are
borne by the Fund as specified below), except to the extent these services are
provided by an administrator or an accounting firm hired by the Fund.
Under the Management Agreement with the Fund, the Advisor receives a
monthly advisory fee at the annual rate of 0.65% of the average weekly net
assets of the Fund (including net assets, if any, attributable to Municipal
Preferred Shares).
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<PAGE> 41
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 period from the commencement of the Fund's operations through
January 1, 2001, the Advisor has agreed to waive all of its management fees. In
addition, from January 2, 2001 through November 30, 2001 (on an annualized
basis) and for the subsequent 12-month periods ending November 30 in the years
indicated below, the Advisor has agreed to waive the Fund's management fees in
the following amounts:
<TABLE>
<CAPTION>
PERCENTAGE WAIVED
PERIOD ENDING (AS A PERCENTAGE OF AVERAGE
NOVEMBER 30, WEEKLY TOTAL NET ASSETS)*
- ------------- ---------------------------
<S> <C>
2001................. 0.30%
2002................. 0.30%
2003................. 0.30%
2004................. 0.30%
2005................. 0.25%
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE WAIVED
PERIOD ENDING (AS A PERCENTAGE OF AVERAGE
NOVEMBER 30, WEEKLY TOTAL NET ASSETS)*
- ------------- ---------------------------
<S> <C>
2006................. 0.20%
2007................. 0.15%
2008................. 0.10%
2009................. 0.05%
</TABLE>
- ---------------
* Including net assets attributable to Municipal Preferred Shares.
The Advisor has not agreed to waive any portion of the Fund's fees and
expenses beyond November 30, 2009.
NET ASSET VALUE
Net asset value of the Fund will be determined no less frequently than as
of the close of regular trading on the New York Stock Exchange (generally 4:00
p.m. Eastern time) on the last business day of each week (generally Friday), and
at such other times as the Fund may authorize. The net asset value of the Fund
equals the value of the Fund's assets less the Fund's liabilities. Portfolio
securities for which market quotations are readily available are valued at
current market value. Short-term investments maturing in 60 days or less are
valued at amortized cost when the Advisor determines, pursuant to procedures
adopted by the Board of Trustees, that such cost approximates current market
value. All other securities and assets are valued at their fair value following
procedures adopted by the Board of Trustees.
When price quotes are not readily available (which is usually the case for
Municipal Obligations), the pricing service establishes a fair market value
based on prices of comparable Municipal Obligations. All valuations are subject
to review by the Fund's Board of Trustees or its delegate, the Advisor.
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<PAGE> 42
DISTRIBUTIONS
The Fund intends to make monthly distributions of its net tax-exempt
interest income, after payment of any dividends on any outstanding preferred
shares. The Fund will distribute annually any taxable income and capital gain.
Distributions to Common Shareholders cannot be assured, and the amount of each
monthly distribution is likely to vary. Initial distributions to Common
Shareholders are expected to be paid approximately 60 days after the completion
of this offering. While there are any preferred shares outstanding, the Fund
might not be permitted to declare any cash dividend or other distributions on
its Common Shares in certain circumstances. See "Description of Shares."
If any of the dividends on the Preferred Shares (as defined below in
"Description of Shares -- Municipal Preferred Shares") is determined to be from
taxable ordinary income or capital gain, the terms of the Preferred Shares may
require the Fund to pay an extra amount of dividends on the Preferred Shares in
an amount sufficient to make each holder of the Preferred Shares whole (on an
after-tax basis) with respect to the estimated federal income tax and/or New
York State and City personal income tax which the holder would be required to
pay on the taxable distributions ("gross-up payments"), in which case the amount
of any dividends payable to Common Shareholders would be reduced by the amount
of any such gross-up payments. For information regarding important income tax
consequences of distributions to Common Shareholders, see "Tax Matters."
DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), all Common
Shareholders whose shares are registered in their own names will have all
distributions reinvested automatically in additional shares of the Fund by
EquiServe (the "Plan Agent"), as agent under the Plan, unless a Common
Shareholder elects to receive cash. An election to receive cash may be revoked
or reinstated at the option of the Common Shareholder. Shareholders whose shares
are held in the name of a broker or nominee will have distributions reinvested
automatically by the broker or nominee in additional shares under the Plan,
unless the service is not provided by the broker or nominee, or unless the
shareholder elects to receive distributions in cash. If the service is not
available, such distributions will be paid in cash. Shareholders whose shares
are held in the name of a broker or nominee should contact the broker or nominee
for details. All distributions to investors who elect not to participate (or
whose broker or nominee elects not to participate) in the Plan will be paid by
check mailed directly to the record holder by the Plan Agent, as dividend paying
agent.
The Plan Agent will furnish each person who buys shares in the offering
with written information relating to the Plan. Included in such information will
be procedures for electing to receive distributions in cash (or, in the case of
shares held in the name of a broker or nominee who does not participate in the
Plan, procedures for having such shares registered in the name of the
shareholder so that such shareholder may participate in the Plan).
If the Trustees of the Fund declare a dividend (including a capital gain
dividend) payable either in shares or in cash, as holders of shares may have
elected, then nonparticipants in the Plan will receive cash and participants in
the Plan will receive the equivalent in shares valued as set forth below.
Whenever a market price is equal to or exceeds net asset value at the time
shares are valued for the purpose of determining the number of shares equivalent
to the distribution, participants will be issued shares at the net asset value
most recently determined as provided under "Net Asset Value" in this prospectus
and the Statement of Additional Information, but in no event less than 95% of
the market price. If the net asset value of the shares at such time exceeds the
market price of shares at such time, or if the Fund should declare a dividend
(including a capital gain dividend) payable only in cash, the Plan Agent will,
as agent for
40
<PAGE> 43
the participants, use the cash that the shareholders would have received as a
dividend to buy shares in the open market, the American Stock Exchange or
elsewhere, for the participants' accounts. If, before the Plan Agent has
completed its purchases, the market price exceeds the net asset value of the
shares, the average per share purchase price paid by the Plan Agent may exceed
the net asset value of the shares, resulting in the acquisition of fewer shares
than if the dividend (including a capital gain dividend) had been paid in shares
issued by the Fund. The Plan Agent will apply all cash received as a dividend
(including a capital gain dividend) to purchase shares on the open market as
soon as practicable after the payment date of such dividend, but in no event
later than 30 days after such date, except where necessary to comply with
applicable provisions of the federal securities laws.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in such accounts, including
information needed by shareholders for personal and tax records. Shares in the
account of each Plan participant will be held by the Plan Agent in
noncertificated form in the name of the participant, and each shareholder's
proxy will include those shares purchased pursuant to the Plan.
There is no charge to participants for reinvesting dividends (including
capital gain dividends). The Plan Agent's fees for handling the reinvestment of
dividends (including capital gain dividends) will be paid by the Fund. There
will be no brokerage charges with respect to shares issued directly by the Fund
as a result of dividends or capital gains distributions payable either in stock
or in cash. However, each participant will pay a pro rata share of brokerage
commissions incurred with respect to the Plan Agent's open market purchases in
connection with the reinvestment of dividends (including capital gain
dividends).
The automatic reinvestment of dividends (including capital gain dividends)
will not relieve participants of any income tax which may be payable on such
dividends. The amount of the dividend for tax purposes may vary depending on
whether the Fund issues new Common Shares or purchases them on the open market.
For additional information, please see "Tax Matters."
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any dividend (including a capital gain dividend) paid after written
notice of the change sent to the members of the Plan at least 30 days before the
record date for such dividend. All correspondence concerning the Plan should be
directed to the Plan Agent at 150 Royall Street, Canton, Massachusetts 02021.
41
<PAGE> 44
DESCRIPTION OF SHARES
COMMON SHARES
The Fund's Declaration of Trust authorizes the issuance of an unlimited
number of Common Shares, no par value per share. All Common Shares have equal
rights to the payment of dividends and the distribution of assets upon
liquidation. Common 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. Whenever Municipal Preferred Shares are
outstanding, Common Shareholders will not be entitled to receive any
distributions from the Fund unless all accrued dividends on Municipal Preferred
Shares have been paid, and unless asset coverage (as defined in the 1940 Act)
with respect to Municipal Preferred Shares would be at least 200% after giving
effect to the distributions. See "Municipal Preferred Shares" below.
The Fund has applied for listing of the Common Shares on the American Stock
Exchange subject to notice of issuance. The Fund intends to hold annual meetings
of shareholders so long as the Common Shares are listed on a national securities
exchange and such meetings are required as a condition to such listing.
The Fund's net asset value per share generally increases when interest
rates decline, and decreases when interest rates rise, and these changes are
likely to be greater because the Fund intends to have a leveraged capital
structure. Net asset value will be reduced immediately following the offering by
the amount of the sales load and organization, if any, and offering expenses
paid by the Fund. The Advisor has agreed to pay (i) all organizational expenses
and (ii) offering costs (other than sales loads) that exceed $0.03 per Common
Share. See "Use of Proceeds."
Unlike open-end funds, closed-end funds like the Fund do not continuously
offer shares and do not provide daily redemptions. Rather, if a shareholder
determines to buy additional Common Shares or sell shares already held, the
shareholder may do so by trading on the American Stock Exchange, through a
broker or otherwise. 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 during some
periods have traded at prices higher than net asset value and during other
periods have traded at prices lower than net asset value. Because the market
value of the Common Shares may be influenced by such factors as dividend levels
(which are in turn affected by expenses), call protection, dividend stability,
portfolio credit quality, net asset value, relative demand for and supply of
such shares in the market, general market and economic conditions, and other
factors beyond the control of the Fund, the Fund cannot assure you that Common
Shares will trade at a price equal to or higher than net asset value in the
future. The Common Shares are designed primarily for long-term investors, and
investors in the Common Shares should not view the Fund as a vehicle for trading
purposes. See "Use of Leverage and Related Risks" and "Additional Risk
Considerations" and the Statement of Additional Information under "Repurchase of
Fund Shares; Conversion to Open-End Fund."
MUNICIPAL PREFERRED SHARES
The Declaration of Trust 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"). Municipal Preferred Shares will
carry one vote per share. Municipal Preferred Shares will, when issued, be fully
paid
42
<PAGE> 45
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.
The Fund's Board of Trustees has indicated its intention to authorize an
offering of Municipal Preferred Shares (representing approximately 38% of the
Fund's capital immediately after the time the Municipal Preferred Shares are
issued) approximately one to three months after completion of the offering of
Common Shares. Any such decision is subject to market conditions and to the
Board's continuing belief that leveraging the Fund's capital structure through
the issuance of Municipal Preferred Shares is likely to achieve the benefits to
the Common Shareholders described in this prospectus. Although the terms of the
Municipal Preferred Shares will be determined by the Board of Trustees (subject
to applicable law and the Fund's Declaration of Trust) if and when it authorizes
an offering of Municipal Preferred Shares, the Board has determined that the
Municipal Preferred Shares, at least initially, would likely pay cumulative
dividends at rates determined over relatively shorter-term periods (such as 7
days), by providing for the periodic redetermination of the dividend rate
through an auction or remarketing procedure. The Board of Trustees has indicated
that the preference on distribution, liquidation preference, voting rights and
redemption provisions of the Municipal Preferred Shares will likely be as stated
below.
LIMITED ISSUANCE OF MUNICIPAL PREFERRED SHARES. Under the 1940 Act, the
Fund could issue Municipal Preferred Shares with an aggregate liquidation value
of up to one-half of the value of the Fund's total net assets, measured
immediately after issuance of the Municipal Preferred Shares. "Liquidation
value" means the original purchase price of the shares being liquidated plus any
accrued and unpaid dividends. In addition, the Fund is not permitted to declare
any cash dividend or other distribution on its Common Shares unless the
liquidation value of the Municipal Preferred Shares is less than one-half of the
value of the Fund's total net assets (determined after deducting the amount of
such dividend or distribution) immediately after the distribution. If the Fund
sells all the Common Shares and Municipal Preferred Shares discussed in this
prospectus, the liquidation value of the Municipal Preferred Shares is expected
to be approximately 38% of the value of the Fund's total net assets. The Fund
intends to purchase or redeem Municipal Preferred Shares, if necessary, to keep
that fraction below one-half.
DISTRIBUTION PREFERENCE. The Municipal Preferred Shares have complete
priority over the Common Shares as to distribution of assets.
LIQUIDATION PREFERENCE. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Fund, holders of
Municipal Preferred Shares will be entitled to receive a preferential
liquidating distribution (expected to equal the original purchase price per
share plus accumulated and unpaid dividends thereon, whether or not earned or
declared) before any distribution of assets is made to holders of Common Shares.
VOTING RIGHTS. Municipal Preferred Shares are required to be voting shares
and to have equal voting rights with Common Shares. Except as otherwise
indicated in this prospectus or the Statement of Additional Information and
except as otherwise required by applicable law, holders of Municipal Preferred
Shares will vote together with Common Shareholders as a single class.
Holders of Municipal Preferred Shares, voting as a separate class, will be
entitled to elect two of the Fund's trustees. The remaining trustees will be
elected by Common Shareholders and holders of Municipal Preferred Shares, voting
together as a single class. In the unlikely event that two full years of accrued
dividends are unpaid on the Municipal Preferred Shares, the holders of all
outstanding Municipal Preferred Shares, voting as a separate class, will be
entitled to elect a majority of the Fund's trustees until all dividends in
arrears have been paid or declared and set apart for payment. In order for the
Fund to take certain actions or enter into certain transactions (such as
authorizing, creating or issuing additional Municipal Preferred Shares or other
preferred shares ranking prior to or on parity with the Municipal
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<PAGE> 46
Preferred Shares or amending, altering or repealing the provisions of the
Declaration of Trust or By-Laws of the Fund so as to materially affect the
preferences, rights or powers of the Municipal Preferred Shares), a separate
class vote of holders of Municipal Preferred Shares will be required, in
addition to the single class vote of the holders of Municipal Preferred Shares
and Common Shares. See the Statement of Additional Information under
"Description of Shares -- Municipal Preferred Shares -- Voting Rights."
REDEMPTION, PURCHASE AND SALE OF MUNICIPAL PREFERRED SHARES. The terms of
the Municipal Preferred Shares may provide that they are redeemable at certain
times, in whole or in part, at the original purchase price per share plus
accumulated dividends. The terms may also state that the Fund may tender for or
purchase Municipal Preferred Shares and resell any shares so tendered. Any
redemption or purchase of Municipal Preferred Shares by the Fund will reduce the
leverage applicable to Common Shares, while any resale of such Municipal
Preferred Shares by the Fund will increase such leverage. See "Use of Leverage
and Related Risks."
The discussion above describes the Board of Trustees' present intention
with respect to a possible offering of Municipal Preferred Shares. If the Board
of Trustees determines to authorize such an offering, the terms of the Municipal
Preferred Shares may be the same as, or different from, the terms described
above, subject to applicable law and the Fund's Declaration of Trust.
CERTAIN PROVISIONS IN THE 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 of Trust 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 1940 Act.
Please refer to the Declaration of Trust, a copy of 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 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 Common Shares. If the Common
Shares were to trade at a substantial discount to net asset value for an
extended period of time, the Board may consider the repurchase of its Common
Shares on the open market or the making of tender offers for such shares. No
assurances can be given that such actions will be taken. Subject to its
investment restrictions, the Fund may borrow money to finance the repurchase of
shares, subject to compliance with the asset coverage requirements of the 1940
Act and the other limitations described under "Use of Leverage and Related
Risks." Shares may not be repurchased, however, (i) if applicable asset coverage
requirements under the 1940 Act (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.
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<PAGE> 47
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 STATUS
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 1940 Act. 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 1940 Act) 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 Municipal Preferred Shares then outstanding at the Municipal
Preferred Shares redemption price. 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 will, at any time in the future, decide to
submit a proposal to convert to open-end status to the shareholders of the Fund.
TAX MATTERS
FEDERAL INCOME TAX MATTERS
The following federal tax discussion reflects provisions of the 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 Common Shares of 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.
The Fund primarily invests in municipal bonds issued by the State of New
York or its political subdivisions, agencies, authorities and instrumentalities,
by other states (including the District of Columbia), cities and local
authorities and certain possessions and territories of the United States (such
as Puerto
45
<PAGE> 48
Rico or Guam) or in municipal bonds whose income is otherwise exempt from
regular federal income tax. Consequently, the regular monthly dividends you
receive (whether paid in cash or reinvested in additional Common Shares) will
generally be exempt from regular federal income taxes. A portion of these
dividends, however, will likely be subject to the federal AMT. If you are
subject to the federal AMT, a portion of your regular monthly dividends may be
taxable. Furthermore, if you receive Social Security or Railroad Retirement
benefits, you should be aware that tax-free income is taken into account in
calculating the amount of these benefits that may be subject to federal income
tax.
For corporate shareholders, interest on all tax-exempt Municipal
Obligations is taken into account in the computation of income subject to the
federal AMT, and dividends from the Fund will not qualify for the dividends
received deduction.
Although the Fund does not seek to realize taxable income or capital gains,
the Fund may realize and distribute taxable income or capital gains from time to
time as a result of the Fund's normal investment activities. The Fund will
distribute at least annually any taxable income or capital gains. Distributions
of any taxable net investment income and net short-term capital gain are taxable
as ordinary income. Distributions of the Fund's net capital gain (i.e., the
excess of the Fund's net long-term capital gain over net short-term capital
loss) ("capital gain dividends"), if any, are taxable to you as long-term
capital gain, regardless of how long you have held your Common Shares. 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 as paid out of the
Fund's earnings and profits and may therefore be treated as a taxable dividend
(even though that portion represents a return of the Fund's capital).
Distributions, if any, in excess of the Fund's earnings and profits will first
reduce the adjusted tax basis of your Common Shares and, after that basis has
been reduced to zero, will constitute capital gains to you (assuming that you
held your Common Shares as a capital asset).
Distributions of taxable income or capital gains will be taxable to you
whether received in cash or in Common Shares under the Dividend Reinvestment
Plan. In the latter case, you will be treated as receiving an amount equal to
the cash used to purchase such shares (where the Plan Agent purchases shares on
the open market on behalf of Plan participants) or generally the fair market
value of the Common Shares on the date of issuance of such Shares (where the
Fund issues shares to Plan participants).
Distributions of taxable income or capital gains are taxable to you even if
they are paid from income or gains earned by the Fund prior to your investment
(and thus were included in the price that you paid).
Each year, you will receive a year-end statement that describes the tax
status of dividends paid to you during the preceding year, including the source
of net tax-exempt interest income by state and the portion of income that is
subject to the federal AMT. You will receive this statement from the firm where
you purchased your Common Shares if you hold your investment in street name; the
Fund will send you this statement if you hold your shares in registered form.
If you sell your Common Shares, you will generally recognize gain or loss
in an amount equal to the difference between your adjusted tax basis in the
Common Shares and the amount received. If you hold your Common Shares as capital
assets, the gain or loss will be a capital gain or loss. The maximum tax rate
applicable to net capital gains recognized by individuals and other noncorporate
taxpayers is (i) the same as the maximum ordinary income tax rate for gains
recognized on the sale of capital assets held for one year or less or (ii) 20%
for gains recognized on the sale of capital assets held for more than one year
(as well as capital gain dividends).
Any loss recognized on a disposition of Common Shares held for six months
or less will be disallowed to the extent of any exempt interest dividends
received with respect to those Common Shares. In addition, any loss not already
disallowed as provided in the preceding sentence will be treated as a long-term
capital loss to the extent of any capital gain dividends received with respect
to those Common Shares. For purposes
46
<PAGE> 49
of determining whether Common Shares have been held for six months or less, the
holding period is suspended for any periods during which your risk of loss is
diminished as a result of holding one or more other positions in substantially
similar or related property, or through certain options or short sales. In
addition, any loss realized on a sale or exchange of Common Shares will be
disallowed to the extent that you replace the disposed of Common Shares with
other Common Shares within a period of 61 days beginning 30 days before and
ending 30 days after the date of disposition, which could, for example, occur if
you are a participant in the Dividend Reinvestment Plan. In such an event, your
basis in the replacement Common Shares will be adjusted to reflect the
disallowed loss.
If you borrow money to buy Fund shares, you may not deduct the interest on
that loan. Under I.R.S. rules, Fund shares may be treated as having been bought
with borrowed money even if the purchase of the Fund shares cannot be traced
directly to borrowed money.
The Fund's investments in Municipal Obligations issued at a discount and
certain other portfolio positions will require the Fund to accrue and distribute
income and gains not yet received. In such cases, the Fund may be required to
sell assets (including when it is not advantageous to do so) to generate the
cash necessary to distribute as dividends to its shareholders all of its income
and gains and therefore eliminate any tax liability at the Fund level.
In order to avoid corporate taxation of its earnings and to pay tax-free
dividends, the Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Code by meeting certain I.R.S. requirements
that govern the Fund's sources of income and diversification of assets, and
distributing substantially all of its earnings to shareholders. In particular,
in order for the Fund to pay tax-free dividends, at least 50% of the value of
the Fund's total assets must consist of tax-exempt obligations. If the Fund
fails to qualify for treatment as a regulated investment company in any taxable
year, the Fund will be subject to tax on its income at corporate rates, and
could be required to recognize unrealized gains, pay substantial taxes and
interest and to make substantial distributions before requalifying as a
regulated investment company that is accorded special tax treatment.
The Fund may be required to withhold 31% of certain of your dividends if
you have not provided the Fund with your correct taxpayer identification number
(normally your Social Security number), or if you are otherwise subject to
back-up withholding.
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 New York State and City personal income
taxes. Consequently, under New York income tax rules, the portion of Fund
distributions derived from interest on New York Municipal Obligations will be
exempt from New York State and City personal income taxes.
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. 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.
47
<PAGE> 50
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each Underwriter named below has severally agreed to
purchase, and the Fund has agreed to sell to such Underwriter, the number of
Common Shares set forth opposite the name of such Underwriter.
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- ---- ---------
<S> <C>
Salomon Smith Barney Inc. ..................................
A.G. Edwards & Sons, Inc. ..................................
PaineWebber Incorporated....................................
Total.............................................
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
Underwriters to purchase the Common Shares included in this offering are subject
to approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to purchase all the Common Shares (other than
those covered by the over-allotment option described below) if they purchase any
of the Common Shares. The representatives have advised the Fund that the
Underwriters do not intend to confirm any sales to any accounts over which they
exercise discretionary authority.
The Underwriters, for whom Salomon Smith Barney Inc. is acting as
representative, propose to offer some of the Common Shares directly to the
public at the public offering price set forth on the cover page of this
prospectus and some of the Common Shares to certain dealers at the public
offering price less a concession not in excess of $ per Common Share. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per Common Share on sales to certain other dealers. If all of the
Common Shares are not sold at the initial offering price, the representatives
may change the public offering price and other selling terms. Investors must pay
for any Common Shares purchased on or before , 1999.
The Fund has granted to the Underwriters an option, exercisable for 45 days
from the date of this prospectus, to purchase up to additional Common
Shares at the public offering price less the underwriting discount. The
Underwriters may exercise such option solely for the purpose of covering
overallotments, if any, in connection with this offering. To the extent such
option is exercised, each Underwriter will be obligated, subject to certain
conditions, to purchase a number of additional Common Shares approximately
proportionate to such Underwriter's initial purchase commitment.
The Fund and the Advisor have agreed that, for a period of 180 days from
the date of this prospectus, they will not, without the prior written consent of
Salomon Smith Barney Inc., on behalf of the Underwriters, dispose of or hedge
any Common Shares or any securities convertible into or exchangeable for Common
Shares. Salomon Smith Barney Inc. in its sole discretion may release any of the
securities subject to these agreements at any time without notice.
Prior to the offering, there has been no public market for the Common
Shares. Consequently, the initial public offering price for the Common Shares
was determined by negotiation among the Fund, the Advisor and the Underwriters
named above. There can be no assurance, however, that the price at which the
Common Shares will sell in the public market after this offering will not be
lower than the price at which they are sold by the Underwriters or that an
active trading market in the Common Shares will develop and continue after this
offering. The Fund has applied for listing of the Common Shares on the American
Stock Exchange.
48
<PAGE> 51
The Fund and the Advisor have each agreed to indemnify the several
Underwriters or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.
The Advisor has agreed to pay (i) all organizational expenses and (ii)
offering costs (other than sales loads) that exceed $0.03 per share. In
addition, the Advisor has agreed to reimburse the Underwriters for certain
expenses incurred by the Underwriter in the offering.
In connection with the requirements for listing the Fund's Common Shares on
the American Stock Exchange, the Underwriters have undertaken to sell lots of
100 or more Common Shares to a minimum of 400 beneficial owners in the United
States. The minimum investment requirement is 100 Common Shares.
Certain Underwriters may make a market in the Common Shares after trading
in the Common Shares has commenced on the American Stock Exchange. No
Underwriter is, however, obligated to conduct market-making activities and any
such activities may be discontinued at any time without notice, at the sole
discretion of the Underwriter. No assurance can be given as to the liquidity of,
or the trading market for, the Common Shares as a result of any market-making
activities undertaken by any Underwriter. This prospectus is to be used by any
Underwriter in connection with the offering and, during the period in which a
prospectus must be delivered, with offers and sales of the Common Shares in
market-making transactions in the over-the-counter market at negotiated prices
related to prevailing market prices at the time of the sale.
The Underwriters have advised the Fund that, pursuant to Regulation M under
the Securities Exchange Act of 1934, as amended, certain persons participating
in the offering may engage in transactions, including stabilizing bids, covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Shares at a level
above that which might otherwise prevail in the open market. A "stabilizing bid"
is a bid for or the purchase of the Common Shares on behalf of an Underwriter
for the purpose of fixing or maintaining the price of the Common Shares. A
"covering transaction" is a bid for or purchase of the Common Shares on behalf
of an Underwriter to reduce a short position incurred by the Underwriters in
connection with the offering. A "penalty bid" is a contractual arrangement
whereby if, during a specified period after the issuance of the Common Shares,
the Underwriters purchase Common Shares in the open market for the account of
the underwriting syndicate and the Common Shares purchased can be traced to a
particular Underwriter or member of the selling group, the underwriting
syndicate may require the Underwriter or selling group member in question to
purchase the Common Shares in question at the cost price to the syndicate or may
recover from (or decline to pay to) the Underwriter or selling group member in
question any or all compensation (including, with respect to a representative,
the applicable syndicate management fee) applicable to the Common Shares in
question. As a result an Underwriter or selling group member and, in turn,
brokers may lose the fees that they otherwise would have earned from a sale of
the Common Shares if their customer resells the Common Shares while the penalty
bid is in effect. The Underwriters are not required to engage in any of these
activities, and any such activities, if commenced, may be discontinued at any
time.
Representatives that sell at least a specified number of Common Shares will
share in the syndicate management fee based on the respective number of shares
sold by them.
The Fund anticipates that from time to time the representatives of the
Underwriters and certain other Underwriters may act as brokers or dealers in
connection with the execution of the Fund's portfolio transactions after they
have ceased to be Underwriters and, subject to certain restrictions, may act as
brokers while they are Underwriters.
The principal business address of Salomon Smith Barney Inc. is 388
Greenwich Street, New York, New York 10010.
49
<PAGE> 52
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.
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 Plan and as transfer agent and
registrar for the shares.
LEGAL OPINIONS
Certain legal matters in connection with the Common Shares will be passed
upon for the Fund by Ropes & Gray, Boston, Massachusetts, and for the
Underwriters by Simpson Thacher & Bartlett, New York, New York. Simpson Thacher
& Bartlett will rely, as to certain matters of Massachusetts law in its opinion,
on the opinion of Ropes & Gray.
50
<PAGE> 53
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
Use of Proceeds............................................. B-2
Investment Objective and Policies........................... B-2
Fund Charges and Expenses................................... B-4
Management of the Fund...................................... B-5
Portfolio Transactions...................................... B-11
Net Asset Value............................................. B-11
Description of Shares....................................... B-12
Repurchase of Common Shares................................. B-14
Miscellaneous Investment Practices.......................... B-16
Tax Matters................................................. B-26
Shareholder Liability....................................... B-29
Additional New York Tax Considerations...................... B-29
Custodian................................................... B-29
Independent Accountants..................................... B-29
Miscellaneous Matters....................................... B-29
Financial Statements........................................ B-30
Report of Independent Accountants........................... B-31
Appendix A -- Ratings of Investments........................ B-32
Appendix B -- Special Considerations Relating to New York... B-37
</TABLE>
51
<PAGE> 54
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,000,000 SHARES
COLONIAL NEW YORK
INSURED MUNICIPAL FUND
COMMON SHARES
$15.00 PER SHARE
-------------------------
PROSPECTUS
, 1999
-------------------------
SALOMON SMITH BARNEY
A.G. EDWARDS & SONS, INC.
PAINEWEBBER INCORPORATED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 55
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 16, 1999
COLONIAL NEW YORK
INSURED MUNICIPAL FUND
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") relating to the common
shares of beneficial interest ("Common Shares") offered by Colonial New York
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 Common Shares (the "Prospectus"). This SAI should be read together with the
Prospectus. Investors may obtain a free copy of the Prospectus by calling
Colonial Management Associates, Inc. at 1-800-426-3750. Capitalized terms used
but not defined in this SAI have the meanings ascribed to them in the
Prospectus.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Use of Proceeds............................................. B-2
Investment Objective and Policies........................... B-2
Fund Charges and Expenses................................... B-4
Management of the Fund...................................... B-5
Portfolio Transactions...................................... B-11
Net Asset Value............................................. B-11
Description of Shares....................................... B-12
Repurchase of Common Shares................................. B-14
Miscellaneous Investment Practices.......................... B-16
Tax Matters................................................. B-26
Additional New York Tax Considerations...................... B-29
Shareholder Liability....................................... B-29
Custodian................................................... B-29
Independent Accountants..................................... B-29
Miscellaneous Matters....................................... B-29
Financial Statements........................................ B-30
Report of Independent Accountants........................... B-31
Appendix A -- Ratings of Investments........................ B-32
Appendix B -- Special Considerations Relating to New York... B-37
</TABLE>
<PAGE> 56
USE OF PROCEEDS
The net proceeds of the offering of Common Shares will be approximately
$ ($ if the underwriters exercise their overallotment option
in full) after payment of the sales load to Salomon Smith Barney Inc., A.G.
Edwards & Sons, Inc. and PaineWebber Incorporated (the "Underwriters") and
estimated organization and 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 New York
Municipal Obligations (as defined below) that meet the Fund's investment
objective at or shortly (within three months) 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 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 Trustees may change the policies without shareholder
approval.
As used in this Statement of Additional Information, 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 "New York 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 New
York State and City 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 which may be issued in the future by means of a
separate prospectus, voting together as a single class, and of the holders of a
"majority of the outstanding" Preferred Shares, including any Municipal
Preferred Shares, voting as a separate class. A "majority of the outstanding"
shares means the lesser of (i) 67% of the shares represented at a meeting at
which more than 50% of the outstanding shares are represented or (ii) more than
50% of the outstanding shares.
The Fund may:
1. issue senior securities or borrow money to the extent permitted by the
1940 Act;
2. only own real estate acquired as a result of owning securities;
3. purchase and sell futures contracts and related options;
4. underwrite securities issued by others only when disposing of portfolio
securities;
5. make loans only through lending of securities, through the purchase of
debt instruments or similar evidences of indebtedness typically sold to
financial institutions and through repurchase agreements;
6. not concentrate more than 25% of its total assets in any one industry
(in the utilities category, gas, electric, water and telephone companies
will be considered as separate industries);
B-2
<PAGE> 57
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 New York 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 New York
State and City personal income taxes.
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.
The Fund intends to apply for ratings for the Municipal Preferred Shares
which it may offer in the future from Moody's Investors Service, Inc.
("Moody's") and/or Standard & Poor's Ratings Services ("Standard & Poor's"). In
order to obtain and maintain the required ratings, the Fund may be required to
comply with investment quality, diversification and other guidelines established
by Moody's or Standard & Poor's. Such guidelines will likely be more restrictive
than the restrictions set forth above. The Fund does not anticipate that such
guidelines would have a material adverse effect on the Fund's Common
Shareholders or its ability to achieve its investment objectives. The Fund
presently anticipates that any Municipal Preferred Shares that it intends to
issue would be initially given the highest ratings by Moody's ("Aaa") or by
Standard & Poor's ("AAA"), but no assurance can be given that such ratings will
be obtained. No minimum rating is required for the issuance of Municipal
Preferred Shares by the Fund. Moody's and Standard & Poor's receive fees in
connection with their ratings issuances.
B-3
<PAGE> 58
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 shares of Municipal Preferred, if any,
for such month at the annual rate of 0.65% of average weekly total net assets.
For the period from the commencement of the Fund's operations through
January 1, 2001, the Advisor has agreed to waive all of its management fees. In
addition, from January 2, 2001 through November 30, 2001 (on an annualized
basis) and for the subsequent 12-month periods ending November 30 in the years
indicated below, the Advisor has agreed to waive the Fund's management fees in
the following amounts:
<TABLE>
<CAPTION>
PERCENTAGE WAIVED
PERIOD ENDING (AS A PERCENTAGE OF AVERAGE
NOVEMBER 30, WEEKLY TOTAL NET ASSETS)*
- ------------- ---------------------------
<S> <C>
2001................. 0.30%
2002................. 0.30%
2003................. 0.30%
2004................. 0.30%
2005................. 0.25%
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE WAIVED
PERIOD ENDING (AS A PERCENTAGE OF AVERAGE
NOVEMBER 30, WEEKLY TOTAL NET ASSETS)*
- ------------- ---------------------------
<S> <C>
2006................. 0.20%
2007................. 0.15%
2008................. 0.10%
2009................. 0.05%
</TABLE>
- ---------------
* Including net assets attributable to Municipal Preferred Shares.
The Advisor has not agreed to waive any portion of the Fund's fees and
expenses beyond November 30, 2009.
The Fund recently commenced operations and has not paid any advisory fees
to the Advisor.
BROKERAGE COMMISSIONS
The Fund recently commenced operations and has not paid any brokerage
commissions.
B-4
<PAGE> 59
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The names and business addresses of the Trustees and officers of the Fund
and their principal occupations and other affiliations during the past five
years are set forth below.
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME (AGE) AND ADDRESS OFFICES WITH FUND DURING PAST FIVE YEARS
- ---------------------- ----------------- ----------------------
<S> <C> <C>
Robert J. Birnbaum (71) Trustee Consultant (formerly Special Counsel,
313 Bedford Road Dechert Price & Rhoads (law firm) from
Ridgewood, NJ 07450 September, 1988 to December, 1993;
President, New York Stock Exchange from May,
1985 to June, 1988; President, American
Stock Exchange, Inc. from 1977 to May,
1985).
Tom Bleasdale (69) Trustee Retired (formerly Chairman of the Board and
502 Woodlands Drive Chief Executive Officer, Shore Bank & Trust
Linville, NC 28646 Company from 1992 to 1993); Director of The
Empire Company since June, 1995.
John V. Carberry* (52) Trustee Senior Vice President of Liberty Financial
56 Woodcliff Road Companies, Inc. (formerly Managing Director,
Wellesley Hills, MA 02481 Salomon Brothers (investment banking) from
January, 1988 to January, 1998).
Lora S. Collins (63) Trustee Attorney (formerly Attorney, Kramer, Levin,
1175 Hill Road Naftalis & Frankel (law firm) from
Southold, NY 11971 September, 1986 to November, 1996).
James E. Grinnell (69) Trustee Private Investor since November, 1988.
22 Harbor Avenue
Marblehead, MA 01945
Richard W. Lowry* (63) Trustee Private Investor since August, 1987.
Seven Winter Street
Nantucket, MA 02554
Salvatore Macera (67) Trustee Private Investor (formerly Executive Vice
26 Little Neck Lane President and Director of Itek Corporation
New Seabury, MA 02649 (electronics) from 1975 to 1981).
William E. Mayer* (59) Trustee Partner, Development Capital, LLC (venture
500 Park Avenue, 5th Floor capital) (formerly Dean, College of Business
New York, NY 10022 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 Board,
16 Running Tide Road Hannaford Bros. Co. (food retailer) from
Cape Elizabeth, ME 04107 May, 1984 to May, 1997, and Chief Executive
Officer, Hannaford Bros. Co. from May, 1973
to May, 1992).
John J. Neuhauser (56) Trustee Dean, Boston College School of Management
84 College Road since September, 1977.
Chestnut Hill, MA 02467
</TABLE>
B-5
<PAGE> 60
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME (AGE) AND ADDRESS OFFICES WITH FUND DURING PAST FIVE YEARS
- ---------------------- ----------------- ----------------------
<S> <C> <C>
Thomas E. Stitzel (63) Trustee Professor of Finance, College of Business,
2208 Tawny Woods Place Boise State University (higher education);
Boise, ID 83706 Business consultant and author.
Robert L. Sullivan (71) Trustee Retired (formerly Partner, KPMG Peat Marwick
45 Sankaty Avenue LLP, from July, 1966 to June, 1985).
Siasconset, MA 02564
Anne-Lee Verville (53) Trustee Consultant (formerly General Manager, Global
359 Stickney Hill Road Education Industry from 1994 to 1997, and
Hopkinton, NH 03229 President, Applications Solutions Division
from 1991 to 1994, IBM Corporation (global
education and global applications)).
Stephen E. Gibson (45) President President of the Fund and the Liberty Funds
since June, 1998, Chairman of the Board
since July, 1998, and Chief Executive
Officer and President since December, 1996,
and Director since 1996 of the Advisor
(formerly Executive Vice President from
July, 1996 to December, 1996); Director,
Chief Executive Officer and President of
Liberty Funds Group LLC (formerly known as
COGRA, LLC) ("LFG") since December, 1998
(formerly Director, Chief Executive Officer
and President of The Colonial Group, Inc.
("TCG") from December, 1996 to December,
1998); Assistant Chairman since August, 1998
and President since November, 1999 of Stein
Roe & Farnham Incorporated ("SR&F");
President of the Liberty-Stein Roe Funds
Investment Trust, Liberty-Stein Roe Funds
Income Trust, Liberty-Stein Roe Funds
Municipal Trust, Liberty-Stein Roe Advisor
Trust, Liberty-Stein Roe Funds Trust, SR&F
Base Trust, Liberty-Stein Roe Advisor
Floating Rate Fund, Liberty-Stein Roe
Institutional Floating Rate Income Fund,
Stein Roe Floating Rate Limited Liability
Company, Stein Roe Variable Investment
Trust, Liberty-Stein Roe Funds Institutional
Trust and Stein Roe Advisor Floating Rate
Advantage Fund since November, 1999
(formerly Managing Director of Marketing of
Putnam Investments from June, 1992 to July,
1996).
J. Kevin Connaughton (34) Controller and Chief Controller and Chief Accounting Officer of
Accounting Officer the Fund and the Liberty Funds, except
Liberty Funds Trust IX, since February,
1998; Controller, Liberty Funds Trust IX,
since December, 1998; Vice President of the
Advisor since February, 1998 (formerly
Senior Tax Manager, Coopers & Lybrand, LLP
from April, 1996 to January, 1998; Vice
President, 440 Financial Group/First Data
Investor Services Group from March, 1994 to
April, 1996).
</TABLE>
B-6
<PAGE> 61
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME (AGE) AND ADDRESS OFFICES WITH FUND DURING PAST FIVE YEARS
- ---------------------- ----------------- ----------------------
<S> <C> <C>
Timothy J. Jacoby (45) Treasurer and Chief Treasurer and Chief Financial Officer of the
Financial Officer Fund and the Liberty Funds, except Liberty
Funds Trust IX, since October, 1996
(formerly Controller and Chief Accounting
Officer from October, 1997 to February,
1998); Treasurer of Liberty Funds Trust IX
since December, 1998; Senior Vice President
of the Advisor since September, 1996; Vice
President, Chief Financial Officer and
Treasurer of LFG since December, 1998
(formerly Vice President, Chief Financial
Officer and Treasurer of TCG from July, 1997
to December, 1998); Senior Vice President of
SR&F since August, 1998 (formerly Senior
Vice President, Fidelity Accounting and
Custody Services from September, 1993 to
September, 1996).
Nancy L. Conlin (45) Secretary Secretary of the Fund and the Liberty Funds,
except Liberty Funds Trust IX, since April,
1998 (formerly Assistant Secretary from
July, 1994 to April, 1998); Director, Senior
Vice President, General Counsel, Clerk and
Secretary of the Advisor since April, 1998
(formerly Vice President, Counsel, Assistant
Secretary and Assistant Clerk from July,
1994 to April, 1998); Vice President,
General Counsel and Secretary of LFG since
December, 1998 (formerly Vice President,
General Counsel and Clerk of TCG from April,
1998 to December, 1998; formerly Assistant
Clerk from July, 1994 to April, 1998).
</TABLE>
- ---------------
* Denotes those Trustees who are "interested persons" (as defined in the
Investment Company Act of 1940, as amended (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 Insured Municipal Fund, Colonial California Insured Municipal
Fund, Colonial Massachusetts Insured Municipal Fund, Colonial Intermediate High
Income Fund, and Colonial Intermarket Income Trust I (collectively, each trust
or any series thereof termed the "Liberty Funds").
At the first annual meeting of the Fund's shareholders following the
issuance of Municipal Preferred Shares, holders of outstanding shares of
Municipal Preferred, voting together as one separate class, will elect two
Trustees, and holders of outstanding Common Shares and shares of Municipal
Preferred, voting together
B-7
<PAGE> 62
as a single class, will elect the remaining Trustees. See "Description of
Shares -- 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 FUND COMPLEX PAID TO THE
THE FUND FOR THE FISCAL YEAR TRUSTEES FOR THE CALENDAR YEAR
TRUSTEE ENDED NOVEMBER 30, 1999 ENDED 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)....................... 803 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)...................... 803 25,250
Robert L. Sullivan(c)..................... 876 104,100
Anne-Lee Verville(c)(f)................... 803(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 (together, the "Fund
Complex").
(c) Elected by the shareholders of LVIT on October 30, 1998.
(d) Is expected to include $431 payable in later years as deferred
compensation.
(e) Includes $52,000 payable in later years as deferred compensation.
(f) Elected by the trustees of the closed-end Liberty Funds on June 18, 1998,
and by the shareholders of the open-end Liberty Funds on October 30, 1998.
(g) Does not receive compensation because he is an affiliated Trustee and
employee of Liberty Financial Companies, Inc. ("Liberty Financial").
(h) Elected by the shareholders of the open-end Liberty Funds on October 30,
1998, and by the trustees of the closed-end Liberty Funds on December 17,
1998.
B-8
<PAGE> 63
(i) Total estimated compensation of $845 for the fiscal year ended November 30,
1999, 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 $803 for the fiscal year ended November 30,
1999, 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).
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
THE LIBERTY ALL-STAR FUNDS FOR THE CALENDAR
TRUSTEE YEAR ENDED DECEMBER 31, 1998(N)
- ------- -------------------------------------------
<S> <C>
Robert J. Birnbaum........................................ $25,000
John V. Carberry(o)....................................... N/A
James E. Grinnell......................................... 25,000
Richard W. Lowry.......................................... 25,000
William E. Mayer(p)....................................... 14,000
John J. Neuhauser(q)...................................... 25,000
</TABLE>
- ---------------
(m) The Liberty All-Star Funds do not currently provide pension or retirement
plan benefits to the trustees/ directors.
(n) The Liberty All-Star Funds are advised by Liberty Asset Management Company
("LAMCO"). LAMCO is an indirect wholly owned subsidiary of Liberty
Financial (an intermediate parent of the Advisor).
(o) Elected by the trustees/directors of the Liberty All-Star Funds on June 30,
1998. Does not receive compensation because he is an affiliated trustee and
employee of Liberty Financial.
(p) Elected by the shareholders of the Liberty All-Star Equity Fund on April
22, 1998, and by the directors of the Liberty All-Star Growth Fund, Inc. on
December 17, 1998.
(q) Elected by the shareholders of the Liberty All-Star Funds on April 22,
1998.
At , 1999, the Fund's officers and Trustees as a group owned less
than 1% of the outstanding Common Shares.
At , 1999, , 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
B-9
<PAGE> 64
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.
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.
B-10
<PAGE> 65
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%.
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.
B-11
<PAGE> 66
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.
DESCRIPTION OF SHARES
The descriptions of the Common Shares and the Municipal Preferred Shares
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 of Trust of the Trust (the "Declaration") and the
By-Laws of the Trust (the "By-Laws"), each as from time to time amended. 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.
COMMON SHARES
The Declaration authorizes the issuance of an unlimited number of Common
Shares, no par value. All Common Shares have equal rights as to the payment of
dividends and the distribution of assets upon liquidation. Common Shares will,
when issued, be fully paid and, subject to matters discussed in "Shareholder
Liability," non-assessable, and will have no pre-emptive or conversion rights or
rights to cumulative voting. At any time when the Fund's Municipal Preferred
Shares are outstanding, Common Shareholders will not be entitled to receive any
distributions from the Fund unless all accrued dividends on Municipal Preferred
Shares have been paid, and unless asset coverage (as defined in the 1940 Act)
with respect to Municipal Preferred Shares would be at least 200% after giving
effect to such distributions. See "Municipal Preferred Shares" below.
The Fund has applied for listing of the Common Shares on the American Stock
Exchange subject to notice of issuance. The Fund intends to hold annual meetings
of shareholders so long as the Common Shares are listed on a national securities
exchange and such meetings are required as a condition to such listing.
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 investment grade municipal bonds have during
some periods traded at prices higher than net asset value and during other
periods have traded at prices lower than net asset value. There can be no
assurance that Common Shares or shares of other municipal funds will trade at a
price higher than net asset value in the future. Net asset value will be reduced
immediately following the offering after payment of the sales load and
organization and offering expenses. Net asset value generally increases when
interest rates decline, and decreases when interest rates rise, and these
changes are likely to be greater in the case of a fund having a leveraged
capital structure such as the Fund will have once it issues Municipal Preferred
Shares. Whether investors will realize gains or losses upon the sale of Common
Shares will not depend upon the Fund's net asset value but will depend entirely
upon whether the market price of the Common Shares at the time of sale is above
or below the original purchase price for the shares. Since the market price of
the Fund's Common Shares will be determined by factors beyond the control of the
Fund, the Fund cannot predict whether the Common Shares will trade at, below, or
above net asset value or at, below or above the initial public offering price.
Accordingly, the Common Shares are designed primarily for long-term investors,
and investors in the Common Shares should not view the Fund as a vehicle for
trading purposes. See "Repurchase of Fund Shares" in this Statement of
Additional Information and the Prospectus under "Use of Leverage and Related
Risks" and "Additional Risk Considerations."
B-12
<PAGE> 67
MUNICIPAL PREFERRED SHARES
The Declaration authorizes the issuance of an unlimited number of Municipal
Preferred Shares, no par value, in one or more classes or series, with rights as
determined by the Board of Trustees, by action of the Board of Trustees without
the approval of the Common Shareholders.
The Fund's Board of Trustees has indicated its intention to authorize an
offering of Municipal Preferred Shares (representing approximately 38% of the
Fund's capital immediately after the time the Municipal Preferred Shares are
issued) within approximately one to three months after completion of the
offering of Common Shares, subject to market conditions and to the Board's
continuing belief that leveraging the Fund's capital structure through the
issuance of Municipal Preferred Shares is likely to achieve the benefits to the
Common Shareholders described in this Statement of Additional Information. That
offering would be made through a separate prospectus. Although the terms of the
Municipal Preferred Shares, including their dividend rate, voting rights,
liquidation preference and redemption provisions, will be determined by the
Board of Trustees (subject to applicable law and the Fund's Declaration) if and
when it authorizes a Municipal Preferred Shares offering, the Board has stated
that the initial series of Municipal Preferred Shares would likely pay
cumulative dividends at relatively shorter-term periods (such as 7 days), by
providing for the periodic redetermination of the dividend rate through an
auction or remarketing procedure. The Board of Trustees has indicated that the
preference on distribution, liquidation preference, voting rights and redemption
provisions of the Municipal Preferred Shares will likely be as stated below.
PREFERENCE ON DISTRIBUTION. The Municipal Preferred Shares have complete
priority over the Common Shares as to distribution of assets.
LIQUIDATION PREFERENCE. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Fund, holders of
Municipal Preferred Shares will be entitled to receive a preferential
liquidating distribution (expected to equal the original purchase price per
share plus accumulated and unpaid dividends thereon, whether or not earned or
declared) before any distribution of assets is made to holders of Common Shares.
After payment of the full amount of the liquidating distribution to which they
are entitled, holders of Municipal Preferred Shares will not be entitled to any
further participation in any distribution of assets by 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 with or into any Massachusetts business
trust or corporation shall be deemed to be a liquidation, dissolution or winding
up of the Fund.
VOTING RIGHTS. In connection with any issuance of Municipal Preferred
Shares, the Fund must comply with Section 18(i) of the Investment Company Act of
1940 (the "1940 Act") which requires, among other things, that Municipal
Preferred Shares be voting shares and have equal voting rights with Common
Shares. Except as otherwise indicated in this Statement of Additional
Information and except as otherwise required by applicable law, holders of
Municipal Preferred Shares will vote together with Common Shareholders as a
single class.
In connection with the election of the Fund's trustees, holders of
Municipal Preferred Shares, voting as a separate class, will be entitled to
elect two of the Fund's trustees, and the remaining trustees shall be elected by
Common Shareholders and holders of Municipal Preferred Shares, voting together
as a single class. In addition, if at any time dividends (whether or not earned
or declared) on the Fund's outstanding Municipal Preferred Shares shall be
unpaid in an amount equal to two full years' dividends thereon, the holders of
all outstanding Municipal Preferred Shares, voting as a separate class, will be
entitled to elect a majority of the Fund's trustees until all such dividends in
arrears have been paid or declared and set apart for payment.
The affirmative vote of the holders of a majority of the outstanding
Municipal Preferred Shares of any class or series, as the case may be, voting as
a separate class, will be required to, among other things (1) take certain
actions which would affect the preferences, rights, or powers of such class or
series or (2) authorize or issue any class or series ranking prior to the
Municipal Preferred Shares. Except as may otherwise be required by law, (1) the
affirmative vote of the holders of at least two-thirds of the Municipal
Preferred Shares outstanding at the time, voting as a separate class, will be
required to approve any conversion of the Fund from a closed-end to an open-end
investment company and (2) the affirmative vote of the holders of at least
B-13
<PAGE> 68
two-thirds of the outstanding Municipal Preferred Shares, voting as a separate
class, shall be required to approve any plan of reorganization (as such term is
used in the 1940 Act) adversely affecting such shares, provided however, that
such separate class vote shall be a majority vote if the action in question has
previously been approved, adopted or authorized by the affirmative vote of
two-thirds of the total number of Trustees fixed in accordance with the
Declaration or the By-laws. The affirmative vote of the holders of a majority of
the outstanding Municipal Preferred Shares, voting as a separate class, shall be
required to approve any action not described in the preceding sentence requiring
a vote of security holders under Section 13(a) of the 1940 Act including, among
other things, changes in the Fund's investment objective or changes in the
investment restrictions described as fundamental policies under "Investment
Objective and Policies -- Investment Restrictions." The class or series vote of
holders of Municipal Preferred Shares described above shall in each case be in
addition to any separate vote of the requisite percentage of Common Shares and
Municipal Preferred Shares necessary to authorize the action in question.
The foregoing voting provisions will not apply with respect to the Fund's
Municipal Preferred Shares if, at or prior to the time when a vote is required,
such shares shall have been (1) redeemed or (2) called for redemption and
sufficient funds shall have been deposited in trust to effect such redemption.
REDEMPTION, PURCHASE AND SALE OF MUNICIPAL PREFERRED SHARES BY THE FUND.
The terms of the Municipal Preferred Shares may provide that they are redeemable
at certain times, in whole or in part, at the original purchase price per share
plus accumulated dividends, that the Fund may tender for or purchase Municipal
Preferred Shares and that the Fund may subsequently resell any shares so
tendered for or purchased. Any redemption or purchase of Municipal Preferred
Shares by the Fund will reduce the leverage applicable to Common Shares, while
any resale of shares by the Fund will increase such leverage. See "Use of
Leverage and Related Risks" in the Prospectus.
The discussion above describes the Board of Trustees' present intention
with respect to a possible offering of Municipal Preferred Shares. If the Board
of Trustees determines to authorize such an offering, the terms of the Municipal
Preferred Shares may be the same as, or different from, the terms described
above, subject to applicable law and the Fund's Declaration.
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
Shares -- Municipal Preferred Shares" for a discussion of the limitations on the
Fund's ability to engage in certain transactions. The staff of the Securities
and Exchange Commission 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 and the 1940 Act and
the rules and regulations thereunder.
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Although the decision to take action in response to a discount from net
asset value will be made by the Board of Trustees at the time it considers such
issue, it is the Board's present policy, which may be changed by the Board, not
to authorize repurchases of the Fund's Common Shares or a tender offer for such
shares if (1) such transactions, if consummated, would (a) result in the
delisting of the Common Shares from the American Stock Exchange, or (b) impair
the Fund's status as a regulated investment company under the Code (which would
make the Fund a taxable entity, causing the Fund's income to be taxed at the
corporate level in addition to the taxation of shareholders who receive
dividends from the Fund) or as a registered closed-end investment company under
the 1940 Act; (2) the Fund would not be able to liquidate portfolio securities
in an orderly manner and consistent with the Fund's investment objective and
policies in order to repurchase shares; or (3) there is, in the Board's
judgment, any (a) material legal action or proceeding instituted or threatened
challenging such transactions or otherwise materially adversely affecting the
Fund, (b) general suspension of or limitation on prices for trading securities
on the American Stock Exchange, (c) declaration of a banking moratorium by
federal or state authorities or any suspension of payment by United States or
New York State banks in which the Fund invests, (d) material limitation
affecting the Fund or the issuers of its portfolio securities by federal or
state authorities on the extension of credit by lending institutions or on the
exchange of foreign currency, (e) commencement of war, armed hostilities or
other international or national calamity directly or indirectly involving the
United States, or (f) other event or condition which would have a material
adverse effect (including any adverse tax effect) on the Fund or its
shareholders if shares were repurchased. The Board of Trustees may in the future
modify these conditions in light of experience. Before deciding whether to take
any action in response to a discount from net asset value, the Board of Trustees
would consider all relevant factors, including the extent and duration of the
discount, the liquidity of the Fund's portfolio, the impact of any action that
might be taken on the Fund or its shareholders, and market considerations. Based
on these considerations, even if the Fund's Common Shares should trade at a
discount, the Board may determine that, in the interest of the Fund and its
shareholders, no action should be taken.
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MISCELLANEOUS INVESTMENT PRACTICES
SHORT-TERM TRADING
In seeking to accomplish the Fund's investment objective, the Advisor may
buy or sell portfolio securities whenever the Advisor believes it appropriate to
do so. In deciding whether to sell a portfolio security, the Advisor does not
consider how long the Fund has owned the security. From time to time the Fund
may buy securities intending to seek short-term trading profits. A change in the
securities held by the Fund is known as "portfolio turnover" and generally
involves some expense to the Fund. This expense may include brokerage
commissions or dealer markups and other transaction costs on both the sale of
securities and the reinvestment of the proceeds in other securities. If sales of
portfolio securities cause the Fund to realize net short-term capital gain, such
gain generally will be taxable as ordinary income. As a result of the Fund's
investment policies, under certain market conditions the Fund's portfolio
turnover rate may be higher than that of other investment companies. Portfolio
turnover rate for a fiscal year is the ratio of the lesser of purchases or sales
of portfolio securities to the monthly average of the value of portfolio
securities -- excluding securities whose maturities at acquisition were one year
or less. The Fund's portfolio turnover rate is not a limiting factor when the
Advisor considers a change in the Fund's portfolio.
LOWER-RATED SECURITIES
The Fund may invest up to 20% of its net assets in New York 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 New York Municipal Obligations considered to be of comparable quality by
the Advisor. The Fund may not invest in bonds rated below B by Moody's or
Standard & Poor's or comparably rated by another Rating Agency. Bonds rated
Ba/BB and below are regarded as having predominantly speculative characteristics
with respect to capacity to pay interest and repay principal, and are commonly
referred to as "junk bonds." These risks include greater sensitivity to a
general economic downturn and less secondary market trading. The lower ratings
of certain securities held by the Fund reflect a greater possibility that
adverse changes in the financial condition of the issuer or in general economic
conditions, or both, or an unanticipated rise in interest rates, may impair the
ability of the issuer to make payments of interest and principal. The inability
(or perceived inability) of issuers to make timely payments of interest and
principal would likely make the values of securities held by the Fund more
volatile and could limit the Fund's ability to sell its securities at prices
approximating the values the Fund had placed on such securities. In the absence
of a liquid trading market for securities held by it, the Fund at times may be
unable to establish the fair value for such securities.
Securities ratings are based largely on the issuer's historical financial
condition and the rating agencies' analysis at the time of rating. Consequently,
the rating assigned to any particular security is not necessarily a reflection
of the issuer's current financial condition, which may be better or worse than
the rating would indicate. In addition, the rating assigned to a security by
Moody's or Standard & Poor's (or by any other nationally recognized securities
rating organization) does not reflect an assessment of the volatility of the
security's market value or the liquidity of an investment in the security. See
Appendix A for a description of security ratings.
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. A decrease in
interest rates will generally result in an increase in the value of the Fund's
assets. Conversely, during periods of rising interest rates, the value of the
Fund's assets will generally decline. The values of lower-rated securities may
often be affected to a greater extent by changes in general economic conditions
and business conditions affecting the issuers of such securities and their
industries. Negative publicity or investor perceptions may also adversely affect
the values of lower-rated securities. Changes by recognized rating services in
their ratings of any fixed-income security and changes in the ability of an
issuer to make payments of interest and principal may also affect the value of
these investments. Changes in the value of portfolio securities generally will
not affect income derived from these securities, but will affect the Fund's net
asset value. The Fund will not necessarily dispose of a security when its rating
is
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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 Funds and
accounts managed by the Advisor and its affiliates, holds all or a major portion
of the securities outstanding. Although the Advisor generally considers such
securities to be liquid because of the availability of an institutional market
for such securities, it is possible that, under adverse market or economic
conditions or in the event of adverse changes in the financial condition of the
issuer, the Fund could find it more difficult to sell these securities when the
Advisor believes it advisable to do so or may be able to sell the securities
only at prices lower than if they were more widely held. Under these
circumstances, it may also be more difficult to determine the fair value of such
securities for purposes of computing the Fund's net asset value. In order to
enforce its rights in the event of a default under such securities, the Fund may
be required to participate in various legal proceedings or take possession of
and manage assets securing the issuer's obligations on such securities. This
could increase the Fund's operating expenses and adversely affect the Fund's net
asset value.
Certain securities held by the Fund may permit the issuer at its option to
"call," or redeem, its securities. If an issuer were to redeem securities held
by the Fund during a time of declining interest rates, the Fund might not be
able to reinvest the proceeds in securities providing the same investment return
as the securities redeemed. The Fund may invest without limit in such bonds.
To the extent the Fund invests in lower-rated or unrated securities, the
achievement of the Fund's goals is more dependent on the Advisor's investment
analysis than would be the case if the Fund were investing in investment grade
securities.
PRIVATE PLACEMENTS
The Fund may invest in securities that are purchased in private placements
and, accordingly, may be subject to restrictions on resale as a matter of
contract or under federal securities laws. Because there may be relatively few
potential purchasers for such investments, especially under adverse market or
economic conditions or in the event of adverse changes in the financial
condition of the issuer, the Fund could find it more difficult to sell such
securities when the Advisor believes it advisable to do so or may be able to
sell such securities only at prices lower than if such securities were more
widely held. At times, it may also be more difficult to determine the fair value
of such securities for purposes of computing the Fund's net asset value.
STEP COUPON BONDS (STEPS)
The Fund may invest in debt securities which do not pay interest for a
stated period of time and then pay interest at a series of different rates for a
series of periods. In addition to the risks associated with the credit rating of
the issuers, these securities are subject to the volatility risk of zero coupon
bonds for the period when no interest is paid.
TENDER OPTION BONDS
A tender option bond is a municipal security (generally held pursuant to a
custodial arrangement) having a relatively long maturity and bearing interest at
a fixed rate substantially higher than prevailing short-term tax-exempt rates
that has been coupled with the agreement of a third party, such as a bank,
broker-dealer or other financial institution, pursuant to which such institution
grants the security holders the option, at periodic intervals, to tender their
securities to the institution and receive the face value thereof. As
consideration for
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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 on the
underlying security. If the Fund delivers securities under the commitment, the
Fund
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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
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security, and when it writes a put option, the Fund may be required to deposit
cash or securities with its broker as "margin," or collateral, for its
obligation to buy or sell the underlying security. As the value of the
underlying security varies, the Fund may have to deposit additional margin with
the broker. Margin requirements are complex and are fixed by individual brokers,
subject to minimum requirements currently imposed by the Federal Reserve Board
and by stock exchanges and other self-regulatory organizations.
PURCHASING PUT OPTIONS. The Fund may purchase put options to protect its
portfolio holdings in an underlying security against a decline in market value.
Such protection is provided during the life of the put option since the Fund, as
holder of the option, is able to sell the underlying security at the put
exercise price regardless of any decline in the underlying security's market
price. In order for a put option to be profitable, the market price of the
underlying security must decline sufficiently below the exercise price to cover
the premium and transaction costs. By using put options in this manner, the Fund
will reduce any profit it might otherwise have realized from appreciation of the
underlying security by the premium paid for the put option and by transaction
costs.
PURCHASING CALL OPTIONS. The Fund may purchase call options to hedge
against an increase in the price of securities that the Fund wants ultimately to
buy. Such hedge protection is provided during the life of the call option since
the Fund, as holder of the call option, is able to buy the underlying security
at the exercise price regardless of any increase in the underlying security's
market price. In order for a call option to be profitable, the market price of
the underlying security must rise sufficiently above the exercise price to cover
the premium and transaction costs.
RISK FACTORS IN OPTIONS TRANSACTIONS
The successful use of the Fund's options strategies depends on the ability
of the Advisor to forecast interest rate and market movements correctly. For
example, if the Fund were to write a call option based on the Advisor's
expectation that the price of the underlying security would fall, but the price
were to rise instead, the Fund could be required to sell the security upon
exercise at a price below the current market price. Similarly, if the Fund were
to write a put option based on the Advisor's expectation that the price of the
underlying security would rise, but the price were to fall instead, the Fund
could be required to purchase the security upon exercise at a price higher than
the current market price.
When the Fund purchases an option, it runs the risk that it will lose its
entire investment in the option in a relatively short period of time, unless the
Fund exercises the option or enters into a closing sale transaction before the
option's expiration. If the price of the underlying security does not rise (in
the case of a call) or fall (in the case of a put) to an extent sufficient to
cover the option premium and transaction costs, the Fund will lose part or all
of its investment in the option. This contrasts with an investment by the Fund
in the underlying security, since the Fund will not realize a loss if the
security's price does not change.
The effective use of options also depends on the Fund's ability to
terminate option positions at times when the Advisor deems it desirable to do
so. There is no assurance that the Fund will be able to effect closing
transactions at any particular time or at an acceptable price.
If a secondary market in options were to become unavailable, the Fund could
no longer engage in closing transactions. Lack of investor interest might
adversely affect the liquidity of the market for particular options or series of
options. A market may discontinue trading of a particular option or options
generally. In addition, a market could become temporarily unavailable if unusual
events -- such as volume in excess of trading or clearing capability -- were to
interrupt its normal operations.
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.
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Disruptions in the markets for the securities underlying options purchased
or sold by the Fund could result in losses on the options. If trading is
interrupted in an underlying security, the trading of options on that security
is normally halted as well. As a result, the Fund as purchaser or writer of an
option will be unable to close out its positions until options trading resumes,
and it may be faced with considerable losses if trading in the security reopens
at a substantially different price. In addition, the Options Clearing
Corporation or other options markets may impose exercise restrictions. If a
prohibition on exercise is imposed at the time when trading in the option has
also been halted, the Fund as purchaser or writer of an option will be locked
into its position until one of the two restrictions has been lifted. If the
Options Clearing Corporation were to determine that the available supply of an
underlying security appears insufficient to permit delivery by the writers of
all outstanding calls in the event of exercise, it may prohibit indefinitely the
exercise of put options. The Fund, as holder of such a put option, could lose
its entire investment if the prohibition remained in effect until the put
option's expiration.
FUTURES CONTRACTS AND RELATED OPTIONS
Subject to applicable law, the Fund may invest without limit in the types
of futures contracts and related options identified in the Prospectus for
hedging and non-hedging purposes, such as to manage the effective duration of
the Fund's portfolio or as a substitute for direct investment. A financial
futures contract sale creates an obligation by the seller to deliver the type of
financial instrument called for in the contract in a specified delivery month
for a stated price. A financial futures contract purchase creates an obligation
by the purchaser to take delivery of the type of financial instrument called for
in the contract in a specified delivery month at a stated price. The
determination is made in accordance with the rules of the exchange on which the
futures contract sale or purchase was made. Futures contracts are traded in the
United States only on commodity exchanges or boards of trade -- known as
"contract markets" -- approved for such trading by the Commodity Futures Trading
Commission (the "CFTC"), and must be executed through a futures commission
merchant or brokerage firm which is a member of the relevant contract market.
Although futures contracts (other than index futures) by their terms call
for actual delivery or acceptance of commodities or securities, in most cases
the contracts are closed out before the settlement date without the making or
taking of delivery. Closing out a futures contract sale is effected by
purchasing a futures contract for the same aggregate amount of the specific type
of financial instrument or commodity with the same delivery date. If the price
of the initial sale of the futures contract exceeds the price of the offsetting
purchase, the seller is paid the difference and realizes a gain. Conversely, if
the price of the offsetting purchase exceeds the price of the initial sale, the
seller realizes a loss. If the Fund is unable to enter into a closing
transaction, the amount of the Fund's potential loss is unlimited. The closing
out of a futures contract purchase is effected by the purchaser's entering into
a futures contract sale. If the offsetting sale price exceeds the purchase
price, the purchaser realizes a gain, and if the purchase price exceeds the
offsetting sale price, the purchaser realizes a loss. In general, 40% of the
gain or loss arising from the closing out of a futures contract traded on an
exchange approved by the CFTC is treated as short-term gain or loss, and 60% is
treated as long-term gain or loss.
Unlike when the Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract. Upon
entering into a contract, the Fund is required to deposit with its custodian in
a segregated account in the name of the futures broker an amount of liquid
assets. This amount is known as "initial margin." The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
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
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a security futures contract and the price of the underlying security has
declined, the position would be less valuable and the Fund would be required to
make a variation margin payment to the broker.
The Fund may elect to close some or all of its futures positions at any
time prior to their expiration in order to reduce or eliminate a position then
currently held by the Fund. The Fund may close its positions by taking opposite
positions which will operate to terminate the Fund's position in the futures
contracts. Final determinations of variation margin are then made, additional
cash is required to be paid by or released to the Fund, and the Fund realizes a
loss or a gain. Such closing transactions involve additional commission costs.
The Fund does not intend to purchase or sell futures or related options for
other than hedging purposes if, as a result, the sum of the initial margin
deposits on the Fund's existing futures and related options positions and
premiums paid for outstanding options on futures contracts would exceed 5% of
the Fund's net assets.
OPTIONS ON FUTURES CONTRACTS. The Fund may purchase and write call and put
options on futures contracts and it may buy or sell and enter into closing
transactions with respect to such options to terminate existing positions.
Options on futures contracts give the purchaser the right, in return for the
premium paid, to assume a position in a futures contract at the specified option
exercise price at any time during the period of the option. The Fund may use
options on futures contracts in lieu of writing or buying options directly on
the underlying securities or purchasing and selling the underlying futures
contracts. For example, to hedge against a possible decrease in the value of its
portfolio securities, the Fund may purchase put options or write call options on
futures contracts rather than selling futures contracts. Similarly, the Fund may
purchase call options or write put options on futures contracts as a substitute
for the purchase of futures contracts to hedge against a possible increase in
the price of securities which the Fund expects to purchase. Such options
generally operate in the same manner as options purchased or written directly on
the underlying investments.
As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an offsetting option. There is
no guarantee that such closing transactions can be effected.
The Fund will be required to deposit initial margin and maintenance margin
with respect to put and call options on futures contracts written by it pursuant
to brokers' requirements, similar to those described above in connection with
the discussion of futures contracts.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. Successful
use of futures contracts by the Fund is subject to the Advisor's ability to
predict movements in various factors affecting securities markets, including
interest rates. Compared to the purchase or sale of futures contracts, the
purchase of call or put options on futures contracts involves less potential
risk to the Fund because the maximum amount at risk is the premium paid for the
options (plus transaction costs). However, there may be circumstances when the
purchase of a call or put option on a futures contract would result in a loss to
the Fund when the purchase or sale of a futures contract would not, such as when
there is no movement in the prices of the hedged investments. The writing of an
option on a futures contract involves risks similar to those risks relating to
the sale of futures contracts.
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
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restrictions may be imposed with respect to particular classes or series of
contracts or options, or underlying securities, (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange, (v) the facilities
of an exchange or a clearing corporation may not at all times be adequate to
handle current trading volume, or (vi) one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of contracts or options (or a particular class or series of contracts or
options), in which event the secondary market on that exchange for such
contracts or options (or in the class or series of contracts or options) would
cease to exist, although outstanding contracts or options on the exchange that
had been issued by a clearing corporation as a result of trades on that exchange
would continue to be exercisable in accordance with their terms.
U.S. TREASURY SECURITY FUTURES CONTRACTS AND OPTIONS. U.S. Treasury
security futures contracts require the seller to deliver, or the purchaser to
take delivery of, the type of U.S. Treasury security called for in the contract
at a specified date and price. Options on U.S. Treasury security futures
contracts give the purchaser the right, in return for the premium paid, to
assume a position in a U.S. Treasury security futures contract at the specified
option exercise price at any time during the period of the option.
Successful use of U.S. Treasury security futures contracts by the Fund is
subject to the Advisor's ability to predict movements in the direction of
interest rates and other factors affecting markets for debt securities. For
example, if the Fund has sold U.S. Treasury security futures contracts in order
to hedge against the possibility of an increase in interest rates which would
adversely affect securities held in its portfolio, and the prices of the Fund's
securities increase instead as a result of a decline in interest rates, the Fund
would be likely to lose part or all of the benefit of the increased value of its
securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash, it may have to sell securities to meet daily maintenance margin
requirements at a time when it may be disadvantageous to do so.
There is also a risk that price movements in U.S. Treasury security futures
contracts and related options will not correlate closely with price movements in
markets for particular securities. For example, if the Fund has hedged against a
decline in the values of high yield corporate securities held by it by selling
Treasury security futures and the values of Treasury securities subsequently
increase while the values of its high yield corporate securities decrease, the
Fund would incur losses on both the Treasury security futures contracts written
by it and the high yield corporate securities held in its portfolio.
INDEX FUTURES CONTRACTS. An index futures contract is a contract to buy or
sell units of an index at a specified future date at a price agreed upon when
the contract is made. Entering into a contract to buy units of an index is
commonly referred to as buying or purchasing a contract or holding a long
position in the index. Entering into a contract to sell units of an index is
commonly referred to as selling a contract or holding a short position. A unit
is the current value of the index. The Fund may enter into stock index futures
contracts, debt index futures contracts, or other index futures contracts
appropriate to its objective. The Fund may also purchase and sell options on
index futures contracts.
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
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situations, if the Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements at a time when it is disadvantageous to
do so.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the index futures and the portion
of the portfolio being hedged, the prices of index futures may not correlate
perfectly with movements in the underlying index due to certain market
distortions. First, all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the index and
futures markets. Second, margin requirements in the futures market are less
onerous than margin requirements in the securities market, and as a result the
futures market may attract more speculators than the securities market does.
Increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and also because of the imperfect correlation between movements
in the index and movements in the prices of index futures, even a correct
forecast of general market trends by the Advisor may still not result in a
profitable position over a short time period.
OPTIONS ON INDEX FUTURES. Options on index futures are similar to options
on securities except that options on index futures give the purchaser the right,
in return for the premium paid, to assume a position in an index futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the period of
the option. Upon exercise of the option, the delivery of the futures position by
the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account which
represents the amount by which the market price of the index futures contract,
at exercise, exceeds (in the case of a call) or is less than (in the case of a
put) the exercise price of the option on the index future. If an option is
exercised on the last trading day prior to its expiration date, the settlement
will be made entirely in cash equal to the difference between the exercise price
of the option and the closing level of the index on which the future is based on
the expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
OPTIONS ON INDICES
As an alternative to purchasing call and put options on index futures, the
Fund may purchase and sell call and put options on the underlying indices
themselves. Such options would be used in a manner identical to the use of
options on index futures.
INDEX WARRANTS
The Fund may purchase put warrants and call warrants whose values vary
depending on the change in the value of one or more specified securities indices
("index warrants"). Index warrants are generally issued by banks or other
financial institutions and give the holder the right, at any time during the
term of the warrant, to receive upon exercise of the warrant a cash payment from
the issuer based on the value of 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
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regulated clearing agency, but are backed only by the credit of the bank or
other institution which issues the warrant. Also, index warrants generally have
longer terms than index options. Although the Fund will normally invest only in
exchange-listed warrants, index warrants are not likely to be as liquid as
certain index options backed by a recognized clearing agency. In addition, the
terms of index warrants may limit the Fund's ability to exercise the warrants at
such time, or in such quantities, as the Fund would otherwise wish to do.
ZERO COUPON SECURITIES (ZEROS)
The Fund may invest in zero coupon securities, which are securities issued
at a significant discount from face value and pay interest only at maturity
rather than at intervals during the life of the security and in certificates
representing undivided interests in the interest or principal of mortgage-backed
securities (interest only/principal only), which tend to be more volatile than
other types of securities. The Fund will accrue and distribute income from zero
coupon and stripped securities and certificates on a current basis and may have
to sell securities to generate cash for distributions.
INVERSE FLOATERS
Inverse floaters are derivative securities whose interest rates vary
inversely to changes in short-term interest rates and whose values fluctuate
inversely to changes in long-term interest rates. The value of certain inverse
floaters will fluctuate substantially more in response to a given change in
long-term rates than would a traditional debt security. These securities have
investment characteristics similar to leverage, in that interest rate changes
have a magnified effect on the value of inverse floaters.
ADDITIONAL INFORMATION ON MUNICIPAL OBLIGATION INSURANCE
ORIGINAL ISSUE INSURANCE. If interest or principal on a Municipal
Obligation is due, but the issuer fails to pay it, the insurer will make
payments in the amount due to its fiscal agent no later than one business day
after the insurer has been notified of the issuer's nonpayment. The fiscal agent
will pay the amount due to the Fund after the fiscal agent receives evidence of
the Fund's right to receive payment of principal and/or interest, and evidence
that all of the rights of payment due shall thereupon vest in the insurer. When
the insurer pays the Fund the payment due from the issuer, the insurer will
succeed to the Fund's rights to that payment.
PORTFOLIO INSURANCE. Each portfolio insurance policy will be
noncancellable and will remain in effect so long as (i) the Fund is in
existence, (ii) the Fund continues to own the Municipal Obligations covered by
the policy, and (iii) the Fund timely pays the premiums for the policy. Each
insurer generally will reserve the right at any time upon 90 days' written
notice to the Fund to refuse to insure any additional Municipal Obligations the
Fund buys after the effective date of the notice. The Fund's Board of Trustees
will generally reserve the right to terminate each policy upon seven days'
written notice to an insurer if it determines that the cost of the policy is not
reasonable in relation to the value of the insurance to the Fund.
SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL OBLIGATIONS
Factors pertaining to the Fund's investment in New York Municipal
Obligations are set forth in Appendix B -- "Special Considerations Relating to
New York."
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TAX MATTERS
FEDERAL INCOME TAX MATTERS
Federal Taxation of the Fund
The ability of the Fund to qualify for taxation as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), requires, among other things, that the Fund satisfy income and asset
diversification tests, and distribute substantially all its income to its
shareholders, as described below. Specifically, in order to qualify as a
regulated investment company, 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. The Fund must also satisfy an asset
diversification test. Under this test, at the close of each quarter of the
Fund's taxable year, at least 50% of the value of the Fund's assets must consist
of cash and cash items (including receivables), U.S. Government securities,
securities of other regulated investment companies, and securities of other
issuers (as to which the Fund has not invested more than 5% of the value of the
Fund's total assets in securities of such issuer and as to which the Fund does
not hold more than 10% of the outstanding voting securities of such issuer), and
no more than 25% of the value of its total assets may be invested in the
securities of any one issuer (other than U.S. Government securities and
securities of other regulated investment companies), or in two or more issuers
which the Fund controls and which are engaged in the same or similar trades or
businesses or related trades or businesses. Finally, 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
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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. Prior proposed legislation that was
ultimately not enacted would have reinstated a deductible tax (the
"Environmental Tax"), imposed through tax years beginning before January 1,
1996, at a rate of 0.12% on a corporation's alternative minimum taxable income
(computed without regard to the alternative minimum tax net operating loss
deduction) in excess of $2 million. If the Environmental Tax is reinstated,
exempt-interest dividends paid by the Fund that are included in a corporate
shareholder's alternative minimum taxable income may subject such shareholder to
the Environmental Tax. It is not possible for the Fund to predict whether
similar legislation might be proposed and enacted in the future. Corporate
shareholders should consult with their own tax advisors regarding the likelihood
of such legislation and its effect on them.
As discussed in the Prospectus, exempt-interest dividends attributable to
interest received on certain private activity bonds and certain industrial
development bonds will not be tax-exempt to any shareholders who are, within the
meaning of Section 147(a) of the Code, "substantial users" of the facilities
financed by such obligations or bonds or who are "related persons" of such
substantial users. In general, a "substantial user" of a facility includes a
"non-exempt person who regularly uses a part of such facility in his trade or
business." "Related persons" are in general defined to include persons among
whom there exists a relationship, either by family or business, which would
result in a disallowance of losses in transactions among them under various
provisions of the Code (or if they are members of the same controlled group of
corporations under the Code), including a partnership and each of its partners
(and their spouses and minor children), an S corporation and each of its
shareholders (and their spouses and minor children) and various combinations of
these relationships. The foregoing is not a complete statement of all of the
provisions of the Code covering the definitions of "substantial user" and
"related person." For additional information, investors should consult their tax
advisors before investing in Common Shares.
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 was payable to shareholders of
record on a date in such month.
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 capital gain
net income) paid to the shareholder that are exempt-interest dividends. Under
rules used by the Internal Revenue Service for determining when borrowed funds
are considered to have been used for the purpose of purchasing or carrying
particular assets, the purchase of Common Shares 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 Common
Shares) 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.
If the Fund engages in hedging transactions, including hedging transactions
in options, futures contracts, and straddles, or other similar transactions, it
will be subject to special tax rules (including constructive sale,
mark-to-market, straddle, wash sale, and short sale rules), the effect of which
may be to accelerate income to
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the Fund, defer losses to the Fund, cause adjustments in the holding periods of
the Fund's securities, convert long-term capital gains into short-term capital
gains or convert short-term capital losses into long-term capital losses. These
rules could therefore affect the amount, timing and character of distributions
to shareholders. The Fund will endeavor to make any available elections
pertaining to such transactions in a manner believed to be in the best interests
of the Fund.
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.
FOREIGN INVESTORS. Non-resident alien individuals, foreign corporations
and certain other foreign entities generally will be subject to a U.S.
withholding tax at a rate of 30% on the Fund's distributions from its ordinary
income and the excess of its net short-term capital gain over its net long-term
capital loss, unless the tax is reduced or eliminated by an applicable tax
treaty. Distributions of the Fund's net capital gain received by such
shareholders and any gain from the sale or other disposition of shares of the
Fund generally will not be subject to U.S. federal income taxation, provided
that non-resident alien status has been certified by the shareholder. Different
U.S. tax consequences may result if the shareholder is engaged in a trade or
business in the United States, is present in the United States for a sufficient
period of time during a taxable year to be treated as a U.S. resident, or fails
to provide any required certifications regarding status as a non-resident alien
investor. Foreign shareholders should consult their tax advisors regarding the
U.S. and foreign tax consequences of an investment in the Fund.
The Internal Revenue Service 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 Common Shares. 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 Common Shares 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
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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.
ADDITIONAL NEW YORK TAX CONSIDERATIONS
The following paragraph is based on the advice of Brown & Wood LLP, special
New York counsel to the Fund.
The portion of exempt-interest dividends paid from interest received by the
Fund from New York Municipal Obligations also will be exempt from New York State
and City personal income taxes. To the extent distributions from the Fund are
attributable to sources other than interest on New York Municipal Obligations
such distributions will not be exempt from New York State and City personal
income taxes. However, exempt-interest dividends (whether or not attributable to
interest on New York Municipal Obligations) paid to a corporate shareholder will
be subject to New York State corporation franchise tax and New York City general
corporation tax. Shareholders subject to income taxation by states other than
New York and cities other than New York City will realize a lower after-tax rate
of return than New York State and New York City shareholders since the dividends
distributed by the Fund generally will not be exempt, to any significant degree,
from income taxation by such other states or cities. The Fund will inform
shareholders annually as to the portion of the Fund's distributions that is
exempt from New York State and City personal income taxes. Interest on
indebtedness incurred or continued to purchase or carry Fund shares generally is
not deductible for New York State and City personal income tax purposes to the
extent attributable to exempt-interest dividends. Capital gain dividends paid by
the Fund will be treated as capital gains which are taxed at ordinary income tax
rates for New York State and City personal income tax purposes.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Declaration disclaims shareholder liability for acts or obligations of the Fund
and requires that a notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Fund or the Trustees.
The Declaration provides for indemnification out of Fund property for all loss
and expense of any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder's incurring financial loss on account of
shareholder liability is limited to circumstances (which are considered remote)
in which the Fund would be unable to meet its obligations and the disclaimer was
inoperative.
CUSTODIAN
The Chase Manhattan Bank, located at 270 Park Avenue, New York, New York
10017-2070, is the Fund's custodian. The custodian is responsible for
safeguarding the Fund's cash and securities, receiving and delivering securities
and collecting the Fund's interest and dividends.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, independent accountants, have audited the
Statement of Net Assets of the Fund dated November 11, 1999 in connection with
the filing of such Statement with the Securities and Exchange Commission. The
address of PricewaterhouseCoopers LLP is 160 Federal Street, Boston,
Massachusetts 02110.
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-
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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.
FINANCIAL STATEMENTS
Following are the audited financial statements for the initial
capitalization of the Fund and the report of PricewaterhouseCoopers LLP dated
November 12, 1999.
Colonial New York Insured Municipal Fund
Statement of Net Assets
November 11, 1999
<TABLE>
<S> <C>
Assets:
Cash............................................... $100,000
Capital:
Paid in Capital (net assets)....................... $100,000
Shares Outstanding (Unlimited number authorized)............ 6,667
Net Asset Value (Capital) Per Share......................... $ 15.00
</TABLE>
NOTES TO STATEMENT OF NET ASSETS
NOTE 1. ORGANIZATION: Colonial New York Insured Municipal Fund (the "Fund") is
a newly organized closed-end, non-diversified management investment company. The
Fund's investment objective is to provide current income generally exempt from
regular federal income tax and New York State and City personal income tax. The
Fund will invest its assets in a non-diversified portfolio of bonds and notes
that generally are issued by or on behalf of the State of New York or its
political subdivisions, agencies, authorities or instrumentalities 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 New York State
and City personal income taxes.
The Fund is inactive except for matters relating to its organization and
registration, as a closed-end investment company under the Investment Company
Act of 1940, and the sale of 6,667 shares of the Fund for $100,000 to Colonial
Management Associates, Inc. (the "Advisor"), a wholly-owned subsidiary of
Liberty Funds Group LLC, which is an indirect majority-owned subsidiary of
Liberty Mutual Insurance Company. The Advisor has agreed to pay (i) all
organizational expenses and (ii) offering costs (other than sales loads) that
exceed $0.03 per Common Share (0.2% of offering price).
NOTE 2. TRANSACTIONS WITH AFFILIATES: Upon commencement of investment
operations, the Advisor will receive an annual management fee from the Fund,
computed and accrued daily and paid monthly, in a maximum amount equal to 0.65%
of the Fund's average weekly total net assets. The Advisor also provides the
Fund with accounting, bookkeeping, pricing and other services. For the first ten
years of the Fund's operation, the Advisor has agreed to waive the following
amount of the Fund's fees: 0.65% from the commencement of the Fund's operations
through January 1, 2001, 0.30% (on an annualized basis) for the period from
January 2, 2001 through November 30, 2001 and for each subsequent year ended
November 30 through November 30, 2004, 0.25% for the year ended November 30,
2005, 0.20% for the year ended November 30, 2006, 0.15% for the year ended
November 30, 2007, 0.10% for the year ended November 30, 2008 and 0.05% for the
year ended November 30, 2009. In addition, the Advisor has agreed at least
through November 30, 2000 to reimburse any of the Fund's other expenses in
excess of 0.20% per annum. The Advisor has not agreed to waive any portion of
the Fund's fees and expenses beyond November 30, 2009.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of
Colonial New York Insured Municipal Fund
In our opinion, the accompanying statement of net assets presents fairly,
in all material respects, the financial position of Colonial New York Insured
Municipal Fund (the "Fund") at November 11, 1999, in conformity with generally
accepted accounting principles. The statement of net assets is the
responsibility of the Fund's management; our responsibility is to express an
opinion on the statement of net assets based on our audit. We conducted our
audit of the statement of net assets in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of net assets is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of net assets, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 12, 1999
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<PAGE> 86
APPENDIX A
RATINGS OF INVESTMENTS
STANDARD & POOR'S CORPORATION -- A brief description of the applicable Standard
& Poor's Corporation ("S&P") rating symbols and their meanings (as published by
S&P) follows:
LONG TERM DEBT
An S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
INVESTMENT GRADE
<TABLE>
<S> <C>
AAA Debt rated "AAA" has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Debt rated "AA" has a very strong capacity to pay interest
and repay principal and differs from the highest rated
issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
</TABLE>
SPECULATIVE GRADE RATING
Debt rated "BB", "B", "CCC", "CC" and "C" is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of
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speculation and "C" the highest. While such debt will likely have some quality
and protective characteristics, these are outweighed by major uncertainties or
major exposures to adverse conditions.
<TABLE>
<S> <C>
BB Debt rated "BB" has less near-term vulnerability to default
than other speculative issues. However, it faces major
ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal
payments. The "BB" rating category is also used for debt
subordinated to senior debt that is assigned an actual or
implied "BBB-" rating.
B Debt rated "B" has a greater vulnerability to default but
currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial, or
economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
The "B" rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied "BB" or
"BB-" rating.
CCC Debt rated "CCC" has a currently identifiable vulnerability
to default, and is dependent upon favorable business,
financial, and economic conditions to meet timely payment of
interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay
principal.
The "CCC" rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied "B" or
"B-" rating.
CC The rating "CC" typically is applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" debt
rating.
C The rating "C" typically is applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-"
debt rating. The "C" rating may be used to cover a situation
where a bankruptcy petition has been filed, but debt service
payments are continued.
CI The rating "CI" is reserved for income bonds on which no
interest is being paid.
D Debt rated "D" is in payment default. The "D" rating
category is used when interest payments or principal
payments are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.
</TABLE>
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
PROVISIONAL RATINGS: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should exercise judgment
with respect to such likelihood and risk.
<TABLE>
<S> <C>
L The letter "L" indicates that the rating pertains to the
principal amount of those bonds to the extent that the
underlying deposit collateral is federally insured and
interest is adequately collateralized.* In the case of
certificates of deposit the letter "L" indicates that the
deposit, combined with other deposits being held in the same
right and capacity, will be honored for principal and
accrued pre-default interest up to the federal insurance
limits within 30 days after closing of the insured
institution or, in the event that the deposit is assumed by
a successor insured institution, upon maturity.
* Continuance of the rating is contingent upon S&P's receipt
of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flow.
NR Indicates no rating has been requested, that there is
insufficient information on which to base a rating, or that
S&P does not rate a particular type of obligation as a
matter of policy.
</TABLE>
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<PAGE> 88
MUNICIPAL NOTES
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note rating.
Notes maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment:
-- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
NOTE RATING SYMBOLS ARE AS FOLLOWS:
<TABLE>
<S> <C>
SP-1 Very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming
safety characteristics will be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
</TABLE>
A note rating is not a recommendation to purchase, sell, or hold a security
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
COMMERCIAL PAPER
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
<TABLE>
<S> <C>
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined
to possess extremely strong safety characteristics are
denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation
is satisfactory. However, the relative degree of safety is
not as high as for issues designated "A-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.
D Debt rated "D" is in payment default. The "D" rating
category is used when interest payments or principal
payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period.
</TABLE>
A commercial paper rating is not a recommendation to purchase, sell, or
hold a security inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished to S&P by the issuer or obtained by S&P from other sources
it considers reliable. S&P does not perform an audit in connection with any
rating and may, on occasion, rely on 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.
B-34
<PAGE> 89
MOODY'S INVESTORS SERVICE, INC. -- A brief description of the applicable
Moody's Investors Service, Inc. ("Moody's") rating symbols and their meanings
(as published by Moody's) follows:
MUNICIPAL BONDS
<TABLE>
<S> <C>
AAA Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edge." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise
what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and
interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment
sometime in the future.
BAA Bonds which are rated Baa are considered as medium grade
obligations, i.e. they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
BA Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may
be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
CAA Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
CA Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of
projects under construction, (b) earnings of projects
unseasoned in operation experience, (c) rentals which begin
when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating
denotes probable credit stature upon completion of
construction or elimination of basis of condition.
</TABLE>
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
Aa1, A1, Baa1, Ba1 and B1.
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<PAGE> 90
SHORT-TERM LOANS
<TABLE>
<S> <C>
MIG 1/VMIG 1 This designation denotes best quality. There is present
strong protection by established cash flows, superior
liquidity support or demonstrated broadbased access to the
market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security
elements are accounted for but there is lacking the
undeniable strength of the preceding grades. Liquidity and
cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is
present and although not distinctly or predominantly
speculative, there is specific risk.
S.G. This designation denotes speculative quality. Debt
instruments in this category lack margins of protection.
</TABLE>
COMMERCIAL PAPER
Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated PRIME-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
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<PAGE> 91
APPENDIX B
SPECIAL CONSIDERATIONS RELATING TO NEW YORK
The following information is a brief summary of factors affecting the
economy of New York City (the "City") or New York State (the "State" or "New
York"). Other factors will affect issuers. The summary is based primarily upon
one or more of the most recent publicly available offering statements relating
to debt offerings of State issuers, however, it has not been updated. The Fund
has not independently verified this information.
The State, some of its agencies, instrumentalities and public authorities
and certain of its municipalities have sometimes faced serious financial
difficulties that could have an adverse effect on the sources of payment for or
the market value of the New York Municipal Obligations in which the Fund
invests.
NEW YORK CITY
GENERAL. More than any other municipality, the fiscal health of the City
has a significant effect on the fiscal health of the State. The City's current
financial plan assumes that, after strong growth in 1998-1999, moderate economic
growth will exist through calendar year 2003, with moderating job growth and
wage increases.
For each of the 1981 through 1999 fiscal years, the City had an operating
surplus, before discretionary and other transfers, and achieved balanced
operating results as reported in accordance with generally accepted accounting
principles ("GAAP"), after discretionary and other transfers. The City has been
required to close substantial gaps between forecast revenues and forecast
expenditures in order to maintain balanced operating results. There can be no
assurance that the City will continue to maintain balanced operating results as
required by State law without tax or other revenue increases or reductions in
City services or entitlement programs, which could adversely affect the City's
economic base.
The Mayor is responsible for preparing the City's financial plan, including
the City's current financial plan for the 2000 through 2003 fiscal years (the
"2000-2003 Financial Plan", "Financial Plan" or "City Financial Plan"). The
City's projections set forth in the City Financial Plan are based on various
assumptions and contingencies that are uncertain and may not materialize.
Changes in major assumptions could significantly affect the City's ability to
balance its budget as required by State law and to meet its annual cash flow and
financing requirements.
As required by law, the City prepares a four-year annual financial plan,
which is reviewed and revised on a quarterly basis and which includes the City's
capital, revenue and expense projections and outlines proposed gap-closing
programs for years with projected budget gaps. The City's current financial plan
projects a surplus in the 2000 fiscal year, before discretionary transfers, and
budget gaps for each of the 2001, 2002 and 2003 fiscal years. This pattern of
current year surplus operating results and projected subsequent year budget gaps
has been consistent through the entire period since 1982, during which the City
has achieved surplus operating results, before discretionary transfers, for each
fiscal year.
CITY'S FINANCING PROGRAM. Implementation of the City Financial Plan is
dependent upon the City's ability to market its securities successfully. The
City's program for financing capital projects for fiscal years 2000 through 2003
contemplates the issuance of $7.449 billion of general obligation bonds and
$3.35 billion of bonds to be issued by the New York City Transitional Finance
Authority (the "Transitional Finance Authority"). In addition, the Financial
Plan anticipates access to approximately $2.4 billion in financing capacity of
the TSASC, Inc. ("TSASC"), which is expected to issue debt secured by revenues
derived from the settlement of litigation with tobacco companies selling
cigarettes in the United States. The Transitional Finance Authority and TSASC
were created to assist the City in financing its capital program while keeping
City indebtedness within the forecast level of the constitutional restrictions
on the amount of debt the City is authorized to incur.
Without additional borrowing capacity, under current projections the City
would reach the limit of its capacity to enter into new contractual commitments
in fiscal year 2000. In order to provide financing for the
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<PAGE> 92
City's current capital plan during and after fiscal year 2000, the Transitional
Finance Authority's debt-incurring capacity will need to be increased, some
other financing mechanism will need to be established or the City's general
obligation debt limit will need to be increased. An amendment to the State
Constitution would be necessary to change the methodology used to calculate the
debt limit to increase the City's general obligation debt limit. A proposed
amendment to the State Constitution may be considered by the State Legislature
and, if approved in two consecutive legislative sessions and by voter
referendum, could have an effective date in the year 2002. Even if the
Constitution were so amended, legislative action to increase the financing
capacity of the Transitional Finance Authority or creation of some other
financing mechanism would be necessary to permit the City to continue its
capital program until the constitutional amendment took effect in 2002.
Accordingly, the Financial Plan anticipates access to approximately $2.4 billion
in financing capacity of TSASC. Even with TSASC's ability to provide
approximately $2.4 billion of financing capacity, the City expects that it will
be required to postpone a substantial part of its capital program from the
latter part of fiscal year 2001 to fiscal year 2002. In addition, the City
issues revenue notes and tax anticipation notes to finance its seasonal working
capital requirements (See "Seasonal Financing Requirements" within). The success
of projected public sales of City bonds and notes, New York City Municipal Water
Finance Authority (the "Water Authority") bonds and Transitional Finance
Authority and other bonds will be subject to prevailing market conditions. The
City's planned capital and operating expenditures are dependent upon the sale of
its general obligation bonds and notes, as well as Water Authority, Transitional
Finance Authority and TSASC bonds.
1999 FISCAL YEAR. For the 1999 fiscal year, the City had an operating
surplus, before discretionary and other transfers, and achieved balanced
operating results, after discretionary and other transfers, in accordance with
GAAP. The 1999 fiscal year is the nineteenth year that the City has achieved an
operating surplus, before discretionary and other transfers, and balanced
operating results, after discretionary and other transfers.
2000-2003 FINANCIAL PLAN. On June 14, 1999, the City released the
Financial Plan for the 2000 through 2003 fiscal years, which relates to the City
and certain entities which receive funds from the City. The Financial Plan
projects revenues and expenditures for the 2000 fiscal year balanced in
accordance with GAAP, and project gaps of $1.8 billion, $1.9 billion and $1.8
billion for fiscal years 2001 through 2003, respectively.
The Financial Plan includes a discretionary transfer in the 1999 fiscal
year of $2.6 billion to pay debt service due in fiscal year 2000, for budget
stabilization purposes, a proposed discretionary transfer in fiscal year 2000 to
pay debt service due in fiscal year 2001 totaling $429 million, and a proposed
discretionary transfer in fiscal year 2001 to pay debt service due in fiscal
year 2002 totaling $345 million.
In addition, the Financial Plan sets forth gap-closing actions to eliminate
a previously projected gap for the 2000 fiscal year and to reduce projected gaps
for fiscal years 2001 through 2003. The gap-closing actions for the 2000 through
2003 fiscal years include: (i) additional City agency actions totaling $502
million, $371 million, $293 million and $283 million for fiscal years 2000
through 2003, respectively; (ii) additional federal aid of $75 million in each
of fiscal years 2000 through 2003, which include the proposed restoration of $25
million of federal revenue sharing and $50 million of increased Federal Medicaid
aid; and (iii) additional State actions totaling approximately $125 million in
each of fiscal years 2000 through 2003. The Financial Plan also reflects a tax
reduction program, which includes the elimination of the City's non-residents
earning tax, the extension of current tax reductions for owners of cooperative
and condominium apartments and a proposed income tax credit for low income wage
earners.
ASSUMPTIONS. The 2000-2003 Financial Plan is based on numerous
assumptions, including the condition of the City's and the region's economies
and modest employment growth and the concomitant receipt of economically
sensitive tax revenues in the amounts projected. The 2000-2003 Financial Plan is
subject to various other uncertainties and contingencies relating to, among
other factors, the extent, if any, to which wage increases for City employees
exceed the annual wage costs assumed for the 1999 through 2003 fiscal years;
continuation of projected interest earnings assumptions for pension fund assets
and current assumptions with respect to wages for City employees affecting the
City's required pension fund contributions; the willingness and ability of the
State to provide the aid contemplated by the Financial Plan and to take various
other actions to assist the City; the ability of Health and Hospitals
Corporation (the "HHC"), the Board of Education (the
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<PAGE> 93
"BOE") and other such agencies to maintain balanced budgets; the willingness of
the federal government to provide the amount of federal aid contemplated in the
Financial Plan; the impact on City revenues and expenditures of federal and
State welfare reform and any future legislation affecting Medicare or other
entitlement programs; adoption of the City's budgets by the City Council in
substantially the forms submitted by the Mayor; the ability of the City to
implement cost reduction initiatives, and the success with which the City
controls expenditures; the impact of conditions in the real estate market on
real estate tax revenues; and unanticipated expenditures that may be incurred as
a result of the need to maintain the City's infrastructure. Certain of these
assumptions have been questioned by the City Comptroller and other public
officials.
The Financial Plan assumes: (i) approval by the Governor and the State
Legislature of the extension of the 14% personal income tax surcharge, which has
subsequently been extended to December 31, 2001 through enacted legislation, and
which is projected to provide revenue of $572 million, $585 million, $600
million and $638 million in the 2000 through 2003 fiscal years, respectively;
(ii) collection of projected rent payments for the City's airports, totaling
$365 million, $185 million and $155 million in the 2001 through 2003 fiscal
years, respectively, a substantial portion of which may depend on the successful
completion of negotiations with The Port Authority of New York and New Jersey
(the "Port Authority") or the enforcement of the City's rights under the
existing leases through pending legal action; (iii) State and federal approval
of the State and federal gap-closing actions proposed by the City in the
Financial Plan; and (iv) receipt of the tobacco settlement funds providing
revenues or expenditure offsets in annual amounts ranging between $250 million
and $300 million. In addition, the economic and financial condition of the City
may be affected by various financial, social, economic and political factors
which could have a material effect on the City.
MUNICIPAL UNIONS. The Financial Plan reflects the costs of the settlements
and arbitration awards with certain municipal unions and other bargaining units,
which together represent approximately 98% of the City's workforce, and assumes
that the City will reach agreement with its remaining municipal unions under
terms which are generally consistent with such settlements and arbitration
awards. These contracts are approximately five years in length and have a total
cumulative net increase of 13%. Assuming the City reaches similar settlements
with its remaining municipal unions, the cost of all settlements for all
City-funded employees would exceed $2 billion annually, during fiscal years 2000
through 2003. The Financial Plan provides no additional wage increases for City
employees after their contracts expire in fiscal years 2000 and 2001.
INTERGOVERNMENTAL AID. The City depends on aid from the State both to
enable the City to balance its budget and to meet its cash requirements. There
can be no assurance that there will not be reductions in State aid to the City
from amounts projected; that State budgets will be adopted by the April 1
statutory deadline, or interim appropriations enacted; or that any such
reductions or delays will not have adverse effects on the City's cash flow or
expenditures. In addition, the federal budget negotiation process could result
in reductions or delays in the receipt of federal grants which could have
additional adverse effects on the City's cash flow or revenues.
YEAR 2000 COMPUTER MATTERS. The year 2000 presents potential operational
problems for computerized data files and computer programs which may recognize
the year 2000 as the year 1900, resulting in possible system failures or
miscalculations. In November 1996, the City's Year 2000 Project Office was
established to develop a project methodology, coordinate the efforts of City
agencies, review plans and oversee implementation of year 2000 projects. At that
time, the City also evaluated the capabilities of the City's Integrated
Financial Management System and Capital Projects Information System, which are
the City's central accounting, budgeting and payroll systems, identified the
potential impact of the year 2000 on these systems, and developed a plan to
replace these systems with a new system which is expected to be year 2000
compliant prior to December 31, 1999. The City has also performed an assessment
of its other mission-critical and high priority computer systems in connection
with making them year 2000 compliant, and the City's agencies have developed and
are implementing both strategic and operational plans for non-compliant
application systems. In addition, the City Comptroller is conducting audits of
the progress of City agencies in achieving year 2000 compliance. While these
efforts may involve additional costs beyond those assumed in the Financial Plan,
the City believes, based on currently available information, that such
additional costs will not be material.
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The Mayor's Office of Operations has stated that work has been completed,
and all or part of the necessary testing has been performed, on approximately
99% (current as of October 26, 1999) of the mission-critical and high priority
systems of Mayoral agencies. The City's computer systems may not all be year
2000 compliant in a timely manner and there could be an adverse impact on City
operations or revenues as a result. The City is developing contingency plans for
all mission-critical and high priority systems of Mayoral agencies to be used if
such systems are not year 2000 compliant. During the months of November and
December, the Mayor's Office of Emergency Management will coordinate drills to
test the contingency plans. The City is also in the process of contacting its
significant third party vendors regarding the status of their compliance. Such
compliance is not within the City's control, and therefore the City cannot
assure that there will not be any adverse effects on the City resulting from any
failure of these third parties.
CERTAIN REPORTS. The City's financial plans have been the subject of
extensive public comment and criticism. From time to time, the staff of the New
York State Financial Control Board (the "Control Board"), the Office of the
State Deputy Comptroller (the "OSDC"), the City Comptroller, the City's
Independent Budget Office (the "IBO") and others issue reports and make public
statements regarding the City's financial condition, commenting on, among other
matters, the City's financial plans, projected revenues and expenditures and
actions by the City to eliminate projected operating deficits. Some of these
reports and statements have warned that the City may have underestimated certain
expenditures and overestimated certain revenues and have suggested that the City
may not have adequately provided for future contingencies. Certain of these
reports have analyzed the City's future economic and social conditions and have
questioned whether the City has the capacity to generate sufficient revenues in
the future to meet the costs of its expenditure increases and to provide
necessary services.
On July 14, 1999, the City Comptroller issued a report on the adopted
budget for fiscal year 2000 and the Financial Plan. Taking into account the
risks and additional resources identified in the report, the report projected a
surplus for fiscal year 2000 of between $223 million and $891 million, including
the $429 million surplus allocated to the Budget Stabilization Account. In
addition, taking into account the risks and additional resources identified in
the report and the budget gaps projected in the Financial Plan, the report
projected budget gaps of between $1.8 billion and $3.5 billion, $1.7 billion and
$3.6 billion, and $1.7 billion and $4.1 billion in fiscal years 2001 through
2003, respectively.
With respect to fiscal years 2000 through 2003, the report identified
baseline risks of between $338 million and $998 million, $654 million and $2.4
billion, $600 million and $2.4 billion and $719 million and $2.9 billion,
respectively, depending upon whether (i) the State approves the extension of the
14% personal income tax surcharge; (ii) the City incurs additional labor costs
as a result of the expiration of labor contracts starting in fiscal year 2001
which, if settled at the current forecast level of inflation, would result in
additional costs totaling $345 million in fiscal year 2001, $713 million in
fiscal year 2002 and $1.1 billion in fiscal year 2003; (iii) the State approves
the continuation in fiscal years 2000 through 2003 of temporary State Medicaid
cost containment; and (iv) the City receives $300 million, $250 million, $300
million and $300 million in fiscal years 2000 through 2003, respectively, from
the tobacco settlement. Additional risks identified in the report for fiscal
years 2000 through 2003 include payments from the Port Authority relating to the
City's claim for back rentals, which are the subject of arbitration; State and
federal gap-closing actions proposed in the Financial Plan; possible increased
overtime expenditures; the sale of the New York City Coliseum in fiscal year
2001; the writedown of outstanding education aid receivables of approximately
$100 million in each of fiscal years 2002 and 2003; and a possible $149 million
shortfall in tax revenues in fiscal year 2003. The report noted that these risks
may be offset by additional resources of between $659 million and $873 million
in fiscal years 2000 through 2003 due to the potential for higher than forecast
tax revenues, lower than forecast payables for prior years, possible debt
service savings, additional State education aid, the possible failure to spend
funds for the construction of three sports facilities and lower pension costs
resulting from excess earnings on pension assets in the 1999 fiscal year.
In his report, the City Comptroller also noted that possible changes to the
assumptions and methods used to compute actuarial liabilities, including changes
in the mortality, disability, investment return and wage assumptions, could
increase the City's pension expenditures by up to $600 million annually, and
that the Financial Plan has provided reserves of $65 million, $250 million, $300
million and $260 million in fiscal years
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2000 through 2003 to absorb some of the anticipated cost increases. The report
further noted that the City Comptroller's forecast is contingent on the
continued growth of the City economy and that the fear of renewed inflationary
pressures has created uncertainty in the bond market which may dampen economic
growth in the future. The report also indicated that a possible negotiated
settlement of a class action, filed on behalf of approximately 65,000 persons
challenging the Department of Corrections policy of strip searching detainees
arrested for nonfelony offenses, may expose the City to substantial costs from
the settlement of litigation. The report noted that, while settlement
negotiations with representatives of the class are being conducted and,
therefore, estimates of the potential cost of this litigation cannot be
determined, the City has recently settled four cases for $25,000 each.
On August 25, 1998, the City Comptroller issued a report reviewing the
current condition of the City's major physical assets and the capital
expenditures required to bring them to a state of good repair. The report's
findings relate only to current infrastructure and do not address future
capacity or technology needs. The report estimated that the expenditure of
approximately $91.83 billion would be required over the next decade to bring the
City's infrastructure to a systematic state of good repair and address new
capital needs already identified. The report stated that the City's current
Ten-Year Capital Strategy, together with funding received from other sources, is
projected to provide approximately $52.08 billion. The report noted that the
City's ability to meet all capital obligations is limited by law, as well as
funding capacity, and that the issue for the City is how best to set priorities
and manage limited resources.
On July 15, 1999, the staff of the OSDC issued a report on the Financial
Plan. With respect to fiscal year 2000, the report identified a possible gap of
$13 million, reflecting revenues which could exceed projections in the Financial
Plan by $290 million, a $200 million shortfall in anticipated federal and State
assistance, a possible $70 million increase in overtime costs and the writedown
of approximately $33 million of outstanding education aid receivables. With
respect to fiscal years 2001 through 2003, the report identified net risks of
$530 million, $447 million and $266 million which, when added to gaps projected
in the Financial Plan, would result in gaps of $2.4 billion, $2.3 billion and
$2.1 billion in fiscal years 2001 through 2003, respectively. The risks
identified in the report included a $200 million shortfall in anticipated
federal and State assistance in each of fiscal years 2001 through 2003, the
potential for increased overtime costs, the writedown of outstanding State
education aid receivables of approximately $100 million in each of fiscal years
2002 and 2003, $100 million of unspecified asset sales in fiscal year 2002 and
delays in the receipt of Port Authority lease payments assumed in the Financial
Plan. However, the report noted that tax revenues could be greater than forecast
by the City by $155 million, $210 million and $255 million in fiscal years 2001
through 2003, respectively. The report also identified a number of other issues,
including a possible delay in the receipt of the City's share of the proceeds
under the settlement with the nation's tobacco companies; the extension of the
14% personal income tax surcharge; the possibility of pension costs being $250
million greater than assumed in the Financial Plan in each of fiscal years 2001
through 2003, as a result of changed actuarial assumptions; and the potential
for wage increases which, at the projected inflation rate, would increase gaps
by $285 million, $635 million and $1.0 billion in fiscal years 2001 through
2003, respectively. The report also noted the possibility that the Federal
Reserve will raise interest rates and slow the economy, which could depress Wall
Street profits below the levels projected by the City and have the potential to
seriously impact the City's nonproperty tax revenue forecasts.
On July 15, 1999, the staff of the Control Board issued a report reviewing
the Financial Plan. The report noted that the City is likely to end fiscal year
2000 in balance. However, the report identified risks of $562 million, $293
million, $640 million and $499 million for fiscal years 2000 through 2003,
respectively, which, when combined with the City's projected gaps, results in
estimated gaps of $562 million, $2.1 billion, $2.5 billion and $2.3 billion for
fiscal years 2000 through 2003, respectively, before making provision for any
increased labor costs which may occur when the current contracts with City
employees expire in calendar year 2000. The report noted the possibility that
non-property taxes in fiscal year 2000 could be $250 million greater than
forecast in the Financial Plan. However, the report also identified risks for
fiscal years 2000 through 2003, which include (i) the possibility that the City
may decide to fund the $63 million annual cost of teachers' salary
supplementation for fiscal years 2000 through 2003, which the State failed to
fund in the 1999 fiscal year, and an additional risk of approximately $100
million in each of fiscal years 2002 and 2003 for BOE
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resulting from the write-down of funds owed to BOE by the State which have been
outstanding for ten or more years; (ii) the receipt of assumed rental payments
from the Port Authority relating to the City's claim for back rents, which are
the subject of arbitration; (iii) a possible delay in the receipt of $300
million from the tobacco settlement in fiscal years 2000 and 2001; (iv) $200
million of federal and State gap-closing actions assumed in the Financial Plan
for each of fiscal years 2000 through 2003; and (v) $177 million in fiscal year
2000 from the lapse of State Medicaid cost containment, which has been extended
subsequent to the report.
In its report, the staff of the Control Board noted that total debt service
is expected to increase from 9.2% of total revenues and 15.8% of tax revenues in
the 1999 fiscal year to 11.6% of total revenues and 19% of tax revenues in
fiscal year 2003, and that the City's capital plant will require additional
resources at the same time that a rising debt service burden must be contained.
With respect to HHC, the report noted that HHC revenues are expected to fall
during the Financial Plan period, primarily due to falling Medicaid receipts,
that HHC will face increasing financial pressure when the State implements
mandatory Medicaid managed care beginning in fiscal year 2000 and that the
eventual size of the projected gaps for HHC in fiscal years 2002 and 2003 may
change substantially from current projections, as the revenue impact of proposed
State and federal reforms, growth in managed care and shifting utilization
patterns remain largely uncertain. Finally, the report noted that, given the
length of the current expansion, there is an increasing probability that a
recession related to the end of the long bull market will occur by the end of
the Financial Plan period, and it is likely that the next downturn, if and when
it occurs, will have a disproportionately great impact on the City because of
its dependence on income flows from financial services.
SEASONAL FINANCING REQUIREMENTS. The City since 1981 has fully satisfied
its seasonal financing needs in the public credit markets, repaying all
short-term obligations within their fiscal year of issuance. The City has issued
$750 million of short-term obligations in the 2000 fiscal year to finance the
City's cash flow needs for the 2000 fiscal year. The City issued $500 million of
short-term obligations in the 1999 fiscal year to finance the City's cash flow
needs for the 1999 fiscal year. The City issued $1.075 billion in short-term
obligations in fiscal year 1998 to finance the City's projected cash flow needs
for the 1998 fiscal year. The City issued $2.4 billion of short-term obligations
in fiscal year 1997. Seasonal financing requirements for the 1996 fiscal year
increased to $2.4 billion from $2.2 billion and $1.75 billion in the 1995 and
1994 fiscal years, respectively. The delay in the adoption of the State's budget
in certain past fiscal years has required the City to issue short-term notes in
amounts exceeding those expected early in such fiscal years.
RATINGS. As of November 3, 1999, Moody's rated the City's outstanding
general obligation bonds A3, Standard & Poor's rated such bonds A- and Fitch
rated such bonds A. In July 1995, Standard & Poor's revised downward its ratings
on outstanding general obligation bonds of the City from A- to BBB+. In July
1998, Standard & Poor's revised its rating of City bonds upward to A-. Moody's
rating of City bonds was revised in February 1998 to A3 from Baa1. On March 8,
1999, Fitch revised its rating of City bonds upward to A. Such ratings reflect
only the view of Moody's, Standard & Poor's and Fitch, from which an explanation
of the significance of such ratings may be obtained. There is no assurance that
such ratings will continue for any given period of time or that they will not be
revised downward or withdrawn entirely. Any such downward revision or withdrawal
could have an adverse effect on the market prices of City bonds.
OUTSTANDING INDEBTEDNESS. As of September 30, 1999, the City and the
Municipal Assistance Corporation for the City of New York had respectively
approximately $26.3 and $2.8 billion of outstanding net long-term debt. As of
May 19, 1999, the Water Authority had approximately $8.7 billion aggregate
principal amount of outstanding bonds, inclusive of subordinate second
resolution bonds, and a $600 million commercial paper program.
WATER, SEWER AND WASTE. Debt service on Water Authority obligations is
secured by fees and charges collected from the users of the City's water and
sewer system. State and federal regulations require the City's water supply to
meet certain standards to avoid filtration. The City's water supply now meets
all technical standards and the City has taken the position that increased
regulatory, enforcement and other efforts to protect its water supply, will
prevent the need for filtration. On May 6, 1997, the U.S. Environmental
Protection Agency granted the City a filtration avoidance waiver through April
15, 2002 in response to the City's adoption of certain watershed regulations.
The estimated incremental cost to the City of implementing
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this Watershed Memorandum of Agreement, beyond investments in the watershed
which were planned independently, is approximately $400 million. The City has
estimated that if filtration of the upstate water supply system is ultimately
required, the construction expenditures required could be between $4 billion and
$5 billion.
Legislation has been passed by the State which prohibits the disposal of
solid waste in any landfill located within the City after December 31, 2001. The
Financial Plan includes the estimated costs of phasing out the use of landfills
located within the City. A suit has been commenced against the City by private
individuals under the Resource Conservation and Recovery Act seeking to compel
the City to take certain measures or, alternatively, to close the Fresh Kills
landfill. If as a result of such litigation, the City is required to close the
landfill earlier than required by State legislation, the City could incur
additional costs during the Financial Plan period. Pursuant to court order, the
City is currently required to recycle 3,400 tons per day of solid waste and is
required to recycle 4,250 tons per day by July 2001. The City as of October 26,
1999 was recycling slightly over 2,600 tons per day of solid waste. The City may
seek to obtain amendments to Local Law No. 19 to modify this requirement. If the
City is unable to obtain such amendments and is required to fully implement
Local Law No. 19, the City may incur substantial costs.
LITIGATION. The City is a defendant in a significant number of lawsuits.
Such litigation includes, but is not limited to, routine litigation incidental
to the performance of its governmental and other functions, actions commenced
and claims asserted against the City arising out of alleged constitutional
violations, alleged torts, alleged breaches of contracts and other alleged
violations of law and condemnation proceedings and other tax and miscellaneous
actions. While the ultimate outcome and fiscal impact, if any, on the City of
the proceedings and claims are not currently predictable, adverse determination
in certain of them might have a material adverse effect upon the City's ability
to carry out the City Financial Plan. The City has estimated that its potential
future liability on account of outstanding claims against it as of June 30, 1999
amounted to approximately $3.5 billion.
NEW YORK STATE
CURRENT ECONOMIC OUTLOOK. The information in this section, obtained from
the State's Annual Information Statement, updated as of the middle of the
State's 1999-2000 fiscal year, summarizes the national and State economic
situation and outlook upon which projections of receipts and certain
disbursements were made for the State's 1999-2000 Financial Plan updated as of
the middle of the State's 1999-2000 fiscal year. Growth in domestic consumption,
which has been a major driving force behind the nation's strong economic
performance in recent years, is expected to slow in 2000 as consumer confidence
retreats from historic highs and the stock market ceases to provide large
amounts of extra discretionary income. Real Gross Domestic Product ("GDP")
growth is projected to be 3.8 percent in 1999, below the 1998 growth rate of 3.9
percent. In 2000, real GDP growth is expected to be 3.1 percent.
The forecast of the State's economy shows continued growth projected in the
1999 and 2000 calendar years for employment, wages and personal income, although
for 2000, a slowdown in the growth rate of employment is expected. The financial
and business service sectors are expected to continue to do well, while
employment in the manufacturing sector is expected to post a modest decline. On
an average annual basis, the employment growth rate in the State is expected to
be somewhat lower than in 1998 and the unemployment rate is expected to drop
further to 5.0 percent in 2000. Personal income is expected to record moderate
gains in 1999. Wage growth in 1999 is expected to be slower than in the previous
year as the recent robust growth rate in bonus payments moderates.
Overall employment growth in the State was 2.1 percent in 1998, but is
expected to drop to 2.0 percent in 1999 and to 1.7 percent in 2000. On the
national level, employment growth was 2.6 percent for 1998 and is projected to
be 2.2 percent and 2.0 percent for 1999 and 2000, respectively.
On an average annual basis, the State unemployment rate was 5.6 percent in
1998 and is projected to be 5.1 percent and 5.0 percent for 1999 and 2000,
respectively. For the nation as a whole, the unemployment rate was 4.5 percent
for 1998, and is projected to be 4.2 percent in 1999 and 4.0 percent in 2000.
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Personal income in the State grew by 5.2 percent in 1998, and is projected
to grow by 4.8 percent in 1999 and 4.9 percent in 2000. For the nation, personal
income grew by 5.0 percent in 1998, and is projected to grow by 5.1 percent and
5.2 percent, respectively, for 1999 and 2000.
The forecast for continued growth, and any resultant impact on the State's
1999-2000 Financial Plan, contains some uncertainties. Stronger-than-expected
gains in employment and wages or in stock market prices could lead to
unanticipated strong growth in consumer spending. Inventory investment dues to
year 2000 computer matters may be significantly stronger than expected towards
the end of 1999 possibly followed by significant weakness early in 2000. Also,
improvements in foreign economies may be weaker-than-expected and therefore may
have unanticipated effects on the domestic economy. The inflation rate may
differ significantly from expectations due to the conflicting impacts of a tight
labor market and improved productivity growth as well as to the direction and
magnitude of fluctuations in oil prices. In addition, the State economic
forecast could over- or underestimate the level of future bonus payments,
financial sector profits or inflation growth, resulting in unexpected economic
impacts. Similarly, the State forecast could fail to correctly estimate the
amount of employment change in the banking, financial and other business service
sectors as well as the direction of employment change that is likely to
accompany telecommunications and energy deregulation.
THE NEW YORK ECONOMY. New York is the third most populous state in the
nation and has a relatively high level of personal wealth. The State's economy
is diverse, with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. The services sector accounts for
more than three of every ten nonagricultural jobs in New York and has a
noticeably higher proportion of total jobs than does the rest of the nation.
Manufacturing employment continues to decline in importance in New York, as in
most other states, and New York's economy is less reliant on this sector than is
the nation. Wholesale and retail trade is the second largest sector in terms of
nonagricultural jobs in New York but is considerably smaller when measured by
income share. The finance, insurance and real estate sector is far more
important in the State than in the nation as a whole. Although this sector
accounts for under one-tenth of all nonagricultural jobs in the State, it
contributes about one-fifth of all nonfarm labor and proprietors' income.
Farming is an important part of large regions of the State, although it
constitutes a very minor part of total State output. Federal, State and local
government together are the third largest sector in terms of nonagricultural
jobs, with the bulk of the employment accounted for by local governments. The
State is likely to be less affected than the nation as a whole during an
economic recession that is concentrated in manufacturing and construction, but
likely to be more affected during a recession that is concentrated in the
service-producing sector.
THE 1999-2000 FISCAL YEAR. The State's 1999-2000 fiscal year began on
April 1, 1999 and ends on March 31, 2000. On March 31, 1999, the State adopted
the debt service portion of the State budget for the 1999-2000 fiscal year; four
months later, on August 4, 1999, it enacted the remainder of the budget. The
Governor approved the budget as passed by the Legislature. Prior to passing the
budget in its entirety for the 1999-2000 fiscal year, the State enacted
appropriations that permitted the State to continue its operations. Following
the enactment of the budget, the State prepared a Financial Plan for the
1999-2000 fiscal year (the "1999-2000 Financial Plan" or the "State Financial
Plan") that sets forth projected receipts and disbursements based on the actions
taken by the Legislature.
General Fund receipts, including transfers from other funds, are projected
to be $39.32 billion, an increase of $2.58 billion or approximately 7.0 percent
over the 1998-1999 fiscal year. General Fund disbursements, including transfers
to other funds, are estimated at $37.35 billion, an increase of $858 million or
approximately 2.4 percent over the 1998-1999 fiscal year. The 1999-2000
Financial Plan projects the State to close the 1999-2000 fiscal year with a
closing balance of $2.87 billion in the General Fund.
RECEIPTS. The $39.32 billion in total General Fund receipts includes
$35.94 billion in tax receipts, $1.36 billion in miscellaneous receipts and
$2.02 billion in transfers from other funds. The transfer of the $1.82 billion
surplus recorded in the 1998-1999 fiscal year to the 1999-2000 fiscal period has
the effect of exaggerating the growth in State receipts from year to year by
depressing reported 1998-1999 figures and inflating 1999-2000 figures.
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Personal income taxes are imposed on the income of individuals, estates and
trusts and are based, with certain modifications, on federal definitions of
income and deductions. Potential changes to federal tax law could alter the
federal definitions of income on which certain State taxes rely. Such changes
could have a significant impact on State revenues in the future. Net General
Fund personal income tax collections are projected to reach $22.99 billion in
the 1999-2000 fiscal year, well over half of all General Fund receipts and
nearly $2.92 billion above the reported 1998-1999 fiscal year collection total.
Much of this growth is associated with the $1.82 billion net impact of the
transfer of the surplus from 1998-1999 to 1999-2000 as partially offset by the
diversion of an additional $661 million in income tax receipts to the School Tax
Relief (STAR) fund. The STAR program was created in 1997 as a State-funded local
property tax relief program funded through the use of personal income tax
receipts. Adjusted for these transactions, the growth in net income tax receipts
is roughly $1.8 billion, an increase of almost 9 percent.
User taxes and fees are comprised of three-quarters of the State's four
percent sales and use tax, cigarette, alcoholic beverage, container, and auto
rental taxes, and a portion of the motor fuel excise levies. This category also
includes receipts from the motor vehicle registration fees and alcoholic
beverage license fees. Dedicated transportation funds outside of the General
Fund receive a portion of motor fuel tax and motor vehicle registration fees and
all of the highway use taxes. User taxes and fees are projected to total $7.35
billion in 1999-2000, an increase of $105 million from reported collection in
the 1998-1999 fiscal year. The sales tax component of this category accounts for
virtually all of the 1999-2000 fiscal year growth.
Business taxes include franchise taxes based generally on net income of
general business, bank and insurance corporations, as well as
gross-receipts-based taxes on utilities and gallonage-based petroleum business
taxes. Business tax receipts are expected to total approximately $4.60 billion
in 1999-2000, $260 million below 1998-1999 results. The year-over-year decline
in projected receipts in this category is largely attributable to statutory
changes.
Transfers from other funds to the General Fund consist primarily of tax
revenues in excess of debt service requirements, including the one percent sales
tax used to support payments to Local Government Assistance Corporation (see
Local Government Assistance Corporation within). Transfers form other funds are
expected to total approximately $2.02 billion, or $99 million more than total
receipts from this category during 1998-1999. Total transfers of sale taxes in
excess of LGAC debt service requirements are expected to increase by
approximately $93 million, while transfers from all other funds are expected to
increase by $6 million.
Miscellaneous receipts include investment income, abandoned property
receipts, medical provider assessments, minor federal grants, receipts from
public authorities, and certain other license and fee revenues. Miscellaneous
receipts are expected to total $1.36 billion in the 1999-2000 fiscal year, down
$142 million from the prior year amount. This reflects the loss of non-recurring
receipts received in the 1998-1999 fiscal year and the growing effects of the
phase-out of the medical provider assessments, scheduled to be eliminated in
January 2000.
Other taxes include the estate and gift tax, the real property gains tax
and pari-mutuel taxes. Taxes in this category are projected to total $1 billion
for 1999-2000, $137 million below the 1998-1999 level. The primary factors
accounting for most of the expected decline include: an adverse tax tribunal
decision resulting in significant refunds of the now repealed real property
gains tax; pari-mutuel tax reductions enacted with the 1999-2000 budget; and the
effects of already enacted reductions in the estate and gift taxes.
NON-RECURRING RESOURCES. The State Division of the Budget estimates that
the 1999-2000 State Financial Plan contains actions that provide non-recurring
resources or savings totaling approximately $500 million, or 1.3 percent of
General Fund resources, the largest of which is the first phase of the
privatization of the Medical Malpractice Insurance Association. To the greatest
extent possible, one-time resources are expected to be utilized to finance
one-time costs, including Year 2000 compliance costs and certain capital
spending.
DISBURSEMENTS. Grants to Local Governments is projected to constitute
approximately 68.5 percent of all 1999-2000 fiscal year General Fund
disbursements, and includes payments to local governments, non-profit
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providers and entitlement benefits to individuals. It is projected to be
approximately $25.62 billion for the 1999-2000 fiscal year, an increase of $926
million or 3.68 percent from the level for the 1998-1999 fiscal year. Under the
1999-2000 enacted budget, General Fund spending on school aid is projected at
$10.52 billion on a State fiscal year basis, an increase of $831 million from
the prior year. Spending for Medicaid in 1999-2000 is projected to total $5.53
billion, essentially unchanged from the 1998-1999 fiscal year. Disbursements for
all other health and social welfare programs are projected to total
approximately $2.68 billion, a decrease of $252 million. Lower welfare spending,
driven by State and federal reforms and a robust economy, accounts for most of
the decline.
State Operations is projected to constitute approximately 18.4 percent of
all 1999-2000 fiscal year General Fund disbursements. State Operations reflects
the costs of running the Executive, Legislative and Judicial branches of
government, including the prison system, mental hygiene institutions, and the
State University system (SUNY). It is projected to be approximately $6.85
billion for the 1999-2000 fiscal year. Personal service costs account for
approximately 73 percent of spending in this category. Spending in this category
is projected to increase by $181 million or 2.7 percent above 1998-1999. The
growth reflects $100 million reserved to fund new collective bargaining
agreements, including the contract ratified by the United University
Professionals. The annualized costs of current collective bargaining agreements,
growth in the Legislative and Judiciary budgets, and staffing costs for the
State's Year 2000 compliance programs also contribute to the year-to-year growth
in spending. The State's overall workforce is projected to remain stable at
approximately 191,300 persons.
General State Charges is projected to constitute approximately 5.5 percent
of all 1999-2000 fiscal year General Fund disbursements. This category accounts
primarily for the costs of providing fringe benefits to State employees and
retirees of the Executive, Legislature and Judiciary. It includes employer
contributions for pensions, social security, health insurance, workers'
compensation and unemployment insurance. This category also covers State
payments-in-lieu of-taxes to local governments for certain State-owned lands,
and the costs of defending lawsuits against the State and its public officers.
Disbursements in this category are estimated at $2.04 billion for the 1999-2000
fiscal year, a decrease of $222 million from the 1998-1999 fiscal year.
Transfers to Other Funds from the General Fund are made primarily to
finance certain portions of State capital projects spending and debt service on
long-term bonds where these costs are not funded from other sources. State Debt
Service is projected to constitute approximately 6.1 percent of all 1999-2000
fiscal year General Fund disbursements. Capital/Other is projected to constitute
approximately 1.5 percent of all such General Fund disbursements. Long-term debt
service transfers are projected at $2.27 billion in the 1999-2000 fiscal year,
an increase of $183 million from 1998-1999. Transfers for capital projects are
projected to total $168 million in 1999-2000, a decline of $78 million from the
1998-1999 fiscal year which is primarily due to the delay of the receipt of
payment of certain reimbursements in the 1998-1999 fiscal year.
FUTURE FISCAL YEARS. State law requires the Governor to propose a balanced
budget each year. Preliminary analysis by the State Division of the Budget
indicates that the State will have a 2000-2001 fiscal year budget gap of
approximately $1.9 billion, or about $300 million above the 1999-2000 Executive
Budget estimate (after adjusting for the projected costs of collective
bargaining). This estimate includes an assumption of the projected costs of new
collective bargaining agreements, $500 million in assumed operating
efficiencies, as well as the planned application of approximately $615 million
of the $1.82 billion tax reduction reserve. In recent years, the State has
closed projected budget gaps which the State Division of the Budget estimates at
$5.0 billion (1995-96), $3.9 billion (1996-97), $2.3 billion (1997-98), and less
than $1 billion (1998-99).
The 1999-2000 Financial Plan has reserved $100 million for collective
bargaining agreements, and reserves are contained in the preliminary outyear
projection for 2000-2001 to cover the recurring costs of new agreements. To the
extent these reserves are inadequate to finance such agreements, the costs of
new labor contracts could increase the size of future budget gaps.
Sustained growth in the State's economy could contribute to closing
projected budget gaps over the next several years, both in terms of
higher-than-projected tax receipts and in lower-than-expected entitlement
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spending. The State assumes that the 2000-2001 Financial Plan will achieve $500
million in savings from initiatives by state agencies to deliver services more
efficiently, workforce management efforts, maximization of Federal and
non-General Fund spending offsets, and other actions necessary to help bring
projected disbursements and receipts into balance. The projections do not assume
any gap-closing benefit from the potential settlement of State claims against
the tobacco industry.
SPECIAL CONSIDERATIONS. Many complex political, social and economic forces
influence the State's economy and finances, which may in turn affect the State's
Financial Plan. These forces may affect the State unpredictably from fiscal year
to fiscal year and are influenced by governments, institutions, and events that
are not subject to the State's control. The Financial Plan is also necessarily
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and State economies.
The State Financial Plan is based upon forecasts of national and State
economic activity. Many uncertainties exists in forecasts of both the national
and the State economies, including consumer attitudes toward spending, the
extent of corporate and governmental restructuring, the condition of the
financial sector, federal fiscal and monetary policies, the level of interest
rates, and the condition of the world economy, which could have an adverse
effect on the State. There can be no assurance that the State economy will not
experience results in the current or any future fiscal year that are worse than
predicted, with corresponding material and adverse effects on the State's
projections of receipts and disbursements.
Projections of total State receipts in the State Financial Plan are based
on the State tax structure in effect during the fiscal year and on assumptions
relating to basic economic factors and their historical relationships to State
tax receipts. Projections of total State disbursements are based on assumptions
relating to economic and demographic factors, potential collective bargaining
agreements, levels of disbursements for various services provided by local
governments (where the cost is partially reimbursed by the State), and the
results of various administrative and statutory mechanisms in controlling
disbursements for State operations.
An additional risk to the State Financial Plan arises from the potential
impact of certain litigation and of federal disallowances now pending against
the State, which could adversely affect the State's projections of receipts and
disbursements. The State Financial Plan assumes no significant litigation or
federal disallowance or other federal actions that could affect State finances,
but has significant reserves in the event of such an action.
The Personal Responsibility and Work Opportunity Reconciliation Act of 1996
created a new Temporary Assistance to Needy Families program (TANF) partially
funded with a fixed federal block grant to states. States are required to meet
work activity participation targets for their TANF caseload and conform with
certain other federal standards or face potential sanctions in the form of a
reduced federal block grant and increased State/local funding requirements. Any
future reduction could have an adverse impact on the State's Financial Plan.
However, the State has been able to demonstrate compliance with TANF work
requirements to date and does not now expect to be subject to associated federal
fiscal penalties.
Despite recent budgetary surpluses recorded by the State, actions affecting
the level of receipts and disbursements, the relative strength of the State and
regional economy, and actions by the federal government could impact projected
budget gaps for the State. To address a potential imbalance in any given fiscal
year, the State would be required to take actions to increase receipts and/or
reduce disbursements as it enacts the budget for that year, and under the State
Constitution, the Governor is required to propose a balanced budget each year.
There can be no assurance, however, that the State Legislature will enact the
Governor's proposals or that the State's actions will be sufficient to preserve
budgetary balance in any given fiscal year or to align recurring receipts and
disbursements in any given fiscal year.
To help guard against these risks, the State has projected reserves of $2.4
billion in the 1999-2000 fiscal year.
Effective January 1, 1997, the Health Care Reform Act (HCRA) moved the
hospital industry into a competitive market system by allowing most
non-governmental payors to negotiate reimbursement directly
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with hospitals. HCRA continued the New York Prospective Hospital Reimbursement
Methodology (NYPHRM) rate setting system for Medicaid.
HCRA legislation is scheduled to expire on December 31, 1999. It is
anticipated that the State Legislature will convene a special session prior to
that date to enact successor HCRA legislation. Since successor legislation has
yet to be adopted, its impact on the State Financial Plan, if any, is unknown at
the time of the State's mid-year 1999-2000 update.
YEAR 2000 COMPUTER MATTERS. New York State is currently addressing "Year
2000" ("Y2K") data processing compliance issues. Since its inception, the
computer industry has used a two-digit date convention to represent the year. In
the year 2000, the date field will contain "00" and, as a result, many computer
systems and equipment may not be able to process dates properly or may fail
since they may not be able to distinguish between the years 1900 and 2000. The
Y2K issue not only affects computer programs, but also the hardware, software
and networks on which they operate. In addition, any system or equipment that is
dependent on an embedded chip, such as telecommunication equipment and security
systems, may also be adversely affected.
In April 1999 the State Comptroller released an audit on the State's Y2K
compliance. The audit, which reviewed the State's Y2K compliance activities
through October 1998, found that the State had made progress in achieving Y2K
compliance, but needed to improve its activities in several areas, including
data interchanges and contingency planning.
The Office for Technology ("OFT") will continue to monitor compliance
progress for the State's mission-critical and high-priority systems. OFT
submitted a final quarterly compliance progress report to the Governor's Office
for the quarter ending September 30, 1999. Monthly exception reporting for the
remainder of 1999 will replace the quarterly reports. Mission-critical systems
are those that may impact the public health, safety and welfare of the State and
its citizens, and for which failure could have a material and adverse impact on
State operations. High-priority systems are critical for a State agency to
fulfill its mission or deliver services. OFT reported that as of September 1999,
the State's mission-critical systems were 100 percent compliant; 93 percent of
the overall compliance effort on the high-priority systems was completed; and
269 systems were Y2K compliant. The State has also procured independent
validation and verification services from a qualified vendor to perform an
automated review of code that has been fixed and a testing review process for
all mission-critical systems was completed in October 1999. Overall the vendor
noted that New York State agencies had followed and implemented several best
practices and therefore the vendor made very few process recommendations and
only a few significant code check issues (.01% of the code), were remaining
after agency reviews of the independent validation and verification services.
The State is also addressing a number of issues related to Y2K compliance,
including: testing all data exchange interfaces with federal, State, local and
private data partners for critical systems (as of September 1999, 98% of data
exchanges were done); completing compliance work of priority equipment and
systems that may depend on embedded chips (as of September 1999, 82% of these
systems were compliant); and contacting critical vendors and supply partners to
obtain and monitor Y2K compliance status information and assurances. Since
problems could be identified during the compliance testing phase that could
produce compliance delays, the State agencies were required to complete
contingency plans for priority systems and business processes by the first
quarter of calendar year 1999. These plans have been completed and tested as of
June 1999 and are being integrated into the State Emergency Response Plan under
the direction of the State Emergency Management Office. As of September 1999, 46
agencies have filed their contingency plans with the State Emergency Management
Office. The Public Service Commission reported that as of September 1999, all
State-regulated utilities, with the exception of a few small water and cable
companies, were ready for the Year 2000, including the existence of
comprehensive contingency plans. The State has also been working with local
governments since December 1996 to raise awareness, promote action and provide
assistance with Y2K compliance.
While the State is taking what it believes to be appropriate action to
address Y2K compliance, there can be no guarantee that all of the State's
systems and equipment will be Y2K compliant and that there will not be an
adverse impact upon State operations or finances as a result. Since Y2K
compliance by outside parties is
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beyond the State's control to remediate, the failure of outside parties to
achieve Y2K compliance could have an adverse impact on State operations or
finances as well.
PRIOR FISCAL YEARS (GAAP-BASIS). GAAP requires fund accounting for all
government resources and the modified accrual basis of accounting for measuring
the financial position and changes therein of governmental funds. The modified
accrual basis of accounting recognizes revenues when they become measurable and
available to finance expenditures, and expenditures when a liability to pay for
goods or services is incurred or a commitment to make aid payments is made,
regardless of when actually paid. There are four GAAP-defined Governmental Fund
types. The General Fund is the major operating fund of the State and receives
all receipts that are not required by law to be deposited in another fund. Debt
Service Funds account for the accumulation of resources for the payment of
general long-term debt service and related costs and payments under
lease-purchase and contractual-obligation financing arrangements. Capital
Project Funds account for financial resources of the State to be used for the
acquisition or construction of major capital facilities (other than those
financed by Special Revenue Funds, Proprietary Funds and Fiduciary Funds).
Special Revenue Funds account for the proceeds of specific revenue sources
(other than expendable trusts or major capital projects), such as federal
grants, that are legally restricted to specified purposes.
The State completed its 1998-1999 fiscal year with a combined governmental
funds operating surplus of $1.32 billion, which included operating surpluses in
the General Fund ($1.078 billion), in the Debt Service Funds ($209 million) and
in the Capital Projects Funds ($154 million) offset, in part, by an operating
deficit in Special Revenue Funds ($117 million). The State reported an
accumulated surplus of $1.645 billion in the General Fund.
The State completed its 1997-1998 fiscal year with a combined Governmental
Funds operating surplus of $1.80 billion, which included an operating surplus in
the General Fund of $1.56 billion, in Capital Projects Funds of $232 million and
in Special Revenue Funds of $49 million, offset in part by an operating deficit
of $43 million in Debt Service Funds. The State reported an accumulated surplus
of $567 million in the General Fund for the first time since it began reporting
its operations on a GAAP-basis.
The State completed its 1996-1997 fiscal year with a combined Governmental
Funds operating surplus of $2.1 billion, which included an operating surplus in
the General Fund of $1.9 billion, in the Capital Projects Funds of $98 million
and in the Special Revenue Funds of $65 million, offset in part by an operating
deficit of $37 million in the Debt Service Funds. The State reported an
accumulated deficit of $995 million in the General Fund.
PRIOR FISCAL YEARS (CASH BASIS). Cash basis accounting results in the
recording of receipts at the time money or checks are deposited in the State
Treasury and the recording of disbursements at the time a check is drawn,
regardless of the fiscal period to which the receipts or disbursements relate.
The State ended its 1998-1999 fiscal year on March 31, 1999 in balance on a
cash basis, with a General Fund cash surplus as reported by the State Division
of the Budget of $1.82 billion. The cash surplus was derived primarily from
higher-than-projected tax collections as a result of continued economic growth,
particularly in the financial markets and the securities industries. General
Fund receipts and transfers from other funds (net of tax refund reserve account
activity) for the 1998-1999 fiscal year totaled $36.74 billion, an increase of
6.34 percent from the 1997-1998 fiscal year levels. General Fund disbursements
and transfers to other funds totaled $36.49 billion for the 1998-1999 fiscal
year, an increase of 6.23 percent from the 1997-1998 fiscal year levels.
The State reported a General Fund closing cash balance of $892 million. The
closing fund balance excludes $2.31 billion that the State deposited into the
tax refund reserve account at the close of the 1998-1999 fiscal year to pay for
tax refunds in the 1999-2000 fiscal year. The tax refund reserve account
transaction has the effect of decreasing reported personal income tax receipts
in the 1998-1999 fiscal year, while increasing reported receipts in the
1999-2000 fiscal year.
The State ended its 1997-1998 fiscal year balanced on a cash basis, with a
reported General Fund cash surplus of $2.04 billion resulting from revenue
growth and lower spending on welfare, Medicaid, and other entitlement programs.
General Fund receipts and transfers from other funds for the 1997-1998 fiscal
year
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(including net tax refund reserve account activity) totaled $34.55 billion, an
annual increase of $1.51 billion, or 4.57 percent over the 1996-1997 fiscal
year. General Fund disbursements and transfers to other funds were $34.35
billion, an annual increase of $1.45 billion or 4.41 percent. The State closed a
budget gap of approximately $2.3 billion for the 1997-1998 fiscal year.
Gap-closing actions included cost containment in State Medicaid, the use of the
$1.4 billion 1996-1997 fiscal year budget surplus to finance 1997-1998 fiscal
year spending, control on State agency spending and other actions.
The State ended its 1996-1997 fiscal year balanced on a cash basis, with a
1996-1997 General Fund cash surplus as reported by the State Division of the
Budget of approximately $1.4 billion that was used to finance the 1997-1998
Financial Plan. The surplus resulted primarily from higher-than-expected
revenues and lower-than-expected spending for social service programs. General
Fund receipts and transfers from other funds for the 1996-1997 fiscal year
totaled $33.04 billion, an increase of 0.7 percent from the 1995-1996 fiscal
year (excluding deposits into the tax refund reserve account). General Fund
disbursements and transfers to other funds totaled $32.90 billion for the
1996-1997 fiscal year, an increase of 0.7 percent from the 1995-1996 fiscal
year.
LOCAL GOVERNMENT ASSISTANCE CORPORATION. In 1990, as part of a State
fiscal reform program, legislation was enacted creating the Local Government
Assistance Corporation (the "LGAC"), a public benefit corporation empowered to
issue long-term obligations to fund certain payments to local governments
traditionally funded through the State's annual seasonal borrowing. The
legislation imposed a cap on the annual seasonal borrowing of the State at $4.7
billion, except in cases where the Governor and the legislative leaders have
certified the need for additional borrowing and provided a schedule for reducing
it to the cap. If borrowing above the cap is thus permitted in any fiscal year,
it is required by law to be reduced to the cap by the fourth fiscal year after
the limit was first exceeded. This provision capping the seasonal borrowing was
included as a covenant with LGAC's bondholders in the resolutions authorizing
such bonds. As of June 1995, LGAC had issued bonds to provide net proceeds of
$4.7 billion, completing the program. The impact of LGAC's borrowing, as well as
other changes in revenue and spending patterns, is that the State has been able
to meet its cash flow needs throughout the fiscal year without relying on
short-term seasonal borrowing.
FINANCING ACTIVITIES. State financing activities include general
obligation debt of the State and State-guaranteed debt, to which the full faith
and credit of the State has been pledged, as well as lease-purchase and
contractual-obligation financings, moral obligation financings and other
financings through public authorities and municipalities, where the State's
obligation to make payments for debt service is generally subject to annual
appropriation by the State Legislature.
As of March 31, 1999, the total amount of outstanding general obligation
debt was approximately $4.825 billion, including $185 million in bond
anticipation notes. The total amount of moral obligation debt was $629 million
(down from $1.39 billion as of March 31, 1998). $25.902 billion of bonds issued
primarily in connection with lease-purchase and contractual-obligation financing
of State capital programs were outstanding.
For purposes of analyzing the financial condition of the State, debt of the
State and of certain public authorities may be classified as State-supported
debt, which includes general obligation debt of the State, LGAC debt and lease
purchase and contractual obligations of public authorities (and municipalities)
where debt service is paid from State appropriations (including dedicated tax
sources, and other revenues such as patient charges and dormitory facilities
rentals). In addition, a broader classification, referred to as State-related
debt, includes State-supported debt, as well as certain types of contingent
obligations, including moral obligation financing, certain contingent
contractual-obligation financing arrangements, and State-guaranteed debt, where
debt service is expected to be paid from other sources and State appropriations
are contingent in that they may be made and used only under certain
circumstances.
The total amount of State-supported debt outstanding grew from 3.48 percent
of personal income in the State in the 1989-1990 fiscal year to 6.21 percent for
the 1998-1999 fiscal year while State-related debt outstanding remained
relatively stable at 6.53 percent of personal income for the same period. Thus,
State-supported debt grew at a faster rate than personal income while
State-related obligations grew at a slightly
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slower rate. At the end of the 1998-1999 fiscal year, there was $37.74 billion
of outstanding State-related debt and $35.84 billion of outstanding
State-supported debt.
During the prior ten years, State-supported long-term debt service
increased on an average annual basis by 8.8 percent to $3.39 billion by the
1998-1999 fiscal year while all governmental funds receipts increased on an
average annual basis of 5.3 percent. This resulted in a general trend of
increases in the ratio of debt service to receipts from fiscal year 1989-1990 to
fiscal year 1998-1999.
PUBLIC AUTHORITIES. The fiscal stability of the State is related, in part,
to the fiscal stability of its public authorities. Public authorities are not
subject to the constitutional restrictions on the incurring of debt which apply
to the State itself, and may issue bonds and notes within the amounts of, and as
otherwise restricted by, their legislative authorization. As of December 31,
1998, there were 17 public authorities that had outstanding debt of $100 million
or more, and the aggregate outstanding debt, including refunding bonds, of all
State public authorities was $94 billion, up from $84 billion as of December 31,
1997. The State's access to the public credit markets could be impaired and the
market price of its outstanding debt may be adversely affected if any of its
public authorities were to default on their respective obligations.
RATINGS. As of June 15, 1999, Moody's and Standard & Poor's rated the
State's outstanding general obligation bonds A2 and A, respectively. Standard &
Poor's revised its ratings upward from A- to A on August 28, 1997. Ratings
reflect only the respective views of such organizations, and explanation of the
significance of such ratings must be obtained from the rating agency furnishing
the same. There is no assurance that a particular rating will continue for any
given period of time or that any such rating will not be revised downward or
withdrawn entirely if, in the judgment of the agency originally establishing the
rating, circumstances so warrant. A downward revision or withdrawal of such
ratings may have an effect on the market price of the New York Municipal
Obligations in which the Fund invests.
LITIGATION. The State is a defendant in numerous legal proceedings
including, but not limited to, claims asserted against the State arising from
alleged torts, alleged breaches of contracts, condemnation proceedings and other
alleged violations of State and federal laws. State programs are frequently
challenged on State and federal constitutional grounds. Adverse developments in
legal proceedings or the initiation of new proceedings could affect the ability
of the State to maintain a balanced State Financial Plan in any given fiscal
year. There can be no assurance that an adverse decision in one or more legal
proceedings would not exceed the amount the State reserves for the payment of
judgments or materially impair the State's financial operations. In its audited
financial statements for the fiscal year ended March 31, 1999, the State
reported its estimated liability for awarded and anticipated unfavorable
judgments at $895 million.
OTHER LOCALITIES. Certain localities outside the City have experienced
financial problems and have requested and received additional State assistance
during the last several State fiscal years. The potential impact on the State of
such actions by localities is not included in the projections of the State
receipts and disbursements for the State's 1999-2000 fiscal year.
In 1997, the total indebtedness of all localities in the State, other than
the City, was approximately $21.0 billion. A small portion (approximately $80
million) of that indebtedness represented borrowing to finance budgetary
deficits and was issued pursuant to enabling State legislation.
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NEW YORK TAX MATTERS
The following is based upon the advice of Brown & Wood LLP, special New
York counsel to the Fund.
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 New York State
and New York City tax laws, applying tax rates expected to be applicable to
individuals for 1999.
<TABLE>
<CAPTION>
TAX EXEMPT YIELD
COMBINED --------------------------------------------
(TAXABLE INCOME*) FEDERAL, NY 4.75 5.00% 5.25% 5.50%
- ----------------------------------------- STATE AND CITY -------- --------- --------- ---------
SINGLE RETURN JOINT RETURN TAX BRACKET IS EQUIVALENT TO A FULLY TAXABLE YIELD OF:
- ------------------- ------------------- -------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 25,751 - $ 50,000 $ 45,001 - $ 90,000 35.65% 7.38% 7.77 8.16% 8.55%
$ 50,001 - $ 62,450 $ 90,001 - $104,050 35.69 7.39 7.77 8.16% 8.55%
$ 62,451 - $130,250 $104,051 - $158,550 38.37 7.71 8.11 8.52% 8.92%
$130,251 - $283,150 $158,551 - $283,150 42.84 8.31 8.75 9.18% 9.62%
Over $283,150 Over $283,150 46.05 8.80 9.27 9.77% 10.19%
</TABLE>
- ---------------
* Net amount subject to federal, New York State and New York City personal
income tax after deductions and exemptions.
The above-indicated federal income tax brackets do not take into account
the effect of a reduction in the deductibility of itemized deductions for
individual taxpayers with adjusted gross income in excess of $126,600. The tax
brackets also do not show the effects of phaseout of personal exemptions for
single filers with adjusted gross income in excess of $126,600 and joint filers
with adjusted gross income in excess of $189,950. The effective tax brackets and
equivalent taxable yields of those taxpayers will be higher than those indicated
above.
The combined federal and New York State, and combined federal, New York
State, and New York City tax brackets are calculated using the highest New York
tax rate applicable within each bracket. Taxpayers with taxable income within
such brackets may have lower combined tax brackets and taxable equivalent yields
than indicated above. The combined tax brackets assume that New York taxes are
itemized deductions for federal income tax purposes. Investors who do not
itemize deductions on their federal income tax returns will have a higher
combined bracket and higher taxable equivalent yield than those indicated above.
The applicable federal tax rates within the brackets are 28%, 31%, 36%, 36% and
39.6%. A supplemental New York State tax will also apply to filers with adjusted
gross income between $100,000 and $150,000 which phases out the benefit of lower
marginal brackets. The adjustment is not reflected above.
Yields shown are for illustration purposes only and are not meant to
represent the Fund's actual yield. No assurance can be given that the Fund will
achieve any specific tax-exempt yield. While it is expected that the Fund will
invest principally in obligations the interest from which is exempt from the
regular federal income tax and New York State and New York City personal income
taxes, other income received by the Fund 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 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 advisers for additional
information.
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PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
Included in Part A
None
Included in Part B
Financial Statements
Report of Independent Accountants
(2) Exhibits
(a)(1) Agreement and Declaration of Trust(1)
(a)(2) Amendment No. 1 to the Agreement and Declaration of Trust
(b) Amended and Restated By-Laws
(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 common shares
(e) Dividend Reinvestment Plan
(f) Not applicable
(g) Management Agreement with Colonial Management Associates,
Inc.
(h) Form of Underwriting Agreement
(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
with The Chase Manhattan Bank
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<PAGE> 108
(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.
(l) Opinion and Consent of Ropes & Gray, counsel to
Registrant
(m) Not applicable
(n) Consent of independent accountants
(o) Not applicable
(p) Subscription Agreement with Colonial Management
Associates, Inc.
(q) Not applicable
(r) Power of Attorney for each of Robert J. Birnbaum, Tom
Bleasdale, John V. Carberry, Lora S. Collins, James E.
Grinnell, Richard W. Lowry, Salvatore Macera, William E.
Mayer, James L. Moody, Jr., John J. Neuhauser, Thomas E.
Stitzel, Robert L. Sullivan and Anne-Lee Verville
- ----------------------------------
(1) Incorporated by reference to the Registration Statement filed with the
Commission via EDGAR on or about August 11, 1999.
Item 25. Marketing Arrangements.
See Sections 5(m), 5(n), 6(v) and 11 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 $ 6,255
American Stock Exchange listing fee* 7,000
Printing* 45,000
Accounting fees and expenses* 5,000
Legal fees and expenses* 73,000
Blue Sky fees 5,000
NASD fee 2,150
Miscellaneous* 25,000
--------
Total* $168,405
========
(*) Estimated
Item 27. Persons Controlled by or under Common Control with Registrant.
None.
Item 28. Number of Holders of Securities
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Common Shares of Beneficial Interest -1-
</TABLE>
Item 29. Indemnification.
The Agreement and Declaration of Trust, as amended, filed as Exhibit
(a)(1) and (a)(2) to this Registration Statement provides for
indemnification to each of the Registrant's Trustees and officers
against all liabilities and expenses incurred in acting
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as Trustee or officer, except in the case of wilful misfeasance,
bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such Trustees and officers. The
Underwriting Agreement 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.
C-3
<PAGE> 110
Item 30. Business and Other Connections of Investment Adviser
The following sets forth business and other
connections of each director and officer of Colonial
Management Associates, Inc. (see next page):
Registrant's investment advisor/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 advisor
under the 1940 Act. As of the end of the fiscal year, December 31, 1998, CASI
had four institutional, corporate or other accounts under management or
supervision, the total market value of which was approximately $227 million. As
of the end of the fiscal year, December 31, 1998, Colonial was the investment
advisor, sub-advisor and/or administrator to 57 mutual funds, including funds
sub-advised by Colonial, the total market value of which investment companies
was approximately $18,950.90 million. Liberty Funds Distributor, Inc., a
subsidiary of Colonial Management Associates, Inc., is the principal underwriter
and the national distributor of all of the funds in the Liberty Mutual Funds
complex, including the Registrant.
The following sets forth the business and other connections of each
director and officer of Colonial Management Associates, Inc.:
<TABLE>
<CAPTION>
(1) (2) (3) (4)
Name and principal
business
addresses* Affiliation
of officers and with Period is through 11/1/99. 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 Trust I through
Asst. IX Asst. Sec.
Sec., Colonial High Income
Counsel Municipal Trust Asst. Sec.
Colonial InterMarket Income
Trust I Asst. Sec.
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
AlphaTrade Inc. Asst. Clerk
Liberty Funds Distributor,
Inc. Asst. Clerk
Liberty Financial Advisers,
Inc. Asst. Sec.
Liberty Funds Group LLC Asst. Sec.
</TABLE>
C-4
<PAGE> 111
Liberty Variable Investment
Trust Asst. Sec.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund,
Inc. Asst. Sec.
Colonial Insured Municipal Fund Asst. Sec
Colonial California Insured
Municipal Fund Asst. Sec
Colonial New York Insured
Municipal Fund Asst. Sec
Stein Roe Advisor Floating
Rate Advantage Fund Asst. Sec
Barron, Suzan M. V.P., Liberty Funds Trust I through
Asst. IX Asst. Sec.
Sec., Colonial High Income
Counsel Municipal Trust Asst. Sec.
Colonial InterMarket Income
Trust I Asst. Sec.
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
AlphaTrade Inc. Asst. Clerk
Liberty Funds Distributor,
Inc. Asst. Clerk
Liberty Financial Advisers,
Inc. Asst. Sec.
Liberty Funds Group LLC Asst. Sec.
Liberty Variable Investment
Trust Asst. Sec.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund,
Inc. Asst. Sec.
Colonial Insured Municipal Fund Asst. Sec
Colonial California Insured
Municipal Fund Asst. Sec
Colonial New York Insured
Municipal Fund Asst. Sec
Stein Roe Advisor Floating
Rate Advantage Fund Asst. Sec
Barsketis, Ophelia Sr.V.P. Stein Roe & Farnham Incorporated Snr. V.P.
Berliant, Allan V.P.
Bissonnette,
Michael Sr.V.P.
Boatman, Bonny E. Sr.V.P.; Colonial Advisory Services, Exec. V.P.
IPC Mbr. Inc.
Stein Roe & Farnham
Incorporated Exec. V.P.
Bunten, Walter V.P.
C-5
<PAGE> 112
Campbell, Kimberly V.P.
Carnabucci,
Dominick V.P.
Carome, Kevin M. Sr.V.P.; Liberty Funds Distributor, Assistant
IPC Mbr. Inc. Clerk
Liberty Funds Group LLC Sr. V.P.;
General
Counsel
Stein Roe & Farnham General
Counsel;
Incorporated Secretary
Stein Roe Services, Inc. Asst. Clerk
Liberty-Stein Roe Funds
Investment Trust Exec. V.P.;
Asst. Sec
Liberty-Stein Roe Funds
Income Trust Exec. V.P.;
Asst. Sec
Liberty-Stein Roe Funds
Municipal Trust Exec. V.P.;
Asst. Sec
Liberty-Stein Roe Advisor Trust Exec. V.P.;
Asst. Sec
Liberty-Stein Roe Funds Trust Exec. V.P.;
Asst. Sec
SR&F Base Trust Exec. V.P.;
Asst. Sec
Stein Roe Variable Investment
Trust Exec. V.P.;
Asst. Sec
Liberty-Stein Roe Institutional
Floating Rate Income Fund Exec. V.P.;
Asst. Sec
Stein Roe Floating Rate
Limited Liability Co. Exec. V.P.;
Asst. Sec
Liberty-Stein Roe Advisor
Floating Rate Fund Exec. V.P.;
Asst. Sec
Liberty-Stein Roe Funds
Institutional Trust Exec. V.P.;
Asst. Sec
Carroll, Sheila A. Sr.V.P.
Citrone, Frank, Jr. Sr.V.P.
Conlin, Nancy L. Sr. V.P.; Liberty Funds Trust I through
Sec.; Clerk IX Secretary
IPC Mbr.; Colonial High Income
Dir; Gen. Municipal Trust Secretary
Counsel Colonial InterMarket Income
Trust I Secretary
Colonial Intermediate High
Income Fund Secretary
Colonial Investment Grade
Municipal Trust Secretary
Colonial Municipal Income
Trust Secretary
Liberty Funds Distributor,
Inc. Dir.; Clerk
Liberty Funds Services, Inc. Clerk; Dir.
C-6
<PAGE> 113
Liberty Funds Group LLC V.P.; Gen.
Counsel and
Secretary
Liberty Variable Investment
Trust Secretary
Colonial Advisory Services,
Inc. Dir.; Clerk
AlphaTrade Inc. Dir.; Clerk
Liberty Financial Advisors,
Inc. Dir.; Sec.
Liberty All-Star Equity Fund Secretary
Liberty All-Star Growth Fund,
Inc. Secretary
Colonial Insured Municipal Fund Secretary
Colonial California Insured
Municipal Fund Secretary
Colonial New York Insured
Municipal Fund Secretary
Stein Roe Advisor Floating
Rate Advantage Fund Secretary
Connaughton, V.P. Liberty Funds Trust I through
J. Kevin VIII CAO; Controller
Liberty Variable Investment
Trust CAO; Controller
Colonial High Income
Municipal Trust CAO; Controller
Colonial Intermarket Income
Trust I CAO; Controller
Colonial Intermediate High
Income Fund CAO; Controller
Colonial Investment Grade
Municipal Trust CAO; Controller
Colonial Municipal Income
Trust CAO; Controller
Liberty All-Star Equity Fund Controller
Liberty All-Star Growth Fund,
Inc. Controller
Liberty Funds Trust IX Controller
Colonial Insured
Municipal Fund CAO; Controller
Colonial California Insured
Municipal Fund CAO; Controller
Colonial New York Insured
Municipal Fund CAO; Controller
Stein Roe Advisor Floating
Rate Advantage Fund CAO; Controller
Liberty-Stein Roe Funds
Investment Trust V.P.; Treasurer
Liberty-Stein Roe Funds Income
Trust V.P.; Treasurer
Liberty-Stein Roe Funds Municipal
Trust V.P.; Treasurer
Liberty-Stein Roe Advisor Trust V.P.; Treasurer
Liberty-Stein Roe Funds Trust V.P.; Treasurer
SR&F Base Trust V.P.; Treasurer
Stein Roe Variable Investment
Trust V.P.; Treasurer
Liberty-Stein Roe Institutional
Floating Rate Income Fund V.P.; Treasurer
C-7
<PAGE> 114
Stein Roe Floating Rate
Limited Liability Co. V.P.; Treasurer
Liberty-Stein Roe Advisor
Floating Rate Fund V.P.; Treasurer
Liberty-Stein Roe Funds
Institutional Trust V.P.; Treasurer
Daniszewski, V.P.
Joseph J.
Dearborn, James V.P.
Desilets,
Marian H. V.P. Liberty Funds Distributor,
Inc. V.P.
Liberty Funds Trust I through
IX Asst. Sec.
Colonial High Income
Municipal Trust Asst. Sec.
Colonial Intermarket Income
Trust I Asst. Sec.
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
Liberty Variable Investment
Trust Asst. Sec.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund,
Inc. Asst. Sec.
Colonial Insured Municipal
Fund Asst. Sec
Colonial California Insured
Municipal Fund Asst. Sec
Colonial New York Insured
Municipal Fund Asst. Sec
Stein Roe Advisor Floating
Rate Advantage Fund Asst. Sec
DiSilva-Begley, V.P. Colonial Advisory Services, Compliance
Linda IPC Mbr. Inc. Officer
Eckelman, Marilyn Sr.V.P.
Ericson, Carl C. Sr.V.P. Colonial Intermediate High
IPC Mbr. Income Fund V.P.
Colonial Advisory Services, Pres.; CEO
Inc. and CIO
Evans, C. Frazier Sr.V.P. Liberty Funds Distributor,
Inc. Mng. Director
Feloney, Joseph L. V.P. Colonial Advisory Services,
Asst. Tres. Inc. Asst. Treas.
Liberty Funds Group LLC Asst. Treas.
Finnemore, Sr.V.P. Colonial Advisory Services,
Leslie W. Inc. Sr. V.P.
Franklin, Sr. V.P. AlphaTrade Inc. President
C-8
<PAGE> 115
Fred J. IPC Mbr. Liberty Financial Companies, Chief
Inc. Compliance Ofcr;
V.P.
Garrison, V.P. Stein Roe & Farnham
William M. Incorporated V.P.
Gibson, Stephen E. Dir.;
Pres.; Liberty Funds Group LLC Dir.;
CEO; Pres.; CEO;
Chairman of Exec. Cmte.
the Board; Mbr.; Chm.
IPC Mbr. Liberty Funds Distributor,
Inc. Dir.; Chm.
Colonial Advisory Services,
Inc. Dir.; Chm.
Liberty Funds Services, Inc. Dir.; Chm.
AlphaTrade Inc. Dir.
Liberty Funds Trust I through
VIII President
Colonial High Income
Municipal Trust President
Colonial InterMarket Income
Trust I President
Colonial Intermediate High
Income Fund President
Colonial Investment Grade
Municipal Trust President
Colonial Municipal Income
Trust President
Liberty Financial Advisors,
Inc. Director
Stein Roe & Farnham Asst. Chairman;
Incorporated President
Liberty Variable Investment
Trust President
Colonial Insured Municipal
Fund President
Colonial California Insured
Municipal Fund President
Colonial New York Insured
Municipal Fund President
Stein Roe Advisor Floating
Rate Advantage Fund President
Liberty-Stein Roe Funds
Investment Trust President
Liberty-Stein Roe Funds
Income Trust President
Liberty-Stein Roe Funds
Municipal Trust President
Liberty-Stein Roe Advisor Trust President
Liberty-Stein Roe Funds Trust President
SR&F Base Trust President
Stein Roe Variable Investment
Trust President
Liberty-Stein Roe Institutional
Floating Rate Income Fund President
Stein Roe Floating Rate
Limited Liability Co. President
Liberty-Stein Roe Advisor
Floating Rate Fund President
Liberty-Stein Roe Funds
Institutional Trust President
C-9
<PAGE> 116
Hansen, Loren A. Sr. V.P.; Stein Roe & Farnham
IPC Mbr. Incorporated Exec. V.P.
Liberty-Stein Roe Funds
Investment Trust Exec. V.P.
Liberty-Stein Roe Funds Income
Trust Exec. V.P.
Liberty-Stein Roe Funds
Municipal Trust Exec. V.P.
Liberty-Stein Roe Advisor Trust Exec. V.P.
Liberty-Stein Roe Funds Trust Exec. V.P.
SR&F Base Trust Exec. V.P.
Stein Roe Variable Investment
Trust Exec. V.P.
Liberty-Stein Roe Institutional
Floating Rate Income Fund Exec. V.P.
Stein Roe Floating Rate
Limited Liability Co. Exec. V.P.
Liberty-Stein Roe Advisor
Floating Rate Fund Exec. V.P.
Liberty-Stein Roe Funds
Institutional Trust Exec. V.P.
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.
Asst. Treas.
Treasurer Liberty Funds Distributor, CFO,
Inc. Treasurer
Colonial Advisory Services, Controller;
Inc. Asst. Treas.
AlphaTrade Inc. CFO, Treas.
Liberty Financial Advisors,
Inc. Asst. Treas.
Jacoby, Timothy J. Sr. V.P.; Liberty Funds Group LLC V.P., Treasr.,
CFO; CFO
Treasurer Liberty Funds Trust I through
VIII Treasr.,CFO
Colonial High Income
Municipal Trust Treasr.,CFO
Colonial InterMarket Income
Trust I Treasr.,CFO
Colonial Intermediate High
Income Fund Treasr.,CFO
Colonial Investment Grade
Municipal Trust Treasr.,CFO
C-10
<PAGE> 117
Colonial Municipal Income
Trust Treasr.,CFO
Colonial Advisory Services,
Inc. CFO, Treasr.
Liberty Financial Advisors,
Inc. Treasurer
Stein Roe & Farnham
Incorporated Snr. V.P.
Liberty Variable Investment
Trust Treasurer, CFO
Liberty All-Star Equity Fund Treasurer
Liberty All-Star Growth Fund,
Inc. Treasurer
Liberty Funds Trust IX Treasurer
Colonial Insured Municipal Fund Treasr.; CFO
Colonial California Insured
Municipal Fund Treasr.; CFO
Colonial New York Insured
Municipal Fund Treasr.; CFO
Stein Roe Advisor Floating
Rate Advantage Fund Treasr.; CFO
Liberty-Stein Roe Funds
Investment Trust Senior V.P.
Liberty-Stein Roe Funds Income
Trust Senior V.P.
Liberty-Stein Roe Funds
Municipal Trust Senior V.P.
Liberty-Stein Roe Advisor Trust Senior V.P.
Liberty-Stein Roe Funds Trust Senior V.P.
SR&F Base Trust Senior V.P.
Stein Roe Variable Investment
Trust Senior V.P.
Liberty-Stein Roe Institutional
Floating Rate Income Fund Senior V.P.
Stein Roe Floating Rate
Limited Liability Co. Senior V.P.
Liberty-Stein Roe Advisor
Floating Rate Fund Senior V.P.
Liberty-Stein Roe Funds
Institutional Trust Senior V.P.
Jansen, Deborah Sr.V.P. Stein Roe & Farnham
Incorporated Sr. V.P.
Jersild, North T. V.P. Stein Roe & Farnham
Incorporated V.P.
Johnson, Gordon V.P.
Knudsen, Gail E. V.P. Liberty Funds Trust I through
IX Asst. Treas.
Colonial High Income
Municipal Trust Asst. Treas.
Colonial InterMarket Income
Trust I Asst. Treas.
Colonial Intermediate High
Income Fund Asst. Treas.
Colonial Investment Grade
Municipal Trust Asst. Treas.
Colonial Municipal Income
Trust Asst. Treas.
Liberty Variable Investment
C-11
<PAGE> 118
Trust Asst. Treas.
Liberty All-Star Equity Fund Asst. Treas.
Liberty All-Star Growth Fund,
Inc. Asst. Treas.
Colonial Insured Municipal Fund Asst. Treas.
Colonial California Insured
Municipal Fund Asst. Treas.
Colonial New York Insured
Municipal Fund Asst. Treas.
Stein Roe Advisor Floating
Rate Advantage Fund Asst. Treas.
Liberty-Stein Roe Funds
Investment Trust V.P.; Contrler
Liberty-Stein Roe Funds Income
Trust V.P.; Contrler
Liberty-Stein Roe Funds
Municipal Trust V.P.; Contrler
Liberty-Stein Roe Advisor Trust V.P.; Contrler
Liberty-Stein Roe Funds Trust V.P.; Contrler
SR&F Base Trust V.P.; Contrler
Stein Roe Variable Investment
Trust V.P.; Contrler
Liberty-Stein Roe Institutional
Floating Rate Income Fund V.P.; Contrler
Stein Roe Floating Rate
Limited Liability Co. V.P.; Contrler
Liberty-Stein Roe Advisor
Floating Rate Fund V.P.; Contrler
Liberty-Stein Roe Funds
Institutional Trust V.P.; Contrler
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. Stein Roe Municipal Trust V.P.
MacKinnon,
Donald S. Sr.V.P.
Marcus, Harold V.P.
Muldoon, Robert V.P.
Newman, Maureen Sr.V.P. Stein Roe Municipal Trust V.P.
Stein Roe Advisor Trust V.P.
Stein Roe Base Trust V.P.
O'Brien, David Sr.V.P.
Ostrander, Laura Sr.V.P. Colonial Advisory Services,
Inc. V.P.
Palombo, Joseph R. Dir.; Colonial Advisory Services,
C-12
<PAGE> 119
Exe.V.P.; Inc. Dir.
IPC Mbr.; Colonial High Income
Municipal Trust V.P.
Colonial InterMarket Income
Trust I V.P.
Colonial Intermediate High
Income Fund V.P.
Colonial Investment Grade
Municipal Trust V.P.
Colonial Municipal Income
Trust V.P.
Liberty Funds Trust I through
IX V.P.
Liberty Funds Services, Inc. Director
Liberty Funds Group LLC CAO; Ex. V.P.
Liberty Funds Distributor,
Inc. Director
AlphaTrade Inc. Director
Liberty Financial Advisors,
Inc. Director
Stein Roe & Farnham
Incorporated Exec. V.P.
Liberty Variable Investment
Trust V.P.
Liberty All-Star Equity Fund V.P.
Liberty All-Star Growth Fund,
Inc. V.P.
Colonial Insured Municipal Fund V.P.
Colonial California Insured
Municipal Fund V.P.
Colonial New York Insured
Municipal Fund V.P.
Stein Roe Advisor Floating
Rate Advantage Fund V.P.
Peishoff, William V.P.
Peterson, Ann T. V.P. Colonial Advisory Services,
Inc. V.P.
Pielech, Mitchell V.P.
Pope, David V.P.
Reading, John V.P.; Liberty Funds Services, Inc. Asst. Clerk
Asst. Liberty Funds Group LLC Asst. Sec.
Sec.; Colonial Advisory Services,
Asst. Inc. Asst. Clerk
Clerk and Liberty Funds Distributor,
Counsel Inc. Asst. Clerk
AlphaTrade Inc. Asst. Clerk
Liberty Funds Trust I through
IX Asst. Sec.
Colonial High Income
Municipal Trust Asst. Sec.
Colonial InterMarket Income
Trust I Asst. Sec.
C-13
<PAGE> 120
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.
Colonial Insured Municipal Fund Asst. Sec
Colonial California Insured
Municipal Fund Asst. Sec
Colonial New York Insured
Municipal Fund Asst. Sec
Stein Roe Advisor Floating
Rate Advantage Fund Asst. Sec
Rega, Michael V.P. Colonial Advisory Services,
Inc. V.P.
Richards, Scott B. Sr. V.P. Colonial Advisory Services,
Inc. Senior V.P.
Schermerhorn, Scott Sr. V.P.
Seibel, Sandra L. V.P. Colonial Advisory Services,
Inc. V.P.
Shields, Yvonne B. V.P. Stein Roe & Farnham
Incorporated V.P.
Smalley, Gregg V.P.
Spanos, Gregory J. Sr. V.P. Colonial Advisory Services,
Inc. Exec. V.P.
Stevens, Richard V.P. Colonial Advisory Services,
Inc. V.P.
Stoeckle, Mark Sr.V.P. Colonial Advisory Services,
Inc. V.P.
Swayze, Gary Sr.V.P.
Thomas, Ronald V.P.
Turcotte,
Frederick J. V.P. Liberty Funds Services, Inc. V.P.
Liberty Funds Distributor, Inc. V.P.
Colonial Advisory Services,
Inc. V.P.
AlphaTrade Inc. V.P.
Liberty Funds Group LLC V.P.
C-14
<PAGE> 121
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 of Oklahoma, Inc. V.P.
IFS Agencies of Alabama, Inc. V.P.
IFS Agencies of New Mexico,
Inc. V.P.
IFS Insurance Agencies of
Ohio, Inc. V.P.
IFS Insurance Agencies of
Texas, Inc. V.P.
Liberty Securities Corporation V.P.
Stein Roe Services, Inc. V.P.
Stein Roe & Farnham
Incorporated V.P.
Stein Roe Futures, Inc. V.P.
Progress Investment Management
Company V.P.
Crabbe Huson Group, Inc. V.P.
Wallace, John R. V.P. Colonial Advisory Services,
Asst.Tres. Inc. Asst. Treas.
Liberty Funds Group LLC Asst. Treas.
Ware, Elizabeth M. V.P.
Wiley, Christine V.P.
Wiley, Peter V.P.
- -------------
*The Principal address of all of the officers and directors of the investment
advisor is One Financial Center, Boston, MA 02111.
Item 32. Management Services
Not Applicable
Item 33. Undertakings
The Registrant hereby undertakes:
(1) To suspend the offering of its common shares of beneficial
interest until it amends its prospectus if (i) subsequent to the
effective date of this Registration Statement, the net asset
value per share of beneficial interest declines more than 10
percent from its net asset value per share of beneficial
interest as of the effective date of this Registration Statement
or, (ii) its net asset value per share of beneficial interest
increases to an amount greater than its net proceeds as stated in
the prospectus contained herein.
(2) Not Applicable
(3) Not Applicable
(4) Not Applicable
(5) (a) That for the purpose of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as a part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant under Rule 497(h) under the Securities Act
of 1933 shall be deemed to be part of this Registration Statement
as of the time it was declared effective; and
(b) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein,
and the offering of the securities at that time shall be deemed to
be the initial bona fide offering thereof.
(6) To send by first class mail or other means designed to ensure
equally prompt delivery, within two business days of receipt of a
written or oral request, any Statement of Additional Information.
C-15
<PAGE> 122
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Amendment to its Registration Statement on Form N-2 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Boston and the
Commonwealth of Massachusetts on the 16th day of November, 1999.
COLONIAL NEW YORK 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 16, 1999
- ---------------------- executive officer)
Stephen E. Gibson
/s/ J. KEVIN CONNAUGHTON Controller and Chief November 16, 1999
- ------------------------ Accounting Officer
J. Kevin Connaughton
/s/ TIMOTHY J. JACOBY Treasurer and Chief November 16, 1999
- ------------------------ Financial Officer
Timothy J. Jacoby
C-16
<PAGE> 123
<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 16, 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>
C-17
<PAGE> 124
EXHIBIT INDEX
(a)(2) Amendment No. 1 to the Agreement and Declaration of Trust
(b) Amended and Restated By-Laws
(d)(2) Form of specimen certificate for the common shares
(e) Dividend Reinvestment Plan
(g) Management Agreement with Colonial Management Associates, Inc.
(h) Form of Underwriting Agreement
(j)(2) Amendment No. 8 to Schedule A of Global Custody Agreement with The
Chase Manhattan Bank
(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.
(l) Opinion and Consent of Ropes & Gray, counsel to Registrant
(n) Consent of independent accountants
(p) Subscription Agreement with Colonial Management Associates, Inc.
(r) Power of attorney
<PAGE> 1
Exhibit (a)(2)
AMENDMENT NO. 1
TO THE
AGREEMENT AND DECLARATION OF TRUST
OF
PREMIER NEW YORK 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 New York 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 New York Municipal Income Fund, do
hereby certify that the undersigned has determined to conduct the business of
the Trust under the name "Colonial New York 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 New York 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 New York 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 (b)
AMENDED AND RESTATED BY-LAWS
OF
COLONIAL NEW YORK INSURED MUNICIPAL FUND
ARTICLE 1
Agreement and Declaration of Trust and Principal Office
1.1 Agreement and Declaration of Trust. These By-Laws shall be subject
to the Agreement and Declaration of Trust, as from time to time in effect (the
"Declaration of Trust"), of Colonial New York Insured Municipal Fund (the
"Trust"), a Massachusetts business trust established by the Declaration of Trust
of the Trust.
1.2 Principal Office of the Trust. The principal office of the Trust
shall be located in Boston, Massachusetts.
ARTICLE 2
Shareholders
2.1 Shareholder Meetings. The annual meeting of the shareholders of the
Trust shall be held between April 1 and May 31 in each year, beginning in 2000,
on a date and at a time within that period set by the Trustees. A special
meeting of the shareholders of the Trust may be called at any time by the
Trustees, by the president or, if the Trustees and the president shall fail to
call any meeting of shareholders for a period of 30 days after written
application of one or more shareholders who hold at least 10% of all outstanding
shares of the Trust, then such shareholders may call such meeting. Each call of
a meeting shall state the place, date, hour and purposes of the meeting.
2.2 Place of Meetings. All meetings of the shareholders shall be held
at the principal office of the Trust, or, to the extent permitted by the
Declaration of Trust, at such other place within the United States as shall be
designated by the Trustees or the president of the Trust.
2.3 Notice of Meetings. A written notice of each meeting of
shareholders, stating the place, date and hour and the purposes of the meeting,
shall be given at least seven days before the meeting to each shareholder
entitled to vote thereat by leaving such notice with him or at his residence or
usual place of business or by mailing it, postage prepaid, and addressed to such
shareholder at his address as it appears in the records of the Trust. Such
notice shall be given by the secretary or an assistant secretary or by an
officer designated by the Trustees. No notice of any meeting of shareholders
need be given to a shareholder if a written waiver of notice, executed before or
after the meeting by such shareholder or his attorney thereunto duly authorized,
is filed with the records of the meeting.
<PAGE> 2
2.4 Ballots. No ballot shall be required for any election unless
requested by a shareholder present or represented at the meeting and entitled to
vote in the election.
2.5 Proxies. Shareholders entitled to vote may vote either in person or
by proxy in writing dated no more than six months before the meeting named
therein, which proxies shall be filed with the secretary or other person
responsible to record the proceedings of the meeting before being voted. Unless
otherwise specifically limited by their terms, such proxies shall entitle the
holders thereof to vote at any adjournment of such meeting but shall not be
valid after the final adjournment of such meeting. The placing of a
shareholder's name on a proxy pursuant to telephonic or electronically
transmitted instructions obtained pursuant to procedures reasonably designed to
verify that such instructions have been authorized by such shareholder shall
constitute execution of such proxy by or on behalf of such shareholder.
ARTICLE 3
Trustees
3.1 Committees and Advisory Board. The Trustees may appoint from their
number an executive committee and other committees. Except as the Trustees may
otherwise determine, any such committee may make rules for the conduct of its
business. The Trustees may appoint an advisory board to consist of not less than
two nor more than five members. The members of the advisory board shall be
compensated in such manner as the Trustees may determine and shall confer with
and advise the Trustees regarding the investments and other affairs of the
Trust. Each member of the advisory board shall hold office until the first
meeting of the Trustees following the next meeting of the shareholders and until
his successor is elected and qualified, or until he sooner dies, resigns, is
removed, or becomes disqualified, or until the advisory board is sooner
abolished by the Trustees.
In addition, the Trustees may appoint a dividend committee of not less
than three persons, at least one of whom shall be a Trustee of the Trust.
No special compensation shall be payable to members of the Dividend
Committee. Each member of the Dividend Committee will hold office until his or
her successor is elected and qualified or until the member dies, resigns, is
removed, becomes disqualified or until the Committee is abolished by the
Trustees.
3.2 Regular Meetings. Regular meetings of the Trustees may be held
without call or notice at such places and at such times as the Trustees may from
time to time determine, provided that notice of the first regular meeting
following any such determination shall be given to absent Trustees.
3.3 Special Meetings. Special meetings of the Trustees may be held at
any time and at any place designated in the call of the meeting, when called by
the president or the treasurer or
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<PAGE> 3
by two or more Trustees, sufficient notice thereof being given to each Trustee
by the secretary or an assistant secretary or by the officer or one of the
Trustees calling the meeting.
3.4 Notice. It shall be sufficient notice of a special meeting to a
Trustee to send notice by mail at least forty-eight hours or by telegram or
telecopier at least twenty-four hours before the meeting addressed to the
Trustee at his or her usual or last known business or residence address or to
give notice to him or her in person or by telephone at least twenty-four hours
before the meeting. Notice of a meeting need not be given to any Trustee 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 Trustee who attends the meeting
without protesting prior thereto or at its commencement the lack of notice to
him or her. Neither notice of a meeting nor a waiver of a notice need specify
the purposes of the meeting.
3.5 Quorum. At any meeting of the Trustees one-third of the Trustees
then in office shall constitute a quorum; provided, however, a quorum shall not
be less than two unless the number of Trustees then in office shall be one. Any
meeting may be adjourned from time to time by a majority of the votes cast upon
the question, whether or not a quorum is present, and the meeting may be held as
adjourned without further notice.
ARTICLE 4
Officers and Agents
4.1 Enumeration; Qualification. The officers of the Trust shall be a
president, a treasurer, a secretary and such other officers, if any, as the
Trustees from time to time may in their discretion elect or appoint or as the
elected officers may appoint pursuant to section 4.3 of these By-Laws. The Trust
may also have such agents, if any, as the Trustees from time to time may in
their discretion appoint. Any officer may be, but none need be, a Trustee or
shareholder. Any two or more offices may be held by the same person.
4.2 Powers. Subject to the other provisions of these By-Laws, each
officer shall have, in addition to the duties and powers herein and in the
Declaration of Trust set forth, such duties and powers as are commonly incident
to his or her office as if the Trust were organized as a Massachusetts business
corporation and such other duties and powers as the Trustees may from time to
time designate, including without limitation the power to make purchases and
sales of portfolio securities of the Trust pursuant to recommendations of the
Trust's investment adviser in accordance with the policies and objectives of the
Trust set forth in its prospectus and with such general or specific instructions
as the Trustees may from time to time have issued.
4.3 Election. The president, the treasurer and the secretary shall be
elected annually by the Trustees at their first meeting following the annual
meeting of the shareholders. Other elected officers, if any, may be elected or
appointed by the Trustees at said meeting or at any other time. Assistant
officers may be appointed by the elected officers.
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<PAGE> 4
4.4 Tenure. The president, the treasurer and the secretary shall hold
office until their respective successors are chosen and qualified, or in each
case until he or she sooner dies, resigns, is removed or becomes disqualified.
Each other officer shall hold office at the pleasure of the Trustees. Each agent
shall retain his or her authority at the pleasure of the Trustees.
4.5 President and Vice Presidents. The president shall be the chief
executive officer of the Trust. The president shall preside at all meetings of
the shareholders and of the Trustees at which he or she is present, except as
otherwise voted by the Trustees. Any vice president shall have such duties and
powers as shall be designated from time to time by the Trustees.
4.6 Treasurer and Controller. The treasurer shall be the chief
financial officer of the Trust and, subject to any arrangement made by the
Trustees with a bank or trust company or other organization as custodian or
transfer or shareholder services agent, shall be in charge of its valuable
papers and shall have such duties and powers as shall be designated from time to
time by the Trustees or by the president. Any assistant treasurer shall have
such duties and powers as shall be designated from time to time by the Trustees.
The Controller shall be the chief accounting officer of the Trust and
shall be in charge of its books of account and accounting records. The
Controller shall be responsible for preparation of financial statements of the
Trust and shall have such other duties and powers as may be designated from time
to time by the Trustees or the President.
4.7 Secretary and Assistant Secretaries. The secretary shall record all
proceedings of the shareholders and the Trustees in books to be kept therefor,
which books shall be kept at the principal office of the Trust. In the absence
of the secretary from any meeting of shareholders of trustees, an assistant
secretary, or if there be none or he or she is absent, a temporary clerk chosen
at the meeting shall record the proceedings thereof in the aforesaid books.
ARTICLE 5
Resignations and Removals
Any Trustee, officer or advisory board member may resign at any time by
delivering his or her resignation in writing to the president, the treasurer or
the secretary or to a meeting of the Trustees. The Trustees may remove any
officer elected by them with or without cause by the vote of a majority of the
Trustees then in office. Except to the extent expressly provided in a written
agreement with the Trust, no Trustee, officer, or advisory board member
resigning, and no officer or advisory board member removed, shall have any right
to any compensation for any period following his or her resignation or removal,
nor any right to damages on account of such removal.
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<PAGE> 5
ARTICLE 6
Vacancies
A vacancy in any office may be filled at any time. Each successor shall
hold office for the unexpired term, and in the case of the president, the
treasurer and the secretary, until his or her successor is chosen and qualified,
or in each case until he or she sooner dies, resigns, is removed or becomes
disqualified.
ARTICLE 7
Shares of Beneficial Interest
7.1 Share Certificates. Each shareholder shall be entitled to a
certificate stating the number of shares owned by him or her, in such form as
shall be prescribed from time to time by the Trustees. Such certificate shall be
signed by the president or a vice president and by the treasurer or an assistant
treasurer. Such signatures may be facsimiles if the certificate is signed by a
transfer agent or by a registrar who is not a Trustee, officer or employee of
the Trust. In case any officer who has signed or whose facsimile signature has
been placed on such certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the Trust with the same effect as if
he or she were such officer at the time of its issue.
In lieu of issuing certificates for shares, the Trustees or the
transfer agent may either issue receipts therefor or may keep accounts upon the
books of the Trust for the record holders of such shares, who shall in either
case be deemed, for all purposes hereunder, to be the holders of certificates
for such shares as if they had accepted such certificates and shall be held to
have expressly assented and agreed to the terms hereof.
7.2 Loss of Certificates. In the case of the alleged loss or
destruction or the mutilation of a share certificate, a duplicate certificate
may be issued in place thereof, upon such terms as the Trustee may prescribe.
7.3 Discontinuance of Issuance of Certificates. The Trustees may at any
time discontinue the issuance of share certificates and may, be written notice
to each shareholder, require the surrender of share certificates to the Trust
for cancellation. Such surrender and cancellation shall not affect the ownership
of shares in the Trust.
ARTICLE 8
Record Date and Closing Transfer Books
The Trustees may fix in advance a time, which shall not be more than 90
days before the date of any meeting of shareholders or the date for the payment
of any dividend or making of any other distribution to shareholders, as the
record date for determining the shareholders having the right to notice and to
vote at such meeting and any adjournment thereof or the right to receive
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<PAGE> 6
such dividend or distribution, and in such case only shareholders of record on
such record date shall have such right, notwithstanding any transfer of shares
on the books of the Trust after the record date; or without fixing such record
date the Trustees may for any of such purposes close the transfer books for all
or any part of such period.
ARTICLE 9
Seal
The seal of the Trust shall, subject to alteration by the Trustees,
consist of a flat-faced circular die with the word "Massachusetts" together with
the name of the Trust and the year of its organization, cut or engraved thereon;
but, unless otherwise required by the Trustees, the seal shall not be necessary
to be placed on, and its absence shall not impair the validity of, any document,
instrument or other paper executed and delivered by or on behalf of the Trust.
ARTICLE 10
Execution of Papers
Except as the Trustees may generally or in particular cases authorize
the execution thereof in some other manner, all deeds, leases, transfers,
contracts, bonds, notes, checks, drafts and other obligations made, accepted or
endorsed by the Trust shall be signed, and all transfers of securities standing
in the name of the Trust shall be executed, by the president or by one of the
vice presidents or by the treasurer or by whomsoever else shall be designated
for that purpose by the vote of the Trustees and need not bear the seal of the
Trust.
ARTICLE 11
Fiscal Year
Except as from time to time otherwise provided by the Trustees, the
fiscal year of the Trust shall end on November 30.
ARTICLE 12
Shares of Beneficial Interest
The Trust has an unlimited number of common shares, without par value,
which may be issued from time to time by the Trustees of the Trust. The Trust
also has a class of _____ preferred shares, without par value, which may be
issued by the Trustees from time to time in one or more series and with such
designations, preferences and other rights, qualifications, limitations and
restrictions as are determined by the Board of Trustees or a duly authorized
committee thereof and set forth in this Article 12.
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<PAGE> 7
12.1 Statement Creating One Series of Municipal Auction Rate
Cumulative Preferred Shares.
There is one series of Municipal Auction Rate Cumulative Preferred
Shares.
PART I
DESIGNATION
SERIES __: A series of _____ preferred shares, without par value,
liquidation preference $25,000 per share plus accumulated but unpaid dividends,
if any, thereon (whether or not earned or declared), is hereby designated
"Municipal Auction Rate Cumulative Preferred Shares, Series __" and is referred
to below as "Series __ Municipal Preferred." Each share of Series __ Municipal
Preferred shall be issued on ________ __, 1999; have an Applicable Rate for its
Initial Rate Period equal to ____% per annum; have an initial Dividend Payment
Date of _______, ________ __, 1999; and have such other preferences, limitations
and relative voting and other rights, in addition to those required by
applicable law or set forth in the Trust's Declaration of Trust, as are set
forth in Part I and Part II of this Section 12.1. Series __ Municipal Preferred
shall constitute a separate series of Municipal Preferred of the Trust. The
Board of Trustees of the Trust may, in their discretion, increase the number of
shares of Municipal Preferred authorized under these By-Laws to authorize the
issuance of another series of Municipal Preferred so long as such issuance is
permitted by paragraph 5 of Part I of this Section 12.1.
1. Definitions. Unless the context or use indicates another or
different meaning or intent, in Part I and Part II of this Section 12.1 the
following terms have the following meanings, whether used in the singular or
plural:
"'AA' Composite Commercial Paper Rate," on any date for any Rate Period
of shares of a series of Municipal Preferred, shall mean (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 for shares of such
series when all of the Outstanding shares of such series 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 interest
equivalent 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 S&P or the equivalent of such rating by S&P or another rating agency,
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<PAGE> 8
as made available on a discount basis or otherwise by the Federal Reserve Bank
of New York for the Business Day next preceding such date; or (ii) in the event
that the Federal Reserve Bank of New York does not make available any such rate,
then the arithmetic average of such rates, as quoted on a discount basis or
otherwise, by the Commercial Paper Dealers to the Auction Agent for the close of
business on the Business Day next preceding such date. If any Commercial Paper
Dealer does not quote a rate required to determine the "AA" Composite Commercial
Paper Rate, the "AA" Composite Commercial Paper Rate shall be determined on the
basis of the quotation or quotations furnished by the remaining Commercial Paper
Dealer or Commercial Paper Dealers and any Substitute Commercial Paper Dealer or
Substitute Commercial Paper Dealers selected by the Trust 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 Trust 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
(.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.
"Accountant's Confirmation" shall have the meaning specified in
paragraph 7(c) of Part I of this Section 12.1.
"Affiliate" shall mean, 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 Trust; provided, however, that no
Broker-Dealer controlled by, in control of or under common control with the
Trust shall be deemed to 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 trustees, directors or executive officers of which is a trustee of the
Trust be deemed to be an Affiliate solely because such trustee, director or
executive officer is also a trustee of the Trust.
"Agent Member" shall mean a member of or participant in the Securities
Depository that will act on behalf of a Bidder.
"Anticipation Notes" shall mean Tax Anticipation Notes (TANs), Revenue
Anticipation Notes (RANs), Tax and Revenue Anticipation Notes (TRANs), Grant
Anticipation Notes (GANs) that are rated by S&P and Bond Anticipation Notes
(BANs).
"Applicable Rate" shall have the meaning specified in paragraph 2(e)(i)
of Part I of this Section 12.1.
"Auction" shall mean each periodic implementation of the Auction
Procedures.
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<PAGE> 9
"Auction Agency Agreement" shall mean the agreement between the Trust
and 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 a series of Municipal Preferred so long as the Applicable
Rate for shares of such series is to be based on the results of an Auction.
"Auction Agent" shall mean the entity appointed as such by a resolution
of the Board of Trustees in accordance with paragraph 6 of Part II of this
Section 12.1.
"Auction Date," with respect to any Rate Period, shall mean the
Business Day next preceding the first day of such Rate Period.
"Auction Procedures" shall mean the procedures for conducting Auctions
set forth in Part II of this Section 12.1.
"Available Municipal Preferred" shall have the meaning specified in
paragraph 3(a) of Part II of this Section 12.1.
"Benchmark Rate" shall have the meaning specified in paragraph 3(c) of
Part II of this Section 12.1.
"Beneficial Owner" with respect to shares of a series of Municipal
Preferred, means a customer of a Broker-Dealer who is listed on the records of
that Broker-Dealer (or, if applicable, the Auction Agent) as a holder of shares
of such series.
"Bid" and "Bids" shall have the respective meanings specified in
paragraph 1(a) of Part II of this Section 12.1.
"Bidder" and "Bidders" shall have the respective meanings specified in
paragraph 1(a) of Part II of this Section 12.1; provided, however, that neither
the Trust nor any affiliate thereof shall be permitted to be a Bidder in an
Auction, except that any Broker-Dealer that is an affiliate of the Trust may be
a Bidder in an Auction, but only if the Orders placed by such Broker-Dealer are
not for its own account.
"Board of Trustees" shall mean the Board of Trustees of the Trust or
any duly authorized committee thereof.
"Broker-Dealer" shall mean any broker-dealer, commercial bank or other
entity permitted by law to perform the functions required of a Broker-Dealer in
Part II of this Section 12.1, 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 Trust and has entered into a Broker-Dealer Agreement that
remains effective.
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<PAGE> 10
"Broker-Dealer Agreement" shall mean an agreement among the Trust, the
Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to
follow the procedures specified in Part II of this Section 12.1.
"Business Day" shall mean 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 The City of New York, New York are authorized by law to close.
"By-Laws" means these Amended and Restated By-Laws of the Trust.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"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 Trust may from time to time
appoint, or, in lieu of any thereof, their respective affiliates or successors.
"Common Shares" means the common shares of beneficial interest, without
par value, of the Trust.
"Cure Date" shall have the meaning specified in paragraph 11(b) of Part
I of this Section 12.1.
"Date of Original Issue" with respect to shares of a series of
Municipal Preferred, shall mean the date on which the Trust originally issued
such shares.
"Declaration" shall mean the Agreement and Declaration of Trust dated
March 16, 1989 of the Trust, as amended by Amendment No. 1 dated July 30, 1999
to the Agreement and Declaration of Trust of the Trust, both on file with the
Secretary of The Commonwealth of Massachusetts and as hereafter restated or
amended from time to time.
"Deposit Securities" shall mean cash and Municipal Obligations rated at
least A-1+ or SP-1+ by S&P, except that, for purposes of subparagraph (a)(v) of
paragraph 11 of Part I of this Section 12.1, such Municipal Obligations shall be
considered "Deposit Securities" only if they are also rated P-1, MIG-1 or VMIG-1
by Moody's.
"Discounted Value," as of any Valuation Date, shall mean, (i) with
respect to an S&P Eligible Asset, the quotient of the Market Value thereof
divided by the applicable S&P 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
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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," with respect to shares of a series of
Municipal Preferred, shall mean any date on which dividends are payable on
shares of such series pursuant to the provisions of paragraph 2(d) of Part I of
this Section 12.1.
"Dividend Period," with respect to shares of a series of Municipal
Preferred, shall mean the period from and including the Date of Original Issue
of shares of such series to but excluding the initial Dividend Payment Date for
shares of such series and any period thereafter from and including one Dividend
Payment Date for shares of such series to but excluding the next succeeding
Dividend Payment Date for shares of such series.
"Escrowed Bonds" means Municipal Obligations that (i) have been
determined to be legally defeased in accordance with S&P's legal defeasance
criteria, (ii) have been determined to be economically defeased in accordance
with S&P's economic defeasance criteria and assigned a rating of AAA by S&P,
(iii) are not rated by S&P 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 S&P's
AAA rating.
"Existing Holder," with respect to shares of a series of Municipal
Preferred, shall mean a Broker-Dealer (or any such other Person as may be
permitted by the Trust) that is listed on the records of the Auction Agent as a
holder of shares of such series.
"Failure to Deposit," with respect to shares of a series of Municipal
Preferred, shall mean a failure by the Trust to pay to the Auction Agent, not
later than 12:00 noon, New York City time, (A) on the Business Day next
preceding any Dividend Payment Date for shares of such series, 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 of such series or (B) on the Business
Day next preceding any redemption date in funds available on such redemption
date for shares of such series in The City of New York, New York, the Redemption
Price to be paid on such redemption date for any shares of such series after
notice of redemption is mailed pursuant to paragraph 11(c) of Part I of this
Section 12.1; provided, however, that the foregoing clause (B) shall not apply
to the Trust's failure to pay the Redemption Price in respect of shares of
Municipal Preferred when the related Notice of Redemption provides that
redemption of such shares is subject to one or more conditions precedent and any
such condition precedent shall not have been satisfied at the time or times and
in the manner specified in such Notice of Redemption.
"Federal Tax Rate Increase" shall have the meaning specified in the
definition of "Moody's Volatility Factor."
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"Gross-up Payment" in respect of any dividend means payment to a Holder
of shares of a series 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 (taking into account both the Taxable Allocations and
the Gross-up Payment) to be equal to the after-tax return the Holder would have
received if no such Taxable Allocations had occurred. Such Gross-up Payment
shall be calculated: (i) without consideration being given to the time value of
money; (ii) assuming that no Holder of shares of Municipal Preferred is subject
to the Federal alternative minimum tax with respect to dividends received from
the Trust; and (iii) assuming that each Holder of shares of Municipal Preferred
is taxable at 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 applicable, whichever is greater, in effect at the time
such Gross-up Payment is made.
"Holder," with respect to shares of a series of Municipal Preferred,
shall mean the Registered Holder of such shares as the same appears on the
record books of the Trust.
"Hold Order" and "Hold Orders" shall have the respective meanings
specified in paragraph 1(a) of Part II of this Section 12.1.
"Independent Accountant" shall mean a nationally recognized accountant,
or firm of accountants, that is, with respect to the Trust, an independent
public accountant or firm of independent public accountants under the Securities
Act of 1933, as amended from time to time.
"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," with respect to shares of a series of Municipal
Preferred, shall mean the period from and including the Date of Original Issue
for such series to but excluding the initial Dividend Payment Date for such
series.
"Interest Equivalent" shall mean a yield on a 360-day basis of a
discount basis security which is equal to the yield on an equivalent
interest-bearing security.
"Inverse Floater" shall mean trust certificates or other instruments
evidencing interests in one or more municipal securities that qualify as S&P
Eligible Assets (and satisfy the issuer and size requirements of the definition
of S&P 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 or original
issuance unless the floating rate instrument has only one reset remaining until
maturity.
-12-
<PAGE> 13
"Issue Type Category" shall mean, with respect to a Municipal
Obligation acquired by the Fund, (A) for purposes of calculating Moody's
Eligible Assets as of any Valuation Date, one of the following categories into
which such Municipal Obligation falls based upon a good faith determination by
the Fund: health care issues (including issues related to teaching and
non-teaching hospitals, public or private); housing issues (including issues
related to single- and multi-family housing projects); educational facilities
issues (including issues related to public and private schools); student loan
issues; resource recovery issues; transportation issues (including issues
related to mass transit, airports and highways); industrial development bond
issues (including issues related to pollution control facilities); utility
issues (including issues related to the provision of gas, water, sewers and
electricity); general obligation issues; lease obligations (including
certificates of participation); escrowed bonds; and other issues ("Other
Issues") not falling within one of the aforementioned categories; and (B) for
purposes of calculating S&P Eligible Assets as of any Valuation Date, one of the
following categories into which such Municipal Obligation falls based upon a
good faith determination by the Fund: health care issues (including issues
related to teaching and non-teaching hospitals, public or private); housing
issues (including issues related to single- and multi-family housing projects);
educational facilities issues (including issues related to public and private
schools); student loan issues; transportation issues (including issues related
to mass transit, airports and highways); industrial development bond issues
(including issues related to pollution control facilities); public power
utilities issues (including issues related to the provision of electricity,
either singly or in combination with the provision of other utilities, and
issues related only to the provision of gas); water and sewer utilities issues
(including issues related to the provision of water and sewers as well as
combination utilities not falling within the public power utilities category);
special utilities issues (including issues related to resource recovery, solid
waste and irrigation as well as other utility issues not falling within the
public power and water and sewer utilities categories); general obligation
issues; lease obligations (including certificates of participation); Escrowed
Bonds; and other issues ("Other Issues") not falling within one of the
aforementioned categories. The general obligation issue category includes any
issuer that is directly or indirectly guaranteed by the State of California or
its political subdivisions. Utility issuers are included in the general
obligation issue category if the issuer is directly or indirectly guaranteed by
the State of California or its political subdivisions. Municipal Obligations in
the utility issuer category will be classified within one of the three following
sub-categories: (i) electric, gas and combination issues (if the combination
issue includes an electric issue); (ii) water and sewer utilities and
combination issues (if the combination issue does not include an electric
issue); and (iii) irrigation, resource recovery, solid waste and other
utilities, provided that Municipal Obligations included in this sub-category
(iii) must be rated by S&P in order to be included in S&P Eligible Assets.
Municipal Obligations in the transportation issue category will be classified
within one of the two following sub-categories: (i) streets and highways, toll
roads, bridges and tunnels, airports and multi-purpose port authorities
(multiple revenue streams generated by toll roads, airports, real estate,
bridges); and (ii) mass transit, parking seaports and others.
-13-
<PAGE> 14
"Kenny Index" shall have the meaning set forth under the definition of
"Taxable Equivalent of the Short-Term Municipal Bond Rate."
"Late Charge" shall have the meaning specified in paragraph 2(e)(i)(B)
of Part I of this Section 12.1.
"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 Trust 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 Trust from
dealers who are nationally recognized members of the National Association of
Securities Dealers, Inc. who are independent of the investment advisor to the
Trust and make a market in the security, at least one of which shall be in
writing. Futures contracts and options are valued at closing prices for such
instruments established by the exchange or board of trade on which they are
traded, or if market quotations are not readily available, are valued at fair
value on a consistent basis using methods determined in good faith by the
Trustees.
"Maximum Potential Gross-up Payment Liability," as of any Valuation
Date, shall mean the aggregate amount of Gross-up Payments that would be due if
the Trust were to make Taxable Allocations, with respect to any taxable year,
estimated based upon dividends paid and the amount of undistributed realized net
capital gains and other taxable income earned by the Trust, as of the end of the
calendar month immediately preceding such Valuation Date, and assuming such
Gross-up Payments are fully taxable.
"Maximum Rate," for shares of a series of Municipal Preferred on any
Auction Date for shares of such series, shall mean:
(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 designated by the Trust pursuant to paragraph 4 of Part I of
this Section 12.1, the product of (A) the Reference Rate on such
Auction Date for the next Rate Period of shares of such series and (B)
the Rate Multiple on such Auction Date, unless shares of such series
have or had a Special Rate Period (other than a Special Rate Period of
28 Rate Period Days or fewer) and an Auction
-14-
<PAGE> 15
at which Sufficient Clearing Bids existed has not yet occurred for a
Minimum Rate Period of shares of such series after such Special Rate
Period, in which case the higher of:
(A) the dividend rate on shares of such series for
the then-ending Rate Period; and
(B) the product of (1) the higher of (x) the
Reference Rate on such Auction Date for a Rate Period equal in
length to the then-ending Rate Period of shares of such
series, if such then-ending Rate Period was 364 Rate Period
Days or fewer, or the Treasury Note Rate on such Auction Date
for a Rate Period equal in length to the then-ending Rate
Period of shares of such series, if such then-ending Rate
Period was more than 364 Rate Period Days, and (y) the
Reference Rate on such Auction Date for a Rate Period equal in
length to such Special Rate Period of shares of such series,
if such Special Rate Period was 364 Rate Period Days or fewer,
or the Treasury Note Rate on such Auction Date for a Rate
Period equal in length to such Special Rate Period, if such
Special Rate Period was more than 364 Rate Period Days and (2)
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
designated by the Trust pursuant to paragraph 4 of Part I of this
Section 12.1, the product of (A) the highest of (1) the Reference Rate
on such Auction Date for a Rate Period equal in length to the
then-ending Rate Period of shares of such series, if such then-ending
Rate Period was 364 Rate Period Days or fewer, or the Treasury Note
Rate on such Auction Date for a Rate Period equal in length to the
then-ending Rate Period of shares of such series, if such then-ending
Rate Period was more than 364 Rate Period Days, (2) 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 (3) the Reference Rate on
such Auction Date for Minimum Rate Periods and (B) the Rate Multiple on
such Auction Date.
"Minimum Rate Period" shall mean any Rate Period consisting of 7 Rate
Period Days.
"Moody's" shall mean Moody's Investors Service, Inc., a Delaware
corporation, and its successors.
"Moody's Discount Factor" shall mean, for purposes of determining the
Discounted Value of any Moody's Eligible Asset, the percentage determined by
reference to the rating on such asset and the shortest Exposure Period set forth
opposite such rating that is the same length as or is longer than the Moody's
Exposure Period, in accordance with the table set forth below:
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<PAGE> 16
<TABLE>
<CAPTION>
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 seven
weeks.............. 154 161 168 176 190 137 149 231
9 weeks or less but
greater than eight
weeks.............. 156 163 170 177 192 138 150 240
</TABLE>
* Moody's rating.
** Municipal Obligations not rated by Moody's but rated BBB by
S&P.
*** 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
S&P, 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 rated less than Baa3 by Moody's or less
than BBB by S&P or not rated by Moody's or S&P.
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 S&P and
mature or have a demand feature at par exercisable in 30 days or less, and (ii)
no Moody's Discount Factor will be applied to cash or to Receivables for
Municipal Obligations Sold or futures, options and similar instruments (to the
extent such securities are Moody's Eligible Assets); provided, however, that for
purposes of determining the Moody's Discount Factor applicable to a Municipal
Obligation, any Municipal Obligation (excluding any short-term Municipal
Obligation) not rated by Moody's but rated by S&P shall be deemed to have a
Moody's rating which is one full rating category lower than its S&P rating.
"Moody's Eligible Asset" shall mean cash, Receivables for Municipal
Obligations Sold, futures, options and similar instruments (other than Inverse
Floaters and index warrants) or a Municipal Obligation that (i) pays interest in
cash, (ii) does not have its Moody's rating, if applicable, suspended by
Moody's, (iii) is part of an issue of Municipal Obligations of at least
$10,000,000, and (iv) is not subject to a covered call or a covered put option
written by the Trust. Municipal Obligations issued by any one issuer and not
rated by Moody's or rated lower than Baa3 by Moody's and not rated by S&P or
rated lower than BBB by S&P ("Unrated Moody's Municipal Obligations") may
comprise no more than 4% of total Moody's
-16-
<PAGE> 17
Eligible Assets; such Unrated Moody's Municipal Obligations, if any, together
with any Municipal Obligations issued by the same issuer and rated BBB by S&P
may comprise no more than 4% of total Moody's Eligible Assets; such BBB-rated
Municipal Obligations and Unrated Moody's Municipal Obligations, if any,
together with any Municipal Obligations issued by the same issuer and rated Baa
by Moody's or A by S&P may comprise no more than 6% of total Moody's Eligible
Assets; such BBB, Baa and A-rated Municipal Obligations and Unrated Moody's
Municipal Obligations, if any, together with any Municipal Obligations issued by
the same issuer and rated A by Moody's or AA by S&P, may comprise no more than
10% of total Moody's Eligible Assets; and such BBB, Baa, A and AA-rated
Municipal Obligations and Unrated Moody's Municipal Obligations, if any,
together with any Municipal Obligations issued by the same issuer and rated Aa
by Moody's or AAA by S&P, may comprise no more than 20% of total Moody's
Eligible Assets. For purposes of the foregoing sentence, any Municipal
Obligation backed by the guaranty, letter of credit or insurance issued by a
third party shall be deemed to be issued by such third party if the issuance of
such third-party credit is the sole determinant of the rating on such Municipal
Obligations. Other securities falling within a particular Issue Type Category
may comprise no more than 12% of total Moody's Eligible Assets; such other
securities, if any, together with any Municipal Obligations falling within a
particular Issue Type Category and rated Baa by Moody's or A by S&P, may
comprise no more than 20% of total Moody's Eligible Assets; such other
securities, Baa and A-rated Municipal Obligations, if any, together with any
Municipal Obligations falling within a particular Issue Type Category and rated
A by Moody's or AA by S&P, may comprise no more than 40% of total Moody's
Eligible Assets; and such other securities, Baa, A and AA-rated Municipal
Obligations, if any, together with any Municipal Obligations falling within a
particular Issue Type Category and rated Aa by Moody's or AAA by S&P, may
comprise no more than 60% of total Moody's Eligible Assets. Notwithstanding any
other provision of this definition, (A) in the case of general obligation
Municipal Obligations only, other securities issued by issuers located within
any one county may comprise no more than 4% of Moody's Eligible Assets; such
other securities, if any, together with any Municipal Obligations issued by
issuers located within the same county and rated Baa by Moody's or A by S&P, may
comprise no more than 6% of Moody's Eligible Assets; such other securities, Baa
and A-rated Municipal Obligations, if any, together with any Municipal
Obligations issued by issuers located with the same county and rated A by
Moody's or AA by S&P, may comprise no more than 10% of Moody's Eligible Assets;
and such other securities, Baa, A and AA-rated Municipal Obligations, if any,
together with any Municipal Obligations issued by issuers located within the
same county and rated Aa by Moody's or AAA by S&P, may comprise no more than 20%
of Moody's Eligible Assets; and (B) in no event may (i) student loan Municipal
Obligations comprise more than 10% of Moody's Eligible Assets; (ii) resource
recovery Municipal Obligations comprise more than 10% of Moody's Eligible
Assets; and (iii) Other Issues comprise more than 10% of Moody's Eligible
Assets. For purposes of applying the foregoing requirements, a Municipal
Obligation shall be deemed to be rated BBB by S&P if rated BBB-, BBB or BBB+ by
S&P, Moody's Eligible Assets shall be calculated without including cash, and
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 S&P, shall be considered to have a long-term rating
of A. When the Trust sells a Municipal Obligation and agrees to repurchase such
Municipal Obligation at a future day, such Municipal Obligation
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<PAGE> 18
shall be valued at its Discounted Value for purposes of determining Moody's
Eligible Assets, and the amount of the repurchase price of such Municipal
Obligation shall be included as a liability for purposes of calculating the
Municipal Preferred Basic Maintenance Amount. When the Trust purchases a Moody's
Eligible Asset and agrees to sell it at a future date, such Eligible Asset shall
be valued at the amount of cash to be received by the Trust upon such future
date, provided that the counterparty to the transaction has a long-term debt
rating of at least A2 and a short-term debt rating of at least P1 from Moody's
and the transaction has a term of no more than 30 days; otherwise such Eligible
Asset shall be valued at the Discounted Value of such Eligible Asset. For
purposes of determining the aggregate Discounted Value of Moody's Eligible
Assets, such aggregate amount shall be reduced with respect to any futures
contracts as set forth in paragraph 10(a) of Part I of this Section 12.1.
Notwithstanding the foregoing, an asset will not be considered a
Moody's Eligible Asset to the extent it is (i) subject to any material lien,
mortgage, pledge, security interest or security agreement of any kind
(collectively, "Liens"), except for (a) Liens which are being contested in good
faith by appropriate proceedings and which Moody's has indicated to the Trust
will not affect the status of such asset as a Moody's Eligible Asset, (b) Liens
for taxes that are not then due and payable or that can be paid thereafter
without penalty, (c) Liens to secure payment for services rendered or cash
advanced to the Trust by Colonial Management Associates, Inc., The Chase
Manhattan Bank or the Auction Agent and (d) Liens by virtue of any repurchase
agreement or futures contract; or (ii) deposited irrevocably for the payment of
any liabilities for purposes of determine the Municipal Preferred Basic
Maintenance Amount.
"Moody's Exposure Period" shall mean the period commencing on a given
Valuation Date and ending 49 days thereafter.
"Moody's Volatility Factor" shall mean, 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 (the "Federal Tax Rate Increase"),
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:
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<PAGE> 19
<TABLE>
<CAPTION>
Federal Volatility
Tax Rate Increase Factor
----------------- ----------
<S> <C>
5% 295%
10% 317%
15% 341%
20% 369%
25% 400%
30% 436%
35% 477%
40% 525%
</TABLE>
"Municipal Obligations" shall mean "Municipal Obligations" as defined
in the Trust's registration statement on Form N-2 as filed with the Securities
and Exchange Commission on ________ __, 1999 (the "Registration Statement").
"Municipal Preferred" shall mean Municipal Auction Rate Cumulative
Preferred Shares, without par value, liquidation preference $25,000 per share,
of the Trust.
"Municipal Preferred Basic Maintenance Amount," as of any Valuation
Date, shall mean the dollar amount equal to the sum of (i) (A) 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; (B)
the aggregate amount of dividends that will have accumulated at the respective
Applicable Rates (whether or not earned or declared) to (but not including) the
first respective Dividend Payment Dates for shares of Municipal Preferred
outstanding that follow 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); (C) the aggregate amount of dividends that would accumulate on
shares of each series of Municipal Preferred outstanding from such first
respective Dividend Payment Date therefor 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 of shares of such series to commence on such Dividend
Payment Date, assuming, solely for purposes of the foregoing, that if on such
Valuation Date the Trust shall have delivered a Notice of Special Rate Period to
the Auction Agent pursuant to paragraph 4(d)(i) of Part I of this Section 12.1
with respect to shares of such series, such Maximum Rate shall be the higher of
(a) the Maximum Rate for the Special Rate Period of shares of such series to
commence on such Dividend Payment Date and (b) the Maximum Rate for a Minimum
Rate Period of shares of such series to commence on such Dividend Payment Date,
multiplied by the Volatility Factor applicable to a Minimum Rate Period, or, in
the event the Trust shall have delivered a Notice of Special Rate Period to the
Auction Agent pursuant to paragraph 4(d)(i) of Part I of this
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<PAGE> 20
Section 12.1 with respect to shares of such series 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 (plus the aggregate amount of
dividends that would accumulate at the maximum dividend rate or rates on any
other Preferred Shares outstanding from such respective dividend payment dates
through the 49th day after such Valuation Date, as established by or pursuant to
the respective statements establishing and fixing the rights and preferences of
such other Preferred Shares) (except that (1) if such Valuation Date occurs at a
time when a Failure to Deposit (or, in the case of Preferred Shares other than
Municipal Preferred, a failure similar to a Failure to Deposit) has occurred
that has not been cured, the dividend for purposes of calculation would
accumulate at the current dividend rate then applicable to the shares in respect
of which such failure has occurred and (2) for those days during the period
described in this subparagraph (C) in respect of which the Applicable Rate in
effect immediately prior to such Dividend Payment Date will remain in effect
(or, in the case of the Preferred Shares other than Municipal Preferred, in
respect of which the dividend rate or rates in effect immediately prior to such
respective dividend payment dates will remain in effect), the dividend for
purposes of calculation would accumulate at such Applicable Rate (or other rate
or rates, as the case may be) in respect of those days); (D) the amount of
anticipated expenses of the Trust for the 90 days subsequent to such Valuation
Date; (E) the amount of the Trust's Maximum Potential Gross-up Payment Liability
in respect of shares of Municipal Preferred (and similar amounts payable in
respect of other Preferred Shares pursuant to provisions similar to those
contained in paragraph 3 of Part I of this Section 12.1) as of such Valuation
Date; and (F) any current liabilities as of such Valuation Date to the extent
not reflected in any of (i) (A) through (i)(E) (including, without limitation,
any payables for Municipal Obligations purchased as of such Valuation Date and
any liabilities incurred for the purpose of clearing securities transactions)
less (ii) the value (i.e., for purposes of current Moody's guidelines, the face
value of cash, short-term Municipal Obligations rated MIG-1, VMIG-1 or P-1, and
short-term securities that are the direct obligation of the U.S. government,
provided in each case that such securities mature on or prior to the date upon
which any of (i) (A) through (i)(F) become payable, otherwise the Moody's
Discounted Value or for purposes of current S&P guides, the face value of cash,
short-term municipal securities rated "A-1+" or "SP-1+" and mature or have a
demand feature exercisable in 30 days or less, and short-term securities that
are the direct obligation of the U.S. government, provided in each case that
such securities mature on or prior to the date upon which any of (i)(A) through
(i)(F) become payable, otherwise S&P's Discounted Value) of any of the Trust's
assets irrevocably deposited by the Trust for the payment of any of (i) (A)
through (i)(F).
"Municipal Preferred Basic Maintenance Cure Date," with respect to the
failure by the Trust to satisfy the Municipal Preferred Basic Maintenance Amount
(as required by paragraph 7(a) of Part I of this Section 12.1) as a given
Valuation Date, shall mean the second Business Day following such Valuation
Date.
"Municipal Preferred Basic Maintenance Report" shall mean a report
signed by the President, Treasurer, Controller, Secretary or any Senior Vice
President or Vice President of the Trust which sets forth, as of the related
Valuation Date, the assets of the Trust, the Market Value
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<PAGE> 21
and the Discounted Value thereof (seriatim and in aggregate), and the Municipal
Preferred Basic Maintenance Amount.
"1940 Act" shall mean the Investment Company Act of 1940, as amended
from time to time.
"1940 Act Cure Date," with respect to the failure by the Trust to
maintain the 1940 Act Municipal Preferred Asset Coverage (as required by
paragraph 7 of Part I of this Section 12.1) as of the last Business Day of each
month, shall mean the last Business Day of the following month.
"1940 Act Municipal Preferred Asset Coverage" shall mean asset
coverage, as defined in Section 18(h) of the 1940 Act, of at least 200% with
respect to all outstanding senior securities of the Trust which are shares of
beneficial interest, including all outstanding shares of Municipal Preferred (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 or
stock of a closed-end investment company as a condition of declaring dividends
on its common shares or stock).
"Notice of Redemption" shall mean any notice with respect to the
redemption of shares of Municipal Preferred pursuant to paragraph 11(c) of Part
I of this Section 12.1.
"Notice of Special Rate Period" shall mean any notice with respect to a
Special Rate Period of shares of Municipal Preferred pursuant to paragraph
4(d)(i) of Part I of this Section 12.1.
"Order" and "Orders" shall have the respective meanings specified in
paragraph 1(a) of Part II of this Section 12.1.
"Outstanding" shall mean, as of any Auction Date with respect to shares
of any series of Municipal Preferred, the number of shares of such series
theretofore issued by the Trust except, without duplication, (i) any shares of
such series theretofore canceled or delivered to the Auction Agent for
cancellation or redeemed by the Trust, (ii) any shares of such series as to
which the Trust or any Affiliate thereof shall be an Existing Holder and (iii)
any shares of such series represented by any certificate in lieu of which a new
certificate has been executed and delivered by the Trust.
"Persons" shall mean and include 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," with respect to shares of a series of
Municipal Preferred, shall mean a customer of a Broker-Dealer that is not a
Beneficial Owner of shares of such series but that wishes to purchase shares of
such series, or that is a Beneficial Owner of shares of such series that wishes
to purchase additional shares of such series.
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<PAGE> 22
"Potential Holder," with respect to shares of a series of Municipal
Preferred, shall mean a Broker-Dealer (or any such other person as may be
permitted by the Trust) that is not an Existing Holder of shares of such series
or that is an Existing Holder of shares of such series that wishes to become the
Existing Holder of additional shares of such series.
"Preferred Shares" shall mean the preferred shares, without par value,
of the Trust, and includes the shares of Municipal Preferred.
"Quarterly Valuation Date" shall mean the last Business Day of each
March, June, September and December of each year, commencing on September 30,
1999 with respect to Series M Municipal Preferred.
"Rate Multiple," for shares of a series of Municipal Preferred on any
Auction Date for shares of such series, shall mean the percentage, determined as
set forth below, based on the prevailing rating of shares of such series in
effect at the close of business on the Business Day next preceding such Auction
Date:
<TABLE>
<CAPTION>
Prevailing Rating Percentage
----------------- ----------
<S> <C> <C>
"aa3"/AA- or higher......................... 110%
"a3"/A-..................................... 125%
"baa3"/BBB-................................. 150%
"ba3"/BB-................................... 200%
Below "ba3"/BB-............................. 250%
</TABLE>
provided, however, that in the event the Trust has notified the Auction Agent of
its intent to allocate income taxable for Federal income tax purposes to shares
of such series prior to the Auction establishing the Applicable Rate for shares
of such series, the applicable percentage in the foregoing table shall be
divided by the quantity 1 minus the greater of the maximum marginal combined
regular Federal individual and New York state income tax rate applicable to
ordinary income (taking into account the Federal income tax deductibility of
state taxes paid or incurred) or the maximum marginal regular Federal corporate
income tax rate applicable to ordinary income.
For purposes of this definition, the "prevailing rating" of shares of a
series 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 S&P 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 S&P 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 S&P 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,
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<PAGE> 23
"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 S&P 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 will be
determined without reference to the rating of any other rating agency. The Trust
shall take all reasonable action necessary to enable either S&P or Moody's to
provide a rating for shares of Municipal Preferred. If neither S&P nor Moody's
shall make such a rating available, Salomon Smith Barney Inc. or its successor
shall select at least one nationally recognized statistical rating organization
(as that term is used in the rules and regulations of the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended from
time to time) to act as a substitute rating agency in respect of shares of such
series of Municipal Preferred, and the Trust shall take all reasonable action to
enable such rating agency to provide a rating for such shares.
"Rate Period," with respect to shares of a series of Municipal
Preferred, shall mean the Initial Rate Period of shares of such series and any
Subsequent Rate Period, including any Special Rate Period, of shares of such
series.
"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 paragraph 2(d) of Part I of this Section 12.1 or paragraph
4(b) of Part I of this Section 12.1.
"Receivables for Municipal Obligations Sold" shall mean (A) for
purposes of calculating Moody's Eligible Assets as of any Valuation Date, 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 Trust 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 the conditions specified in (i) above, and (B) for
purposes of calculating S&P Eligible Assets as of any Valuation Date, 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.
"Redemption Price" shall mean the applicable redemption price specified
in paragraph 11(a) or (b) of Part I of this Section 12.1.
"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
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<PAGE> 24
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.
"Registration Statement" has the meaning specified in the definition of
"Municipal Obligations."
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., and its successors.
"S&P Discount Factor" shall mean, for purposes of determining the
Discounted Value of any S&P Eligible Asset, the percentage determined by
reference to the rating on such asset and the shortest S&P Exposure Period set
forth opposite such rating that is the same length as or is longer than the S&P
Exposure Period, in accordance with the table set forth below:
<TABLE>
<CAPTION>
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>
- --------------
* S&P rating.
** S&P Eligible Assets not rated by S&P or rated less than BBB by S&P and
not rated at least the equivalent of an "A" rating by another
nationally recognized credit rating agency.
*** Municipal Obligations rated AAA by S&P which are not interest bearing
or do not pay interest at least semi-annually.
Notwithstanding the foregoing, (i) the S&P Discount Factor for
short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated A-1+ or SP-1+ by S&P and mature or have a demand feature
exercisable within 30 days or less, 120% if such Municipal Obligations are rated
A-1 or SP-1- by S&P and mature or have a demand feature exercisable within 30
days or less, or 125% if such Municipal Obligations are not rated by S&P but are
rated VMIG-1, P-1 or MIG-1 by Moody's; provided, however, 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 S&P; 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 S&P Eligible Assets; (ii) no
S&P Discount Factor will be applied to cash, options and similar instruments or
to Receivables for Municipal Obligations Sold, except that S&P Discount Factors
will be applied to futures and Inverse Floaters; and (iii) except as set forth
in clause (i) above, in the case of any Municipal Obligation that is not rated
by S&P but qualifies as an S&P Eligible Asset pursuant to clause (iii) of that
definition, such Municipal Obligation will be deemed to have an S&P rating one
full rating category lower than the S&P rating category that is the equivalent
of the rating category in which such Municipal
-24-
<PAGE> 25
Obligation is placed by such other nationally recognized credit rating agency.
For purposes of the foregoing, Anticipation Notes rated SP-1+ or, if not rated
by S&P, 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,
shall be considered to be short-term Municipal Obligations.
"S&P Eligible Asset" shall mean cash (excluding any cash irrevocably
deposited by the Trust for the payment of any liabilities within the meaning of
Municipal Preferred Basic Maintenance Amount), Receivables for Municipal
Obligations Sold, futures, options, Inverse Floaters and similar instruments or
a Municipal Obligation owned by the Trust that (i) is interest bearing and pays
interest at least semi-annually; (ii) is payable with respect to principal and
interest in U.S. Dollars; (iii) is publicly rated BBB or higher by S&P or,
except in the case of Anticipation Notes that are Grant Anticipation Notes or
Bond Anticipation Notes which must be rated by S&P to be included in S&P
Eligible Assets, if not rated by S&P but rated by another nationally recognized
credit rating agency, is rated at least A by such agency; (iv) is not part of a
private placement of Municipal Obligations (except in the case of Inverse
Floaters); (v) is part of an issue of Municipal Obligations with an original
issue size of at least $20 million or, if of an issue with an original issue
size below $20 million (but in no event below $10 million), is issued by an
issuer with a total of at least $50 million of securities outstanding; and (vi)
is not subject to a covered call or covered put option written by the Trust.
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) Municipal Obligations (excluding Escrowed Bonds) of any
one issuer or guarantor (excluding bond insurers) shall be considered
S&P Eligible Assets only to the extent the Market Value of such
Municipal Obligations does not exceed 10% of the aggregate Market Value
of S&P Eligible Assets, provided that 2% is added to the applicable S&P
Discount Factor for every 1% by which the Market Value of such
Municipal Obligations exceeds 5% of the aggregate Market Value of S&P
Eligible Assets, and provided that Municipal Obligations (excluding
Escrowed Bonds) not rated by S&P or rated less than BBB by S&P or not
rated at least A by another nationally recognized credit rating agency
of any one issuer or guarantor (excluding bond insurers) shall
constitute S&P Eligible Assets only to the extent the Market Value of
such Municipal Obligations does not exceed 5% of the aggregate Market
Value of S&P Eligible Assets;
(2) Municipal Obligations (excluding Escrowed Bonds) of any
one Issue Type Category shall be considered S&P Eligible Assets only to
the extent the Market Value of such Municipal Obligations does not
exceed 25% of the aggregate Market Value of S&P
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<PAGE> 26
Eligible Assets; provided, however, that Municipal Obligations falling
within the utility Issue Type Category will be broken down into three
sub-categories and such Municipal Obligations will be considered S&P
Eligible Assets to the extent the Market Value of such Municipal
Obligations in each such sub-category does not exceed 25% of the
aggregate Market Value of S&P Eligible Assets per each sub-category
provided that the total utility Issue Type Category does not exceed 60%
of the Aggregate Market Value of S&P Eligible Assets; provided,
however, that Municipal Obligations falling within the transportation
Issue Type Category will be broken down into two sub-categories and
such Municipal Obligations will be considered S&P Eligible Assets to
the extent the Market Value of such Municipal Obligations in both
sub-categories combined does not exceed 40% of the aggregate Market
Value of S&P Eligible Assets (exposure to transportation sub-category
(i) described in the definition of Issue Type Category is limited to
25% of the aggregate Market Value of S&P Eligible Assets, provided,
however, exposure to transportation sub-category (ii) described above
can exceed the 25% limit to the extent that exposure to transportation
sub-category (i) is reduced, for a total exposure up to and not
exceeding 40% of the aggregate Market Value of S&P Eligible Assets for
the transportation Issue Type Category); and provided, however, that
general obligation issues will be considered S&P Eligible Assets only
to the extent the Market Value of such general obligation issues does
not exceed 50% of the aggregate Market Value of S&P Eligible Assets;
(3) Municipal Obligations not rated at least BBB by S&P or not
rated by S&P or not rated at least A by another nationally recognized
credit rating agency shall be considered S&P Eligible Assets only to
the extent the Market Value of such Municipal Obligations does not
exceed 50% of the aggregate Market Value of S&P Eligible Assets;
provided, however, that if the Market Value of such Municipal
Obligations exceeds 50% of the aggregate Market Value of S&P Eligible
Assets, a portion of such Municipal Obligations (selected by the Trust)
shall not be considered S&P Eligible Assets, so that the Market Value
of such Municipal Obligations (excluding such portion) does not exceed
50% of the aggregate Market Value of S&P Eligible Assets;
(4) Municipal Obligations which are not interest bearing or do
not pay interest at least semi-annually shall be considered S&P
Eligible Assets if rated AAA by S&P; and
(5) Non-New York long-term Municipal Obligations shall be
considered S&P Eligible Assets only to the extent the Market Value of
such Municipal Obligations does not exceed 20% of the aggregate Market
Value of S&P Eligible Assets.
For purposes of determining the aggregate Discounted Value of S&P's
Eligible Assets, such aggregate amount shall be reduced with respect to any
futures contracts as set forth in paragraph 10(a) of Part I of this Section
12.1.
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<PAGE> 27
"S&P Exposure Period" shall mean the period commencing on a given
Valuation Date and ending three business days thereafter.
"S&P Volatility Factor" shall mean, 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.
"Securities Depository" shall mean The Depository Trust Company and its
successors and assigns or any other securities depository selected by the Trust
which agrees to follow the procedures required to be followed by such securities
depository in connection with shares of Municipal Preferred.
"Sell Order" and "Sell Orders" shall have the respective meanings
specified in paragraph 1(a) of Part II of this Section 12.1.
"Special Rate Period," with respect to shares of a series of Municipal
Preferred, shall have the meaning specified in paragraph 4(a) of Part I of this
Section 12.1.
"Special Redemption Provisions" shall have the meaning specified in
paragraph 11(a)(i) of Part I of this Section 12.1.
"Submission Deadline" shall mean 1:30 P.M., New York City 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" shall have the respective meanings
specified in paragraph 3(a) of Part II of this Section 12.1.
"Submitted Hold Order" and "Submitted Hold Orders" shall have the
respective meanings specified in paragraph 3(a) of Part II of this Section 12.1.
"Submitted Order" and "Submitted Orders" shall have the respective
meanings specified in paragraph 3(a) of Part II of this Section 12.1.
"Submitted Sell Order" and "Submitted Sell Orders" shall have the
respective meanings specified in paragraph 3(a) of Part II of this Section 12.1.
"Subsequent Rate Period," with respect to shares of a series of
Municipal Preferred, shall mean the period from and including the first day
following the Initial Rate Period of shares of such series to but excluding the
next Dividend Payment Date for shares of such series and any period thereafter
from and including one Dividend Payment Date for shares of such series to but
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<PAGE> 28
excluding the next succeeding Dividend Payment Date for shares of such series;
provided, however, that if any Subsequent Rate Period is also a Special Rate
Period, such term shall mean the period commencing on the first day of such
Special Rate Period and ending on the last day of the last Dividend Period
thereof.
"Substitute Commercial Paper Dealer" shall mean CS First Boston or
Morgan Stanley & Co. Incorporated or their respective affiliates or successors,
if such entity is a commercial paper dealer; provided, however, that none of
such entities shall be a Commercial Paper Dealer.
"Substitute U.S. Government Securities Dealer" shall mean CS First
Boston and Merrill Lynch, Pierce, Fenner & Smith Incorporated or their
respective affiliates or successors, if such entity is a U.S. Government
securities dealer; provided, however, that none of such entities shall be a U.S.
Government Securities Dealer.
"Sufficient Clearing Bids" shall have the meaning specified in
paragraph 3(a) of Part II of this Section 12.1.
"Taxable Allocation" shall have the meaning specified in paragraph 3 of
Part I of this Section 12.1.
"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 S&P 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 S&P (if S&P 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., New York City time, on such date by
S&P 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 S&P 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., New York
City time, on such date by S&P 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
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<PAGE> 29
to ordinary income or the maximum marginal regular Federal corporate income tax
rate applicable to ordinary income (in each case expressed as a decimal).
"Taxable Income" shall have the meaning specified in paragraph 3(c) of
Part II of this Section 12.1.
"Treasury Bill" shall mean a direct obligation of the U.S. Government
having a maturity at the time of issuance of 364 days or less.
"Treasury Bill Rate," on any date for any Rate Period, shall mean (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.
"Treasury Note" shall mean 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.
"Treasury Note Rate," on any date for any Rate Period, shall mean (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. If
any U.S. Government Securities Dealer does not quote a rate required to
determine the Treasury Bill Rate or the Treasury Note Rate, the Treasury Bill
Rate or the Treasury Note 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 Trust 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 Trust 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.
"U.S. Government Securities Dealer" shall mean Lehman Government
Securities Incorporated, Goldman, Sachs & Co., Salomon Smith Barney Inc. and
Morgan Guaranty Trust
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<PAGE> 30
Company of New York or their respective affiliates or successors, if such entity
is a U.S. government securities dealer.
"Valuation Date" shall mean, for purposes of determining whether the
Trust is maintaining the Municipal Preferred Basic Maintenance Amount, each
Business Day.
"Variation Margin" means, in connection with an outstanding futures
contract owned or sold by the Trust, the amount of cash or securities paid to or
received from a broker (subsequent to the Initial Margin payment) from time to
time as the price of such futures contract fluctuates.
"Volatility Factor" shall mean, as of any Valuation Date, the greater
of the Moody's Volatility Factor and the S&P Volatility Factor.
"Voting Period" shall have the meaning specified in paragraph 5(b) of
Part I of this Section 12.1.
"Winning Bid Rate" shall have the meaning specified in paragraph 3(a)
of Part II of this Section 12.1.
2. Dividends.
(a) Ranking. The shares of a series of Municipal Preferred shall 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 by the Trust.
(b) Cumulative Cash Dividends. The Holders of shares of Municipal
Preferred of any series 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, these By-Laws and applicable law, cumulative cash
dividends at the Applicable Rate for shares of such series, determined as set
forth in subparagraph (e) of this paragraph 2, and no more (except to the extent
set forth in paragraph 3 of Part I of this Section 12.1), payable on the
Dividend Payment Dates with respect to shares of such series determined pursuant
to subparagraph (d) of this paragraph 2. 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, as herein provided,
on shares of Municipal Preferred. No interest, or sum of money in lieu of
interest, shall be payable in respect of any dividend payment or payments on
shares of Municipal Preferred which may be in arrears, and, except to the extent
set forth in subparagraph (e)(i) of this paragraph 2, no additional sum of money
shall be payable in respect of any such arrearage.
(c) Dividends Cumulative From Date of Original Issue. Dividends on
shares of Municipal Preferred of any series shall accumulate at the Applicable
Rate for shares of such series from the Date of Original Issue thereof.
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<PAGE> 31
(d) Dividend Payment Dates and Adjustments Thereof. The Dividend
Payment Dates with respect to shares of a series of Municipal Preferred shall be
_______, ________ __, 1999 and each _______ thereafter with respect to shares of
Series __ Municipal Preferred; provided, however, that
(i) (A) if the _______ on which dividends would otherwise be
payable on shares of Series __ Municipal Preferred is not a Business
Day, then such dividends shall be payable on shares of such series on
the first Business Day that falls [before/after] such _______; and
(ii) notwithstanding the foregoing provisions of this
paragraph 2(d), the Trust in its discretion may establish the Dividend
Payment Dates in respect of any Special Rate Period of shares of a
series of Municipal Preferred consisting of more than 28 Rate Period
Days; 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, which Notice of Special Rate Period
shall be filed with the Secretary of the Trust; 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 in accordance with subparagraph (b) of
paragraph 4 of Part I of this Section 12.1.
(e) Dividend Rates and Calculation of Dividends.
(i) Dividend Rates. The dividend rate on shares of Municipal
Preferred of any series during the period from and after the Date of
Original Issue of shares of such series to and including the last day
of the Initial Rate Period of shares of such series shall be equal to
the rate per annum set forth with respect to shares of such series
under "Designation" in Part I of this Section 12.1. For each Subsequent
Rate Period of shares of such series thereafter, the dividend rate on
shares of such series shall be equal to the rate per annum that results
from an Auction for shares of such series on the Auction Date next
preceding such Subsequent Rate Period; provided, however, that if:
(A) an Auction for any such Subsequent Rate Period is
not held for any reason other than as described below, the
dividend rate on shares of such series for such Subsequent
Rate Period will be the Maximum Rate for shares of such series
on the Auction Date therefor;
(B) any Failure to Deposit shall have occurred with
respect to shares of such series during any Rate Period
thereof (other than any Special Rate Period consisting of more
than 364 Rate Period Days or any Rate Period succeeding any
Special Rate Period consisting of more than 364 Rate Period
Days during which a Failure to Deposit occurred that has not
been cured), but, prior to 12:00 Noon, New York City time, on
the third Business Day next succeeding the date on which
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<PAGE> 32
such Failure to Deposit occurred, such Failure to Deposit
shall have been cured in accordance with subparagraph (f) of
this paragraph 2 and the Trust 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 the shares of such series, 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 subparagraph (f) of this paragraph 2
(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 such series and (2) if such Failure to
Deposit consisted of the failure timely to pay to the Auction
Agent the Redemption Price of the shares, if any, of such
series for which Notice of Redemption has been mailed by the
Trust pursuant to paragraph 11(c) of Part I of this Section
12.1, 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
subparagraph (f) of this paragraph 2 (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 such
series to be redeemed, no Auction will be held in respect of
shares of such series for the Subsequent Rate Period thereof
and the dividend rate for shares of such series for such
Subsequent Rate Period will be the Maximum Rate for shares of
such series on the Auction Date for such Subsequent Rate
Period;
(C) any Failure to Deposit shall have occurred with
respect to shares of such series during any Rate Period
thereof (other than any Special Rate Period consisting of more
than 364 Rate Period Days or any Rate Period succeeding any
Special Rate Period consisting of more than 364 Rate Period
Days during which a Failure to Deposit occurred that has not
been cured), and, prior to 12:00 Noon, New York City time, on
the 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 subparagraph (f) of this
paragraph 2 or the Trust shall not have paid the applicable
Late Charge to the Auction Agent, no Auction will be held in
respect of shares of such series for the first Subsequent Rate
Period thereof thereafter (or for any Rate Period thereof
thereafter to and including the Rate Period during which (1)
such Failure to Deposit is cured in accordance with
subparagraph (f) of this paragraph 2 and (2) the Trust pays
the applicable Late Charge to the Auction Agent (the condition
set forth in this clause (2) to apply
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only in the event Moody's is rating such shares at the time
the Trust cures such Failure to Deposit), in each case no
later than 12:00 Noon, New York City time, on the fourth
Business Day prior to the end of such Rate Period), and the
dividend rate for shares of such series for each such
Subsequent Rate Period shall be a rate per annum equal to the
Maximum Rate for shares of such series on the Auction Date for
such Subsequent Rate Period (but with the prevailing rating
for shares of such series, for purposes of determining such
Maximum Rate, being deemed to be "Below 'ba3'/BB-"); or
(D) any Failure to Deposit shall have occurred with
respect to shares of such series during a Special Rate Period
thereof consisting of more than 364 Rate Period Days, or
during any Rate Period thereof succeeding any Special Rate
Period consisting of more than 364 Rate Period Days during
which a Failure to Deposit occurred that has not been cured,
and, prior to 12:00 Noon, New York City time, on the fourth
Business Day preceding the Auction Date for the Rate Period
subsequent to such Rate Period, such Failure to Deposit shall
not have been cured in accordance with subparagraph (f) of
this paragraph 2 or, in the event Moody's is then rating such
shares, the Trust shall not have paid the applicable Late
Charge to the Auction Agent (such Late Charge, for purposes of
this subparagraph (D), 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
such series for such Subsequent Rate Period (or for any Rate
Period thereof thereafter to and including the Rate Period
during which (1) such Failure to Deposit is cured in
accordance with subparagraph (f) of this paragraph 2 and (2)
the Trust 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 Trust
cures such Failure to Deposit), in each case no later than
12:00 Noon, New York City time, on the fourth Business Day
prior to the end of such Rate Period), and the dividend rate
for shares of such series for each such Subsequent Rate Period
shall be a rate per annum equal to the Maximum Rate for shares
of such series on the Auction Date for such Subsequent Rate
Period (but with the prevailing rating for shares of such
series, for purposes of determining such Maximum Rate, being
deemed to be "Below 'ba3'/BB-") (the rate per annum of which
dividends are payable on shares of a series of Municipal
Preferred for any Rate Period thereof being herein referred to
as the "Applicable Rate" for shares of such series).
(ii) Calculation of Dividends. The amount of dividends per
share payable on shares of a series of Municipal Preferred on any date
on which dividends shall be payable on shares of such series shall be
computed by multiplying the Applicable Rate for shares of such series
in effect for such Dividend Period or Dividend Periods or part thereof
for
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<PAGE> 34
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.
(f) Curing a Failure to Deposit. A Failure to Deposit with respect to
shares of a series of Municipal Preferred shall have been cured (if such Failure
to Deposit is not solely due to the willful failure of the Trust to make the
required payments to the Auction Agent) with respect to any Rate Period of
shares of such series if, within the respective time periods described in
subparagraph (e)(i) of this paragraph 2, the Trust shall have paid to the
Auction Agent (A) all accumulated and unpaid dividends on shares of such series
and (B) without duplication, the Redemption Price for shares, if any, of such
series for which Notice of Redemption has been mailed by the Trust pursuant to
paragraph 11(c) of Part I of this Section 12.1; provided, however, that the
foregoing clause (B) shall not apply to the Trust's failure to pay the
Redemption Price in respect of shares of Municipal Preferred when the related
Redemption Notice 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.
(g) Dividend Payments by Trust to Auction Agent. The Trust shall pay to
the Auction Agent, not later than 12:00 Noon, New York City time, on the
Business Day next preceding each Dividend Payment Date for shares of a series of
Municipal Preferred, an aggregate amount of funds available on the next Business
Day in The City of New York, New York, equal to the dividends to be paid to all
Holders of shares of such series on such Dividend Payment Date.
(h) Auction Agent as Trustee of Dividend Payments by Trust. All moneys
paid to the Auction Agent for the payment of dividends (or for the payment of
any Late Charge) shall be held in trust for the payment of such dividends (and
any such Late Charge) by the Auction Agent for the benefit of the Holders
specified in subparagraph (i) of this paragraph 2. Any moneys paid to the
Auction Agent in accordance with the foregoing but not applied by the Auction
Agent to the payment of dividends (and any such Late Charge) will, to the extent
permitted by law, be repaid to the Trust at the end of 90 days from the date on
which such moneys were so to have been applied.
(i) Dividends Paid to Holders. Each dividend on shares of Municipal
Preferred shall be paid on the Dividend Payment Date therefor to the Holders
thereof as their names appear on the record books of the Trust on the Business
Day next preceding such Dividend Payment Date.
(j) Dividends Credited Against Earliest Accumulated But Unpaid
Dividends. 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. Dividends in arrears
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<PAGE> 35
for any past Dividend Period may be declared and paid at any time, without
reference to any regular Dividend Payment Date, to the Holders as their names
appear on the record books of the Trust on such date, not exceeding 15 days
preceding the payment date thereof, as may be fixed by the Board of Trustees.
(k) Dividends Designated as Exempt-Interest Dividends. Dividends on
shares of Municipal Preferred shall be designated as exempt-interest dividends
up to the amount of tax-exempt income of the Trust, to the extent permitted by,
and for purposes of, Section 852 of the Code.
3. 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, these By-Laws and
applicable law, dividends in an amount equal to the aggregate Gross-up Payments
as follows:
(a) Minimum Rate Periods and Special Rate Periods of 28 Rate Period
Days or Fewer. If, in the case of any Minimum Rate Period or any Special Rate
Period of 28 Rate Period Days or fewer, the Trust allocates any net capital gain
or other income taxable for Federal and/or New York state income tax purposes to
a dividend paid on shares of Municipal Preferred without having given advance
notice thereof to the Auction Agent as provided in paragraph 5 of Part II of
this Section 12.1 (such allocation being 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 liquidation of the Trust, the
Trust 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 Trust'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 Trust.
(b) Special Rate Periods of More Than 28 Rate Period Days. If, in the
case of any Special Rate Period of more than 28 Rate Period Days, the Trust
makes a Taxable Allocation to a dividend paid on shares of Municipal Preferred,
the Trust 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 Trust'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 Trust.
(c) No Gross-up Payments In the Event of a Reallocation. The Trust
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 Trust.
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<PAGE> 36
4. Designation of Special Rate Periods.
(a) Length of and Preconditions for Special Rate Period. The Trust, at
its option, may designate any succeeding Subsequent Rate Period of shares of a
series 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,
subject to adjustment as provided in subparagraph (b) of this paragraph 4. A
designation of a Special Rate Period shall be effective only if (A) notice
thereof shall have been given in accordance with subparagraphs (c) and (d)(i) of
this paragraph 4, (B) an Auction for shares of such series shall have been held
on the Auction Date immediately preceding the first day of such proposed Special
Rate Period and Sufficient Clearing Bids for shares of such series shall have
existed in such Auction, and (C) if any Notice of Redemption shall have been
mailed by the Trust pursuant to paragraph 11(c) of Part I of this Section 12.1
with respect to any shares of such series, the Redemption Price with respect to
such shares shall have been deposited with the Auction Agent. In the event the
Trust wishes to designate any succeeding Subsequent Rate Period for shares of a
series of Municipal Preferred as a Special Rate Period consisting of more than
28 Rate Period Days, the Trust shall notify S&P (if S&P is then rating such
series) and Moody's (if Moody's is then rating such series) in advance of the
commencement of such Subsequent Rate Period that the Trust wishes to designate
such Subsequent Rate Period as a Special Rate Period and shall provide S&P (if
S&P is then rating such series) and Moody's (if Moody's is then rating such
series) with such documents as either may request.
(b) Adjustment of Length of Special Rate Period. In the event the Trust
wishes to designate a Subsequent Rate Period 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 Trust shall designate such
Subsequent Rate Period as a Special Rate Period consisting of the period
commencing at 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, in the case of Series __ Municipal
Preferred.
(c) Notice of Proposed Special Rate Period. If the Trust proposes to
designate any succeeding Subsequent Rate Period of shares of a series of
Municipal Preferred as a Special Rate Period pursuant to subparagraph (a) of
this paragraph 4, 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 Trust 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 Trust 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 Trust by first-class mail, postage prepaid, to the Holders of shares of such
series. Each such notice shall state (A) that the Trust may exercise its option
to designate a succeeding Subsequent Rate Period of shares of such series as a
Special Rate Period, specifying the first day thereof and (B) that the Trust
will, by 11:00 A.M., New York City time, on the
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<PAGE> 37
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 Trust shall specify the Special Rate Period
designated, or (y) its determination not to exercise such option.
(d) Notice of Special Rate Period. No later than 11:00 A.M., New York
City time, on the second Business Day next preceding the first day of any
proposed Special Rate Period of shares of a series of Municipal Preferred as to
which notice has been given as set forth in subparagraph (c) of this paragraph 4
(or such later time or date, or both, as may be agreed to by the Auction Agent),
the Trust shall deliver to the Auction Agent either:
(i) a notice ("Notice of Special Rate Period") stating (A)
that the Trust has determined to designate the next succeeding Rate
Period of shares of such series 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 shares of
such series shall not be held on such Auction Date for any reason or
(2) an Auction for shares of such series shall be held on such Auction
Date but Sufficient Clearing Bids for shares of such series shall not
exist in such Auction, (D) the scheduled Dividend Payment Dates for
shares of such series during such Special Rate Period and (E) the
Special Redemption Provisions, if any, applicable to shares of such
series 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
series) and S&P Eligible Assets (if S&P is then rating such series)
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 are determined
by reference to the first Exposure Period longer than the Exposure
Period then applicable to the Trust, as described in the definition of
Moody's Discount Factor herein); or
(ii) a notice stating that the Trust has determined not to
exercise its option to designate a Special Rate Period of shares of
such series and that the next succeeding Rate Period of shares of such
series shall be a Minimum Rate Period.
(e) Failure to Deliver Notice of Special Rate Period. If the Trust
fails to deliver either of the notices described in subparagraphs (d)(i) or
(d)(ii) of this paragraph 4 (and, in the case of the notice described in
subparagraph (d)(i) of this paragraph 4, a Municipal Preferred Basic Maintenance
Report to the effect set forth in such subparagraph (if either Moody's or S&P is
then rating the series in question)) with respect to any designation of any
proposed Special Rate Period to the Auction Agent by 11:00 A.M., New York City
time, on the second Business Day
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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
Trust 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 subparagraph
(d)(ii) of this paragraph 4. In the event the Trust delivers to the Auction
Agent a notice described in subparagraph (d)(i) of this paragraph 4, it shall
file a copy of such notice with the Secretary of the Trust, and the contents of
such notice shall be binding on the Trust. In the event the Trust delivers to
the Auction Agent a notice described in subparagraph (d)(ii) of this paragraph
4, the Trust will provide Moody's (if Moody's is then rating the series in
question) and S&P (if S&P is then rating the series in question) a copy of such
notice.
5. Voting Rights.
(a) One Vote Per Share of Municipal Preferred. Except as otherwise
provided in the Declaration, this paragraph 5 or as otherwise required by law,
(i) each Holder of shares of Municipal Preferred shall be entitled to one vote
for each share of Municipal Preferred held by such Holder on each matter
submitted to a vote of shareholders of the Trust, and (ii) the holders of
outstanding Preferred Shares, including each share of Municipal Preferred, and
of Common Shares shall vote together as a single class; provided, however, that,
at any meeting of the shareholders of the Trust held for the election of
trustees, the holders of outstanding Preferred Shares, including Municipal
Preferred, represented in person or by proxy at said meeting, shall be entitled,
as a class, to the exclusion of the holders of all other securities and classes
of shares of beneficial interest of the Trust, to elect two trustees of the
Trust, each Preferred Share, including each share of Municipal Preferred,
entitling the holder thereof to one vote. Subject to subparagraph (b) of this
paragraph 5, the holders of outstanding Common Shares and Preferred Shares,
including Municipal Preferred, voting together as a single class, shall elect
the balance of the trustees.
(b) Voting For Additional Trustees.
(i) Voting Period. During any period in which any one or more
of the conditions described in subparagraphs (A) or (B) of this
subparagraph (b)(i) shall exist (such period being referred to herein
as a "Voting Period"), the number of trustees constituting the Board of
Trustees shall be automatically increased by the smallest number that,
when added to the two trustees elected exclusively by the holders of
Preferred Shares, including shares of Municipal Preferred, would
constitute a majority of the Board of Trustees as so increased by such
smallest number; and the holders of Preferred Shares, including
Municipal Preferred, shall be entitled, voting as a class on a
one-vote-per-share basis (to the exclusion of the holders of all other
securities and classes of shares of beneficial interest of the Trust),
to elect such smallest number of additional trustees, together with the
two trustees that such holders are in any event entitled to elect. A
Voting Period shall commence:
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(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 Trust.
Upon the termination of a Voting Period, the voting rights described in this
subparagraph (b)(i) shall cease, subject always, however, to the revesting of
such voting rights in the Holders upon the further occurrence of any of the
events described in this subparagraph (b)(i).
(ii) Notice of Special Meeting. As soon as practicable after
the accrual of any right of the holders of Preferred Shares to elect
additional trustees as described in subparagraph (b)(i) of this
paragraph 5, the Trust shall notify the Auction Agent and the Auction
Agent shall call a special meeting of such holders, by mailing a notice
of such special meeting to such holders, such meeting to be held not
less than 10 nor more than 20 days after the date of mailing of such
notice. If the Trust fails to send such notice to the Auction Agent or
if the Auction Agent does not call such a special meeting, it may be
called by any such holder on like notice. The record date for
determining the holders entitled to notice of and to vote at such
special meeting shall be the close of business on the fifth Business
Day preceding the day on which such notice is mailed. At any such
special meeting and at each meeting of holders of Preferred Shares held
during a Voting Period at which trustees are to be elected, such
holders, voting together as a class (to the exclusion of the holders of
all other securities and classes of shares of beneficial interest of
the Trust), shall be entitled to elected the number of trustees
prescribed in subparagraph (b)(i) of this paragraph 5 on a
one-vote-per-share basis.
(iii) Terms of Office of Existing Trustees. The terms of
office of all persons who are trustees of the Trust at the time of a
special meeting of Holders and holders of other Preferred Shares to
elect trustees shall continue, notwithstanding the election at such
meeting by the Holders and such other holders of the number of trustees
that they are entitled to elect, and the persons so elected by the
Holders and such other holders, together with the two incumbent
trustees elected by the Holders and such other holders of Preferred
Shares and the remaining incumbent trustees elected by the Holders of
the Common Shares and Preferred Shares, shall constitute the duly
elected trustees of the Trust.
(iv) Terms of Office of Certain Trustees to Terminate Upon
Termination of Voting Period. Simultaneously with the termination of a
Voting Period, the term of office of the additional trustees elected by
the Holders and holders of other Preferred
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Shares pursuant to subparagraph (b)(i) of this paragraph 5 shall
terminate, the remaining trustees shall constitute the trustees of the
Trust and the voting rights of the Holders and such other holders to
elect additional trustees pursuant to subparagraph (b)(i) of this
paragraph 5 shall cease, subject to the provisions of the last sentence
of subparagraph (b)(i) of this paragraph 5.
(c) Holders of Municipal Preferred To Vote on Certain Other Matters.
(i) Increases in Capitalization. So long as any shares of
Municipal Preferred are outstanding, the Trust shall not, without the
affirmative vote or consent of the Holders of at least a majority of
the shares of Municipal Preferred outstanding at the time, in person or
by proxy, either in writing or at a meeting, voting as a separate
class: (a) authorize, create or issue any class or series of 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 Trust, or
authorize, create or issue additional shares of any series of Municipal
Preferred (except that, notwithstanding the foregoing, but subject to
the provisions of paragraph 10(c) of Part I of this Section 12.1, the
Board of Trustees, without the vote or consent of the Holders of
Municipal Preferred, may from time to time authorize and create, and
the Trust may from time to time issue, additional shares of any series
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 Trust; provided,
however, that if Moody's or S&P is not then rating the shares of
Municipal Preferred, the aggregate liquidation preference of all
Preferred Shares of the Trust outstanding after any such issuance,
exclusive of accumulated and unpaid dividends, may not exceed
$60,000,000) or (b) amend, alter or repeal the provisions of the
Declaration or the By-Laws, including this Section 12.1, whether by
merger, consolidation or otherwise, so as to materially affect any
preference, right or power of such shares of Municipal Preferred to the
Holders thereof; provided, however, that (i) none of the actions
permitted by the exception to (a) above will be deemed to affect such
preferences, rights or powers, (ii) a division of a share of Municipal
Preferred will be deemed to affect such preferences, rights or powers
only if the terms of such division adversely affect the Holders of
shares of Municipal Preferred and (iii) the authorization, creation and
issuance of classes or series of shares ranking junior to 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 Trust, will be deemed to affect such preferences,
rights or powers only if Moody's or S&P is then rating shares of
Municipal Preferred and such issuance would, at the time thereof, cause
the Trust 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 Trust shall
not, without the affirmative vote or consent of the Holders of at least
66 2/3% of the shares of Municipal Preferred outstanding at the time,
in person or by proxy, either in writing or at a meeting, voting as
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<PAGE> 41
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 Trust is solvent and does not foresee becoming insolvent.
(ii) 1940 Act Matters. Unless a higher percentage is provided
for in the Declaration or these By-Laws, (A) the affirmative vote of
the Holders of at least a majority of the Preferred Shares, including
Municipal Preferred, outstanding at the time, voting as a separate
class, shall be required to approve any conversion of the Trust from a
closed-end to an open-end investment company and (B) the affirmative
vote of the Holders of a "majority of the outstanding Preferred
Shares," including Municipal Preferred, voting as a separate class,
shall be required to approve any plan of reorganization (as such term
is used in the 1940 Act) adversely affecting such shares. The
affirmative vote of the Holders of a "majority of the outstanding
Preferred Shares," including Municipal Preferred, voting as a separate
class, shall be required to approve any action not described in the
first sentence of this paragraph 5(c)(ii) requiring a vote of security
holders of the Trust under Section 13(a) of the 1940 Act. For purposes
of the foregoing, "majority of the outstanding Preferred Shares" means
(i) 67% or more of such shares present at a meeting, if the Holders of
more than 50% of such shares are present or represented by proxy, or
(ii) more than 50% of such shares, whichever is less. In the event a
vote of Holders of Municipal Preferred is required pursuant to the
provisions of Section 13(a) of the 1940 Act, the Trust shall, not later
than ten Business Days prior to the date on which such vote is to be
taken, notify Moody's (if Moody's is then rating the shares of
Municipal Preferred) and S&P (if S&P is then rating the shares of
Municipal Preferred) that such vote is to be taken and the nature of
the action with respect to which such vote is to be taken. The Trust
shall, not later than ten Business Days after the date on which such
vote is taken, notify Moody's (if Moody's is then rating the shares of
Municipal Preferred) and S&P (if S&P is then rating the shares of
Municipal Preferred) of the results of such vote.
(iii) Separate Vote by Series. To the extent permitted by the
1940 Act, with respect to actions set forth in paragraph 5(c)(i) and
paragraph 5(c)(ii) above (including amendment, alteration or repeal of
the provisions of the Declaration of Trust or the ByLaws, whether by
merger, consolidation or otherwise) that would adversely affect the
rights of one or more series of Municipal Preferred (the "Affected
Series") in a manner different from any other series of Municipal
Preferred, the Trust will not approve any such action without the
affirmative vote or consent of the Holders of at least a majority of
the shares of each such Affected Series outstanding at the time, in
person or proxy, either in writing or at a meeting (each such Affected
Series voting as a separate class).
(d) Board May Take Certain Actions Without Shareholder Approval. The
Board of Trustees, without the vote or consent of the shareholders of the Trust,
may from time to time amend, alter or repeal any or all of the definitions of
the terms listed below, or any provision of this Section 12.1 viewed by Moody's
or S&P as a predicate for any such definition, and any such
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amendment, alteration or repeal will not be deemed to affect the preferences,
rights or powers of shares of Municipal Preferred or the Holders thereof;
provided, however, that the Board of Trustees receives written confirmation from
(i) Moody's (such confirmation being required to be obtained only in the event
Moody's is rating the shares of Municipal Preferred and in no event being
required to be obtained in the case of the definitions of (x) Deposit
Securities, Discounted Value, Receivables for Municipal Obligations Sold and
Other Issues as such terms apply to S&P Eligible Asset and (y) S&P Discount
Factor, S&P Eligible Asset, S&P Exposure Period and S&P Volatility Factor) and
(ii) S&P (such confirmation being required to be obtained only in the event S&P
is rating the shares of Municipal Preferred and in no event being required to be
obtained in the case of the definitions of (x) Discounted Value, Receivables for
Municipal Obligations Sold and Other Issues as such terms apply to Moody's
Eligible Asset, and (y) Moody's Discount Factor, Moody's Eligible Asset, Moody's
Exposure Period and Moody's Volatility Factor) that any such amendment,
alteration or repeal would not impair the ratings then assigned by Moody's or
S&P, as the case may be, to shares of Municipal Preferred:
Deposit Securities
Discounted Value
Escrowed Bonds
Market Value
Maximum Potential Gross-up Payment Liability
Municipal Preferred Basic Maintenance Amount
Municipal Preferred Basic Maintenance Cure Date
Municipal Preferred Basic Maintenance Report
Moody's Discount Factor
Moody's Eligible Asset
Moody's Exposure Period
Moody's Volatility Factor
1940 Act Cure Date
1940 Act Municipal Preferred Asset Coverage
Other Issues
Quarterly Valuation Date
Receivables for Municipal Obligations Sold
S&P Discount Factor
S&P Eligible Asset
S&P Exposure Period
S&P Volatility Factor
Valuation Date
Volatility Factor
(e) Voting Rights Set Forth Herein Are Sole Voting Rights. Unless
otherwise required by law, these By-Laws or by the Declaration, the Holders of
shares of Municipal Preferred shall not have any relative rights or preferences
or other special rights other than those specifically set forth herein.
(f) No Preemptive Rights or Cumulative Voting. The Holders of shares of
Municipal Preferred shall have no preemptive rights or rights to cumulative
voting.
(g) Voting for Trustees Sole Remedy for Trust's Failure to Pay
Dividends. In the event that the Trust fails to pay any dividends on the shares
of Municipal Preferred, the exclusive remedy of the Holders shall be the right
to vote for Trustees pursuant to the provisions of this paragraph 5.
(h) Holders Entitled to Vote. For purposes of determining any rights of
the Holders to vote on any matter, whether such right is created by this Section
12.1, by the other provisions of these By-Laws or the Declaration, by statute or
otherwise, no Holder shall be entitled to vote
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any share of Municipal Preferred and no share of Municipal Preferred shall be
deemed to be "outstanding" for the purpose of voting or determining the number
of shares required to constitute a quorum if, prior to or concurrently with the
time of determination of shares entitled to vote or shares deemed outstanding
for quorum purposes, as the case may be, the requisite Notice of Redemption with
respect to such shares shall have been mailed as provided in paragraph 11(c) of
Part I of this Section 12.1 and the Redemption Price for the redemption of such
shares shall have been deposited in trust with the Auction Agent for that
purpose. No shares of Municipal Preferred held by the Trust or any affiliate of
the Trust (except for shares held by a Broker-Dealer that is an affiliate of the
Trust for the account of its customers) shall have any voting rights or be
deemed to be outstanding for voting or other purposes.
(i) Notwithstanding any provision of these By-Laws to the contrary,
neither the Holders of Municipal Preferred, nor the Holders of any one or more
series thereof, shall be entitled to vote as a separate class with respect to
any matter, if such separate class vote is prohibited by the 1940 Act.
6. 1940 Act Municipal Preferred Asset Coverage.
The Trust shall maintain, as of the last Business Day of each month in
which any share of Municipal Preferred is outstanding, the 1940 Act Municipal
Preferred Asset Coverage.
7. Municipal Preferred Basic Maintenance Amount.
(a) So long as shares of Municipal Preferred are outstanding, the Trust
shall maintain, on each Valuation Date, and shall verify to its satisfaction
that it is maintaining on such Valuation Date, (i) S&P Eligible Assets having an
aggregate Discounted Value equal to or greater than the Municipal Preferred
Basic Maintenance Amount (if S&P is then rating the shares of Municipal
Preferred) and (ii) Moody's Eligible Assets having an aggregate Discounted Value
equal to or greater than the Municipal Preferred Basic Maintenance Amount (if
Moody's is then rating the shares of Municipal Preferred).
(b) On or before 5:00 P.M., New York City time, on the third Business
Day after a Valuation Date on which the Trust fails to satisfy the 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 Trust shall complete and deliver to S&P (if S&P is then rating the
shares of Municipal Preferred), Moody's (if Moody's is then rating the shares of
Municipal Preferred) and the Auction Agent (if either S&P or Moody's is then
rating the shares of Municipal Preferred) a Municipal Preferred Basic
Maintenance Report as of the date of such failure or such Municipal Preferred
Basic Maintenance Cure Date, as the case may be, which will be deemed to have
been delivered to the Auction Agent if the Auction Agent receives a copy of
telecopy, telex or other electronic transcription thereof and on the same day
the Trust mails to the Auction Agent for delivery on the next Business Day the
full Municipal Preferred Basic Maintenance Report.
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The Trust shall also deliver a Municipal Preferred Basic Maintenance
Report to (i) the Auction Agent (if either Moody's or S&P is then rating the
shares of Municipal Preferred) as of (A) the fifteenth day of each month (or, if
such day is not a Business Day, the next succeeding Business Day) and (B) the
last Business Day of each month, (ii) Moody's (if Moody's is then rating the
shares of Municipal Preferred) and S&P (if S&P is then rating the shares of
Municipal Preferred) as of any Quarterly Valuation Date, in each case on or
before the third Business Day after such day, and (iii) S&P and Moody's, if and
when requested for any Valuation Date, on or before the third Business Day after
such request. A failure by the Trust to deliver a Municipal Preferred Basic
Maintenance Report pursuant to the preceding sentence shall be deemed to be
delivery of a Municipal Preferred Basic Maintenance Report indicating the
Discounted Value for all assets of the Trust is less than the Municipal
Preferred Basic Maintenance Amount, as of the relevant Valuation Date.
(c) Within ten Business Days after the date of delivery of a Municipal
Preferred Basic Maintenance Report in accordance with subparagraph (b) of this
paragraph 7 relating to a Quarterly Valuation Date, the Trust shall cause the
Independent Accountant to confirm in writing to S&P (if S&P is then rating the
shares of Municipal Preferred), Moody's (if Moody's is then rating the shares of
Municipal Preferred) and the Auction Agent (if either S&P or Moody's is then
rating the shares of Municipal Preferred) (i) the mathematical accuracy of the
calculations reflected in such Report (and in any other Municipal Preferred
Basic Maintenance Report, randomly selected by the Independent Accountant, that
was delivered by the Trust during the quarter ending on such Quarterly Valuation
Date) and (ii) that, in such Report (and in such randomly selected Report), the
Trust determined in accordance with this paragraph whether the Trust had, at
such Quarterly Valuation Date (and at the Valuation Date addressed in such
randomly-selected Report), S&P Eligible Assets (if S&P is then rating the shares
of Municipal Preferred) of an aggregate Discounted Value at least equal to the
Municipal Preferred Basic Maintenance Amount and Moody's Eligible Assets (if
Moody's is then rating the shares of Municipal Preferred) of an aggregate
Discounted Value at least equal to the Municipal Preferred Basic Maintenance
Amount (such confirmation being herein called the "Accountant's Confirmation").
(d) Within ten Business Days after the date of delivery of a Municipal
Preferred Basic Maintenance Report in accordance with subparagraph (b) of this
paragraph 7 relating to any Valuation Date on which the Trust failed to satisfy
the Municipal Preferred Basic Maintenance Amount, and relating to the Municipal
Preferred Basic Maintenance Cure Date with respect to such failure to satisfy
the Municipal Preferred Basic Maintenance Amount, the Trust shall cause the
Independent Accountant to provide to S&P (if S&P is then rating the shares of
Municipal Preferred), Moody's (if Moody's is then rating the shares of Municipal
Preferred) and the Auction Agent (if either S&P or Moody's is then rating the
shares of Municipal Preferred) an Accountant's Confirmation as to such Municipal
Preferred Basic Maintenance Report.
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(e) If any Accountant's Confirmation delivered pursuant to subparagraph
(c) or (d) of this paragraph 7 shows that an error was made in the Municipal
Preferred Basic Maintenance Report for a particular Valuation Date for which
such Accountant's Confirmation was required to be delivered, or shows that a
lower aggregate Discounted Value for the aggregate of all S&P Eligible Assets
(if S&P is then rating the shares of Municipal Preferred) or Moody's Eligible
Assets (if Moody's is then rating the shares of Municipal Preferred), as the
case may be, of the Trust was determined by the Independent Accountant, the
calculation or determination made by such Independent Accountant shall be final
and conclusive and shall be binding on the Trust, and the Trust shall
accordingly amend and deliver the Municipal Preferred Basic Maintenance Report
to S&P (if S&P is then rating the shares of Municipal Preferred), Moody's (if
Moody's is then rating the shares of Municipal Preferred) and the Auction Agent
(if either S&P or Moody's is then rating the shares of Municipal Preferred)
promptly following receipt by the Trust of such Accountant's Confirmation.
(f) On or before 5:00 p.m., New York City time, on the first Business
Day after the Date of Original Issue of any shares of Municipal Preferred, the
Trust shall complete and deliver to S&P (if S&P is then rating the shares of
Municipal Preferred) and Moody's (if Moody's is then rating the shares of
Municipal Preferred) a Municipal Preferred Basic Maintenance Report as of the
close of business on such Date of Original Issue. Within five Business Days of
such Date of Original Issue, the Trust shall cause the Independent Accountant to
confirm in writing to S&P (if S&P is then rating the shares of Municipal
Preferred) (i) the mathematical accuracy of the calculations reflected in such
Report and (ii) that the Discounted Value of S&P Eligible Assets reflected
thereon equals or exceeds the Municipal Preferred Basic Maintenance Amount
reflected thereon.
(g) On or before 5:00 p.m., New York City time, on the third Business
Day after either (i) the Trust shall have redeemed Common Shares or (ii) the
ratio of the Discounted Value of S&P Eligible Assets or the Discounted Value of
Moody's Eligible Assets to the Municipal Preferred Basic Maintenance Amount is
less than or equal to 105%, the Trust shall complete and deliver to S&P (if S&P
is then rating the shares of Municipal Preferred) or Moody's (if Moody's is then
rating the shares of Municipal Preferred), as the case may be, a Municipal
Preferred Basic Maintenance Report as of the date of either such event.
8. [Reserved].
9. Restrictions on Dividends and Other Distributions.
(a) Dividends on Preferred Shares Other Than Municipal Preferred.
Except as set forth in the next sentence, no dividends shall be declared or paid
or set apart for payment on the shares of any class or series of shares of
beneficial interest of the Trust 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
each series of Municipal Preferred through its most recent Dividend Payment
Date. When dividends are not
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paid in full upon the shares of each series of Municipal Preferred through its
most recent Dividend Payment Date or upon the shares of any other class or
series of shares of beneficial interest of the Trust 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 of beneficial
interest 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 of beneficial interest 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 of beneficial interest 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
shares for the Dividend Periods during which dividends were not paid in full).
(b) Dividends and Other Distributions With Respect to Common Shares
Under the 1940 Act. The Board of Trustees shall not declare any dividend (except
a dividend payable in Common Shares), or declare any other distribution, upon
the Common Shares, or purchase Common Shares, unless in every such case the
Preferred Shares have, at the time of any such declaration or purchase, an asset
coverage (as defined in and determined pursuant to the 1940 Act) of at least
200% (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 or stock of a closed-end investment company as a condition of declaring
dividends on its common shares or stock) after deducting the amount of such
dividend, distribution or purchase price, as the case may be.
(c) Other Restrictions on Dividends and Other Distributions. For so
long as any share of Municipal Preferred is outstanding, and except as set forth
in subparagraph (a) of this paragraph 9 and paragraph 12(c) of Part I of this
Section 12.1, (A) the Trust shall not declare, pay or set apart for payment any
dividend or other distribution (other than a dividend or distribution paid in
shares of, or 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) in respect of the Common Shares or any
other shares of the Trust 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, 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
Trust 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), or any such parity shares (except by conversion into or exchange
for shares of the Trust ranking junior to or on a parity with Municipal
Preferred as to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up), unless (i) full cumulative dividends on
shares of each series of Municipal Preferred through its most recently ended
Dividend Period shall have been paid or shall have been declared and sufficient
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funds for the payment thereof deposited with the Auction Agent and (ii) the
Trust has redeemed the full number of shares of Municipal Preferred required to
be redeemed by any provision for mandatory redemption pertaining thereto, and
(B) the Trust shall not declare, pay or set apart for payment any dividend or
other distribution (other than a dividend or distribution paid in shares of, or
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) in respect of Common Shares or any other shares of
the Trust ranking junior to shares of Municipal Preferred as to the payment of
dividends or the distribution of assets upon dissolution, liquidation or winding
up, 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 Trust ranking junior to shares of
Municipal Preferred as to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up), unless immediately after
such transaction the Discounted Value of Moody's Eligible Assets (if Moody's is
then rating the shares of Municipal Preferred) and S&P Eligible Assets (if S&P
is then rating the shares of Municipal Preferred) would each at least equal the
Municipal Preferred Basic Maintenance Amount.
10. Rating Agency Restrictions.
For so long as any shares of Municipal Preferred are outstanding and
Moody's or S&P, or both, are rating such shares, the Trust will not, unless it
has received written confirmation from Moody's or S&P, or both, as appropriate,
that any such action would not impair the ratings then assigned by such rating
agency to such shares, engage in any one or more of the following transactions:
(a) 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 except that the
Trust may purchase or sell futures contracts based on the Bond Buyer Municipal
Bond Index (the "Municipal Index") or United States Treasury Bonds or Notes
("Treasury Bonds") and write, purchase or sell put and call options on such
contracts (collectively, "Hedging Transactions"), subject to the following
limitations:
(i) the Trust 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 Trust by the Trust's taking an
opposite position thereto ("Closing Transactions")), which would cause
the Trust at the time of such transaction to own or have sold the least
of (A) more than 1,000 outstanding futures contracts based on the
Municipal Index, (B) outstanding futures contracts based on the
Municipal Index exceeding in number 25% of the quotient of the Market
Value of the Trust's total assets divided by $1,000 or (C) outstanding
futures contracts based on the Municipal Index exceeding in number 10%
of the average number of daily open interest 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.
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(ii) the Trust will not engage in any Hedging Transaction
based on Treasury Bonds (other than Closing Transactions) which would
cause the Trust at the time of such transaction to own or have sold the
lesser of (A) outstanding futures contracts based on Treasury Bonds
exceeding in number 50% of the quotient of the Market Value of the
Trust's total assets divided by $100,000 ($200,000 in the case of a
two-year United States Treasury Note) or (B) outstanding futures
contracts based on Treasury Bonds exceeding in number 10% of the
average number of daily traded futures contracts based on Treasury
Bonds in the 30 days preceding the time of effecting such transaction
as reported by The Wall Street Journal;
(iii) the Trust will engage in Closing Transactions to close
out any outstanding futures contract which the Trust owns or has sold
or any outstanding option thereon owned by the Trust in the event (A)
the Trust does not have S&P Eligible Assets 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 Trust is required to pay
Variation Margin on the second such Valuation Date;
(iv) the Trust will engage in a Closing Transaction to close
out any outstanding futures contract or option thereon in the month
prior to the delivery month under the terms of such futures contract or
option thereon unless the Trust holds the securities deliverable under
such terms; and
(v) when the Trust writes a futures contract or option
thereon, it will either maintain an amount of cash, cash equivalents or
high grade (rated A or better by S&P or Moody's, as the case may be),
fixed-income securities in a segregated account with the Trust's
custodian, so that the amount so segregated plus the amount of Initial
Margin and Variation Margin held in the account of or on behalf of the
Trust's broker with respect to such futures contract or option equals
the Market Value of the futures contract or option, or, in the event
the Trust writes a futures contract or option thereon which requires
delivery of an underlying security, it shall hold such underlying
security in its portfolio.
For purposes of determining whether the Trust has S&P Eligible Assets
or Moody's Eligible Assets, as the case may be, with a Discounted Value that
equals or exceeds the Municipal Preferred Basic Maintenance Amount, the
Discounted Value of cash or securities held for the payment of Initial Margin or
Variation Margin shall be zero and the aggregate Discounted Value of S&P
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 Trust plus (II) 25% of the aggregate settlement value, as
marked to market, of any outstanding futures contracts based on Treasury Bonds
which contracts are owned by the Trust.
(b) borrow money, except that the Trust may, without obtaining the
written confirmation described above, borrow money for the purpose of clearing
securities transactions if
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(i) 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 under subparagraph (F) under the
definition of that term in Part I of this Section 12.1) and (ii) such borrowing
(A) 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 (B) is for "temporary purposes," is evidenced by a
promissory note or other evidence of indebtedness and is an amount not exceeding
5% of the value of the total assets of the Trust 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;
(c) issue additional shares of any series of Municipal Preferred or any
class or series of 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 Trust, or reissue
any shares of Municipal Preferred previously purchased or redeemed by the Trust;
(d) engage in any short sales of securities;
(e) lend securities;
(f) merge or consolidate into or with any corporation;
(g) change the pricing service (currently both Muller Data Corporation
and Standard & Poor's J.J. Kenny Evaluation Services are used by the Trust)
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
(h) enter into reverse repurchase agreements.
11. Redemption.
(a) Optional Redemption.
(i) Subject to the provisions of subparagraph (v) of this
subparagraph (a), shares of Municipal Preferred of any series may be
redeemed, at the option of the Trust, as a whole or from time to time
in part, on the second Business Day preceding any Dividend Payment Date
for shares of such series, out of funds legally available therefor, 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 a series of Municipal
Preferred may not be redeemed in part if after such partial redemption
fewer
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than 500 shares of such series remain outstanding; (2) unless otherwise
provided herein, shares of a series of Municipal Preferred are
redeemable by the Trust 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 subparagraph (ii) of
this subparagraph (a), the Notice of Special Rate Period relating to a
Special Rate Period of shares of a series of Municipal Preferred, as
delivered to the Auction Agent and filed with the Secretary of the
Trust, may provide that shares of such series shall not be redeemable
during the whole or any part of such Special Rate Period (except as
provided in subparagraph (iv) of this subparagraph (a)) 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").
(ii) A Notice of Special Rate Period relating to shares of a
series of Municipal Preferred for a Special Rate Period thereof may
contain Special Redemption Provisions only if the Trust's Board of
Trustees, after consultation with the Broker-Dealer or Broker-Dealers
for such Special Rate Period of shares of such series, determines that
such Special Redemption Provisions are in the best interest of the
Trust.
(iii) If fewer than all of the outstanding shares of a series
of Municipal Preferred are to be redeemed pursuant to subparagraph (i)
of this subparagraph (a), the number of shares of such series to be
redeemed shall be determined by the Board of Trustees, and such shares
shall be redeemed pro rata from the Holders of shares of such series in
proportion to the number of shares of such series held by such Holders.
(iv) Subject to the provisions of subparagraph (v) of this
subparagraph (a), shares of any series of Municipal Preferred may be
redeemed, at the option of the Trust, as a whole but not in part, out
of funds legally available therefor, on the first day following any
Dividend Period thereof included in a Rate Period consisting of more
than 364 Rate Period Days if, on the date of determination of the
Applicable Rate for shares of such series 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 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) to the date fixed for redemption.
(v) The Trust may not on any date mail a Notice of Redemption
pursuant to subparagraph (c) of this paragraph 11 in respect of a
redemption contemplated to be effected pursuant to this subparagraph
(a) unless on such date (a) the Trust has available Deposit Securities
with maturity or tender dates not later than the day preceding the
applicable redemption date and having a value not less than the amount
(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
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the Discounted Value of S&P Eligible Assets (if S&P is then rating the
shares of Municipal Preferred) each at least equal the Municipal
Preferred Basic Maintenance Amount, and would at least equal the
Municipal Preferred Basic Maintenance Amount immediately subsequent to
such redemption if such redemption were to occur on such date. For
purposes of determining in clause (b) of the preceding sentence whether
the Discounted Value of Moody's Eligible Assets at least equals the
Municipal Preferred Basic Maintenance Amount, the Moody's Discount
Factors applicable to Moody's Eligible Assets shall be determined by
reference to the first Exposure Period longer than the Exposure Period
then applicable to the Trust, as described in the definition of Moody's
Discount Factor herein.
(b) Mandatory Redemption. The Trust shall 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, certain of the shares of Municipal Preferred,
if the Trust fails to have either Moody's Eligible Assets with a Discounted
Value, or S&P Eligible Assets with a Discounted Value, greater than or equal to
the Municipal Preferred Basic Maintenance Amount or fails to maintain the 1940
Act Municipal Preferred Asset Coverage, in accordance with the requirements of
the rating agency or 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, as the case may be (the "Cure Date"). The
number of shares of Municipal Preferred to be redeemed shall be equal to the
lesser of (i) 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 Trust's having both
Moody's Eligible Assets with a Discounted Value, and S&P Eligible Assets with a
Discounted Value, greater than or equal to the Municipal Preferred Basic
Maintenance Amount or maintaining 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
shall be redeemed), and (ii) 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 accordance with the Declaration, these By-Laws and applicable law.
In determining the shares of Municipal Preferred required to be redeemed in
accordance with the foregoing, the Trust shall allocate the number 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 (and, then pro rata
among each series of Municipal Preferred) subject to redemption or retirement.
The Trust shall effect such redemption on the date fixed by the Trust therefor,
which date shall not be earlier than 20 days nor later than 40 days after such
Cure Date, except that if the Trust does not have funds legally available for
the redemption of all of the required number of shares of Municipal Preferred
and other Preferred Shares which are subject to redemption or retirement or the
Trust otherwise is unable to effect
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such redemption on or prior to 40 days after such Cure Date, the Trust shall
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 a series
of Municipal Preferred are to be redeemed pursuant to this subparagraph (b), the
number of shares of such series to be redeemed shall be redeemed pro rata from
the Holders of shares of such series in proportion to the number of shares of
such series held by such Holders.
(c) Notice of Redemption. If the Trust shall determine or be required
to redeem shares of a series of Municipal Preferred pursuant to subparagraph (a)
or (b) of this paragraph 11, it shall mail a Notice of Redemption with respect
to such redemption by first class mail, postage prepaid, to each Holder of the
shares of such series to be redeemed, at such Holder's address as the same
appears on the record books of the Trust on the record date established by the
Board of Trustees. Such Notice of Redemption shall be so mailed not less than 20
nor more than 45 days prior to the date fixed for redemption. Each such Notice
of Redemption shall state: (i) the redemption date; (ii) the number of shares of
Municipal Preferred to be redeemed and the series thereof; (iii) the CUSIP
number for shares of such series; (iv) the Redemption Price; (v) the place or
places where the certificate(s) for such shares (properly endorsed or assigned
for transfer, if the Board of Trustees shall so require and the Notice of
Redemption 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 this paragraph 11 under
which such redemption is made. If fewer than all shares of a series of Municipal
Preferred held by any Holder are to be redeemed, the Notice of Redemption mailed
to such Holder shall also specify the number of shares of such series to be
redeemed from such Holder. The Trust may provide in any Notice of Redemption
relating to an optional redemption contemplated to be effected pursuant to
subparagraph (a) of this paragraph 11 that such redemption is subject to one or
more conditions precedent and that the Trust shall not be required to make 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.
(d) No Redemption Under Certain Circumstances. Notwithstanding the
provisions of subparagraphs (a) or (b) of this paragraph 11, if any dividends on
shares of a series of Municipal Preferred (whether or not earned or declared)
are in arrears, no shares of such series shall be redeemed unless all
outstanding shares of such series are simultaneously redeemed, and the Trust
shall not purchase or otherwise acquire any shares of such series; provided,
however, that the foregoing shall not prevent the purchase or acquisition of all
outstanding shares of such series 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 such series.
(e) Absence of Funds Available for Redemption. To the extent that any
redemption for which Notice of Redemption has been mailed is not made by reason
of the absence of legally available funds therefor in accordance with the
Declaration, these By-Laws and applicable law, such redemption shall be made as
soon as practicable to the extent such funds become available. Failure to redeem
shares of Municipal Preferred shall be deemed to occur if at any time after the
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date specified for redemption in a Notice of Redemption the Trust shall have
failed, for any reason whatsoever, to deposit in trust with the Auction Agent
the Redemption Price with respect to any shares of which such Notice of
Redemption has been mailed; provided, however, that the foregoing shall not
apply in the case of the Trust's failure to deposit in trust with the Auction
Agent the Redemption Price with respect to any shares where (1) the Notice of
Redemption relating to such redemption provided that such redemption was subject
to one or more conditions precedent and (2) any such condition precedent shall
not have been satisfied at the time or times and in the manner specified in such
Notice of Redemption. Notwithstanding the fact that the Trust 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
shall include those shares of Municipal Preferred for which a Notice of
Redemption has been mailed.
(f) Auction Agent as Trustee of Redemption Payments by Trust. All
moneys paid to the Auction Agent for payment of the Redemption Price of shares
of Municipal Preferred called for redemption shall be held in trust by the
Auction Agent for the benefit of Holders of shares so to be redeemed.
(g) Shares for Which Notice of Redemption Has Been Given Are No Longer
Outstanding. Provided a Notice of Redemption has been mailed pursuant to
subparagraph (c) of this paragraph 11, 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 shall cease to accumulate and
such shares shall no longer be deemed to be outstanding for any purpose, and all
rights of the Holders of the shares so called for redemption shall cease and
terminate, except the right of such Holders to receive the Redemption Price, but
without any interest or other additional amount, except as provided in
paragraphs 2(e)(i) and 3 of Part I of this Section 12.1. 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 of Redemption 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 Trust shall 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 shall, to the extent permitted by law, be repaid to the Trust,
after which time the Holders of shares of Municipal Preferred so called for
redemption may look only to the Trust for payment of the Redemption Price and
all other amounts to which they may be entitled. The Trust shall be entitled to
receive, from time to time after the date fixed for redemption, any interest on
the funds so deposited.
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(h) Compliance With Applicable Law. In effecting any redemption
pursuant to this paragraph 11, the Trust shall use its best efforts to comply
with all applicable conditions precedent to effecting such redemption under the
1940 Act and any applicable Massachusetts law, but shall effect no redemption
except in accordance with the 1940 Act and any applicable Massachusetts law.
(i) Only Whole Shares of Municipal Preferred May Be Redeemed. In the
case of any redemption pursuant to this paragraph 11, only whole shares of
Municipal Preferred shall be redeemed, and in the event that any provision of
the Declaration or these By-Laws would require redemption of a fractional share,
the Auction Agent shall be authorized to round up so that only whole shares are
redeemed.
12. Liquidation Rights.
(a) Ranking. The shares of a series of Municipal Preferred shall 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
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust.
(b) Distributions Upon Liquidation. Upon the dissolution, liquidation
or winding up of the affairs of the Trust, whether voluntary or involuntary, the
Holders of shares of Municipal Preferred then outstanding shall be entitled to
receive and to be paid out of the assets of the Trust 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 Trust ranking junior to the
Municipal Preferred upon dissolution, liquidation or winding up, an amount equal
to the Liquidation Preference with respect to such shares 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 distributions in same-day funds,
together with any payments required to be made pursuant to paragraph 3 of Part I
of this Section 12.1 in connection with the liquidation of the Trust. After the
payment to the Holders of the shares of Municipal Preferred of the full
preferential amounts provided for in this subparagraph (b), the holders of
Municipal Preferred as such shall have no right or claim to any of the remaining
assets of the Trust.
(c) Pro Rata Distributions. In the event the assets of the Trust
available for distribution to the Holders of shares of Municipal Preferred upon
any dissolution, liquidation or winding up of the affairs of the Trust, whether
voluntary or involuntary, shall be insufficient to pay in full all amounts to
which such Holders are entitled pursuant to subparagraph (b) of this paragraph
12, no such distribution shall be made on account of any shares of any other
class or series of Preferred Shares ranking on a parity with the shares of
Municipal Preferred with respect to the distribution of assets 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.
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(d) Rights of Junior Shares. Subject to the rights of the holders of
shares 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 Trust, after
payment shall have been made in full to the Holders of the shares of Municipal
Preferred as provided in subparagraph (b) of this paragraph 12, 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 of the affairs of the Trust 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.
(e) Certain Events Not Constituting Liquidation. Neither the sale of
all or substantially all of the property or business of the Trust, nor the
merger or consolidation of the Trust 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 Trust shall be a dissolution,
liquidation or winding up, whether voluntary or involuntary, for the purposes of
this paragraph 12.
13. Miscellaneous.
(a) Amendment of this Section 12.1 to Add Additional Series. Subject to
the provisions of subparagraph (c) of paragraph 10 of Part I of this Section
12.1, the Board of Trustees may, by resolution duly adopted, without shareholder
approval (except as otherwise provided by this Section 12.1 or required by
applicable law), amend Section 12.1 to (1) reflect any amendment hereto which
the Board of Trustees is entitled to adopt pursuant to the terms of this Section
12.1 without shareholder approval or (2) add additional series of Municipal
Preferred or additional shares of a series of Municipal Preferred (and terms
relating thereto) to the series and shares of Municipal Preferred theretofore
described thereon. Each such additional series and all such additional shares
shall be governed by the terms of this Section 12.1.
(b) [Reserved]
(c) No Fractional Shares. No fractional shares of Municipal Preferred
shall be issued.
(d) Status of Shares of Municipal Preferred Redeemed, Exchanged or
Otherwise Acquired by the Trust. Shares of Municipal Preferred which are
redeemed, exchanged or otherwise acquired by the Trust shall return to the
status of authorized and unissued Preferred Shares without designation as to
series.
(e) Board May Resolve Ambiguities. To the extent permitted by
applicable law, the Board of Trustees may interpret or adjust the provisions of
this Section 12.1 to resolve any
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inconsistency or ambiguity or to remedy any formal defect, and may amend this
Section 12.1 with respect to any series of Municipal Preferred prior to this
issuance of shares of such series.
(f) Headings Not Determinative. The headings contained in this Section
12.1 are for convenience of reference only and shall not affect the meaning or
interpretation of this Section 12.1.
(g) Notices. All notices or communications, unless otherwise specified
in these ByLaws or this Section 12.1, shall be sufficiently given if in writing
and delivered in person or mailed by first-class mail, postage prepaid.
PART II
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
Owner 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 which 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 Owner which such Beneficial
Owner offers to sell without regard to the Applicable Rate for
shares of such series for the next succeeding 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
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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) such number or a lesser number of Outstanding
shares of such series to be determined as set forth in
paragraph 4(a)(iv) of Part II of this Section 12.1 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) of
Part II of this Section 12.1 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:
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(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) of
Part II of this Section 12.1 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) of Part II of this
Section 12.1 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 Trust) with the provisions of paragraph 7 of Part II of this
Section 12.1 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) of
Part II of this Section 12.1 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 Trust) as an Existing Holder in respect of shares subject to Orders
submitted or deemed submitted to it by Beneficial Owners and as a Potential
Holder in respect of shares subject to Orders submitted to it by Potential
Beneficial Owners, and shall specify with respect to each Order for such shares:
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(i) the name of the Bidder placing such Order (which shall be
the Broker-Dealer unless otherwise permitted by the Trust);
(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:
(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
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such Existing Holder, and if the number of shares of such series
subject to such Hold Order exceeds the number of Outstanding shares of
such series held by such Existing Holder, the number of shares subject
to each such Hold Order shall be reduced pro rata to cover the number
of Outstanding shares of such series held by such Existing Holder;
(ii) (A) any Bid for shares of such series shall be considered
valid up to and including the excess of the number of
Outstanding shares of such series held by such Existing Holder
over the number of shares of such series subject to any Hold
Orders referred to in clause (i) above;
(B) subject to subclause (A), if more than one Bid of
an Existing Holder for shares of such series is submitted to
the Auction Agent with the same rate and the number of
Outstanding shares of such series subject to such Bids is
greater than such excess, such Bids shall be considered valid
up to and including the amount of such excess, and the number
of shares of such series subject to each Bid with the same
rate shall be reduced pro rata to cover the number of shares
of such series equal to such excess;
(C) subject to subclauses (A) and (B), if more than
one Bid of an Existing Holder for shares of such series is
submitted to the Auction Agent with different rates, such Bids
shall be considered valid in the ascending order of their
respective rates up to and including the amount of such
excess; and
(D) in any such event, the number, if any, of such
Outstanding shares of such series subject to any portion of
Bids considered not valid in whole or in part under this
clause (ii) 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.
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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 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 shall determine for such series:
(i) the excess of the number of Outstanding shares of such
series over the number of Outstanding shares of such series subject to
Submitted Hold Orders (such excess being hereinafter referred to as the
"Available Municipal Preferred" of such series);
(ii) from the Submitted Orders for shares of such series
whether:
(A) the number of Outstanding shares of such series
subject to Submitted Bids of Potential Holders specifying one
or more rates equal to or lower than the Maximum Rate for
shares of such series;
exceeds or is equal to the sum of:
(B) the number of Outstanding shares of such series
subject to Submitted Bids of Existing Holders specifying one
or more rates higher than the Maximum Rate for shares of such
series; and
(C) the number of Outstanding shares of such series
subject to Submitted Sell Orders
(in the event such excess or such equality exists (other than
because the number of shares of such series in subclauses (B)
and (C) above is zero because all of the Outstanding shares of
such series are subject to Submitted Hold Orders), such
Submitted Bids in subclause (A) above being hereinafter
referred to collectively as "Sufficient Clearing Bids" for
shares of such series); and
(iii) if Sufficient Clearing Bids for shares of such series
exist, the lowest rate specified in such Submitted Bids (the "Winning
Bid Rate" for shares of such series) which if:
(A) (I) each such Submitted Bid of Existing Holders
specifying such lowest rate and (II) all other such Submitted
Bids of Existing Holders specifying
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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 Trust 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
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Federal corporate income tax rate applicable to ordinary income; provided,
however, that if the Trust 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 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, whichever is
greater, multiplied by the Taxable Yield Rate. For purposes of the foregoing,
"Taxable Yield Rate" means the rate determined by (a) dividing the amount of
Taxable Income available for distribution per such share of Municipal Preferred
by the number of days in the Dividend Period in respect of which such Taxable
Income is contemplated to be distributed, (b) multiplying the amount determined
in (a) above by 365 (in the case of a Dividend Period of 7 Rate Period Days) or
360 (in the case of any other Dividend Period), and (c) dividing the amount
determined in (b) above by $25,000.
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 subparagraph (a) of paragraph 3 of Part II of
this Section 12.1, 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;
-63-
<PAGE> 64
(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 share 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 subparagraph (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 made by 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 of Municipal Preferred subject to such
Submitted Bids and the denominator of which shall be the aggregate
number of Outstanding shares of 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 order of
priority and all other Submitted Bids for shares of such series shall be
rejected:
(i) Existing 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 rejected, thus entitling such Existing
Holders to continue to hold the shares of Municipal Preferred subject
to such Submitted Bids;
-64-
<PAGE> 65
(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 Bids 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
paragraph (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 number 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
-65-
<PAGE> 66
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.
(g) Neither the Trust 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 Trust 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 Trust shall, in the case of a
Minimum Rate Period or a Special Rate Period of 28 Rate Period Days or fewer,
and may, in the case of any other Special Rate Period, 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 Trust,
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 Trust to so act, shall be
in each case a commercial bank, trust company or other financial institution
independent of the Trust and its affiliates (which however, may engage or have
engaged in business transactions with the Trust or its affiliates) and at no
time shall the Trust 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
-66-
<PAGE> 67
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 Trust, 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 in Part II of this Section 12.1 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 Trust) 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
Trust to any Person other than the Securities Depository or its nominee.
ARTICLE 13
Amendments
These By-Laws may be amended or replaced, in whole or in part, by a
majority of the Trustees then in office at any meeting of the Trustees, or by
one or more writings signed by such a majority. Any action required to be taken
by a majority of the Trustees under this Article may also be taken by a
committee of the Trustees duly appointed for the purpose.
-67-
<PAGE> 1
Exhibit (d)(2)
T
COLONIAL NEW YORK INSURED MUNICIPAL FUND
SHARE CERTIFICATE
THIS CERTIFICATE IS TRANSFERABLE IN BOSTON, MA OR NEW YORK, NY
SHARE(S) OF BENEFICIAL INTEREST CUSIP 195836 10 1
NO PAR VALUE SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES that
is the owner of
COLONIAL NEW YORK INSURED MUNICIPAL FUND, the said shares being issued, received
and held under and subject to the terms and provisions of the Agreement and
Declaration of Trust dated August 10, 1999, establishing Colonial New York
Insured Municipal Fund, and all amendments thereto, copies of which are on file
with the Secretary of the Commonwealth of Massachusetts. The said owner by
accepting this certificate agrees to and is bound by all of the said terms and
provisions. The shares represented hereby are transferable in writing by the
owner thereof in person or by attorney upon surrender of this certificate to the
Fund properly endorsed for transfer. This certificate is executed on behalf of
the Trustees of the Fund as Trustees and not individually and the obligations
hereof are not binding upon any of the Trustees, officers or shareholders of the
Trust individually but are binding only upon the assets and property of the
Trust. This certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Trust and the facsimile signatures of its duly
authorized officers.
Dated:
/s/ Timothy J. Jacoby /s/ Stephen E. Gibson
Treasurer President
Countersigned and Registered:
BANKBOSTON, N.A.
Transfer Agent
and Registrar,
By
Authorized Signature.
<PAGE> 2
EXPLANATION OF ABBREVIATIONS
The following abbreviations when used in the form of ownership on the face
of this certificate shall be construed as though they were written out in full
according to applicable laws or regulations. Abbreviations in addition to those
appearing below, may be used.
<TABLE>
<CAPTION>
Abbreviation Equivalent Abbreviation Equivalent
- ------------ ---------- ------------ ----------
<S> <C> <C> <C>
JT TEN As joint tenants, with right of TEN IN COM As tenants in common
survivorship and not as tenants in TEN BY ENT As tenants by the entireties
common UNIF TRANSFERS MIN ACT Uniform Transfers to Minors
</TABLE>
<TABLE>
<CAPTION>
Abbreviation Equivalent Abbreviation Equivalent
- ------------ ---------- ------------ ----------
<S> <C> <C> <C>
ADM Administrator(s) FDN Foundation
Administratrix PL Public Law
AGMT Agreement TR (As) trustee(s), for, of
CUST Custodian for UA Under Agreement
EST Estate, Of estate of UW Under will of, Of will of,
EX Executor(s), Executrix Under last will & Testament
FBO For the benefit of
</TABLE>
- --------------------------------------------------------------------------------
TRANSFER FOR
FOR VALUE RECEIVED, ______________________ hereby sell, assign and transfer unto
(I/We)
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
________________________________________________________________________________
________________________________________________________________________________
Please print or typewrite name and address (including postal zip code of
assignee)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
________________________________________________________________________________
represented by this Certificate and do hereby irrevocably constitute and appoint
______________________________________________________________________ Attorney,
to transfer said shares on the books of the Fund with full power of substitution
in the premises.
Dated: ________________________________________
SIGNATURE GUARANTEED BY Signature(s)____________________________
(The signature to this assignment must
correspond with the name as written upon
the face of this Certificate in every
particular, without alteration or
enlargement or any change whatsoever. If
more then one owner, all must sign).
_____________________________________
(Signature must be guaranteed by a commercial bank or trust company or member
firm of any national stock exchange).
IMPORTANT NOTICE:
When you sign your name to the Transfer Form without filling in the name of
your "Assignee" this certificate becomes fully negotiable, similar to a check
endorsed in blank. Therefore, to safeguard a signed certificate, it is
recommended that you fill in the name of the new owner in the "Assignee" space.
Alternatively, instead of using this Transfer Form, you may sign a separate
"stock power" form and then mail the unsigned certificate and the signed "stock
power" in separate envelopes. For added protection, use registered mail for a
certificate.
<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 NEW YORK 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 NEW YORK 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 (h)
EXECUTION COPY
COLONIAL NEW YORK INSURED MUNICIPAL FUND
_________ Shares
Common Shares of Beneficial Interest
UNDERWRITING AGREEMENT
November __, 1999
SALOMON SMITH BARNEY INC.
A.G. EDWARDS & SONS, INC.
PAINE WEBBER INCORPORATED
As Representatives of the
several Underwriters listed in
Schedule I hereto
c/o SALOMON SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Colonial New York Insured Municipal Fund, a Massachusetts
business trust (the "Trust"), proposes, upon the terms and conditions set forth
herein, to issue and sell an aggregate of _________ shares (the "Firm Shares")
of its common shares of beneficial interest, no par value per share (the "Common
Shares"). The Trust also proposes to grant to the Underwriters (as defined
below), upon the terms and subject to the conditions set forth herein, an option
to purchase up to _______ additional shares (the "Option Shares" and together
with the Firm Shares, the "Shares") of its Common Shares. The Shares will be
authorized by, and subject to the terms and conditions of, the Agreement and
Declaration of Trust of the Trust, as amended (the "Declaration"), in the form
filed as an exhibit to the Registration Statement referred to in Section 1 of
this agreement. The Trust and its investment adviser, Colonial Management
Associates, Inc. ("CMA" or the "Advisor"), wish to confirm as follows their
agreement with Salomon Smith Barney Inc., A.G. Edwards & Sons, Inc. and Paine
Webber Incorporated (the "Representatives"), as representatives of the several
Underwriters listed in Schedule I hereto (the "Underwriters"), in connection
with the purchase of the Shares by the Underwriters.
Collectively, the Management Agreement dated as of October 25,
1999 between the Trust and CMA (the "Management Agreement"), the Custodian
Agreement, as amended through the date hereof, dated as of August 17, 1997
between the Trust and The Chase Manhattan Bank (the "Custodian
<PAGE> 2
2
Agreement"), and the Stock Transfer Agent Agreement dated as of October 25, 1999
between the Trust and BankBoston, N.A. (the "Transfer Agency Agreement") are
hereinafter referred to as the "Trust Agreements." This Underwriting Agreement
is hereinafter referred to as the "Agreement."
1. Registration Statement and Prospectus. The Trust has
prepared in conformity with the provisions of the Securities Act of 1933, as
amended (the "1933 Act"), the Investment Company Act of 1940, as amended (the
"1940 Act"), and the rules and regulations of the Securities and Exchange
Commission (the "Commission") promulgated under the 1933 Act (the "1933 Act
Rules and Regulations") and the 1940 Act (the "1940 Act Rules and Regulations"
and, together with the 1933 Act Rules and Regulations, the "Rules and
Regulations") a registration statement on Form N-2, as amended (File Nos.
333-84991 and 811-09539), under the 1933 Act and the 1940 Act (the "registration
statement"), including a prospectus relating to the Shares, and has filed the
registration statement and prospectus in accordance with the 1933 Act and the
1940 Act. The Trust also has filed a notification of registration of the Trust
as an investment company under the 1940 Act on Form N-8A (the "1940 Act
Notification"). The term "Registration Statement" as used in this Agreement
means the registration statement (including all financial schedules and
exhibits), as amended at the time it becomes effective under the 1933 Act or, if
the registration statement became effective under the 1933 Act prior to the
execution of this Agreement, as amended or supplemented at the time it became
effective, prior to the execution of this Agreement. If it is contemplated, at
the time this Agreement is executed, that a post-effective amendment to the
registration statement will be filed under the 1933 Act and must be declared
effective before the offering of the Shares may commence, the term "Registration
Statement" as used in this Agreement means the registration statement as amended
by said post-effective amendment. If the Trust has filed an abbreviated
registration statement to register an additional amount of Shares pursuant to
Rule 462(b) under the 1933 Act (the "Rule 462 Registration Statement"), then any
reference herein to the term "Registration Statement" shall include such Rule
462 Registration Statement. The term "Prospectus" as used in this Agreement
means the prospectus and statement of additional information in the forms
included in the Registration Statement as supplemented by the addition of the
information contained in the prospectus filed with the Commission pursuant to
Rule 497(h). The term "Prepricing Prospectus" as used in this Agreement means
the prospectus and statement of additional information subject to completion in
the forms included in the registration statement at the time of filing of
amendment no. 2 to the registration statement with the Commission on September
27, 1999, and as such prospectus and statement of additional information shall
have been amended from time to time prior to the date of the Prospectus,
together with any other prospectus and statement of additional information
relating to the Trust other than the Prospectus approved in writing by or
directly or indirectly prepared by the Trust or the Advisor; it being understood
that the definition of Prepricing Prospectus above shall not include any
Prepricing Prospectus prepared by the Underwriters unless approved in writing by
the Trust or the Advisor. The terms "Registration Statement," "Prospectus" and
"Prepricing Prospectus" shall also include any financial statements and other
information incorporated by reference therein.
<PAGE> 3
3
The Trust has furnished you with copies of such registration
statement, each amendment to such registration statement filed with the
Commission and each Prepricing Prospectus.
2. Agreements to Sell and Purchase. (a) The Trust hereby
agrees, subject to all the terms and conditions set forth herein, to issue and
sell to the Underwriters and, upon the basis of the representations, warranties
and agreements of the Trust and the Advisor herein contained and subject to all
the terms and conditions set forth herein, each Underwriter agrees severally and
not jointly to purchase from the Trust, at a purchase price of $15.00 per share,
the number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto.
(b) The Trust also agrees, subject to all the terms and
conditions set forth herein, to sell to the Underwriters, and, upon the basis of
the representations, warranties and agreements of the Trust herein contained and
subject to all the terms and conditions set forth herein, the Underwriters shall
have the right to purchase from the Trust, at the same purchase price per share
as the Underwriters shall pay for the Firm Shares, pursuant to an option (the
"over-allotment option") which may be exercised at any time and from time to
time prior to 9:00 P.M., New York City time, on the 45th day after the date of
the Prospectus (or, if such 45th day shall be a Saturday or Sunday or a holiday,
on the next business day thereafter when the American Stock Exchange is open for
trading), up to an aggregate of _______ Option Shares. Option Shares may be
purchased only for the purpose of covering over-allotments made in connection
with the offering of the Firm Shares. Upon any exercise of the over-allotment
option, each Underwriter, severally and not jointly, agrees to purchase from the
Trust the number of Option Shares (subject to such adjustments as you may
determine in order to avoid fractional shares) which bears the same proportion
to the number of Option Shares to be purchased by the Underwriters as the number
of Firm Shares set forth opposite the name of such Underwriter in Schedule I
hereto (or such number of Firm Shares increased as set forth in Section 11
hereof) bears to the aggregate number of Firm Shares.
(c) The Trust also agrees, subject to all the terms and
conditions set forth herein, to sell to the Advisor, and, upon the basis of the
representations, warranties and agreements of the Trust herein contained and
subject to all the terms and conditions set forth herein, the Advisor shall have
the right to purchase from the Trust, at the same purchase price per share as
the Underwriters shall pay for the Option Shares, pursuant to an option (the
"Advisor Option") which may be exercised at any time and from time to time prior
to 9:00 P.M., New York City time, on the 45th day after the date of the
Prospectus (or, if such 45th day shall be a Saturday or Sunday or a holiday, on
the next business day thereafter when the American Stock Exchange is open for
trading), up to an aggregate of 1,000 shares of beneficial interest of the Trust
(the "Advisor Shares").
3. Terms of Public Offering. The Trust and the Advisor have
been advised by you that the Underwriters propose to make a public offering of
their respective Shares as soon after the Registration Statement and this
Agreement have become effective as in your judgment is advisable and initially
to offer the Shares upon the terms set forth in the Prospectus.
<PAGE> 4
4
4. Delivery of the Shares and Payment Therefor. Delivery to
the Underwriters of and payment for the Firm Shares and the Option Shares (if
the option provided for in Section 2(b) hereof shall have been exercised on or
before the third business day prior to the Closing Date (as defined below))
shall be made at the office of Simpson Thacher & Bartlett, 425 Lexington Avenue,
New York, NY 10017, at 9:30 A.M., New York City time, on November [19], 1999
(the "Closing Date"). The place of closing for the Firm Shares and the Closing
Date may be varied by agreement between you and the Trust.
Delivery to the Underwriters of and payment for any Option
Shares to be purchased by the Underwriters shall be made at the aforementioned
office of Simpson Thacher & Bartlett at such time on such date (the "Option
Closing Date"), which may be the same as the Closing Date but shall in no event
be earlier than the Closing Date nor earlier than two nor later than ten
business days after the giving of the notice hereinafter referred to, as shall
be specified in a written notice from you on behalf of the Underwriters to the
Trust of the Underwriters' determination to purchase a number, specified in such
notice, of Option Shares. The place of closing for any Option Shares and the
Option Closing Date for such Shares may be varied by agreement between you and
the Trust.
The place and time for the closing of the Advisor Shares shall
be as agreed upon by the Advisor and the Trust, except that the date of such
closing for the Advisor Shares shall in no event be earlier than the Closing
Date.
Certificates for the Firm Shares and for any Option Shares to
be purchased hereunder shall be registered in such names and in such
denominations as you shall request prior to 9:30 A.M., New York City time, on
the second business day preceding the Closing Date or any Option Closing Date,
as the case may be. Such certificates shall be made available to you in New York
City for inspection and packaging not later than 9:30 A.M., New York City time,
on the business day next preceding the Closing Date or the Option Closing Date,
as the case may be. The certificates evidencing the Firm Shares and any Option
Shares to be purchased hereunder shall be delivered to you on the Closing Date
or the Option Closing Date, as the case may be, through the facilities of The
Depository Trust Company, against payment of the purchase price therefor in
immediately available funds.
5. Agreements of the Trust and the Advisor. The Trust and the
Advisor, jointly and severally, agree with the several Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered,
it is necessary for the Registration Statement or a post-effective
amendment thereto to be declared effective under the 1933 Act before
the offering of the Shares may commence, the Trust will endeavor to
cause the Registration Statement or such post-effective amendment to
become effective under the 1933 Act as soon as possible and will advise
you promptly and, if requested by you, will confirm such advice in
writing when the Registration Statement or such post-effective
amendment has become effective.
<PAGE> 5
5
(b) The Trust will advise you promptly and, if requested by
you, will confirm such advice in writing: (i) of any request made by
the Commission for amendment of or a supplement to the Registration
Statement, any Prepricing Prospectus or the Prospectus (or any
amendment or supplement to any of the foregoing) or for additional
information, (ii) of the issuance by the Commission, the National
Association of Securities Dealers, Inc. (the "NASD"), any state
securities commission, any national securities exchange, any
arbitrator, any court or any other governmental, regulatory,
self-regulatory or administrative agency or any official of any order
suspending the effectiveness of the Registration Statement, prohibiting
or suspending the use of the Prospectus or any Prepricing Prospectus,
or any sales material (as hereinafter defined), of any notice pursuant
to Section 8(e) of the 1940 Act, of the suspension of qualification of
the Shares for offering or sale in any jurisdiction, or the initiation
of any proceeding for any such purposes, (iii) of receipt by the Trust,
the Advisor, any affiliate of the Trust or the Advisor or any
representative or attorney of the Trust or the Advisor of any other
material communication from the Commission, the NASD, any state
securities commission, any national securities exchange, any
arbitrator, any court or any other governmental, regulatory,
self-regulatory or administrative agency or any official relating to
the Trust (if such communication relating to the Trust is received by
such person within three years after the date of this Agreement), the
Registration Statement, the 1940 Act Notification, the Prospectus, any
Prepricing Prospectus, any sales material (as herein defined) (or any
amendment or supplement to any of the foregoing) or this Agreement or
any of the Trust Agreements and (iv) within the period of time referred
to in paragraph (f) below, of any material adverse change in the
condition (financial or other), business, prospects, properties, net
assets or results of operations of the Trust or the Advisor or of the
happening of any other event which makes any statement of a material
fact made in the Registration Statement or the Prospectus, or any
Prepricing Prospectus or any sales materials (as herein defined) (or
any amendment or supplement to any of the foregoing) untrue or which
requires the making of any additions to or changes in the Registration
Statement or the Prospectus, or any Prepricing Prospectus or any sales
materials (as herein defined) (or any amendment or supplement to any of
the foregoing) in order to state a material fact required by the 1933
Act, the 1940 Act or the Rules and Regulations to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, or of the
necessity to amend or supplement the Registration Statement, the
Prospectus, or any Prepricing Prospectus or any sales material (as
herein defined) (or any amendment or supplement to any of the
foregoing) to comply with the 1933 Act, the 1940 Act, the Rules and
Regulations or any other law or order of any court or regulatory body.
If at any time the Commission, the NASD, any state securities
commission, any national securities exchange, any arbitrator, any court
or any other governmental, regulatory, self-regulatory or
administrative agency or any official shall issue any order suspending
the effectiveness of the Registration Statement, prohibiting or
suspending the use of the Prospectus or any sales material (as herein
defined) (or any amendment or supplement to any of the foregoing) or
suspending the qualification of the Shares for offering or sale in any
jurisdiction, the Trust will make every reasonable effort to obtain the
withdrawal of such order at the earliest possible time.
<PAGE> 6
6
(c) The Trust will furnish to you, without charge, three
signed copies of the Registration Statement as originally filed with
the Commission and of each amendment thereto, including financial
statements and all exhibits thereto, and will also furnish to you,
without charge, such number of conformed copies of the Registration
Statement as originally filed and of each amendment thereto, but
without exhibits, as you may request.
(d) The Trust will not (i) file any amendment to the
Registration Statement or make any amendment or supplement to the
Prospectus, or any sales material (as herein defined), of which you
shall not previously have been advised or to which you shall reasonably
object after being so advised or (ii) so long as, in the opinion of
counsel for the Underwriters, a Prospectus is required by the 1933 Act
to be delivered in connection with sales by any Underwriter or any
dealer, file any information, documents or reports pursuant to the
Securities Exchange Act of 1934, as amended (the "1934 Act"), without
delivering a copy of such information, documents or reports to you, as
Representatives of the several Underwriters, prior to or concurrently
with such filing.
(e) Prior to the execution and delivery of this Agreement, the
Trust has delivered to you, without charge, in such quantities as you
have requested, copies of each form of the Prepricing Prospectus. The
Trust consents to the use, in accordance with the provisions of the
1933 Act and with the state securities or blue sky laws of the
jurisdictions in which the Shares are offered by the several
Underwriters and by dealers, prior to the date of the Prospectus, of
each Prepricing Prospectus so furnished by the Trust.
(f) As soon after the execution and delivery of this Agreement
as possible and thereafter from time to time for such period as in the
opinion of counsel for the Underwriters a prospectus is required by the
1933 Act to be delivered in connection with sales by any Underwriter or
any dealer, the Trust will expeditiously deliver to each Underwriter
and each dealer, without charge, as many copies of the Prospectus (and
of any amendment or supplement thereto) as you may reasonably request.
The Trust consents to the use of the Prospectus (and of any amendment
or supplement thereto) in accordance with the provisions of the 1933
Act and with the state securities or blue sky laws of the jurisdictions
in which the Shares are offered by the several Underwriters and by all
dealers to whom Shares may be sold, both in connection with the
offering and sale of the Shares and for such period of time thereafter
as the Prospectus is required by the 1933 Act to be delivered in
connection with sales by any Underwriter or any dealer. If during such
period of time any event shall occur that in the judgment of the Trust
or in the opinion of counsel for the Underwriters is required to be set
forth in the Registration Statement or the Prospectus (as then amended
or supplemented) or should be set forth therein in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading, or if it is necessary to supplement or amend
the Registration Statement or the Prospectus to comply with the 1933
Act, the 1940 Act, the Rules and Regulations or any other federal law,
rule or regulation, or any state securities or blue sky disclosure
laws, rules or regulations, the Trust will forthwith prepare and,
subject to the provisions of paragraph (d) above, promptly file with
the Commission an
<PAGE> 7
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appropriate supplement or amendment thereto, and will expeditiously
furnish to the Underwriters and dealers, without charge, a reasonable
number of copies thereof; provided that, if the supplement or amendment
is required exclusively as a result of a misstatement in or omission
from the information provided to the Trust in writing by the
Underwriters expressly for use in the Prospectus, the Trust may deliver
such supplement or amendment to the Underwriters and dealers at a
reasonable charge not to exceed the actual cost thereof to the Trust.
In the event that the Trust and you, as Representatives of the several
Underwriters, agree that the Registration Statement or the Prospectus
should be amended or supplemented, the Trust, if requested by you, will
promptly issue a press release announcing or disclosing the matters to
be covered by the proposed amendment or supplement.
(g) The Trust will cooperate with you and with counsel for the
Underwriters in connection with the registration or qualification of
the Shares for offering and sale by the several Underwriters and by
dealers under the securities or blue sky laws of such jurisdictions as
you may designate and will file such consents to service of process or
other documents necessary or appropriate in order to effect such
registration or qualification; provided that in no event shall the
Trust be obligated to qualify to do business or as a dealer in
securities in any jurisdiction where it is not now so qualified or to
take any action which would subject it to service of process in suits,
other than those arising out of the offering or sale of the Shares, in
any jurisdiction where it is not now so subject nor will the Trust be
obligated to execute a general consent to service of process.
(h) The Trust will make generally available to its security
holders an earnings statement, which need not be audited, covering a
twelve-month period ending not later than 15 months after the effective
date of the Registration Statement as soon as practicable after the end
of such period, which earnings statement shall satisfy the provisions
of Section 11(a) of the 1933 Act and Rule 158 of the 1933 Act Rules and
Regulations.
(i) During the period of five years hereafter, the Trust will
furnish to you (i) as soon as available, a copy of each report of the
Trust mailed to shareholders or filed with the Commission or furnished
to the American Stock Exchange (the "AMEX") other than reports on Form
N-SAR, and (ii) from time to time such other information concerning the
Trust as you may reasonably request.
(j) If this Agreement shall terminate or shall be terminated
after execution pursuant to any provisions hereof (otherwise than by
notice given by you terminating this Agreement pursuant to Section 12
hereof or pursuant to the second paragraph of Section 11 hereof) or if
this Agreement shall be terminated by the Underwriters because of any
failure or refusal on the part of the Trust or the Advisor to comply
with the terms or fulfill any of the conditions of this Agreement, the
Trust and the Advisor, jointly and severally, agree to reimburse the
Representatives for all out-of-pocket expenses (including reasonable
fees and expenses of counsel for the Underwriters) incurred by the
Underwriters in connection herewith.
<PAGE> 8
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(k) The Trust will apply the net proceeds from the sale of the
Firm Shares, and of the Option Shares, if any, substantially in
accordance with the description set forth in the Prospectus and in such
a manner as to comply with the investment objectives, policies and
restrictions of the Trust as described in the Prospectus.
(l) The Trust will timely file the requisite copies of the
Prospectus with the Commission pursuant to Rule 497(c) or Rule 497(h)
of the 1933 Act Rules and Regulations, whichever is applicable or, if
applicable, will timely file the certification permitted by Rule 497(j)
of the 1933 Act Rules and Regulations and will advise you of the time
and manner of such filing.
(m) Except as provided in this Agreement, the Trust will not
sell, contract to sell or otherwise dispose of any Common Shares or any
securities convertible into or exercisable or exchangeable for Common
Shares, or grant any options or warrants to purchase Common Shares, for
a period of 180 days after the date of the Prospectus, without the
prior written consent of Salomon Smith Barney Inc.; provided, however,
that the Trust may issue and make open market purchases of Common
Shares pursuant to any dividend reinvestment plan of the Trust in
effect as of the Closing Date.
(n) Except as stated in this Agreement and in the Prepricing
Prospectus and Prospectus, and except for share repurchases, tender
offers or purchases of Shares in the open market pursuant to the
Trust's dividend reinvestment plan, neither the Trust nor the Advisor
has taken, nor will it take, directly or indirectly, any action
designed to or that might reasonably be expected to cause or result in
stabilization or manipulation of the price of the Shares or any other
securities issued by the Trust to facilitate the sale or resale of the
Shares.
(o) The Trust will use its best efforts to cause the Shares to
be duly authorized for listing by the AMEX prior to the date the Shares
are issued.
(p) The Trust will use its best efforts to comply with all
requirements under the Internal Revenue Code of 1986, as amended (the
"Code") to qualify as a regulated investment company under Subchapter M
of the Code.
(q) The Trust and the Advisor will each use its best efforts
to perform all of the agreements required of it and discharge all
conditions to closing as set forth in this Agreement.
6. Representations and Warranties of the Trust and the
Advisor. The Trust and the Advisor, jointly and severally, represent and warrant
to each Underwriter that:
(a) Each Prepricing Prospectus included as part of the
registration statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 497 of the 1933 Act Rules and
Regulations, complied when so filed in all material respects with the
<PAGE> 9
9
provisions of the 1933 Act, the 1940 Act and the Rules and Regulations. The
Commission has not issued any order preventing or suspending the use of any
Prepricing Prospectus.
(b) The registration statement in the form in which it became
or becomes effective and also in such form as it may be when any post-effective
amendment thereto shall become effective and the Prospectus and any supplement
or amendment thereto when filed with the Commission under Rule 497 of the 1933
Act Rules and Regulations and the 1940 Act Notification when originally filed
with the Commission and any amendment or supplement thereto when filed with the
Commission, complied or will comply in all material respects with the
requirements of the 1933 Act, the 1940 Act and the Rules and Regulations, as
applicable, and did not or will not at any such times contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except that this
representation and warranty does not apply to (i) statements in or omissions
from the registration statement or the Prospectus made in reliance upon and in
conformity with information relating to any Underwriter furnished to the Trust
in writing by or on behalf of any Underwriter expressly for use therein or (ii)
with respect to the representations of the Trust, the description of the Advisor
contained in the Prospectus under the heading "Management of the Fund."
(c) All the outstanding shares of beneficial interest of the
Trust have been duly authorized and validly issued, are fully paid and, except
as set forth in the Statement of Additional Information of the Trust under
"Shareholder Liability," nonassessable and are free of any preemptive or similar
rights; the Shares have been duly authorized and, when issued and delivered to
the Underwriters against payment therefor in accordance with the terms hereof,
will be validly issued, fully paid and, except as set forth in the Statement of
Additional Information of the Trust under "Shareholder Liability," nonassessable
and free of any preemptive or similar rights that entitle or will entitle any
person to acquire any Shares upon the issuance thereof by the Trust, and will
conform to the description thereof in the Registration Statement and the
Prospectus (and any amendment or supplement to either of them); and the
capitalization of the Trust conforms to the description thereof in the
Registration Statement and the Prospectus (and any amendment or supplement to
either of them).
(d) Except for the Option Shares and the Advisor Shares and as
otherwise described in the Prospectus, there are no outstanding options,
warrants or other rights calling for the issuance of, or any commitment, plan or
arrangement to issue, any shares of beneficial interest of the Trust or any
security convertible into or exchangeable or exercisable for shares of
beneficial interest of the Trust.
(e) The Trust is a business trust duly organized and validly
existing in good standing under the laws of the Commonwealth of Massachusetts
with full business trust power and authority to own, lease and operate its
properties and to conduct its business as described in the Registration
Statement and the Prospectus (and any amendment or supplement to either of
them), and is duly registered and qualified to conduct its business and is in
good standing in each jurisdiction or place where the nature of its properties
or the conduct of its business requires such registration or qualification,
except where the failure so to register or qualify does not have a
<PAGE> 10
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material adverse effect on the condition (financial or other), business,
prospects, properties, net assets or results of operations of the Trust; and the
Trust has no subsidiaries.
(f) There are no legal or governmental proceedings pending or,
to the knowledge of the Trust, threatened, against the Trust, or to which the
Trust or any of its properties is subject, that are required to be described in
the Registration Statement or the Prospectus (and any amendment or supplement to
either of them) but are not described as required, and there are no agreements,
contracts, indentures, leases or other instruments that are required to be
described in the Registration Statement or the Prospectus (and any amendment or
supplement to either of them) or to be filed as an exhibit to the Registration
Statement that are not described or filed as required by the 1933 Act, the 1940
Act or the Rules and Regulations.
(g) The Trust is not in violation of the Declaration or its
bylaws (the "Bylaws"), or other organizational documents of the Trust (together
with the Declaration and the Bylaws, the "Organizational Documents") or of any
law, ordinance, administrative or governmental rule or regulation applicable to
the Trust or of any decree of the Commission, the NASD, any state securities
commission, any national securities exchange, any arbitrator, any court or
governmental agency, body or official having jurisdiction over the Trust, or in
default in the performance of any material obligation, agreement or condition
contained in any bond, debenture, note or any other evidence of indebtedness or
in any material agreement, indenture, lease or other instrument to which the
Trust is a party or by which it or any of its properties may be bound, except
where such violation does not have a material adverse effect on the condition
(financial or other), business, prospects, properties, net assets or results of
operations of the Trust.
(h) Neither the issuance and sale of the Shares, the
execution, delivery or performance of this Agreement or any of the Trust
Agreements by the Trust, nor the consummation by the Trust of the transactions
contemplated hereby or thereby (A) requires any consent, approval, authorization
or other order of, or registration or filing with, the Commission, the NASD, any
state securities commission, any national securities exchange, any arbitrator,
any court, regulatory body, administrative agency or other governmental body,
agency or official (except such as may have been obtained prior to the date
hereof and such as may be required for compliance with the state securities or
blue sky laws of various jurisdictions which have been or will be effected in
accordance with this Agreement) or conflicts or will conflict with or
constitutes or will constitute a breach of, or a default under, the
Organizational Documents or (B) conflicts or will conflict with or constitutes
or will constitute a breach of, or a default under, any agreement, indenture,
lease or other instrument to which the Trust is a party or by which it or any of
its properties may be bound, or violates or will violate any statute, law,
regulation or judgment, injunction, order or decree applicable to the Trust or
any of its properties, or will result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Trust pursuant to the
terms of any agreement or instrument to which it is a party or by which it may
be bound or to which any of its property or assets is subject. The Trust is not
subject to any order of any court or of any arbitrator, governmental authority
or administrative agency.
<PAGE> 11
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(i) The accountants, PricewaterhouseCoopers LLP, who have
certified or shall certify the financial statements included or incorporated by
reference in the Registration Statement and the Prospectus (or any amendment or
supplement to either of them) are independent public accountants as required by
the 1933 Act, the 1940 Act and the Rules and Regulations.
(j) The financial statements, together with related schedules
and notes, included or incorporated by reference in the Registration Statement
and the Prospectus (and any amendment or supplement to either of them), present
fairly the financial position, results of operations and changes in financial
position of the Trust on the basis stated or incorporated by reference in the
Registration Statement at the respective dates or for the respective periods to
which they apply; such statements and related schedules and notes have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
therein; and the other financial and statistical information and data included
in the Registration Statement and the Prospectus (and any amendment or
supplement to either of them) are accurately presented and prepared on a basis
consistent with such financial statements and the books and records of the
Trust.
(k) The execution and delivery of, and the performance by the
Trust of its obligations under, this Agreement and the Trust Agreements have
been duly and validly authorized by the Trust, and this Agreement and the Trust
Agreements have been duly executed and delivered by the Trust and assuming due
authorization, execution and delivery by the other parties thereto, constitute
the valid and legally binding agreements of the Trust, enforceable against the
Trust in accordance with their terms (subject to the qualification that the
enforceability of the Trust's obligations thereunder may be limited by
bankruptcy, insolvency, reorganization, moratorium, and similar laws of general
applicability relating to or affecting creditors' rights, and to general
principles of equity regardless of whether enforceability is considered in a
proceeding in equity or at law), except as rights to indemnity and contribution
hereunder and thereunder may be limited by federal or state securities laws.
(l) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement to either of them), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement to either of them),
the Trust has not incurred any liability or obligation, direct or contingent, or
entered into any transaction, not in the ordinary course of business, that is
material to the Trust, and there has not been any change in the capitalization,
or material increase in the short-term debt or long-term debt, of the Trust, or
any material adverse change, or any development involving or which may
reasonably be expected to involve, a prospective material adverse change, in the
condition (financial or other), business, prospects, properties, net assets or
results of operations of the Trust, whether or not arising in the ordinary
course of business (a "Material Adverse Effect").
(m) The Trust has not distributed and, prior to the later to
occur of (i) the Closing Date and (ii) completion of the distribution of the
Shares, will not distribute any offering material in connection with the
offering and sale of the Shares other than the Registration Statement, the
<PAGE> 12
12
Prepricing Prospectus, the Prospectus or other materials, if any, permitted by
the 1933 Act, the 1940 Act or the Rules and Regulations.
(n) (i) The Trust has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits") as are
necessary to own its properties and to conduct its business in the manner
described in the Prospectus (and any amendment or supplement thereto), except
for any such permits the absence of which would not have a Material Adverse
Effect and subject to such qualifications as may be set forth in the Prospectus;
(ii) the Trust has fulfilled and performed all its material obligations with
respect to such permits and no event has occurred which allows, or after notice
or lapse of time would allow, revocation or termination thereof or results in
any other material impairment of the rights of the Trust under any such permit,
subject in each case to such qualification as may be set forth in the Prospectus
(and any amendment or supplement thereto); and (iii) except as described in the
Prospectus (and any amendment or supplement thereto), none of such permits
contains any restriction that is materially burdensome to the Trust, except
where the failure of (i), (ii) or (iii) to be accurate would not, individually
or in the aggregate, have a Material Adverse Effect on the Trust.
(o) The Trust maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization and
with the applicable requirements of the 1940 Act, the 1940 Act Rules and
Regulations and the Code; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets and to maintain
compliance with the books and records requirements under the 1940 Act and the
1940 Act Rules and Regulations; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(p) To the Trust's knowledge, neither the Trust nor any
employee or agent of the Trust has made any payment of funds of the Trust or
received or retained any funds, which payment, receipt or retention of funds is
of a character required to be disclosed in the Prospectus, except for the
issuance of up to 6,667 shares of beneficial interest of the Trust to the
Advisor to comply with the net worth requirements of Section 14(a) of the 1940
Act.
(q) The Trust has filed all tax returns required to be filed,
if any, which returns are complete and correct in all material respects, and the
Trust is not in default in the payment of any taxes which were payable pursuant
to said returns or any assessments with respect thereto.
(r) No holder of any security of the Trust has any right to
require registration of any security of the Trust because of the filing of the
registration statement or consummation of the transactions contemplated by this
Agreement.
(s) The Trust, subject to the registration statement having
been declared effective and the filing of the Prospectus under Rule 497 under
the 1933 Act Rules and Regulations, has taken all required action under the 1933
Act, the 1940 Act and the Rules and Regulations to
<PAGE> 13
13
make the public offering and consummate the sale of the Shares as contemplated
by this Agreement.
(t) The conduct by the Trust of its business (as described in
the Prospectus) does not require it to be the owner, possessor or licensee of
any patents, patent licenses, trademarks, service marks or trade names which it
does not own, possess or license.
(u) The Trust is registered under the 1940 Act as a
closed-end, non-diversified management investment company and the 1940 Act
Notification has been duly filed with the Commission and, at the time of filing
thereof and any amendment or supplement thereto, conformed in all material
respects with all applicable provisions of the 1940 Act and the 1940 Act Rules
and Regulations. The Trust has not received any notice from the Commission
pursuant to Section 8(e) of the 1940 Act with respect to the 1940 Act
Notification. The Trust is, and at all times through the completion of the
transactions contemplated hereby, will be, in compliance in all material
respects with the terms and conditions of the 1933 Act and the 1940 Act. No
person is serving or acting as an officer, director or investment adviser of the
Trust except in accordance with the provisions of the 1940 Act and the 1940 Act
Rules and Regulations and the Investment Advisers Act of 1940, as amended (the
"Advisers Act"), and the rules and regulations of the Commission promulgated
under the Advisers Act (the "Advisers Act Rules and Regulations").
(v) Except as stated in this Agreement and in the Prospectus
(and any amendment or supplement thereto), the Trust has not taken, nor will it
take, directly or indirectly, any action designed to or which might reasonably
be expected to cause or result in stabilization or manipulation of the price of
any securities issued by the Trust to facilitate the sale or resale of the
Shares, and the Trust is not aware of any such action taken or to be taken by
any affiliates of the Trust.
(w) All advertising and other sales literature (including
"prospectus wrappers") authorized in writing by or prepared by the Trust or the
Advisor for use in connection with the offering and sale of the Shares
(collectively, "sales material") complied and comply in all material respects
with the applicable requirements of the 1933 Act, the 1940 Act, the Rules and
Regulations and the rules and interpretations of the NASD and no such sales
material contained or contains an untrue statement of a material fact or omitted
or omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
The "broker kits" prepared by or approved by the Trust or the
Advisor for distribution to and use internally by brokers and dealers
participating in the offering of the Shares accurately and fairly presents the
information contained therein in all material respects for purposes of such
internal use and contains only information the substance of which is included in
the Prospectus or the Statement of Additional Information of the Trust. Any road
show slides and road show scripts prepared or approved in writing by the Trust
or the Advisor for use in presentations to brokers and dealers participating in
the offering of the Shares accurately and fairly present the information
contained therein in all material respects for purposes of such use.
<PAGE> 14
14
(x) Each of the Trust Agreements and the Trust's obligations
under this Agreement and each of the Trust Agreements comply in all material
respects with all applicable provisions of the 1933 Act, the 1940 Act, the Rules
and Regulations, the Advisers Act and the Advisers Act Rules and Regulations.
(y) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement to either of them), no director of
the Trust is an "interested person" (as defined in the 1940 Act) of the Trust or
an "affiliated person" (as defined in the 1940 Act) of any Underwriter.
(z) The Shares have been duly authorized for listing, subject
to official notice of issuance, on the AMEX.
(aa) The Advisor has considered, and is taking actions to
address, the possible adverse effects of the Year 2000 on the critical computer
systems used by the Advisor and its affiliates on behalf of the Trust. Testing
and remediation of those systems is complete and the Advisor has determined that
recognition and execution of date-sensitive functions involving certain dates
prior to and after December 31, 1999 (the "Year 2000 Problem") will not pose
significant problems for the computer systems used by the Advisor on behalf of
the Trust. The Advisor believes, after reasonable inquiry, that suppliers,
vendors, or financial service organizations used in the operation of the Trust
have remedied or will remedy the Year 2000 Problem and that those suppliers,
vendors or financial service organizations believe that their modifications will
be completed on a timely basis, except to the extent that a failure to remedy by
any such supplier, vendor, or financial service organization would not have a
material adverse effect on the operations of the Trust. The Trust is in
compliance with the Commission's Release No. 33-7558 related to Year 2000
compliance, as amended to date.
7. Representations and Warranties of the Advisor. CMA
represents and warrants to each Underwriter that:
(a) The Advisor is a corporation duly incorporated and validly
existing in good standing under the laws of the Commonwealth of Massachusetts,
with full corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Registration Statement and the
Prospectus (and any amendment or supplement to either of them), and is duly
registered and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
so to register or to qualify does not have a material adverse effect on the
condition (financial or other), business, prospects, properties, net assets or
results of operations of the Advisor or on the ability of the Advisor to perform
its obligations under this Agreement and the Management Agreement.
(b) The Advisor is duly registered with the Commission as an
investment adviser under the Advisers Act and is not prohibited by the Advisers
Act, the Advisers Act Rules and Regulations, the 1940 Act or the 1940 Act Rules
and Regulations from acting under the Management Agreement for the Trust as
contemplated by the Prospectus (or any amendment or
<PAGE> 15
15
supplement thereto). There does not exist any proceeding or any facts or
circumstances the existence of which could lead to any proceeding which might
adversely affect the registration of the Advisor with the Commission.
(c) There are no legal or governmental proceedings pending or,
to the knowledge of the Advisor, threatened against the Advisor, or to which the
Advisor or any of its properties is subject, that are required to be described
in the Registration Statement or the Prospectus (or any amendment or supplement
to either of them) but are not described as required or that may reasonably be
expected to involve a prospective material adverse change, in the condition
(financial or other), business, prospects, properties, net assets or results of
operations of the Advisor or on the ability of the Advisor to perform its
obligations under this Agreement and the Management Agreement.
(d) Neither the execution, delivery or performance of this
Agreement or the performance of the Management Agreement by the Advisor, nor the
consummation by the Advisor of the transactions contemplated hereby or thereby
(A) requires the Advisor to obtain any consent, approval, authorization or other
order of or registration or filing with, the Commission, the NASD, any state
securities commission, any national securities exchange, any arbitrator, any
court, regulatory body, administrative agency or other governmental body, agency
or official or conflicts or will conflict with or constitutes or will constitute
a breach of or a default under, the certificate of incorporation or by-laws, or
other organizational documents, of the Advisor or (B) conflicts or will conflict
with or constitutes or will constitute a breach of or a default under, any
agreement, indenture, lease or other instrument to which the Advisor is a party
or by which it or any of its properties may be bound, or violates or will
violate any statute, law, regulation or filing or judgment, injunction, order or
decree applicable to the Advisor or any of its properties or will result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Advisor pursuant to the terms of any agreement or instrument to
which it is a party or by which it may be bound or to which any of the property
or assets of the Advisor is subject. The Advisor is not subject to any order of
any court or of any arbitrator, governmental authority or administrative agency.
(e) The execution and delivery of, and the performance by the
Advisor of its obligations under, this Agreement and the Management Agreement
have been duly and validly authorized by the Advisor, and this Agreement and the
Management Agreement have been duly executed and delivered by the Advisor and,
assuming due authorization, execution and delivery by the other parties thereto,
each constitutes the valid and legally binding agreement of the Advisor,
enforceable against the Advisor in accordance with its terms (subject to the
qualification that the enforceability of the Advisor's obligations thereunder
may be limited by bankruptcy, insolvency, reorganization, moratorium and similar
laws of general applicability relating to or affecting creditors' rights, and to
general principles of equity regardless of whether enforceability is considered
in a proceeding in equity or at law), except as rights to indemnity and
contribution hereunder may be limited by federal or state securities laws.
(f) The description of the Advisor in the Registration
Statement and the Prospectus (and any amendment or supplement thereto) complied
and comply in all material
<PAGE> 16
16
respects with the provisions of the 1933 Act, the 1940 Act, the Advisers Act,
the Rules and Regulations and the Advisers Act Rules and Regulations and did not
and will not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(g) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement to either of them), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement to either of them),
the Advisor has not incurred any liability or obligation, direct or contingent,
or entered into any transaction, not in the ordinary course of business, that is
material to the Advisor or the Trust and that is required to be disclosed in the
Registration Statement or the Prospectus and there has not been any material
adverse change, or any development involving or which may reasonably be expected
to involve, a prospective material adverse change, in the condition (financial
or other), business, prospects, properties, net assets or results of operations
of the Advisor, whether or not arising in the ordinary course of business, or
which, in each case, could have a material adverse effect on the ability of the
Advisor to perform its obligations under this Agreement and the Management
Agreement.
(h) (i) The Advisor has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits") as are
necessary to own its properties and to conduct its business in the manner
described in the Prospectus (and any amendment thereto); (ii) the Advisor has
fulfilled and performed all its material obligations with respect to such
permits and no event has occurred which allows, or after notice or lapse of time
would allow, revocation or termination thereof or results in any other material
impairment of the rights of the Advisor under any such permit; and (iii) except
as described in the Prospectus (and any amendment or supplement thereto), none
of such permits contains any restriction that is materially burdensome to the
Advisor, except where the failure of (i), (ii), or (iii) to be accurate would
not, individually or in the aggregate, have a Material Adverse Effect on the
Advisor.
(i) Except as stated in this Agreement and in the Prospectus
(and in any amendment or supplement thereto), the Advisor has not taken, nor
will it take, directly or indirectly, any action designed to or which might
reasonably be expected to cause or result in stabilization or manipulation of
the price of any securities issued by the Trust to facilitate the sale or resale
of the Shares, and the Advisor is not aware of any such action taken or to be
taken by any affiliates of the Advisor.
8. Indemnification and Contribution. (a) The Trust and the
Advisor, jointly and severally, agree to indemnify and hold harmless you and
each other Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act
from and against any and all losses, claims, damages, liabilities and expenses
(including reasonable costs of investigation), joint or several, arising out of
or based upon any untrue statement or alleged untrue statement of a material
fact contained in any Prepricing Prospectus or in the Registration Statement or
the Prospectus or in any amendment or supplement thereto, or arising out of or
based upon any omission or alleged omission to state
<PAGE> 17
17
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which such statements
were made, not misleading, except insofar as such losses, claims, damages,
liabilities or expenses arise out of or are based upon any untrue statement or
omission or alleged untrue statement or omission which has been made therein or
omitted therefrom in reliance upon and in conformity with the information
relating to any Underwriter furnished in writing to the Trust by or on behalf of
any Underwriter expressly for use in connection therewith; provided, however,
that the indemnification contained in this paragraph (a) with respect to any
Prepricing Prospectus, Prospectus or Registration Statement (or any amendment or
supplement to any of the foregoing) shall not inure to the benefit of any
Underwriter (or to the benefit of any person controlling such Underwriter) on
account of any such loss, claim, damage, liability or expense arising from the
sale of the Shares by such Underwriter to any person if a copy of the Prospectus
(or any amendment or supplement thereto) shall not have been delivered or sent
to such person within the time required by the 1933 Act and the 1933 Act Rules
and Regulations, and the untrue statement or alleged untrue statement or
omission or alleged omission of a material fact contained in such Prepricing
Prospectus was corrected in the Prospectus (or any amendment or supplement
thereto), provided that the Trust has delivered the Prospectus (or any amendment
or supplement thereto) to the several Underwriters in requisite quantity on a
timely basis to permit such delivery or sending. The foregoing indemnity
agreement shall be in addition to any liability which the Trust or the Advisor
may otherwise have.
(b) Any party that proposes to assert the right to be
indemnified under this Section 8 will, promptly after receipt of notice of
commencement of any action against such party in respect of which a claim is to
be made against an indemnifying party or parties under this Section 8, notify
each such indemnifying party of the commencement of such action, enclosing a
copy of all papers served, but the omission to so notify such indemnifying party
(i) will not relieve it from any liability that it may have to any indemnified
party under the foregoing provision of this Section 8 unless, and only to the
extent that, such omission results in the forfeiture of substantive rights or
defenses by the indemnifying party and (ii) will not, in any event, relieve such
indemnifying party from any other obligation (other than pursuant to the
foregoing provision of this Section 8) it may have under this Agreement. If any
action, suit or proceeding shall be brought against any Underwriter or any
person controlling any Underwriter in respect of which indemnity may be sought
against the Trust or the Advisor, such Underwriter or such controlling person
shall promptly notify the Trust or the Advisor, and the Trust or the Advisor
shall assume the defense thereof, including the employment of counsel and
payment of all fees and expenses. Such Underwriter or any such controlling
person shall have the right to employ separate counsel in any such action, suit
or proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Underwriter or such
controlling person unless (i) the Trust or the Advisor have agreed in writing to
pay such fees and expenses, (ii) the Trust and the Advisor have failed to assume
the defense and employ counsel, or (iii) the named parties to any such action,
suit or proceeding (including any impleaded parties) include both such
Underwriter or such controlling person and the Trust or the Advisor and such
Underwriter or such controlling person shall have been advised by its counsel
that representation of such indemnified party and the Trust or the Advisor by
the same counsel would be inappropriate under applicable standards of
professional conduct (whether or not such
<PAGE> 18
18
representation by the same counsel has been proposed) due to actual or potential
differing interests between them (in which case the Trust and the Advisor shall
not have the right to assume the defense of such action, suit or proceeding on
behalf of such Underwriter or such controlling person). It is understood,
however, that the Trust and the Advisor shall, in connection with any one such
action, suit or proceeding or separate but substantially similar or related
actions, suits or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of only one separate firm of attorneys (in addition to any local
counsel) at any time for all such Underwriters and controlling persons not
having actual or potential differing interests with you or among themselves,
which firm shall be designated in writing by the Representatives, and that all
such fees and expenses shall be reimbursed as they are incurred. The Trust and
the Advisor shall not be liable for any settlement of any such action, suit or
proceeding effected without their written consent (which consent shall not be
unreasonably withheld), but if settled with such written consent, or if there be
a final judgment for the plaintiff in any such action, suit or proceeding, the
Trust and the Advisor agree to indemnify and hold harmless any Underwriter, to
the extent provided in the preceding paragraph, and any such controlling person
from and against any loss, claim, damage, liability or expense by reason of such
settlement or judgment.
(c) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Trust and the Advisor, their trustees,
directors, any officers who sign the Registration Statement, and any person who
controls the Trust or the Advisor within the meaning of Section 15 of the 1933
Act or Section 20 of the 1934 Act, to the same extent as the foregoing indemnity
from the Trust and the Advisor to each Underwriter, but only with respect to
information relating to such Underwriter furnished in writing by or on behalf of
such Underwriter expressly for use in the Registration Statement, the Prospectus
or any Prepricing Prospectus, or any amendment or supplement thereto. If any
action, suit or proceeding shall be brought against the Trust or the Advisor,
any of their trustees or directors, any such officer, or any such controlling
person based on the Registration Statement, the Prospectus or any Prepricing
Prospectus, or any amendment or supplement thereto, and in respect of which
indemnity may be sought against any Underwriter pursuant to this paragraph (c),
such Underwriter shall have the rights and duties given to the Trust and the
Advisor by paragraph (b) above (except that if the Trust or the Advisor shall
have assumed the defense thereof such Underwriter shall not be required to do
so, but may employ separate counsel therein and participate in the defense
thereof, but the fees and expenses of such counsel shall be at such
Underwriter's expense), and the Trust and the Advisor, their trustees and
directors, any such officer, and any such controlling person shall have the
rights and duties given to the Underwriters by paragraph (b) above. The
foregoing indemnity agreement shall be in addition to any liability which the
Underwriters may otherwise have.
(d) If the indemnification provided for in this Section 8 is
unavailable to an indemnified party under paragraphs (a) or (c) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Trust and the Advisor on the one hand
<PAGE> 19
19
(treated jointly for this purpose as one person) and the Underwriters on the
other hand from the offering of the Shares, or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Trust and the Advisor on the one hand
(treated jointly for this purpose as one person) and the Underwriters on the
other in connection with the statements or omissions that resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Trust and the
Advisor on the one hand (treated jointly for this purpose as one person) and the
Underwriters on the other hand shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses) received by
the Trust bear to the total underwriting discounts and commissions received by
the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus. The relative fault of the Trust and the Advisor on the one hand
(treated jointly for this purpose as one person) and the Underwriters on the
other hand shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Trust
and the Advisor on the one hand (treated jointly for this purpose as one person)
or by the Underwriters on the other hand and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action against such party in respect of
which a claim for contribution may be made under this Section 8(d), notify such
party or parties from whom contribution may be sought, but the omission so to
notify (i) will not relieve the party or parties from whom contribution may be
sought from any other obligation it or they may have under this Section 8(d),
unless such omission results in the forfeiture of substantive rights or defenses
by the party or parties from whom contribution is being sought and (ii) will
not, in any event, relieve the party or parties from whom contribution may be
sought from any other obligation (other than pursuant to this Section 8(d)) it
or they may have under this Agreement. Except for a settlement entered into
pursuant to the last sentence of Section 8(b) hereof, no party will be liable
for contribution with respect to any action or claim settled without its written
consent (which consent shall not be unreasonably withheld).
(e) The Trust, the Advisor and the Underwriters agree that it
would not be just and equitable if contribution pursuant to this Section 8 were
determined by a pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation that does not
take account of the equitable considerations referred to in paragraph (d) above.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in paragraph (d) above
shall be deemed to include, subject to the limitations set forth above, any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating any claim or defending any such action, suit or
proceeding. Notwithstanding the provisions of this Section 8, no Underwriter
shall be required to contribute any amount in excess of the amount by which such
total price of the Shares underwritten by it and distributed to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution
from any
<PAGE> 20
20
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 8 are several
in proportion to the respective numbers of Firm Shares set forth opposite their
names in Schedule I hereto (or such numbers of Firm Shares increased as set
forth in Section 11 hereof) and not joint.
(f) No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity could have been sought hereunder by
such indemnified party, unless such settlement includes an unconditional release
of such indemnified party from all liability on claims that are the subject
matter of such action, suit or proceeding.
(g) Notwithstanding any other provisions in this Section 8, no
party shall be entitled to the benefit of any provision under this Agreement
which protects or purports to protect such person against any liability to the
Trust or its security holders to which such person would otherwise be subject by
reason of such person's willful misfeasance, bad faith, or gross negligence, in
the performance of such person's duties hereunder, or by reason of such person's
reckless disregard of such person's obligations and duties hereunder.
(h) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution under
this Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Trust and the Advisor set forth in this
Agreement shall remain operative and in full force and effect, regardless of (i)
any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Trust, the Advisor, their trustees, directors
or officers, or any person controlling the Trust or the Advisor, (ii) acceptance
of any Shares and payment therefor hereunder, and (iii) any termination of this
Agreement. A successor to any Underwriter or any person controlling any
Underwriter, or to the Trust, the Advisor, their trustees, directors or
officers, or any person controlling the Trust or the Advisor, shall be entitled
to the benefits of the indemnity, contribution, and reimbursement agreements
contained in this Section 8.
9. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares and the Option
Shares, as the case may be, hereunder are subject to the following conditions:
(a) If, at the time this Agreement is executed and delivered,
it is necessary for the registration statement or a post-effective amendment
thereto to be declared effective before the offering of the Shares may commence,
the registration statement or such post-effective amendment shall have become
effective not later than 5:30 P.M., New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by you, and all
filings, if any, required by Rules 497 and 430A under the 1933 Act and the 1933
Act Rules and Regulations shall have been timely made; no stop order suspending
the effectiveness of the Registration Statement or order pursuant to Section
8(e) of the 1940 Act shall have been issued
<PAGE> 21
21
and no proceeding for those purposes shall have been instituted or, to the
knowledge of the Trust, the Advisor or any Underwriter, threatened by the
Commission, and any request of the Commission for additional information (to be
included in the registration statement or the prospectus or otherwise) shall
have been complied with to your satisfaction.
(b) Subsequent to the effective date of this Agreement, there
shall not have occurred (i) any change or any development involving a
prospective change in or affecting the condition (financial or other), business,
prospects, properties, net assets, or results of operations of the Trust or the
Advisor not contemplated by the Prospectus, which in your opinion, as
Representatives of the several Underwriters, would materially adversely affect
the market for the Shares, or (ii) any event or development relating to or
involving the Trust or the Advisor or any officer or director of the Trust or
the Advisor which makes any statement made in the Prospectus untrue or which, in
the opinion of the Trust and its counsel or the Underwriters and their counsel,
requires the making of any addition to or change in the Prospectus in order to
state a material fact required by the 1933 Act, the 1940 Act or the Rules and
Regulations or any other law to be stated therein or necessary in order to make
the statements therein not misleading, if amending or supplementing the
Prospectus to reflect such event or development would, in your opinion, as
Representatives of the several Underwriters, materially adversely affect the
market for the Shares.
(c) You shall have received on the Closing Date an opinion of
Ropes & Gray, counsel for the Trust, dated the Closing Date and addressed to
you, as Representatives of the several Underwriters, in form and substance
satisfactory to you and to the effect that:
(i) The Trust has been duly organized and is validly
existing and in good standing as an unincorporated voluntary
association (commonly known as a Massachusetts business trust)
under the laws of the Commonwealth of Massachusetts and has
full power and authority to own, lease and operate its
properties and to conduct its business as described in the
Registration Statement and the Prospectus and to issue and
sell the Shares as contemplated by this Agreement;
(ii) The Shares have been duly authorized and, when
issued and delivered to the Underwriters against payment
therefor in accordance with the terms of this Agreement, will
be validly issued, fully paid and, except as set forth in the
Statement of Additional Information under "Shareholder
Liability," nonassessable and free of any preemptive or
similar rights; the form of certificates evidencing the Shares
complies with all requirements of Massachusetts law;
(iii) The Shares conform in all material respects
with the statements relating thereto contained in the
Prospectus under the caption "Description of Shares"; and the
Trust's authorized capitalization is as set forth in the
Prospectus under the caption "Description of Shares";
<PAGE> 22
22
(iv) The Registration Statement is effective under
the 1933 Act and the 1940 Act; the filing of the Prospectus
pursuant to Rule 497(h) under the 1933 Act has been made
within the time required by Rule 497(h); and, to the best of
such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued
and no proceeding for any such purpose is pending or
threatened by the Commission;
(v) The Trust is duly registered with the Commission
under the 1940 Act as a closed-end, non-diversified management
investment company and, to such counsel's knowledge, no order
of suspension or revocation of such registration pursuant to
Section 8(e) of the 1940 Act has been issued or proceedings
therefor initiated or threatened by the Commission;
(vi) The 1940 Act Notification, the Registration
Statement, the Prospectus and each amendment thereof or
supplement thereto (other than the financial statements and
schedules, the notes thereto and any schedules and other
financial data contained or incorporated by reference therein
or omitted therefrom, as to which such counsel need express no
opinion) comply as to form in all material respects with the
applicable requirements of the 1933 Act, the 1940 Act and the
Rules and Regulations;
(vii) The statements made in the Prospectus
(including the Statement of Additional Information) under the
caption "Tax Matters", insofar as they constitute matters of
law or legal conclusions, have been reviewed by such counsel
and constitute accurate statements of any such matters of law
or legal conclusions in all material respects, and fairly
present the information called for with respect thereto by
Form N-2 under the 1940 Act;
(viii) To such counsel's knowledge, there are no
legal or governmental proceedings pending or threatened
against the Trust, or to which the Trust or any of its
properties is subject, that are required to be described in
the Registration Statement or the Prospectus but are not
described as required;
(ix) To the best of such counsel's knowledge after
reasonable inquiry, there are no agreements, contracts,
indentures, leases or other instruments that are required to
be described in the Registration Statement or the Prospectus
or to be filed as an exhibit to the Registration Statement by
the 1933 Act or the 1940 Act or by the rules and regulations
thereunder which have not been so described or filed as an
exhibit or incorporated therein by reference as permitted by
the 1933 Act, the 1940 Act or the Rules and Regulations;
(x) Neither the issuance and sale of the Shares as
described in the Prospectus, the execution, delivery or
performance of this Agreement, or any of the Trust Agreements
by the Trust, nor the consummation by the Trust of the
transactions contemplated thereby (i) requires any consent,
approval, authorization
<PAGE> 23
23
or other order of or registration or filing by the Trust with
the Commission, the NASD, any national securities exchange,
any arbitrator, any court, regulatory body, administrative
agency or other governmental body, agency or official (except
such as may have been obtained or made on or prior to the date
hereof and such as may be required for compliance with state
securities or Blue Sky laws) or conflicts or will conflict
with or constitutes or will constitute a breach of, or a
default under, the Declaration of Trust, the By-Laws or other
organizational documents of the Trust or (ii) (a) conflicts or
will conflict with or constitutes or will constitute a breach
of, or a default under, any agreement, indenture, lease or
other instrument to which the Trust is a party or by which it
or any of its properties may be bound and that is identified,
in an officer's certificate of the Trust, as material to the
business, financial condition, operations, properties or
prospects of the Trust (the "Agreements and Instruments"), (b)
violates or will violate any statute, law or regulation
(assuming compliance with state securities and Blue Sky laws),
except that such counsel may state that they express no
opinion as to the reasonableness or fairness of compensation
paid under the Management Agreement, (c) violates or will
violate any judgment, injunction, order or decree that is
applicable to the Trust or any of its properties and that is
known to such counsel or, or (d) will result in the creation
or imposition of any lien, charge or encumbrance upon any
property or assets of the Trust pursuant to the terms of the
Agreements and Instruments;
(xi) The Trust has the power and authority to enter into this
Agreement and each of the Trust Agreements, and this Agreement
and each of the Trust Agreements have been duly authorized,
executed and delivered by the Trust; assuming due
authorization, execution and delivery by the other parties
thereto, this Agreement and each of the Trust Agreements
constitutes the valid and binding obligation of the Trust
enforceable in accordance with its terms (except as rights to
indemnity and contribution in each such agreement may be
limited by Federal or state securities laws and except that
such counsel may state that they express no opinion as to the
reasonableness or fairness of compensation paid under the
Management Agreement), subject as to enforcement to
bankruptcy, insolvency, moratorium, reorganization and other
laws of general applicability relating to or affecting
creditors' rights and to general equity principles (regardless
of whether enforceability is considered in a proceeding in
equity or at law);
(xii) The Trust Agreements comply in all material
respects with all applicable provisions of the 1933 Act, the
Advisers Act, the 1940 Act, the 1933 Act Rules and
Regulations, the Advisers Act Rules and Regulations and the
1940 Act Rules and Regulations;
(xiii) The provisions of the Declaration of Trust, as
amended, and By-Laws of the Trust and the investment policies
and restrictions described in the Prospectus (including the
Statement of Additional Information) under the captions
"Investment Objectives and Policies" and "Miscellaneous
Investment Practices" comply with the requirements of the 1940
Act and the Rules and Regulations; and
(xiv) The Shares have been duly authorized for
listing, subject to official notice of issuance, on the AMEX.
<PAGE> 24
24
Such counsel may also state, in substantially the same form,
that:
They have not independently verified the accuracy,
completeness or fairness of the statements made or the information contained in
the Registration Statement or the Prospectus, and, except for the statements
referred to in paragraphs (iii) and (vii) above and the information referred to
in paragraph (xiii) above, they are not passing upon and do not assume any
responsibility therefor. In the course of the preparation by the Trust of the
Registration Statement and the Prospectus, they have participated in discussions
with the Representatives and employees and officers of the Trust and the Advisor
and in discussions with the Trust's independent accountants, in which the
business and the affairs of the Trust and the Advisor and the contents of the
Registration Statement and the Prospectus were discussed. On the basis of
information that they have gained in the course of their representation of the
Trust in connection with its preparation of the Registration Statement and the
Prospectus and their participation in the discussions referred to above, no
facts have come to their attention that would lead them to believe that as of
its effective date, the Registration Statement contained any untrue statement of
a material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading, or
that as of the Closing Date the Prospectus contained an untrue statement of
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading (in each case other than the financial
statements and schedules, the notes thereto and any schedules and other
financial data contained or incorporated by reference therein or omitted
therefrom, as to which they need express no opinion).
(d) You shall have received on the Closing Date an opinion of
the General Counsel, counsel for the Advisor, dated the Closing Date and
addressed to you, as Representatives of the several Underwriters, in form and
substance satisfactory to you and to the effect that:
(i) The Advisor is a corporation duly incorporated
and validly existing and in good standing under the laws of
The Commonwealth of Massachusetts and has full power and
authority to own, lease and operate its properties and to
conduct its business as described in the Registration
Statement and the Prospectus;
(ii) The Advisor is duly registered with the
Commission as an investment adviser under the Advisers Act of
1940, as amended (the "Advisers Act"), and is not prohibited
by the 1940 Act, the Advisers Act or the rules and regulations
thereunder from acting as the investment advisor to the Trust
pursuant to the Management Agreement as described in the
Prospectus;
(iii) To the best of such counsel's knowledge after
reasonable inquiry, there are no legal or governmental
proceedings pending or threatened against the Advisor, or to
which the Advisor or any of its properties is subject, that
are required to be described in the Registration Statement or
the Prospectus but are not described as required;
<PAGE> 25
25
(iv) To the best of such counsel's knowledge after
reasonable inquiry, the Adviser is not in violation of the
Articles or By-Laws, nor is the Advisor in default under any
material agreement, indenture or instrument or in breach or
violation of any judgment, decree, order, rule or regulation
of any court or governmental or self-regulatory agency or
body;
(v) Neither the execution, delivery or performance of
the Underwriting Agreement, nor the consummation by the
Advisor of the transactions contemplated hereby or thereby,
(i) requires any consent, approval, authorization or other
order of or registration or filing by the Advisor with, the
Commission, the NASD, any national securities exchange, any
arbitrator, any court, regulatory body, administrative agency
or other governmental body, agency or official (except such as
may have been obtained or made on or prior to the date hereof
and such as may be required for compliance with state
securities or Blue Sky laws) or conflicts or will conflict
with or constitutes or will constitute a breach of, or a
default under, the Articles, the By-Laws or other
organizational documents of the Advisor or (ii) (a) conflicts
or will conflict with or constitutes or will constitute a
breach of, or a default under, any agreement, indenture, lease
or other instrument to which the Advisor is a party or by
which it or any of its properties may be bound (the
"Agreements and Instruments"), (b) violates or will violate
any statute, law or regulation (assuming compliance with state
securities and Blue Sky laws), (c) violates or will violate
any judgment, injunction, order or decree that is applicable
to the Advisor or any of its properties and that is known to
me or (d) will result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the
Advisor pursuant to the terms of the Agreements and
Instruments;
(vi) The Adviser has the corporate power and
authority to enter into this Agreement and the Management
Agreement, and this Agreement and the Management Agreement
have been duly authorized, executed and delivered by the
Advisor; assuming due authorization, execution and delivery by
the other parties thereto, the Underwriting Agreement and the
Management Agreement each constitutes the valid and binding
obligation of the Advisor enforceable in accordance with its
terms (except as rights to indemnity and contribution in this
Agreement and the Management Agreement may be limited by
Federal or state securities laws), subject as to enforcement
to bankruptcy, insolvency, moratorium, reorganization and
other laws of general applicability relating to or affecting
creditors' rights and to general equity principles (regardless
of whether enforceability is considered in a proceeding in
equity or at law); and
(vii) The description of the Advisor (other than
statements as to the Advisor's investment decisions, beliefs
and strategies regarding the Trust's portfolio as to which
such counsel need express no opinion) in the Registration
Statement and the Prospectus (including the Statement of
Additional Information) does not contain an untrue statement
of a material fact or omit to state a material
<PAGE> 26
26
fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which
they were made, not misleading.
Such counsel may also state, in substantially the same form,
that:
She has not independently verified the accuracy, completeness
or fairness of the statements made or the information contained in the
Registration Statement or the Prospectus, and, except for the information
referred to in paragraph (vii) above, she is not passing upon and does not
assume any responsibility therefor.
(e) You shall have received on the Closing Date an opinion of
Brown & Wood LLP, special New York counsel for the Trust, dated the Closing Date
and addressed to you, as Representatives of the several Underwriters, in form
and substance satisfactory to you and to the effect that:
(i) The statements in the Prospectus (including the
Statement of Additional Information) under the captions "Tax
Matters" and "Additional New York Tax Considerations," insofar
as they refer to statements of New York law or legal
conclusions involving matters of New York laws, have been
reviewed by us and are correct in all material respects; and
(ii) Such counsel shall also state that they have
participated in the preparation of the statements set forth in
the Registration Statement under the captions "Additional Risk
Considerations -- Certain Risks Associated with Investments in
New York Municipal Obligations" and "Appendix B -- Special
Considerations Relating to New York," the statements set forth
in the Prospectus under the caption "Additional Risk
Considerations -- Certain Risks Associated with Investments in
New York Municipal Obligations," and the statements set forth
in the Statement of Additional Information under the caption
"Appendix B -- Special Considerations Relating to New York,"
and that based upon the foregoing, no facts have come to their
attention which cause them to believe that the statements
contained in the Registration Statement under such captions
(except as to any financial statements or other financial data
included in the Registration Statement, as to which they
express no belief), as of its effective date, contained an
untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to
make the statements contained therein not misleading or that
the statements contained in the Prospectus and Statement of
Additional Information under such captions (except as to any
financial statements or other financial data included in the
Prospectus or any such amendment or supplement, as to which
they express no belief), as of its issue date and as of the
Closing Date or the Option Closing Date, as the case may be,
contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or
necessary to make the statements contained therein, in the
light of the circumstances under which they were made, not
misleading.
<PAGE> 27
27
(f) You shall have received on the Closing Date an opinion of
Simpson Thacher & Bartlett, counsel for the Underwriters, dated the Closing Date
and addressed to you, with respect to such matters as you may reasonably
request.
(g) You shall have received letters addressed to you and dated
the date hereof and the Closing Date from PricewaterhouseCoopers LLP,
independent certified public accountants, substantially in the forms heretofore
approved by the Representatives.
(h) (i) No order suspending the effectiveness of the
Registration Statement or prohibiting or suspending the use of the Prospectus
(or any amendment or supplement thereto) or any Prepricing Prospectus or any
sales material shall have been issued and no proceedings for such purpose or for
the purpose of commencing an enforcement action against the Trust, the Advisor
or, with respect to the transactions contemplated by the Prospectus (or any
amendment or supplement thereto) and this Agreement, any Underwriter, may be
pending before or, to the knowledge of the Trust, the Advisor or any Underwriter
or in the reasonable view of counsel to the Underwriters, shall be threatened or
contemplated by the Commission at or prior to the Closing Date and that any
request for additional information on the part of the Commission (to be included
in the Registration Statement, the Prospectus or otherwise) be complied with to
the satisfaction of the Underwriters; (ii) there shall not have been any change
in the capitalization of the Trust nor any material increase in the short-term
or long-term debt of the Trust (other than in the ordinary course of business)
from that set forth or contemplated in this Agreement, the Registration
Statement or the Prospectus (or any amendment or supplement thereto); (iii)
there shall not have been, subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus (or any
amendment or supplement to either of them), except as may otherwise be stated in
the Registration Statement and Prospectus (or any amendment or supplement to
either of them), any material adverse change in the condition (financial or
other), business, prospects, properties, net assets or results of operations of
the Trust or the Advisor; (iv) the Trust shall not have any liabilities or
obligations, direct or contingent (whether or not in the ordinary course of
business), that are material to the Trust, other than those reflected in the
Registration Statement or the Prospectus (or any amendment or supplement to
either of them); and (v) all the representations and warranties of the Trust and
the Advisor contained in this Agreement shall be true and correct on and as of
the date hereof and on and as of the Closing Date as if made on and as of the
Closing Date, and you shall have received a certificate of the Trust and the
Advisor, dated the Closing Date and signed by the chief executive officer and
the chief financial officer of each of the Trust and the Advisor (or such other
officers as are acceptable to you), to the effect set forth in this Section 9(h)
and in Section 9(i) hereof.
(i) Neither the Trust nor the Advisor shall have failed at or
prior to the Closing Date to have performed or complied in all material respects
with any of its agreements herein contained and required to be performed or
complied with by it hereunder at or prior to the Closing Date.
(j) The Shares have been duly authorized for listing, subject
to official notice of issuance, on the AMEX.
<PAGE> 28
28
(k) The Trust and the Advisor shall have furnished or caused
to be furnished to you such further certificates and documents as you shall have
reasonably requested.
All such opinions, certificates, letters and other documents
will be in compliance with the provisions hereof only if they are reasonably
satisfactory in form and substance to you and your counsel.
Any certificate or document signed by any officer of the Trust
or the Advisor and delivered to you, or to your counsel, shall be deemed a
representation and warranty by the Trust or the Advisor, as applicable, to each
Underwriter as to the statements made therein.
10. Expenses. The Trust agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by it of
its obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the 1940 Act
Notification, the Prospectus and each amendment or supplement to any of them
(including, without limitation, the filing fees prescribed by the 1933 Act, the
1940 Act and the Rules and Regulations); (ii) the printing (or reproduction) and
delivery (including postage, air freight charges and charges for counting and
packaging) of such copies of the Registration Statement, each Prepricing
Prospectus, the Prospectus, any sales material and all amendments or supplements
to any of them as may be reasonably requested for use in connection with the
offering and sale of the Shares; (iii) the preparation, printing,
authentication, issuance and delivery of certificates for the Shares, including
any stamp taxes in connection with the original issuance and sale of the Shares;
(iv) the reproduction and delivery of this Agreement, any dealer agreements and
all other agreements or documents reproduced and delivered in connection with
the offering of the Shares; (v) the registration of the Shares under the 1934
Act and the listing of the Shares on the AMEX; (vi) the registration or
qualification of the Shares for offer and sale under the securities or blue sky
laws of the several states as provided in Section 5(g) hereof (including the
reasonable fees, expenses and disbursements of counsel for the Underwriters
relating to the preparation, printing or reproduction, and delivery of the
preliminary and supplemental blue sky memoranda and such registration and
qualification); (vii) the filing fees and the fees and expenses of counsel for
the Underwriters in connection with any filings required to be made with the
NASD; (viii) the transportation and other expenses incurred by or on behalf of
Trust representatives in connection with presentations to prospective purchasers
of the Shares; and (ix) the fees and expenses of the Trust's accountants and the
fees and expenses of counsel (including local and special counsel) for the
Trust. The Advisor and not the Trust agrees to pay an amount not greater than
$75,000 in reimbursement of certain expenses of the Underwriter in connection
with this Agreement.
11. Effective Date of Agreement. This Agreement shall become
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the registration statement or a post-effective amendment thereto to be
declared effective before the offering of the Shares may commence, when
notification of the effectiveness of the registration statement or such
post-effective amendment has been released by the Commission. Until such time as
this Agreement shall have
<PAGE> 29
29
become effective, it may be terminated by the Trust, by notifying you, or by
you, as Representatives of the several Underwriters, by notifying the Trust.
If any one or more of the Underwriters shall fail or refuse to
purchase Shares which it or they are obligated to purchase hereunder on the
Closing Date, and the aggregate number of Shares which such defaulting
Underwriter or Underwriters are obligated but fail or refuse to purchase is not
more than one-tenth of the aggregate number of Shares which the Underwriters are
obligated to purchase on the Closing Date, each non-defaulting Underwriter shall
be obligated, severally, in the proportion which the number of Firm Shares set
forth opposite its name in Schedule I hereto bears to the aggregate number of
Firm Shares set forth opposite the names of all non-defaulting Underwriters or
in such other proportion as you may specify, to purchase the Shares which such
defaulting Underwriter or Underwriters are obligated, but fail or refuse, to
purchase. If any one or more of the Underwriters shall fail or refuse to
purchase Shares which it or they are obligated to purchase on the Closing Date
and the aggregate number of Shares with respect to which such default occurs is
more than one-tenth of the aggregate number of Shares which the Underwriters are
obligated to purchase on the Closing Date and arrangements satisfactory to you
and the Trust for the purchase of such Shares by one or more non-defaulting
Underwriters or other party or parties approved by you and the Trust are not
made within 36 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Trust. In any
such case which does not result in termination of this Agreement, either you or
the Trust shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and the Prospectus or any other documents or arrangements
may be effected. Any action taken under this paragraph shall not relieve any
defaulting Underwriter from liability in respect of any such default of any such
Underwriter under this Agreement. The term "Underwriter" as used in this
Agreement includes, for all purposes of this Agreement, any party not listed in
Schedule I hereto who, with your approval and the approval of the Trust,
purchases Shares which a defaulting Underwriter is obligated, but fails or
refuses, to purchase.
Any notice under this Section 11 may be given by telegram,
telecopy or telephone but shall be subsequently confirmed by letter.
12. Termination of Agreement. This Agreement shall be subject
to termination in your absolute discretion, without liability on the part of any
Underwriter to the Trust or the Advisor, by notice to the Trust or the Advisor,
if prior to the Closing Date or any Option Closing Date (if different from the
Closing Date and then only as to the Option Shares), as the case may be, (i)
trading in securities generally on the New York Stock Exchange, the American
Stock Exchange or the Nasdaq National Market shall have been suspended or
materially limited, (ii) a general moratorium on commercial banking activities
in New York shall have been declared by either federal or state authorities, or
(iii) there shall have occurred any outbreak or escalation of hostilities or
other international or domestic calamity, crisis or change in political,
financial or economic conditions, the effect of which on the financial markets
of the United States is to make it, in your judgment, impracticable or
inadvisable to commence or continue the offering of the Shares at the offering
price to the public set forth on the cover page of the Prospectus or to
<PAGE> 30
30
enforce contracts for the resale of the Shares by the Underwriters. Notice of
such termination may be given to the Trust by telegram, telecopy or telephone
and shall be subsequently confirmed by letter.
13. Information Furnished by the Underwriters. The statements
set forth in the last sentence of the last paragraph of the front cover page in
the Prospectus, as well as, under the caption "Underwriting" in the Prospectus,
the names of the underwriters and numbers of Shares listed opposite such names
in the first paragraph, the last sentence of the second paragraph, the second
sentence of the ninth paragraph and the first sentence of the eleventh paragraph
constitute the only information relating to any Underwriter furnished to the
Fund in writing by or on behalf of the Underwriters through you as such
information is referred to herein, expressly for use in the Prospectus.
14. Miscellaneous. Except as otherwise provided in Sections 5,
11 and 12 hereof, notice given pursuant to any provision of this Agreement shall
be in writing and shall be delivered (i) if to the Trust or the Advisor, at the
office of the Trust at One Financial Center, Boston, MA 02111, Attention:
Secretary; or (ii) if to you, as Representatives of the several Underwriters, to
Salomon Smith Barney Inc., 388 Greenwich Street, New York, New York 10013,
Attention: Manager, Investment Banking Division.
This Agreement has been and is made solely for the benefit of
the several Underwriters, the Trust, the Advisor, their directors and officers,
and the other controlling persons referred to in Section 8 hereof and their
respective successors and assigns, to the extent provided herein, and no other
person shall acquire or have any right under or by virtue of this Agreement.
Neither the term "successor" nor the term "successors and assigns" as used in
this Agreement shall include a purchaser from any Underwriter of any of the
Shares in his status as such purchaser.
15. Notice. A copy of the Agreement and Declaration of Trust
of the Trust is on file with the Secretary of State of the Commonwealth of
Massachusetts, and notice is hereby given that this Agreement is executed on
behalf of the Trust by an officer or Trustee of the Trust in his or her capacity
as an officer or Trustee of the Trust and not individually and that the
obligations of or arising out of this instrument are not binding upon any of the
Trustees, officers or shareholders individually but are binding only upon the
assets and property of the Trust.
16. Applicable Law; Counterparts. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York.
This Agreement may be signed in various counterparts which
together constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
[End of text]
<PAGE> 31
31
Please confirm that the foregoing correctly sets forth the agreement
among the Trust, the Advisor and the several Underwriters.
Very truly yours,
COLONIAL NEW YORK INSURED
MUNICIPAL FUND
By: _____________________________
COLONIAL MANAGEMENT ASSOCIATES, INC.
By: _____________________________
Confirmed as of the date first above mentioned on behalf of themselves and the
other several Underwriters named in Schedule I hereto.
SALOMON SMITH BARNEY INC.
A.G. EDWARDS & SONS, INC.
PAINE WEBBER INCORPORATED
As Representatives of the Several Underwriters
By: SALOMON SMITH BARNEY INC.
By: _______________________________
Managing Director
<PAGE> 32
SCHEDULE I
COLONIAL NEW YORK INSURED MUNICIPAL FUND
<TABLE>
<CAPTION>
Number of
Underwriter Firm Shares
----------- -----------
<S> <C>
Salomon Smith Barney Inc.......................................
A.G. Edwards & Sons, Inc.......................................
Paine Webber Incorporated......................................
[Others].......................................................
Total..........................................................
===========
</TABLE>
<PAGE> 1
Exhibit (j)(2)
AMENDMENT NO. 8 TO SCHEDULE A
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first-above written.
CUSTOMER
Trust Series
Liberty Funds Trust I Colonial High Yield Securities Fund
Colonial Income Fund
Colonial Strategic Income Fund
Stein Roe Advisor Tax-Managed Growth Fund
Stein Roe Advisor Tax-Managed Value Fund
Liberty Funds Trust II Colonial Money Market Fund
Colonial Intermediate U.S. Government Fund
Colonial Short Duration U.S. Government Fund
Newport Tiger Cub Fund
Newport Japan Opportunities Fund
Newport Greater China Fund
Liberty Funds Trust III Colonial Select Value Fund
The Colonial Fund
Colonial Federal Securities Fund
Colonial Global Equity Fund
Colonial International Horizons Fund
Colonial Global Utilities Fund
Colonial Strategic Balanced Fund
The Crabbe Huson Special Fund
Crabbe Huson Small Cap Fund
Crabbe Huson Real Estate Investment Fund
Crabbe Huson Equity Fund
Crabbe Huson Managed Income & Equity Fund
Crabbe Huson Oregon Tax-Free Fund
Crabbe Huson Contrarian Income Fund
Crabbe Huson Contrarian Fund
Liberty Funds Trust IV Colonial Tax-Exempt Fund
Colonial Tax-Exempt Insured Fund
Colonial Municipal Money Market Fund
Colonial High Yield Municipal Fund
Colonial Utilities Fund
Colonial Intermediate Tax-Exempt Fund
Colonial Counselor Select Income Portfolio
Colonial Counselor Select Balanced Portfolio
Colonial Counselor Select Growth Portfolio
Liberty Funds Trust V Colonial Massachusetts Tax-Exempt Fund
Colonial Minnesota Tax-Exempt Fund
Colonial Michigan Tax-Exempt Fund
Colonial New York Tax-Exempt Fund
Colonial Ohio Tax-Exempt Fund
Colonial California Tax-Exempt Fund
Colonial Connecticut Tax-Exempt Fund
Colonial Florida Tax-Exempt Fund
Colonial North Carolina Tax-Exempt Fund
Liberty Funds Trust VI Colonial U.S. Growth & Income Fund
Colonial Small Cap Value Fund
Colonial Value Fund
Newport Asia Pacific Fund
Liberty Funds Trust VII Newport Tiger Fund
Newport Europe Fund
Colonial Intermediate High Income Fund
Colonial InterMarket Income Trust I
Page 1
<PAGE> 2
Colonial Municipal Income Trust
Colonial High Income Municipal Trust
Colonial Investment Grade Municipal Trust
Colonial Insured Municipal Fund
Colonial California Insured Municipal Fund
Colonial Massachusetts Insured Municipal Fund
Colonial New York Insured Municipal Fund
Liberty All-Star Growth Fund, Inc.
Liberty All-Star Equity Fund
Liberty Variable Investment Trust
Colonial Growth and Income Fund,
Variable Series Stein Roe Global Utilities Fund,
Variable Series Colonial International Fund for Growth,
Variable Series Colonial U.S. Growth & Income Fund,
Variable Series Colonial Strategic Income Fund,
Variable Series Newport Tiger Fund,
Variable Series Liberty All-Star Equity Fund,
Variable Series Colonial High Yield Securities Fund,
Variable Series Colonial Small Cap Value Fund,
Variable Series Colonial International Horizons Fund,
Variable Series Colonial Global Equity Fund,
Variable Series Crabbe Huson Real Estate Investment Fund,
Variable Series
By: /s/ Nancy L. Conlin
Nancy L. Conlin
October 25, 1999
THE CHASE MANHATTAN BANK
By: /s/ Rosemary M. Stidmon
Rosemary M. Stidmon
October 25, 1999
Page 2 of 2
<PAGE> 1
Exhibit (k)(1)
BANKBOSTON, N.A.
STOCK TRANSFER AGENT SERVICES AGREEMENT FOR:
COLONIAL NEW YORK 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 New York Insured Municipal Fund (hereinafter referred to as
"CNYIMF").
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, CNYIMF will be charged as follows:
$2,000.00 Monthly Administrative Fee
$2,500.00 One-Time Project Fee To Establish New Fund
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 CNYIMF 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
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<PAGE> 2
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.
8. Daily Transfer Activity Journals reflecting ownership changes to
be mailed to CNYIMF 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.
Page 2
<PAGE> 3
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 CNYIMF.
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 New York Insured Municipal Fund
Page 3
<PAGE> 4
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 CNYIMF as an expense.
Colonial New York Insured Municipal Fund
Page 4
<PAGE> 5
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 CNYIMF 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 New York Insured Municipal Fund
Page 5
<PAGE> 6
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 CNYIMF 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 CNYIMF if CNYIMF 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
CNYIMF has failed to cure such breach within five (5) business days of
receipt of such notice.
Should CNYIMF 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 CNYIMF. 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. CNYIMF 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 New York Insured Municipal Fund
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<PAGE> 7
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 CNYIMF.
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 NEW YORK INSURED MUNICIPAL FUND
By: /s/ David D. Dixon By: /s/ Nancy L. Conlin
Title: Vice President Title: Secretary
Page 7
<PAGE> 1
Exhibit (k)(2)
PRICING AND BOOKKEEPING AGREEMENT
AGREEMENT dated as of October 26, 1999, between Colonial New York 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 NEW YORK 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 as of the 25th day of October, 1999, by and between COLONIAL NEW
YORK 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 January
1, 2001 the Advisor agrees to waive all of its management fees. In addition,
from January 2, 2001 through November 30, 2001 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
weekly net assets of the Fund:
<TABLE>
<CAPTION>
Period Ending Period Ending
November 30 Waiver November 30 Waiver
----------- ------ ----------- ------
<S> <C> <C> <C>
2001 .30% 2006 .20%
2002 .30% 2007 .15%
2003 .30% 2008 .10%
2004 .30% 2009 .05%
2005 .25%
</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.
1
<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 NEW YORK INSURED MUNICIPAL FUND
By: /s/ J. Kevin Connaughton
-----------------------------------
Attest: /s/ Suzan M. Barron
-------------------------------
Assistant Secretary
COLONIAL MANAGEMENT ASSOCIATES, INC.
By: /s/ Nancy L. Conlin
-----------------------------------
Attest: /s/ Laurie Russell
-------------------------------
Assistant Secretary
2
<PAGE> 1
Exhibit (k)(3)(ii)
EXPENSE REIMBURSEMENT AGREEMENT
AGREEMENT made as of the 25th day of October, 1999, by and between COLONIAL NEW
YORK 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");
NOW THEREFORE, 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, 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) November 30, 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 NEW YORK 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 (l)
November 16, 1999
Colonial New York Insured Municipal Fund
One Financial Center
Boston, Massachusetts 02111
Ladies and Gentleman:
We have acted as counsel to Colonial New York Insured Municipal Fund (the
"Trust") in connection with the Registration Statement of the Trust on From N-2
(File No. 333-84991) under the Securities Act of 1933 and the Investment Company
Act of 1940 (File No. 811-09539) (the "Registration Statement") as amended (the
"Acts"), with respect to certain of its common shares of beneficial interest
(the "Common Shares"). The Common Shares are to be sold pursuant to an
Underwriting Agreement substantially in the form filed as an exhibit to the
Registration Statement (the "Underwriting Agreement") among the Trust, Colonial
Management Associates, Inc., Salomon Smith Barney Inc., A.G. Edwards & Sons,
Inc. and PaineWebber Incorporated.
We have examined the Trust's Agreement and Declaration of Trust on file in
the office of the Secretary of State of the Commonwealth of Massachusetts, as
amended (the "Declaration of Trust"), and the Trust's By-Laws (the "By-Laws"),
and are familiar with the actions taken by the Trust in connection with the
issuance and sale of the Common Shares. We have also examined such other
documents and records as we have deemed necessary for the purpose of this
opinion.
Based upon the foregoing, we are of the opinion that:
1. The Trust is a duly organized and validly existing unincorporated
association under the laws of the Commonwealth of Massachusetts.
<PAGE> 2
Colonial New York Insured Municipal Fund -2- November 16, 1999
2. The Common Shares have been duly authorized and, when issued and paid
for in accordance with the Underwriting Agreement, will be validly issued, fully
paid and nonassessable by the Trust.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that a notice of such disclaimer be given
in each note, bond, contract, instrument, certificate or undertaking entered
into or executed by the Trust or its Trustees. The Declaration of Trust provides
for indemnification out of the property of the Trust for all loss and expense of
any shareholder of the Trust held personally liable solely by reason of his
being or having been a shareholder. Thus, the risk of a shareholder's incurring
financial loss on account of being a shareholder is limited to circumstances in
which the Trust itself would be unable to meet its obligations.
We understand that this opinion is to be used in connection with the
registration of the Common Shares for offering and sale pursuant to the
Securities Act of 1933, as amended. We consent to the filing of this opinion
with and as part of the Registration Statement and to the references to our firm
in the related prospectus under the captions "Tax Matters" and "Legal Opinions"
in the Prospectus contained in the Registration Statement.
Very truly yours,
/s/ Ropes & Gray
--------------------------
Ropes & Gray
<PAGE> 1
Exhibit (n)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-Effective Amendment No. 4 to the registration
statement on Form N-2 (the "Registration Statement") of our report dated
November 12, 1999 relating to the financial statements of Colonial New York
Insured Municipal Fund, which appears in such Statement of Additional
Information which constitutes part of this Registration Statement. We also
consent to the references to us under the headings "Independent Accountants" and
"Financial Statements" in such Statement of Additional Information.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 15, 1999
<PAGE> 1
Exhibit (p)
COLONIAL NEW YORK INSURED MUNICIPAL FUND
SUBSCRIPTION AGREEMENT
This Agreement made as of the 25th day of October, 1999 by and between
Colonial New York 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 NEW YORK INSURED MUNICIPAL FUND
By: /s/ Nancy L. Conlin
----------------------------
Title: Secretary
COLONIAL MANAGEMENT ASSOCIATES, INC.
By: /s/ Nancy L. Conlin
----------------------------
Title: Senior VP
-3-
<PAGE> 1
Exhibit (r)
POWER OF ATTORNEY FOR SIGNATURE
The undersigned constitutes William J. Ballou, Suzan M. Barron, Nancy L. Conlin,
Ellen Harrington, Timothy J. Jacoby, John M. Loder and John W. Reading
individually, as my true and lawful attorney, with full power to each of them to
sign for me and in my name, any and all registration statements and any and all
amendments to the registration statements filed under the Securities Act of 1933
or the Investment Company Act of 1940 with the Securities and Exchange
Commission for the purpose of complying with such registration requirements in
my capacity as a trustee of Colonial Insured Municipal Fund, Colonial New York
Insured Municipal Fund, Colonial Massachusetts Insured Municipal Fund and
Colonial California Insured Municipal Fund. This Power of Attorney authorizes
the above individuals to sign my name and will remain in full force and effect
until specifically rescinded by me.
I specifically permit this Power of Attorney to be filed as an exhibit to any
registration statement or amendment to a registration statement of Colonial
Insured Municipal Fund, Colonial New York Insured Municipal Fund, Colonial
Massachusetts Insured Municipal Fund and Colonial California Insured Municipal
Fund, and I request that this Power of Attorney constitute authority to sign
additional amendments and registration statements by virtue of its incorporation
by reference into any registration statements or amendments for Colonial Insured
Municipal Fund, Colonial New York Insured Municipal Fund, Colonial Massachusetts
Insured Municipal Fund and Colonial California Insured Municipal Fund.
In witness whereof, I have signed this Power of Attorney on this 20th day of
August, 1999.
Robert J. Birnbaum James L. Moody, Jr.
Tom Bleasdale John J. Neuhauser
John V. Carberry Thomas E. Stitzel
Lora S. Collins Robert L. Sullivan
James E. Grinnell Anne-Lee Verville
Richard W. Lowry
Salvatore Macera
William E. Mayer
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