<PAGE>
AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 28, 2000
SECURITIES ACT FILE NO. 333-42364
INVESTMENT COMPANY ACT FILE NO. 811-4841
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. 1 [X]
-----------
Post-Effective Amendment No. [ ]
-----------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 11 [X]
MFS MUNICIPAL INCOME TRUST
(Exact Name of Registrant as Specified in Charter)
500 Boylston Street
Boston, Massachusetts 02116
(Address of Principal Executive Offices)
(617) 954-5000
(Registrant's Telephone Number, including Area Code)
<TABLE>
<S> <C> <C>
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Name and Address of
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Agent for Service Copies to Copies to
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Stephen E. Cavan Jeremiah J. Bresnahan, Jr. Cynthia G. Cobden, Esq.
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c/o Massachusetts Financial Bingham Dana LLP Simpson Thacher & Bartlett
Services Company 150 Federal Street 425 Lexington Avenue
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500 Boylston Street Boston, Massachusetts 02110 New York, New York 10017
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Boston, Massachusetts 02116
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</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. [ ]
<PAGE>
<TABLE>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED (1) UNIT (1) PRICE (1) REGISTRATION FEE (2)
--------------------------- ------------------- -------------------------- -------------------------- --------------------
<S> <C> <C> <C> <C>
Municipal Auction 5,600 Shares $25,000 $140,000,000 $36,960
Rate Cumulative
Preferred Shares
No Par Value
Per Share
(1) Estimated solely for purposes of calculating the registration fee.
(2) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, Pennsylvania. $264 was previously paid. $36,696.00 was
transmitted in connection with this filing.
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 27, 2000
[Red Herring]
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.
PROSPECTUS
$140,000,000
MFS MUNICIPAL INCOME TRUST
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED
("MUNICIPAL PREFERRED") SHARES
2,800 SHARES, SERIES T
2,800 SHARES, SERIES TH
LIQUIDATION PREFERENCE $25,000 PER SHARE
------------
MFS Municipal Income Trust (the "Trust") is selling 2,800 Series T and 2,800
Series TH Municipal Auction Rate Cumulative Preferred Shares ("Municipal
Preferred"). The Trust is a non-diversified, closed-end management investment
company that, as its investment objective, seeks to provide high current income
exempt from federal income taxes. The Trust seeks to achieve its investment
objective by investing primarily (i.e., at least 80% of its assets under normal
circumstances) in debt securities issued by or on behalf of states, territories
and possessions of the United States, and the District of Columbia and their
political subdivisions, agencies or instrumentalities, the interest on which is
exempt from federal income tax. Normally, at least 65% of the Trust's assets
will be invested in tax-exempt securities rated below the three highest rating
categories of recognized rating agencies. Tax-exempt securities rated below the
four highest categories of recognized agencies are commonly known as "junk
bonds." The Trust may invest up to 100% of its assets in junk bonds.
(continued on next page)
INVESTING IN THE SHARES OF MUNICIPAL PREFERRED INVOLVES CERTAIN RISKS. SEE
THE "RISK FACTORS AND SPECIAL CONSIDERATIONS" SECTION BEGINNING ON PAGE 10 OF
THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the issuance of these securities or
determined if this Prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
------------
PER SHARE TOTAL
--------- -----
Public Price .................................. $25,000 $140,000,000
Sales Load .................................... $ 250 $ 1,400,000
Proceeds to Trust (before expenses)* .......... $24,750 $138,600,000
*Offering Expenses to be paid by the Trust are estimated to be $518,460.
The public offering price per share will be increased by the amount of
dividends, if any, that have accumulated from the date the shares of Municipal
Preferred are first issued.
The underwriter is offering the shares of Municipal Preferred subject to
various conditions. The underwriter expects to deliver the shares to
purchasers, in book-entry form through The Depository Trust Company, on or about
December , 2000.
------------
SALOMON SMITH BARNEY
December , 2000
<PAGE>
(continued from previous page)
Investors in Municipal Preferred shares will be entitled to receive cash
dividends at an annual rate that may vary for the successive dividend periods
for such shares. The dividend rate on the Series T Municipal Preferred shares
for the period from and including the date of issue to but excluding
, 2000 will be % per year. The dividend rate on the Series TH Municipal
Preferred shares for the period from and including the date of issue to but
excluding , 2000 will be % per year. For each subsequent period for a series,
the auction agent will determine the dividend rate for a particular period by an
auction conducted on the business day prior to that period. Investors in shares
of Municipal Preferred may participate in auctions through their broker-dealers
in accordance with the procedures specified herein. The Trust may redeem shares
of Municipal Preferred as described under "Description of Municipal Preferred --
Redemption."
This Prospectus sets forth concisely the information about the Trust that a
prospective investor should know before investing, including information about
risks. You should read this Prospectus before you invest and keep it for future
reference. The Trust's Statement of Additional Information, dated
, 2000, has been filed with the Securities and Exchange Commission and
contains additional information about the Trust and is incorporated by reference
into (which means it is considered to be a part of) this Prospectus. You may
obtain a free copy by calling Massachusetts Financial Services Company at
1-800-637-2304. See page B-1 of this Prospectus for a table of contents of the
Statement of Additional Information.
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. THE TRUST HAS NOT, AND THE UNDERWRITER HAS NOT,
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON
IT. THE TRUST IS NOT, AND THE UNDERWRITER IS NOT, MAKING AN OFFER TO SELL THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU
SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS PROSPECTUS IS ACCURATE AS
OF THE DATE ON THE FRONT COVER OF THIS PROSPECTUS ONLY. THE TRUST'S BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE
THAT DATE.
TABLE OF CONTENTS
PAGE
Prospectus Summary .................................................... 4
Risk Factors and Special Considerations ............................... 10
Financial Highlights .................................................. 12
The Trust ............................................................. 12
Use of Proceeds ....................................................... 12
Capitalization At April 30, 2000 ...................................... 13
Portfolio Composition ................................................. 13
Investment Objective and Policies ..................................... 13
Management of the Trust ............................................... 14
The Auction ........................................................... 15
Determination of Net Asset Value ...................................... 17
Description of Municipal Preferred .................................... 17
Rating Agency Guidelines .............................................. 23
Description of Common Shares .......................................... 24
Certain Provisions in the Declaration of Trust ........................ 24
Repurchase of Common Shares; Conversion to Open-end Fund .............. 25
Tax Matters ........................................................... 26
Custodian, Auction Agent, Transfer Agent, Dividend Disbursing
Agent and Registrar ................................................. 27
Underwriting .......................................................... 28
Legal Opinions ........................................................ 28
Reports to Shareholders ............................................... 28
Experts ............................................................... 28
Further Information ................................................... 28
Glossary .............................................................. 29
Appendix A -- Investment Techniques and Practices ..................... A-1
Table of Contents of Statement of Additional Information .............. B-1
<PAGE>
PROSPECTUS SUMMARY
This summary highlights some information from this Prospectus. It may not
contain all of the information that is important to you. To understand the
offering of the Municipal Preferred shares fully, you should read the entire
Prospectus carefully, including the risk factors. You should also refer to the
Glossary, which defines certain terms used in this Prospectus. This summary is
qualified in its entirety by reference to the detailed information included in
this Prospectus and the Statement of Additional Information.
THE OFFERING ........... MFS Municipal Income Trust (the "Trust") is offering a
total of 2,800 shares of Series T and 2,800 shares of
Series TH Municipal Preferred at a purchase price of
$25,000 per share plus dividends, if any, that have
accumulated from the date the Trust first issues the
shares. Except as described in this Prospectus, the
two series have the same rights and preferences and
are offered on the same terms. The two offerings,
however, are independent of each other, and one
offering is not contingent upon the closing of the
other offering. Certain information presented in this
Prospectus assumes that each offering is made and
effected as contemplated, but there can be no
assurance that this will be the case. Salomon Smith
Barney Inc. is offering the shares as underwriter.
The Municipal Preferred shares of each series will be
preferred shares of the Trust that entitle their
holders to receive cash dividends at an annual rate
that may vary for the successive dividend periods for
that series. Except as described under "-- Dividends
and Dividend Periods" and "Description of the
Municipal Preferred -- Dividends and Dividend
Periods," each dividend period for each series will be
seven days. An auction agent will determine the
dividend rate for each series for a particular period
by an auction conducted on the business day
immediately prior to the start of that dividend period
for that series.
Investors and potential investors in the Municipal
Preferred shares of each series may participate in
auctions for the Municipal Preferred shares through
their broker-dealers.
Generally, investors in Municipal Preferred shares
will not receive certificates representing ownership
of their shares. The securities depository (The
Depository Trust Company or any successor) or its
nominee for the account of the investor's agent member
(generally the investor's broker-dealer) will maintain
record ownership of the Municipal Preferred shares of
each series in book-entry form. An investor's agent
member, in turn, will maintain records of that
investor's beneficial ownership of Municipal Preferred
shares.
THE TRUST .............. The Trust is a closed-end, non-diversified management
investment company. See "The Trust." The Trust was
organized as a Massachusetts business trust on
September 18, 1986 and has registered under the
Investment Company Act of 1940, as amended. The
Trust's common shares of beneficial interest are
traded on the New York Stock Exchange under the symbol
"MFM."
RISK FACTORS SUMMARY ... Risk is inherent in all investing. Therefore, before
investing you should consider certain risks carefully
when you invest in the Trust.
The primary risks of investing in Municipal Preferred
shares are the following:
o if an auction of a series fails you may not be able
to sell some or all of your shares of that series;
o because of the nature of the market for Municipal
Preferred shares, you may receive less than the
price you paid for your shares if you sell them
outside of the auction, especially when market
interest rates are rising;
o a rating agency could downgrade Municipal Preferred
shares, which could affect liquidity;
o the Trust may be forced to redeem your shares to
meet regulatory or rating agency requirements or
may voluntarily redeem your shares in certain
circumstances;
o in extraordinary circumstances the Trust may not
earn sufficient income from its investments to pay
dividends;
o if long-term rates rise, the value of the Trust's
investment portfolio may decline, reducing the
asset coverage for the Municipal Preferred shares;
o if an issuer of a municipal bond in which the Trust
invests defaults, there may be a negative impact on
the income and asset value of the Trust's portfolio
(the effects of this risk may, however, be
mitigated by the Trust's investment in municipal
bonds covered by insurance);
o because the Trust may invest a higher percentage of
its assets in a small number of issuers, the Trust
is more susceptible to any single economic,
political or regulatory event affecting those
issuers than is a diversified fund;
o junk bonds are subject to a substantially higher
degree of credit risk than higher rated bonds;
during recessions, a high percentage of issuers of
junk bonds may default on payments of principal and
interest; the price of a junk bond may therefore
fluctuate drastically due to bad news about the
issuer or the economy in general; and
o during recessions and periods of broad market
declines, junk bonds could become less liquid,
meaning that they will be harder to value or sell
at a fair price.
For additional risks of investing in the Municipal
Preferred shares of the Trust, see "Risk Factors and
Special Considerations" below.
DIVIDENDS AND
DIVIDEND PERIODS ....... Dividends on each series of Municipal Preferred shares
are cumulative from the date the shares are first
issued. The Trust will pay dividends on the shares of
Municipal Preferred, out of legally available funds
and when declared by the Board of Trustees, beginning
on , 2000 for Series T and , 2000 for Series TH.
After the initial dividend period, each dividend
period for each series of the Municipal Preferred
shares will generally consist of seven days; provided,
however, that before any auction for a series, the
Trust may decide, subject to certain limitations and
only if it gives certain notices, to declare a Special
Rate Period of up to five years. The Trust may declare
a Special Rate Period if, for example, it expects that
short-term rates may increase or market conditions
otherwise change, in an effort to optimize the effect
of the Trust's leverage on common shareholders. In the
case of dividend periods that are not Special Rate
Periods, dividends generally will be payable on each
succeeding Wednesday for Series T and Friday for
Series TH Municipal Preferred shares. The Trust may
specify different dividend payment dates for certain
Special Rate Periods.
The Trust will pay dividends through the securities
depository (The Depository Trust Company) on each
dividend payment date for each series.
The dividend rate on the Series T Municipal Preferred
for the period from and including the date of issue to
but excluding , 2000 will be
% per year. The dividend rate on the Series TH
Municipal Preferred for the period from and
including the date of issue to but excluding
, 2000 will be % per year. For each
subsequent dividend period for a series, the auction
agent (Bankers Trust Company) will determine the
dividend rate on the shares of Municipal Preferred
through an auction for that series.
MAXIMUM DIVIDEND RATE .. Generally, the rate at which the Trust pays dividends
on shares of a series of Municipal Preferred may not
exceed the maximum dividend rate. The maximum dividend
rate may vary for different dividend periods. It is
determined by the current credit rating assigned to
the shares of Municipal Preferred and an independent
reference rate (as discussed under "Description of
Municipal Preferred -- Dividends and Dividend Periods"
on page 18 herein) that may vary over time.
If the number of shares of a series of Municipal
Preferred available during an auction exceeds the
total number of shares of such series subject to bids
for that auction at less than or equal to the maximum
dividend rate for such series, then the dividend rate
for the subsequent dividend period for that series
will be the maximum dividend rate. In addition, if the
Trust fails to pay a dividend on shares of a series of
Municipal Preferred, or if the Trust fails to pay the
full redemption price for shares of a series of
Municipal Preferred when due, then the dividend rate
for the subsequent dividend period for that series
will be the maximum dividend rate. If, however, the
Trust cures its failure to pay a dividend or to pay
the full redemption price, then the maximum dividend
rate will not apply.
ASSET MAINTENANCE ...... Under the Statement creating the Municipal Preferred
shares of the Trust, which establishes and fixes the
rights and preferences of the shares of Municipal
Preferred, the Trust must maintain:
o asset coverage of the Municipal Preferred shares as
required by the rating agency or agencies rating
the Municipal Preferred shares, and
o asset coverage of the Municipal Preferred shares of
at least 200% as required by the Investment Company
Act of 1940.
Based on the composition of the Trust's portfolio and
market conditions as of October 31, 2000, the asset
coverage of the Municipal Preferred shares as measured
pursuant to the Investment Company Act of 1940 would
be approximately 317% if the Trust were to issue all
Municipal Preferred shares of both series offered in
this Prospectus, representing approximately 32% of the
Trust's capital.
MANDATORY REDEMPTION ... If the Trust does not maintain its required asset
coverage, it must redeem shares of each series of
Municipal Preferred at $25,000 per share plus any
dividends that accumulate and remain unpaid up to the
date fixed for redemption. The Trustwill limit
redemption to the number of Municipal Preferred
shares, together with all other preferred shares of
the Trust (if any), necessary to restore the required
asset coverage. As of the date of this offering, there
are no other preferred shares outstanding. The Trust
may avoid mandatory redemption by restoring its
required asset coverage pursuant to rating agency
guidelines. The provisions of the Investment Company
Act of 1940 may restrict the Trust's ability to make a
mandatory redemption in connection with a failure to
comply with the rating agencies' asset coverage
requirements.
OPTIONAL REDEMPTION .... The Trust, at its option and subject to certain
conditions, may choose to redeem all or a portion of
the shares of Municipal Preferred of each series
generally on the second business day preceding any
dividend payment date at the price of $25,000 per
share plus accumulated but unpaid dividends, if any,
whether or not earned or declared to (but not
including) the date fixed for redemption, and, during
certain Special Rate Periods, any applicable premium.
LIQUIDATION PREFERENCE The liquidation preference (that is, the amount the
Trust must pay to Municipal Preferred shareholders if
the Trust is liquidated) for shares of each series of
Municipal Preferred will be $25,000 per share plus
accumulated but unpaid dividends, if any, whether or
not earned or declared.
VOTING RIGHTS .......... The Investment Company Act of 1940 requires that the
holders of both series of Municipal Preferred shares,
and the holders of any other preferred shares of the
Trust, voting as a separate class, have the right to:
o elect at least two trustees at all times, and
o elect a majority of the trustees at any time when
dividends on the Municipal Preferred shares, or any
other preferred shares of the Trust, are unpaid for
two full years.
In each case, the holders of common shares, both
series of Municipal Preferred shares, and any other
preferred shares of the Trust, voting together as a
single class, will elect the remaining trustees. The
holders of each series of Municipal Preferred shares,
and the holders of any other preferred shares of the
Trust, will vote as a separate class or classes on
certain other matters as required under the Trust's
Declaration of Trust, the Investment Company Act of
1940, and Massachusetts law. Each common share, each
Municipal Preferred share, and each share of any other
class of preferred shares of the Trust is entitled to
one vote per share.
TAXATION ............... In general, dividends on shares of Municipal Preferred
will be exempt from regular federal income tax in the
hands of owners of such shares to the extent such
dividends are paid from tax- exempt income earned on
the Trust's investments. Exempt- interest dividends
paid by the Trust from interest earned on certain
private activity bonds may increase a corporate
shareholder's alternative minimum tax liability, and
all exempt-interest dividends may increase a corporate
shareholder's alternative minimum tax liability. The
extent of any such increase will depend on the
shareholder's particular tax situation. The Trust is
currently required to allocate net capital gain, net
tax-exempt income and other income taxable for federal
income tax purposes, if any, proportionately between
common shares of beneficial interest and shares of
Municipal Preferred. The Trust shall, in the case of a
seven- day dividend period or a Special Rate Period of
28 days or fewer for the shares of Municipal
Preferred, and may, in the case of any other Special
Rate Period for such shares, give notice of the amount
of any income taxable for federal income tax purposes
to be included in a dividend on shares of Municipal
Preferred in advance of the related auction.
Alternatively, if the Trust does not give such advance
notice, it generally will be required to pay such
dividend, increased by a Gross-Up Payment, to holders
of shares of Municipal Preferred. The amount of
taxable income allocable to shares of Municipal
Preferred will depend upon the amount of such income
realized by the Trust, but is not generally expected
to be significant.
INVESTMENT OBJECTIVE ... The Trust's investment objective is to provide high
current income exempt from federal income taxes. There
can be no assurance that the Trust will achieve its
investment objective.
INVESTMENT STRATEGIES .. The Trust is a non-diversified mutual fund. This means
that the Trust may invest a relatively high percentage
of its assets in a small number of issuers. The Trust
also may invest a high percentage of its assets in
securities of issuers located in the same state, that
derive income from similar projects and that are
otherwise related.
The Trust invests, under normal market conditions, at
least 80% of its total assets in municipal securities
and participation interests in municipal securities
issued by banks, the interest on which is exempt from
federal income tax. Municipal securities are bonds or
other debt obligations of a U.S. state or political
subdivision, such as a county, city, town, village, or
authority. Participation interests in municipal
securities are interests in holdings of municipal
obligations backed by a letter of credit or guarantee
from the issuing bank. The Trust seeks to invest in
municipal securities whose income is exempt from
federal income taxes. However, the interest income on
certain of these municipal securities may be subject
to an alternative minimum tax. Under normal
circumstances, the Trust will invest at least 65% of
its assets in tax exempt securities rated below the
three highest rating categories of recognized rating
agencies. Tax-exempt securities rated below the four
highest categories of recognized agencies are commonly
known as "junk bonds." The Trust may invest up to 100%
of its assets in junk bonds.
The Trust may temporarily invest either in tax-exempt
securities in the higher rating categories of
recognized rating agencies or in cash or cash
equivalent short-term obligations of similar quality,
including, but not limited to, short-term municipal
obligations, certificates of deposit, commercial
paper, short-term notes, obligations issued or
guaranteed by the U.S. Government, its agencies,
authorities or instrumentalities and repurchase
agreements. Interest on certain of these short-term
obligations will be subject to federal income tax.
INVESTMENT ADVISER ..... Massachusetts Financial Services Company ("MFS" or the
"Adviser"), an investment adviser registered under the
Investment Advisers Act of 1940, as amended, has
served as the Trust's investment adviser since the
Trust's inception.
RATINGS ................ The Trust will not issue shares of Municipal Preferred
unless such shares have a rating of Aaa from Moody's
Investors Service, Inc. ("Moody's") and AAA from
Standard & Poor's Ratings Group ("Standard & Poor's").
SECONDARY MARKET TRADING Broker-dealers may, but are not obligated to, maintain
a secondary market in shares of each series of
Municipal Preferred outside of auctions. There can be
no assurance that a secondary market will develop or,
if it does develop, that it will provide owners with
liquidity of investment. Shares of each series of
Municipal Preferred may be transferred outside of
auctions only to a broker-dealer or such other persons
who may be permitted by the Trust.
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
You should consider the following risk factors and other special
considerations in deciding whether to invest in shares of Municipal Preferred.
Please note that there are many circumstances which could cause the value of
your investment in the Municipal Preferred to decline, and which could prevent
the Trust from achieving its objective, that are not described here.
MUNICIPAL SECURITIES RISK.
o INTEREST RATE RISK. As with any fixed income security, the prices of
municipal securities in the Trust's portfolio will generally fall when
interest rates rise. Conversely, when interest rates fall, the prices of
municipal securities in the Trust's portfolio will generally rise.
o MATURITY RISK. The Trust may invest in municipal securities of any maturity.
Interest rate risk will generally affect the price of a municipal security
more if the security has a longer maturity. Municipal securities with longer
maturities will therefore be more volatile than other fixed income securities
with shorter maturities. Conversely, municipal securities with shorter
maturities will be less volatile but generally provide lower returns than
municipal securities with longer maturities. The average maturity of the
Trust's municipal security investments may affect the volatility of the
Trust's share price.
o CREDIT RISK. Credit risk is the risk that the issuer of a municipal security
will not be able to pay principal and interest when due. Rating agencies
assign credit ratings to certain municipal securities to indicate their
credit risk. The price of a municipal security will generally fall if the
issuer defaults on its obligation to pay principal or interest, the rating
agencies downgrade the issuer's credit rating or other news affects the
market's perception of the issuer's credit risk. A participation interest is
also subject to the risk of default by the issuing bank.
o CALL RISK. The issuers of municipal securities held by the Trust may call, or
prepay principal due on, their securities, particularly during periods of
declining interest rates. The Trust may not be able to reinvest that
principal at attractive rates, reducing income to the Trust. The Trust also
may lose the premium paid for the securities.
o GENERAL OBLIGATIONS AND REVENUE OBLIGATIONS RISK. The Trust may invest in
municipal bonds that are general obligations backed by the full faith and
credit of the municipal issuer. The Trust may also invest in municipal bonds
called revenue obligations which are subject to a higher degree of credit
risk than general obligations. Generally, the Trust primarily invests in
revenue obligations. Revenue obligations finance specific projects, such as
building a hospital, and are not backed by the full faith and credit of the
municipal issuer. Because revenue obligations are repaid from the revenues
from a facility, they are subject to a risk of default in payments of
principal and interest if the facility does not generate enough income.
LIQUIDITY RISK. The fixed income securities purchased by the Trust may be traded
in the over-the-counter market rather than on an organized exchange and are
subject to liquidity risk. This means that they may be harder to purchase or
sell at a fair price. The inability to purchase or sell these fixed income
securities at a fair price could have a negative impact on the Trust's
performance.
LOWER RATED MUNICIPAL SECURITIES RISK.
o HIGHER CREDIT RISK. Junk bonds are subject to a substantially higher degree
of credit risk than higher rated bonds. During recessions, a high percentage
of issuers of junk bonds may default on payments of principal and interest.
The likelihood of these issuers declaring or being placed into bankruptcy may
be higher relative to issuers of investment grade securities. The price of a
junk bond may therefore fluctuate drastically due to bad news about the
issuer or the economy in general. Municipal securities in the lower rating
categories and comparable unrated bonds are deemed to be predominantly
speculative in character.
o HIGHER LIQUIDITY RISK. During recessions and periods of broad market
declines, junk bonds could become less liquid, meaning that they will be
harder to value or sell at a fair price.
NON-DIVERSIFIED STATUS RISK. Because the Trust may invest a higher percentage of
its assets in a small number of issuers, the Trust is more susceptible to any
single economic, political or regulatory event affecting those issuers than is a
diversified fund.
AUCTION RISK. Shareholders may not be able to sell a series of Municipal
Preferred shares at an auction if the auction fails; that is, if there are more
Municipal Preferred shares of that series offered for sale than there are buyers
for those shares. The Trust believes this event is unlikely. Also, if a
shareholder places hold orders (orders to retain Municipal Preferred shares) at
an auction only at a specified rate, and that bid rate exceeds the rate set at
the auction, such shareholder will not retain his or her Municipal Preferred
shares. Finally, if a shareholder buys shares or elects to retain shares without
specifying a rate below which he or she would not wish to continue to hold those
shares, and the auction sets a below-market rate, such shareholder may receive a
lower rate of return on his or her shares than the market rate. See "Description
of Municipal Preferred" and "The Auction -- Auction Procedures."
ANTITAKEOVER PROVISIONS. The Trust's Declaration of Trust includes provisions
that could limit the ability of other entities or persons to acquire control of
the Trust or to change the composition of its Board of Trustees. Such provisions
could discourage a third party from seeking to obtain control of the Trust.
INVESTMENT CONSIDERATIONS. Investors in the shares of Municipal Preferred
should consider the following factors:
o The credit ratings of the shares of Municipal Preferred could be reduced
while an investor holds such shares.
o Neither broker-dealers nor the Trust are obligated to purchase shares of the
Municipal Preferred in an auction or otherwise nor is the Trust required to
redeem shares of the Municipal Preferred in the event of a failed auction.
o If sufficient bids do not exist in an auction, the applicable dividend rate
will be the maximum applicable dividend rate, and in such event, owners of
the shares of Municipal Preferred wishing to sell will not be able to sell
all, and may not be able to sell any, of such shares in the auction. As a
result, investors may not have liquidity of investment.
SECONDARY MARKET. The broker-dealers intend to maintain a secondary trading
market in the shares of each series of Municipal Preferred outside of auctions;
however, they have no obligation to do so and there can be no assurance that a
secondary market for either series of the shares of the Municipal Preferred will
develop or, if one does develop, that it will provide holders with a liquid
trading market. The shares of each series of Municipal Preferred will not be
registered on any stock exchange or on any automated quotation system. An
increase in the level of interest rates likely will have an adverse effect on
the secondary market price of the shares of Municipal Preferred, and a selling
shareholder may have to sell Municipal Preferred between auctions at a price per
share of less than $25,000. You may transfer shares outside of auctions only to
broker-dealers or such other persons as may be permitted by the Trust.
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth certain specified information for a common share
of beneficial interest of the Trust outstanding throughout each period
presented. The financial highlights for the period ended October 31, 1999 have
been audited by Deloitte & Touche LLP, the Trust's independent accountants,
whose unqualified report for the period ended October 31, 1999 is included in
the Trust's October 31, 1999 Annual Report and in "Report of Independent
Accountants" in the "Financial Statements" section of the Statement of
Additional Information. The financial highlights for the six month period ended
April 30, 2000 are unaudited. The financial highlights should be read in
conjunction with the financial statements and notes thereto included in
"Financial Statements" in the Statement of Additional Information.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
SIX MONTHS ENDED ----------------------------------------------------------------------------
APRIL 30, 2000 1999 1998 1997 1996 1995
(UNAUDITED)
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value - beginning of
period $ 7.96 $ 8.55 $ 8.51 $ 8.58 $ 8.84 $ 8.73
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.26 $ 0.54 $ 0.57 $ 0.61 $ 0.66 $ 0.68
Net realized and unrealized
gain (loss) on investments (0.23) (0.60) 0.05 (0.03) (0.26) 0.13
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.03 $(0.06) $ 0.62 $ 0.58 $ 0.40 $ 0.81
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders from net
investment income $(0.26) $(0.53) $(0.58) $(0.65) $(0.66) $(0.70)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 7.73 $ 7.96 $ 8.55 $ 8.51 $ 8.58 $ 8.84
====== ====== ====== ====== ====== ======
Per share market value - end of
period $ 6.94 $ 7.13 $ 9.19 $ 9.06 $ 9.38 $ 9.50
------ ------ ------ ------ ------ ------
Total return 0.84%++ (0.59)% 8.37% 3.90% 4.50% 12.57%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA:
Expenses## 1.08%+ 1.06% 1.10% 1.19% 1.24% 1.33%
Net investment income 6.79%+ 6.49% 6.62% 7.26% 7.47% 7.66%
PORTFOLIO TURNOVER 10% 15% 12% 21% 13% 14%
NET ASSETS AT END OF PERIOD
(000 OMITTED) $303,230 $312,195 $333,544 $329,282 $328,630 $334,985
------
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
</TABLE>
THE TRUST
The Trust is a closed-end, non-diversified management investment company.
The Trust's investment objective is to provide high current income exempt from
federal income taxes. The bonds and notes purchased by the Trust generally are
issued by or on behalf of states, territories and possessions of the United
States, and the District of Columbia and their political subdivisions, agencies
or instrumentalities, the interest on which is exempt from federal income tax
("Municipal Bonds" or "tax-exempt securities"). See "Investment Objective and
Policies." No assurance can be given that the Trust's investment objective will
be achieved. All or a portion of the Trust's dividends may be subject to the
Federal alternative minimum tax. The Trust was organized as a Massachusetts
business trust under the laws of the Commonwealth of Massachusetts on September
18, 1986, and is registered under the Investment Company Act of 1940, as amended
(the "1940 Act"). In November 1986, the Trust issued 31,011,802 shares of
beneficial interest, no par value (the "Common Shares"), pursuant to the initial
public offering thereof and commenced operations. The Trust's Common Shares are
traded on the New York Stock Exchange under the symbol "MFM." The Trust's
principal office is located at 500 Boylston Street, Boston, MA 02116, and its
telephone number is (617) 954-5000.
USE OF PROCEEDS
The net proceeds of this offering will be approximately $138,081,540, after
payment of the sales load to Salomon Smith Barney Inc. (the "Underwriter") and
estimated offering costs.
The net proceeds of the offering will be invested in accordance with the
Trust's investment objective and policies. It is presently anticipated that the
Trust will be able to invest substantially all of the net proceeds in Municipal
Obligations that meet the Trust's investment objective at or shortly (within six
to eight weeks) after the completion of the offering. To the extent that all of
the proceeds cannot be so invested, pending such investment, the Trust will
invest such proceeds initially in high-quality, short-term tax-exempt
securities, the income on which will be exempt from federal income taxes (other
than the possible incidence of any alternative minimum tax), or in high-quality
Municipal Obligations with relatively low volatility (such as pre-refunded and
intermediate-term securities), to the extent such securities are available. If
necessary to invest fully the net proceeds of the offerings immediately, the
Trust may also purchase, as temporary investments, short-term taxable
investments of the type described under "Investment Objective and Policies," the
income on which is subject to federal income taxes.
CAPITALIZATION AT APRIL 30, 2000
The following table sets forth the unaudited capitalization of the Trust at
April 30, 2000 and as adjusted to give effect to the issuance of the shares of
Series T and Series TH Municipal Preferred offered hereby (including estimated
offering expenses and sales loads of $1,918,460).
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
---------------- ----------------
<S> <C> <C>
Shareholders' Equity:
Preferred Shares, no par value per share; unlimited shares
authorized (no shares issued; 5,600 shares of Municipal
Auction Rate Cumulative Preferred Shares issued, as
adjusted, at $25,000 per share liquidation preference) . $ -- $140,000,000
Common Shares, no par value per share; unlimited shares
authorized; 39,297,340 less 55,500 treasury shares ..... 355,603,287 353,684,827
Accumulated undistributed net investment income .......... 1,038,188 1,038,188
Accumulated net realized loss on investments ............. (6,919,649) (6,919,649)
Unrealized depreciation on investments ................... (46,491,950) (46,491,950)
------------ ------------
Net Assets ................................................. $303,229,876 $441,311,416
============ ============
</TABLE>
PORTFOLIO COMPOSITION
As of April 30, 2000, approximately 99% of the market value of the Trust's
portfolio was invested in long and intermediate-term Municipal Obligations and
approximately 1% of the market value of the Trust's portfolio was invested in
short-term securities. For purposes of the foregoing sentence, futures contracts
in which the Trust has invested are not included in the market value of the
Trust's portfolio. The following table sets forth certain information with
respect to the composition of the Trust's investment portfolio (excluding
short-term securities) as of April 30, 2000.
<TABLE>
<CAPTION>
STANDARD & NUMBER MARKET NUMBER MARKET
POOR'S* OF ISSUES VALUE PERCENT MOODY'S* OF ISSUES VALUE PERCENT
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AAA 28 $ 52,694,199.27 17.4% Aaa 24 $ 42,535,819.95 14.0%
AA 7 9,801,500.08 3.2 Aa 9 13,652,447.32 4.5
A 9 13,873,447.66 4.6 A 3 2,890,122.79 1.0
BBB 31 44,507,212.81 14.7 Baa 25 42,976,466.90 14.2
BB 9 9,729,799.27 3.2 Ba 14 18,048,986.11 6.0
B 6 8,676,648.29 2.9 B 1 706,039.39 0.2
NR** 121 163,818,067.10 54.0 NR** 135 182,290,992.02 60.1
--- --------------- ----- --- -------------- -----
Total 211 $303,100,874.47 100.0% Total 211 303,100,874.47 100.0%
=== =============== ===== === ============== =====
------
* Standard & Poor's rating categories may be modified further by a plus (+) or minus (-) in AA, A, BBB, BB and B ratings.
Moody's rating categories may be modified further by a 1, 2 or 3 in Aa, A, Baa, Ba and B ratings.
** Many bonds are rated by only one rating agency, which results in a higher percentage of bonds in this category. The total
market value of bonds that do not carry a rating from any rating service is $144,348,744.19, which represents 47.6% of the
market value of the Trust's portfolio (excluding short-term securities and futures) as of April 30, 2000.
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
The Trust's investment objective is to provide high current income exempt
from federal income taxes.
The Trust is a non-diversified mutual fund and invests, under normal market
conditions, at least 80% of its total assets in municipal securities and
participation interests in municipal securities issued by banks, the interest on
which is exempt from federal income tax. Municipal securities are bonds or other
debt obligations of a U.S. state or political subdivision, such as a county,
city, town, village, or authority. Participation interests in municipal
securities are interests in holdings of municipal obligations backed by a letter
of credit or guarantee from the issuing bank. The Trust seeks to invest in
municipal securities whose income is exempt from federal income taxes. However,
the interest income on certain of these municipal securities may be subject to
an alternative minimum tax. Under normal circumstances, the Trust will invest at
least 65% of its assets in tax-exempt securities rated below the three highest
rating categories of recognized rating agencies. Tax- exempt securities rated
below the four highest categories of recognized agencies are commonly known as
"junk bonds." The Trust may invest up to 100% of its assets in junk bonds.
In selecting fixed income investments for the Trust, MFS considers the views
of its large group of fixed income portfolio managers and research analysts.
This group periodically assesses the three-month total return outlook for
various segments of the fixed income markets. This three-month "horizon" outlook
is used by the portfolio manager(s) of MFS' fixed income oriented funds
(including the Trust) as a tool in making or adjusting a fund's asset
allocations to various segments of the fixed income markets. In assessing the
credit quality of fixed income securities, MFS does not rely solely on the
credit ratings assigned by credit rating agencies, but rather performs its own
independent credit analysis.
The Trust may temporarily invest either in tax-exempt securities in the
higher rating categories of recognized rating agencies or in cash or cash
equivalent short-term obligations of similar quality, including, but not limited
to, short-term municipal obligations, certificates of deposit, commercial paper,
short-term notes, obligations issued or guaranteed by the U.S. Government, its
agencies, authorities or instrumentalities and repurchase agreements. Interest
on certain of these short-term obligations will be subject to federal income
tax.
The Trust may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of the
Trust and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which the Trust may
engage, including the principal investment techniques and practices described
above, are identified in Appendix A to this Prospectus, and are discussed,
together with their risks, in the Trust's Statement of Additional Information.
The Trust may engage in active and frequent trading to achieve its principal
investment strategies. This may result in the realization and distribution to
shareholders of higher capital gains as compared to a Trust with less active
trading policies, which may increase your tax liability. Frequent trading also
increases transaction costs, which could detract from the Trust's performance.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Board of Trustees is responsible for the general supervision of the
Trust, including general supervision of the duties performed by the Adviser
under its Advisory Agreement (as defined below) with the Trust. There are 8
trustees of the Trust, 2 of whom are "interested persons" (as defined in the
1940 Act) of the Trust or the Adviser. The names and addresses of the trustees
and officers of the Trust and their principal occupations and other affiliations
during the past five years are set forth under "Management of the Trust" in the
Statement of Additional Information.
THE ADVISER
MFS. MFS, a Delaware corporation, is the Trust's Adviser. MFS and its
predecessor organizations have a history of money management dating from 1924,
thus making MFS America's oldest mutual fund organization. MFS is a subsidiary
of Sun Life of Canada (U.S.) Financial Services Holdings, Inc. ("Sun Life of
Canada (U.S.)") which in turn is an indirect wholly owned subsidiary of Sun Life
of Canada ("Sun Life"). Sun Life, is one of the largest international life
insurance companies and has been operating in the United States since 1895. The
executive officers of MFS report to the Chairman of Sun Life. The principal
business address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
PORTFOLIO MANAGER. Michael Roberge is a Senior Vice President of MFS. Mr.
Roberge has been the portfolio manager of the Trust since December, 1997 and
has been employed in the investment area of MFS since 1996. From 1994 to 1996,
Mr. Roberge worked as a municipal credit analyst and portfolio manager with
Colonial Investment Management.
ADVISORY AGREEMENT. The Investment Advisory Agreement between MFS and the Trust
(the "Advisory Agreement") provides that, subject to the direction of the Board
of Trustees of the Trust, MFS is responsible for the actual management of the
Trust's portfolio. The responsibility for making decisions to buy, sell or hold
a particular security rests with the Adviser, subject to review by the Board of
Trustees. The Adviser also provides certain administrative services and general
office facilities.
ADVISORY FEE. For the services provided by MFS under the Advisory Agreement, the
Trust pays it a fee computed and paid monthly in an amount equal to the sum of
0.4% of the average daily net assets of the Trust and 6.32% of the gross income
(i.e., income other than gains from the sale of securities or gains received
from futures contracts) of the Trust, in each case on an annualized basis, for
the Trust's then-current fiscal year. This advisory fee may be greater than that
paid by funds with similar investment objectives.
THE AUCTION
GENERAL
The provisions of the Statement creating the Municipal Preferred shares of
the Trust (the "Statement") provide that, except as otherwise described herein,
the Applicable Rate with respect to shares of Municipal Preferred for each Rate
Period after the Initial Rate Period thereof shall be equal to the rate per
annum that the Auction Agent advises has resulted on the Business Day preceding
the first day of such Subsequent Rate Period (an "Auction Date") from
implementation of the auction procedures (the "Auction Procedures") set forth in
the Statement and summarized below, in which persons determine to hold or offer
to sell or, based on dividend rates bid by them, offer to purchase or sell such
shares. Each periodic implementation of the Auction Procedures is referred to
herein as an "Auction."
Certain defined terms used in this section and under "Description of
Municipal Preferred" are defined in the Glossary.
AUCTION PROCEDURES
Prior to the Submission Deadline on each Auction Date for the shares of each
series of Municipal Preferred, each 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 Municipal Preferred (a "Beneficial Owner") may submit orders
("Orders") to that Broker-Dealer as follows:
o Hold Order -- indicating its desire to hold shares of Municipal Preferred
without regard to the Applicable Rate for the next Rate Period.
o Bid -- indicating its desire to sell shares of Municipal Preferred at
$25,000 per share if the Applicable Rate for the next Rate Period is less
than the rate specified in such Bid (also known as a hold-at-a-rate
order).
o Sell Order -- indicating its desire to sell shares of Municipal Preferred
at $25,000 per share without regard to the Applicable Rate for the next
Rate Period.
A Beneficial Owner may submit different types of Orders to its Broker-
Dealer with respect to shares of Municipal Preferred then held by such
Beneficial Owner. A Beneficial Owner that submits a Bid to its Broker-Dealer
having a rate higher than the Maximum Rate on the Auction Date will be treated
as having submitted a Sell Order to its Broker-Dealer. A Beneficial Owner that
fails to submit an Order to its Broker-Dealer will ordinarily be deemed to have
submitted a Hold Order to its Broker-Dealer; provided, however, that if a
Beneficial Owner fails to submit an Order to its Broker-Dealer for an Auction
relating to a Rate Period for Municipal Preferred of more than 28 Rate Period
Days, such Beneficial Owner will be deemed to have submitted a Sell Order to its
Broker-Dealer. A Sell Order shall constitute an irrevocable offer to sell the
shares of Municipal Preferred subject thereto. A Beneficial Owner that offers to
become the Beneficial Owner of additional shares of Municipal Preferred is, for
purposes of such offer, a Potential Beneficial Owner of additional shares of
Municipal Preferred as discussed below.
A customer of a Broker-Dealer that is not a Beneficial Owner of shares of
Municipal Preferred but that wishes to purchase shares, or that is a Beneficial
Owner that wishes to purchase additional shares (in each case, a "Potential
Beneficial Owner"), may submit Bids to its Broker-Dealer in which it offers to
purchase shares of Municipal Preferred at $25,000 per share if the Applicable
Rate for the next Rate Period is not less than the rate specified in such Bid. A
Bid placed by a Potential Beneficial Owner specifying a rate higher than the
Maximum Rate on the Auction Date will not be accepted.
The Broker-Dealers in turn will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves (unless otherwise permitted by the Trust)
as Existing Holders in respect of shares subject to Orders submitted or deemed
submitted to them by Beneficial Owners and as Potential Holders in respect of
shares subject to Orders submitted to them by Potential Beneficial Owners.
However, neither the Trust nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing. Any Order placed with the
Auction Agent by a Broker-Dealer as or on behalf of an Existing Holder or a
Potential Holder will be treated in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or Potential Beneficial Owner. Similarly,
any failure by a Broker-Dealer to submit to the Auction Agent an Order in
respect of any shares of Municipal Preferred held by it or customers who are
Beneficial Owners will be treated in the same manner as a Beneficial Owner's
failure to submit to its Broker-Dealer an Order in respect of shares of
Municipal Preferred held by it. A Broker-Dealer may also submit Orders to the
Auction Agent for its own account as an Existing Holder or Potential Holder,
provided it is not an affiliate of the Trust. The Auction Agent after each
Auction for shares of Municipal Preferred will pay to each Broker-Dealer, from
funds provided by the Trust, a service charge at the annual rate of 14 of 1% in
the case of any Auction immediately preceding a Rate Period of less than one
year, or a percentage agreed to by the Trust and the Broker-Dealers in the case
of any Auction immediately preceding a Rate Period of one year or longer, of the
purchase price of shares of Municipal Preferred placed by such Broker-Dealer at
such Auction. See "The Auction -- Broker-Dealers" in the Statement of Additional
Information.
If Sufficient Clearing Bids exist (that is, the number of shares of
Municipal Preferred subject to Bids submitted or deemed submitted to the Auction
Agent by Broker-Dealers as or on behalf of Potential Holders with rates equal to
or lower than the Maximum Rate is at least equal to the number of shares of
Municipal Preferred subject to Sell Orders submitted or deemed submitted to the
Auction Agent by Broker-Dealers as or on behalf of Existing Holders), the
Applicable Rate for the next succeeding Rate Period will be the lowest rate
specified in the Submitted Bids which, taking into account such rate and all
lower rates bid by Broker-Dealers as or on behalf of Existing Holders and
Potential Holders, would result in Existing Holders and Potential Holders owning
all the shares of Municipal Preferred available for purchase in the Auction. If
Sufficient Clearing Bids do not exist, the Applicable Rate for the next
succeeding Rate Period will be the Maximum Rate on the Auction Date. In such
event, Beneficial Owners that have submitted or are deemed to have submitted
Sell Orders may not be able to sell in such Auction all shares of Municipal
Preferred subject to such Sell Orders. If Broker-Dealers submit or are deemed to
have submitted to the Auction Agent Hold Orders with respect to all Existing
Holders, the Applicable Rate for the next succeeding Rate Period will be the All
Hold Order Rate.
The Auction Procedures include a pro rata allocation of shares for purchase
and sale, which may result in an Existing Holder continuing to hold or selling,
or a Potential Holder purchasing, a number of shares of Municipal Preferred that
is fewer than the number of shares of Municipal Preferred specified in its
Order. To the extent the allocation procedures have that result, Broker-Dealers
that have designated themselves as Existing Holders or Potential Holders in
respect of customer Orders will be required to make appropriate pro rata
allocations among their respective customers.
Settlement of purchases and sales with respect to shares of each series of
Municipal Preferred will be made on the next Business Day (also a Dividend
Payment Date) after the Auction Date through the Securities Depository.
Purchasers will make payment through their Agent Members in same-day funds to
the Securities Depository against delivery to their respective Agent Member. The
Securities Depository will make payment to the Sellers' Agent Members in
accordance with the Securities Depository's normal procedures, which now provide
for payment against delivery by their Agent Members in same-day funds. The
settlement procedures to be used with respect to Auctions for shares of
Municipal Preferred are set forth in Appendix D to the Statement of Additional
Information.
The first Auction for shares of Municipal Preferred will be held on , 2000
for Series T and , 2000 for Series TH, the Business Day preceding the Dividend
Payment Date for the Initial Rate Period of each respective series. Thereafter,
except during Special Rate Periods, Auctions will normally be held every Tuesday
for Series T and Thursday for Series TH, and each Subsequent Rate Period will
normally begin on the following Wednesday for Series T and Friday for Series TH.
Except as noted below, 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 Minimum Rate
Periods or Special Rate Periods of 28 Rate Period Days or fewer, and may, in the
case of any other Special Rate Period, notify the Auction Agent of the amount to
be so included not later than the Dividend Payment Date next preceding the
Auction Date on which the Applicable Rate for such dividend is to be
established. Whenever the Auction Agent receives such notice from the 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 customers who are Beneficial Owners and Potential Beneficial
Owners believed by it to be interested in submitting an Order in the Auction to
be held on such Auction Date. The Trust may also include such net capital gain
or other income taxable for federal income tax purposes in a dividend on shares
of Municipal Preferred without giving advance notice if the dividend is
increased by a Gross-Up Payment. The Trust must notify the Auction Agent of the
additional amounts to be included in such dividend at least five Business Days
prior to the applicable Dividend Payment Date.
SECONDARY MARKET TRADING AND TRANSFER OF MUNICIPAL PREFERRED
The Broker-Dealers (including the Underwriter) expect, but are not
obligated, to maintain a secondary trading market in shares of Municipal
Preferred outside of Auctions. The Broker-Dealers may discontinue such activity
at any time. There can be no assurance that a secondary trading market for
shares of Municipal Preferred will develop or, if it does develop, that it will
provide owners with liquidity of investment. The shares of Municipal Preferred
will not be registered on any stock exchange or on the National Association of
Securities Dealers Automated Quotations System. Investors who purchase shares of
Municipal Preferred in an Auction for a Special Rate Period should note that
because the dividend rate on such shares will be fixed for the length of such
Rate Period, the secondary market value of such shares may fluctuate in response
to the changes in interest rates, and may be more or less than their original
cost if sold on the open market in advance of the next Auction thereof,
depending on market conditions.
A Beneficial Owner or an Existing Holder may sell, transfer, or otherwise
dispose of shares of Municipal Preferred only in whole shares and only (1)
pursuant to a Bid or Sell Order placed with the Auction Agent in accordance with
the Auction Procedures, (2) to a Broker-Dealer or (3) to such other persons as
may be permitted by the Trust; 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
the foregoing 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.
DETERMINATION OF NET ASSET VALUE
Net asset value of the Trust will be determined no less frequently than as
of the close of regular trading on the New York Stock Exchange (the "Exchange")
(generally 4:00 p.m. New York City time) on the last Business Day of each week
(generally Friday), and at such other times as the Trust may authorize. The net
asset value of the Trust equals the value of the Trust's assets less the Trust's
liabilities. Debt securities (other than short-term obligations which mature in
60 days or less), including listed issues, are valued on the basis of valuations
furnished by dealers or by a pricing service with consideration to factors such
as institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other market
data, without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates market value. Securities for which there are no such
quotations or valuations are valued in good faith, at fair value, by the
Trustees.
DESCRIPTION OF MUNICIPAL PREFERRED
GENERAL
The Declaration of Trust of the Trust (the "Declaration") provides that the
Trust may authorize separate classes of shares of beneficial interest. The
Statement authorizes the issuance of 5,600 preferred shares of beneficial
interest, no par value per share, which may be issued from time to time in such
series and with such designations, preferences and other rights, qualifications,
limitations and restrictions as are determined in a resolution of the Board of
Trustees ("Preferred Shares"). The Statement authorizes the issuance of up to
2,800 shares of Series T and 2,800 shares of Series TH Municipal Preferred.
Shares of Municipal Preferred carry one vote per share. Shares of Municipal
Preferred 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 pre-emptive or conversion rights or rights to
cumulative voting.
DIVIDENDS AND DIVIDEND PERIODS
GENERAL. The Initial Rate Period for Series T Municipal Preferred shares is a
period consisting of days. The Initial Rate Period for Series TH Municipal
Preferred shares is a period consisting of days. Any Subsequent Rate Period will
be a Minimum Rate Period (7 Rate Period Days) unless the Trust, subject to
certain conditions, designates such Subsequent Rate Period as a Special Rate
Period. See "Designation of Special Rate Periods" below.
Dividends on the shares of Municipal Preferred will be payable, when, as and
if declared by the Board of Trustees out of funds legally available therefor in
accordance with the Declaration, the Statement and applicable law on Wednesday,
, 2000 for Series T and Friday, , 2000 for Series TH, and thereafter on each
Wednesday for Series T and Friday for Series TH; provided, however, that (1) if
the day on which dividends would otherwise be payable is not a Business Day,
then dividends shall be payable instead on the first Business Day that falls
after such regular dividend payment day and (2) the Trust may specify different
Dividend Payment Dates in respect of any Special Rate Period of such shares of
more than 28 Rate Period Days.
The amount of dividends per share payable on shares of Municipal Preferred
on any date on which dividends shall be payable on such shares shall be computed
by multiplying the Applicable Rate in effect for such Dividend Period or
Dividend Periods or part thereof for which dividends have not been paid by a
fraction, the numerator of which shall be the number of days in such Dividend
Period or Dividend Periods or part thereof and the denominator of which shall be
365 if such Dividend Period consists of 7 Rate Period Days and 360 for all other
Dividend Periods, and applying the rate obtained against $25,000.
Dividends will be paid through the Securities Depository on each Dividend
Payment Date in accordance with its normal procedures, which now provide for it
to distribute dividends in next-day funds to Agent Members, who in turn are
expected to distribute such dividend payments to the persons for whom they are
acting as agents. Each of the initial Broker-Dealers, however, has indicated to
the Trust that such Broker-Dealer or the Agent Member designated by such
Broker-Dealer will make such dividend payments available in same-day funds on
each Dividend Payment Date to customers that use such Broker-Dealer or its
designee as Agent Member.
Dividends on shares of Municipal Preferred shall accumulate from the Date of
Original Issue. The dividend rate for Series T Municipal Preferred shares for
the Initial Rate Period will be % per annum. The dividend rate for Series TH
Municipal Preferred shares for the Initial Rate Period will be % per annum. For
each Subsequent Rate Period, the dividend rate will be the Applicable Rate that
the Auction Agent advises the Trust results from an Auction, except as provided
below.
The Applicable Rate that results from an Auction will not be greater than
the Maximum Rate for shares of a series of Municipal Preferred which is:
(i) in the case of any Auction Date which is not the Auction Date
immediately prior to the first day of any proposed Special Rate Period, the
product of (1) the Reference Rate on such Auction Date for the next Rate
Period of shares of such series and (2) the Rate Multiple on such Auction
Date, unless such 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 at which Sufficient Clearing Bids existed has not yet occurred for a
Minimum Rate Period after such Special Rate Period, in which case the higher
of:
(A) the dividend rate on such shares of such series of the then-
ending Rate Period; and
(B) the product of (x) the higher of (I) the Reference Rate on such
Auction Date for a Rate Period equal in length to the then-ending Rate
Period, if such then-ending Rate Period was 364 Rate Period Days or
fewer, or the Treasury Note Rate on such Auction Date for a Rate Period
equal in length to the then-ending Rate Period of shares of such series,
if such then-ending Rate Period was more than 364 Rate Period Days, and
(II) the Reference Rate on such Auction Date for a Rate Period equal in
length to such Special Rate Period of 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 (y) the Rate Multiple on such Auction Date; or
(ii) in the case of any Auction Date which is the Auction Date
immediately prior to the first day of any proposed Special Rate Period, the
product of (1) the highest of (x) the Reference Rate on such Auction Date
for a Rate Period equal in length to the then-ending Rate Period 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 such series, if such
then-ending Rate Period was more than 364 Rate Period Days, (y) the
Reference Rate on such Auction Date for the Special Rate Period for which
the Auction is being held if such Special Rate Period is 364 Rate Period
Days or fewer or the Treasury Note Rate on such Auction Date for the Special
Rate Period for which the Auction is being held if such Special Rate Period
is more than 364 Rate Period Days, and (z) the Reference Rate on such
Auction Date for Minimum Rate Periods and (2) the Rate Multiple on such
Auction Date.
If any Auction for any 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 on the Auction Date for
such Subsequent Rate Period.
If the Trust fails to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, shares of Municipal
Preferred during any Rate Period thereof (other than any Special Rate Period of
more than 364 Rate Period Days or any Rate Period succeeding any Special Rate
Period of more than 364 Rate Period Days during which such a failure occurred
that has not been cured), and, prior to 12:00 Noon on the third Business Day
next succeeding the date such failure occurred, such failure shall have been
cured, as described more fully in the Statement of Additional Information, 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 Municipal Preferred for such
Subsequent Rate Period will be the Maximum Rate on the Auction Date for such
Subsequent Rate Period.
If the Trust fails to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, any shares of Municipal
Preferred during any Rate Period (other than any Special Rate Period of more
than 364 Rate Period Days or any Rate Period succeeding any Special Rate Period
of more than 364 Rate Period Days during which such a failure occurred that has
not been cured), and, prior to 12:00 Noon on the third Business Day next
succeeding the date on which such failure occurred, such failure shall not have
been cured, as described more fully in the Statement of Additional Information,
no Auction will be held in respect of such 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 such failure is so
cured no later than 12:00 Noon on the fourth Business Day prior to the end of
such Rate Period), and the dividend rate for such shares for each such
Subsequent Rate Period shall be a rate per annum equal to the Maximum Rate on
the Auction Date for each such Subsequent Rate Period (but with the prevailing
rating for such shares, for purposes of determining such Maximum Rate, being
deemed to be "Below "ba3"/BB-").
If the Trust fails to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, any shares of Municipal
Preferred during a Special Rate Period of more than 364 Rate Period Days, or
during any Rate Period succeeding any Special Rate Period of more than 364 Rate
Period Days during which such a failure occurred that has not been cured 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 and as more
fully described in the Statement of Additional Information, no Auction will be
held in respect of shares of such series for such Subsequent Rate Period thereof
(or for any Rate Period thereof thereafter to and including the Rate Period
during which such failure is so cured), and the dividend rate for each such
Subsequent Rate Period shall be a rate per annum equal to the Maximum Rate on
the Auction Date for each such Subsequent Rate Period (but with the prevailing
rating for such shares of such series, for purposes of determining such Maximum
Rate, being deemed to be "Below "ba3"/BB-").
A failure to pay dividends on or the redemption price of shares of Municipal
Preferred shall have been cured with respect to any Rate Period if, within the
respective time periods described above, the Trust shall have paid to the
Auction Agent (i) all accumulated and unpaid dividends on the shares of
Municipal Preferred of such series and (ii) without duplication, the redemption
price for the shares of Municipal Preferred of such series, if any, for which
notice of redemption has been mailed by the Trust; provided, however, that the
foregoing clause (ii) shall not apply to the Trust's failure to pay the
redemption price in respect of shares of Municipal Preferred when the related
notice of redemption provides that redemption of such shares is subject to one
or more conditions precedent and any such condition precedent shall not have
been satisfied at the time or times and in the manner specified in such notice
of redemption.
GROSS-UP PAYMENTS. Holders of shares of Municipal Preferred shall be entitled to
receive, when, as and if declared by the Board of Trustees, out of funds legally
available therefor in accordance with the Declaration, the Statement and
applicable law, dividends in an amount equal to the aggregate Gross-Up Payments
in accordance with the following:
If, in the case of any Minimum Rate Period or any Special Rate Period of 28
Rate Period Days or fewer, or, in the case of any other Special Rate Period, the
Trust allocates any net capital gain or other income taxable for federal income
tax purposes to a dividend paid on shares of Municipal Preferred without having
given advance notice thereof to the Auction Agent as described above under "The
Auction -- Auction Procedures" (a "Taxable Allocation") solely by reason of the
fact that such allocation is made retroactively as a result of the redemption of
all or a portion of the outstanding shares of Municipal Preferred or the
liquidation of the Trust, the Trust shall, prior to the end of the fiscal year
in which such dividend was paid or written 90 days (and generally within 60
days) after the end of the Trust's fiscal year for which a retroactive Taxable
Allocation is made, provide notice thereof to the Auction Agent and direct the
Trust's dividend disbursing agent to send such notice with a Gross-Up Payment to
each holder of shares (initially Cede & Co., as nominee of the Securities
Depository) that was entitled to such dividend payment with respect to shares of
Municipal Preferred during such fiscal year at such holder's address as the same
appears or last appeared on the record books of the Trust. The Trust, within 30
days after such notice is given to the Auction Agent, will pay to the Auction
Agent (who then will distribute to such holders of Municipal Preferred), out of
funds legally available therefor, an amount equal to the aggregate Gross-Up
Payment with respect to all retroactive Taxable Allocations made to such holder
during the fiscal year in question.
If the Trust does not give advance notice of the amount of taxable income to
be included in a dividend on shares of Municipal Preferred in the related
Auction, the Trust may include such taxable income in a dividend on shares of
Municipal Preferred if it increases the dividend by an additional amount
calculated as if such income were a retroactive Taxable Allocation and the
additional amount was a Gross-Up Payment.
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.
A "Gross-Up Payment" in respect of any dividend means payment to a holder of
shares of Municipal Preferred of an amount which, giving effect to the Taxable
Allocations made with respect to such dividend, would cause such holder's
after-tax returns (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.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS. For so long as any shares of
Municipal Preferred are outstanding, the Trust may not declare, pay or set apart
for payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or in options, warrants or rights to subscribe
for or purchase, Common Shares) in respect of Common Shares or call for
redemption, redeem, purchase or otherwise acquire for consideration any Common
Shares (except by conversion into or exchange for shares of the Trust ranking
junior to the shares of Municipal Preferred as to the payment of dividends and
the distribution of assets upon liquidation), unless (1) full cumulative
dividends on shares of Municipal Preferred through their most recently ended
Dividend Period shall have been paid or shall have been declared and sufficient
funds for the payment thereof deposited with the Auction Agent; (2) 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 (3)
immediately after such transaction the Discounted Value of the Trust's portfolio
would at least equal the Municipal Preferred Basic Maintenance Amount in
accordance with guidelines of the rating agency or agencies then rating the
shares of Municipal Preferred.
Except as set forth in the next sentence, no dividends shall be declared or
paid or set apart for payment on any class or series of shares of beneficial
interest of the 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 Municipal
Preferred through their most recent Dividend Payment Date. When dividends are
not paid in full upon the shares of Municipal Preferred through their most
recent Dividend Payment Date or upon any other class or series of shares ranking
on a parity as to the payment of dividends with shares of Municipal Preferred
through their most recent respective dividend payment dates, all dividends
declared upon shares of Municipal Preferred and any other such class or series
of shares ranking on a parity as to the payment of dividends with shares of
Municipal Preferred shall be declared pro rata so that the amount of dividends
declared per share on shares of Municipal Preferred and such other class or
series of shares shall in all cases bear to each other the same ratio that
accumulated dividends per share on the shares of Municipal Preferred and such
other class or series of shares bear to each other.
DESIGNATION OF SPECIAL RATE PERIODS
The Trust, at its option, may designate any succeeding Subsequent Rate
Period as a Special Rate Period consisting of a specified number of Rate Period
Days evenly divisible by seven and not more than 1,820 (approximately 5 years),
subject to certain adjustments. A designation of a Special Rate Period shall be
effective only if, among other things, (i) the Trust shall give certain notices
to the Auction Agent, (ii) an Auction for such shares shall have been held on
the Auction Date immediately preceding the first day of such proposed Special
Rate Period and Sufficient Clearing Bids for such shares shall have existed in
such Auction and (iii) if the Trust shall have mailed a notice of redemption
with respect to any shares of Municipal Preferred, the redemption price with
respect to such shares shall have been deposited with the Auction Agent. The
Trust may declare a Special Rate Period if, for example, it expects that
short-term rates may increase or market conditions otherwise change, in an
effort to optimize the effect of the Trust's leverage on common shareholders.
VOTING RIGHTS
In addition to voting rights described below under "Certain Provisions in
the Declaration of Trust" and in the Statement of Additional Information under
"Investment Objective and Policies -- Fundamental Investment Policies," holders
of shares of Municipal Preferred, voting as a separate class, are entitled to
elect (1) two trustees of the Trust at all times and (2) a majority of the
trustees if at any time dividends on shares of Municipal Preferred shall be
unpaid in an amount equal to two years dividends thereon, and to continue to be
so represented until all dividends in arrears shall have been paid or otherwise
provided for. In all other cases, trustees shall be elected by holders of Common
Shares and Preferred Shares (including Municipal Preferred), voting together as
a single class.
Subject to the voting rights described above and except as otherwise
specified under "Certain Provisions in the Declaration of Trust," the Trust may
not, among other things, without the approval of the holders of a "majority of
the outstanding" shares of Municipal Preferred, voting as a separate class,
approve any plan of reorganization adversely affecting shares of Municipal
Preferred. In addition, the Trust may not, without the affirmative vote of the
holders of at least a majority of the shares of Municipal Preferred outstanding
at the time, voting as a separate class: (a) authorize, create or issue
additional shares of Municipal Preferred or classes or series of Preferred
Shares ranking prior to or on a parity with shares of Municipal Preferred with
respect to the payment of dividends or the distribution of assets upon
liquidation (except as provided below) or (b) amend, alter or repeal the
provisions of the Declaration or the By-Laws, whether by merger, consolidation
or otherwise, so as to materially affect any preference, right or power of such
shares of Municipal Preferred or the holders thereof; provided, however, that a
division of a share of Municipal Preferred shall be deemed to materially affect
any such preference, right or power only if the terms of such division adversely
affect the holders of shares of Municipal Preferred. The Trust may not, without
the affirmative vote of the holders of at least 6623% of the shares of Municipal
Preferred outstanding at the time, voting as a separate class, file a voluntary
application for relief under Federal bankruptcy law or any similar application
under state law for so long as the Trust is solvent and does not foresee
becoming insolvent. Notwithstanding the second sentence of this paragraph, the
Trust may, without the vote of the holders of shares of Municipal Preferred,
authorize, create or issue additional shares of Municipal Preferred or classes
or series of Preferred Shares ranking on a parity with shares of Municipal
Preferred with respect to the payment of dividends and the distribution of
assets upon liquidation if the Trust obtains written confirmation from Moody's
(if Moody's is then rating the shares of Municipal Preferred) and Standard &
Poor's (if Standard & Poor's is then rating the shares of Municipal Preferred)
that the issuance of any such additional shares or class or series of shares
would not impair the rating then assigned by such rating agency to shares of
Municipal Preferred; provided, however, that if Moody's or Standard & Poor's is
not then rating the shares of Municipal Preferred, the aggregate liquidation
preference of all Preferred Shares of the Trust outstanding after any such
issuance, exclusive of accumulated and unpaid dividends, may not exceed
$140,000,000. If any action set forth in this paragraph would adversely affect
the rights of one or more series (the "Affected Series") of Municipal Preferred
in a manner different from any other series of Municipal Preferred, the Trust
will not approve any such action without the affirmative vote of the holders of
at least a majority of the shares of each such Affected Series outstanding at
the time (each such Affected Series voting as a separate class).
REDEMPTION
MANDATORY REDEMPTION. In the event the Trust does not timely cure a failure to
maintain (1) a Discounted Value of its portfolio equal to the Municipal
Preferred Basic Maintenance Amount or (2) the 1940 Act Municipal Preferred Asset
Coverage, in each case in accordance with the requirements of the rating agency
or agencies then rating the shares of Municipal Preferred, shares of Municipal
Preferred will be subject to mandatory redemption on a date specified by the
Board of Trustees, out of funds legally available therefor in accordance with
the Declaration, the Statement and applicable law, at the redemption price of
$25,000 per share plus an amount equal to accumulated but unpaid dividends
thereon (whether or not earned or declared) to (but not including) the date
fixed for redemption. Any such redemption will be limited to the number of
shares of Municipal Preferred necessary to restore the required Discounted Value
or the 1940 Act Municipal Preferred Asset Coverage, as the case may be.
In determining the number of shares of Municipal Preferred required to be
redeemed in accordance with the foregoing, the Trust will allocate the number of
shares required to be redeemed to satisfy the Municipal Preferred Basic
Maintenance Amount or the 1940 Act Municipal Preferred Asset Coverage, as the
case may be, pro rata among shares of Municipal Preferred and other Preferred
Shares of the Trust, subject to redemption or retirement.
OPTIONAL REDEMPTION. Shares of Municipal Preferred are redeemable, at the
option of the Trust:
(i) in whole or in part, on the second Business Day preceding any
Dividend Payment Date for such shares, out of funds legally available
therefor in accordance with the Declaration, the Statement and applicable
law, at the redemption price of $25,000 per share plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared)
to (but not including) the date fixed for redemption; provided, however,
that (1) shares of Municipal Preferred may not be redeemed in part if after
such partial redemption fewer than 500 shares remain outstanding and (2) the
notice establishing a Special Rate Period of shares of Municipal Preferred,
as delivered to the Auction Agent and filed with the Secretary of the Trust,
may provide that such shares shall not be redeemable during the whole or any
part of such Special Rate Period (except as provided in (ii) below) or shall
be redeemable during the whole or any part of such Special Rate Period only
upon payment of such redemption premium or premiums as shall be specified
therein; and
(ii) as a whole but not in part, out of funds legally available therefor
in accordance with the Declaration, the Statement and applicable law, on the
first day following any Dividend Period included in a Rate Period of more
than 364 Rate Period Days if, on the date of determination of the Applicable
Rate for such Rate Period, such Applicable Rate equaled or exceeded on such
date of determination the Treasury Note Rate for such Rate Period, at a
redemption price of $25,000 per share plus an amount equal to accumulated
but unpaid dividends thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption.
Notwithstanding the foregoing, if any dividends on shares of Municipal
Preferred (whether or not earned or declared) are in arrears, no shares of a
series of Municipal Preferred shall be redeemed unless all outstanding shares of
such series of Municipal Preferred are simultaneously redeemed, and the Trust
shall not purchase or otherwise acquire any shares of such series of Municipal
Preferred; provided, however, that the foregoing shall not prevent the purchase
or acquisition of all outstanding shares of such series of Municipal Preferred
pursuant to the successful completion of an otherwise lawful purchase or
exchange offer made on the same terms to, and accepted by, holders of all
outstanding shares of such series of Municipal Preferred.
LIQUIDATION
Upon a liquidation of the Trust, whether voluntary or involuntary, the
holders of shares of Municipal Preferred then outstanding will be entitled to
receive and to be paid out of the assets of the Trust available for distribution
to its shareholders, an amount equal to the aggregate of (i) the liquidation
preference with respect to such shares ($25,000 per share), (ii) an amount equal
to all dividends thereon (whether or not earned or declared) accumulated but
unpaid to (but not including) the date of final distribution in same-day funds,
and (iii) any applicable Gross-up Payments in connection with the liquidation of
the Trust. The holders of shares of Municipal Preferred will receive this amount
before any payment or distribution shall be made on the Common Shares. The right
to such amount, upon liquidation, is subject to the rights of holders of any
series or class or classes of shares ranking on a parity with shares of
Municipal Preferred with respect to the distribution of assets upon liquidation
of the Trust. After the payment to the holders of the shares of Municipal
Preferred of the full preferential amounts provided for as described herein, the
holders of Municipal Preferred as such shall have no right or claim to any of
the remaining assets of the Trust.
Neither the sale of all or substantially all 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 liquidation, whether voluntary or involuntary, for the purposes of the
foregoing paragraph.
RATING AGENCY GUIDELINES
The Trust is required under Moody's and Standard & Poor's guidelines to
maintain assets having in the aggregate a Discounted Value at least equal to the
Municipal Preferred Basic Maintenance Amount. Moody's and Standard & Poor's have
each established separate guidelines for determining Discounted Value. To the
extent any particular portfolio holding does not satisfy the applicable rating
agency's guidelines, all or a portion of such holding's value will not be
included in the calculation of Discounted Value (as defined by such rating
agency). The Moody's and Standard & Poor's guidelines do not impose any
limitations on the percentage of Trust assets that may be invested in holdings
not eligible for inclusion in the calculation of the Discounted Value of the
Trust's portfolio. The amount of such assets included in the portfolio at any
time may vary depending upon the rating, diversification and other
characteristics of the eligible assets included in the portfolio. The Municipal
Preferred Basic Maintenance Amount includes the sum of (i) the aggregate
liquidation preference of shares of Municipal Preferred then outstanding and
(ii) certain accrued and projected payment obligations of the Trust.
The Trust is also required under rating agency guidelines to maintain, with
respect to the shares of Municipal Preferred, as of the last Business Day of
each month in which any shares of Municipal Preferred are outstanding, asset
coverage of at least 200% with respect to senior securities which are shares,
including 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 of a closed-end investment company as a
condition of declaring dividends on its common shares) ("1940 Act Municipal
Preferred Asset Coverage"). Based on the composition of the Trust's portfolio
and market conditions as of October 31, 2000, the 1940 Act Municipal Preferred
Asset Coverage with respect to shares of Municipal Preferred, assuming the
issuance on the date hereof of all shares of Municipal Preferred offered hereby
and after giving effect to the deduction of the sales load and offering costs
relating thereto estimated at $1,918,460, would be computed as follows:
<TABLE>
<CAPTION>
VALUE OF TRUST ASSETS LESS LIABILITIES NOT
CONSTITUTING SENIOR SECURITIES
------------------------------------------
<S> <C> <C>
$443,870,662
------------
= = 317%
Senior securities representing indebtedness plus $140,000,000
liquidation value of the shares of Municipal Preferred ------------
</TABLE>
In the event the Trust does not timely cure a failure to maintain (1) a
Discounted Value of its portfolio equal to the Municipal Preferred Basic
Maintenance Amount or (2) the 1940 Act Municipal Preferred Asset Coverage, in
each case in accordance with the requirements of the rating agency or agencies
then rating the shares of Municipal Preferred, the Trust will be required to
redeem shares of Municipal Preferred as described above under "Description of
Municipal Preferred -- Redemption."
The Trust may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by Moody's or Standard & Poor's.
Failure to adopt any such modifications, however, may result in a change in the
ratings described above or a withdrawal of ratings altogether. In addition, any
rating agency providing a rating for the shares of Municipal Preferred may, at
any time, change or withdraw any such rating. The Board of Trustees may, without
shareholder approval, amend, alter or repeal any or all of the definitions and
related provisions which have been adopted by the Trust pursuant to the rating
agency guidelines in the event the Trust receives written confirmation from
Moody's or Standard & Poor's, or both, as appropriate, that any such change
would not impair the ratings then assigned by Moody's and Standard & Poor's to
shares of Municipal Preferred.
As described by Moody's and Standard & Poor's, a preferred share rating is
an assessment of the capacity and willingness of an issuer to pay preferred
share obligations. The ratings on the Municipal Preferred are not
recommendations to purchase, hold or sell shares of Municipal Preferred,
inasmuch as the ratings do not comment as to market price or suitability for a
particular investor. The rating agency guidelines described above also do not
address the likelihood that an owner of shares of Municipal Preferred will be
able to sell such shares in an Auction or otherwise. The ratings are based on
current information furnished to Moody's and Standard & Poor's by the Trust and
the Adviser, and information obtained from other sources. The ratings may be
changed, suspended or withdrawn as a result of changes in, or the unavailability
of, such information.
A rating agency's guidelines will apply to shares of Municipal Preferred
only so long as such rating agency is rating such shares. The Trust will pay
certain fees to Moody's or Standard & Poor's, or both, for rating shares of
Municipal Preferred.
DESCRIPTION OF COMMON SHARES
In addition to the shares of Municipal Preferred, the Declaration authorizes
the issuance of an unlimited number of Common Shares, no par value. As of April
30, 2000, the Trust had 39,241,840 Common Shares outstanding and net assets of
$303,229,876. See "Financial Highlights," above.
All Common Shares have equal noncumulative voting rights and equal rights
with respect to dividends, assets and liquidation. Common Shares are fully paid
and nonassessable when issued and have no preemptive, conversion or exchange
rights. So long as any shares of Municipal Preferred are outstanding, the Trust
is not permitted to declare dividends on, make any distributions with respect
to, or purchase its Common Shares unless, at the time of such declaration,
distribution or purchase, as applicable (and after giving effect thereto), all
accumulated dividends on any preferred shares of the Trust have been paid.
In the past, the Trust's Common Shares have traded on the New York Stock
Exchange at various times at either a premium or a discount in relation to net
asset value. Shares of other closed-end investment companies frequently trade on
a stock exchange at a discount from net asset value.
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 Trust'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 Trust in a tender offer or similar transaction. Also,
the Declaration provides that the affirmative vote or consent of two-thirds of
the outstanding Common Shares and any Preferred Shares of the Trust (including
shares of Municipal Preferred), voting together as a single class, and of the
Preferred Shares (including shares of Municipal Preferred) voting as a separate
class, would be required to authorize the conversion of the Trust 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. In addition, the
affirmative vote or consent of the holders of two-thirds of the outstanding
shares of the Trust is required to authorize any of the following transactions:
(i) merger or consolidation of the Trust with or into any other
corporation;
(ii) sale, lease or exchange of all or any substantial part of the
assets of the Trust to any entity or person (except assets having an
aggregate fair market value of less than $1,000,000); or
(iii) sale, lease or exchange to the Trust, in exchange for securities
of the Trust, of any assets of any entity or person (except assets having an
aggregate fair market value of less than $1,000,000) if such corporation,
person or entity is directly, or indirectly through affiliates, the
beneficial owner of five percent or more of the outstanding shares of the
Trust.
However, such vote or consent will not be required with respect to the foregoing
transactions where the Board of Trustees under certain conditions approves the
transaction.
The foregoing provisions will make more difficult a change in the Trust's
management, or consummation of the foregoing transactions without the Trustees'
approval, and could have the effect of depriving shareholders of an opportunity
to sell their shares at a premium over prevailing market prices by discouraging
a third party from seeking to obtain control of the Trust in a tender offer or
similar transaction. However, they provide the advantage of potentially
requiring persons seeking control of the Trust to negotiate with its management
regarding the price to be paid and facilitating the continuity of the Trust's
management.
Reference is made to the Declaration of Trust of the Trust, on file with
SEC, 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 Trust's market price and net asset value. If shares of the Trust
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. Since
commencement of the Trust's operations, no such open market purchases or tender
offers have been made, and no assurances can be given that such actions will be
taken in the future. Subject to its investment restrictions, the Trust may
borrow money to finance the repurchase of shares, subject to compliance with the
1940 Act Municipal Preferred Asset Coverage, Section 18 of the 1940 Act and the
other limitations described under "Rating Agency Guidelines." 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 Trust,
including shares of Municipal Preferred) are not met or would not be met
following such repurchase or (ii) if otherwise prohibited by applicable law.
There can be no assurance that repurchases or tenders, if they were to
occur, would result in the shares trading at a price which is equal to their net
asset value. The Trust anticipates that the market price of the shares will
usually vary from net asset value. The market price of the shares will be
determined, among other things, by the relative demand for and supply of the
shares in the market, the Trust's investment performance, the Trust's dividends
and yield and investor perception of the Trust's overall attractiveness as an
investment as compared with other investment alternatives. It should be
recognized that any such acquisitions of shares would decrease the total assets
of the Trust and therefore have the effect of increasing the Trust's expense
ratio. Furthermore, any interest on borrowings to finance share repurchase
transactions would reduce the Trust's net income.
CONVERSION TO OPEN-END STATUS
The Trust's Board of Trustees may from time to time consider submitting to
the holders of the shares of beneficial interest of the Trust at any time a
proposal to convert the Trust 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 Trust's capital structure is leveraged and the possibility
of re-leveraging, the spread, if any, between yields on lower rated securities
in the Trust's portfolio and interest and dividend charges on senior securities
and general market and economic conditions. In addition to any vote required by
Massachusetts law, conversion of the Trust to an open-end investment company
would require the affirmative vote of two-thirds of the Common Shares and any
Preferred Shares of the Trust (including shares of Municipal Preferred) entitled
to be voted on the matter, voting together as a single class, and of the
Preferred Shares (including shares of Municipal Preferred) entitled to be voted
on the matter, voting as a single class. 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 Trust converted to an open-end
investment company, it would be required to redeem all shares of Municipal
Preferred then outstanding at the redemption price specified under "Description
of Municipal Preferred -- Redemption -- Optional Redemption." In addition, the
Trust could be required to liquidate portfolio securities to meet required and
requested redemptions, and its Common Shares would no longer be listed on the
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 Trust.
TAX MATTERS
The following discussion briefly summarizes some of the federal income tax
considerations generally applicable to investments in the Trust. This discussion
is based on the Code, existing Treasury regulations, rulings published by the
Internal Revenue Service and judicial decisions, all as of the date of this
prospectus. These authorities are subject to change, possibly with retroactive
effect. A more detailed summary is available under the heading "Tax Matters" in
the Statement of Additional Information. However, because each investor's tax
situation is different (especially with regard to state, local and foreign tax
considerations), investors are urged to consult their own tax advisers regarding
the tax considerations that may be applicable in their particular situations.
The Trust intends to qualify each year as a "regulated investment company"
under Subchapter M of the Code. Because the Trust intends to distribute all of
its net tax-exempt income, net investment income and net realized capital gains
to shareholders in accordance with the timing requirements imposed by the Code,
it is not expected that the Trust will be required to pay an entity- level
federal income or excise tax.
The Trust intends to satisfy applicable requirements of the Code so as to be
able to designate dividends that the Trust pays which are attributable to
interest on Municipal Bonds as "exempt-interest dividends." Exempt-interest
dividends are excludable from a shareholder's gross income for federal income
tax purposes, subject to the possible application of the federal alternative
minimum tax discussed below. Distributions of income, if any, from capital
gains, from investments in taxable securities, and from certain other
transactions, including futures transactions, will be taxable to shareholders.
The Trust will designate dividends paid as exempt-interest dividends in a manner
that allocates such dividends between the holders of the Common Shares and the
holders of shares of Municipal Preferred in proportion to the total dividends
paid to each of those classes for a given taxable year, or as otherwise as
required by applicable law. Long-term capital gain distributions and other
income subject to regular federal income tax will similarily be allocated
between the two classes. The amount of taxable income allocable to Municipal
Preferred shares will depend on the amount of such income realized by the Trust,
but generally is not expected to be significant.
The Trust does not expect any of its dividends to qualify for the
dividends-received deduction for corporations. Shareholders may not have to pay
state or local taxes on the portion of dividends that the Trust pays from
interest on U.S. government obligations; investors should consult with their tax
advisers in this regard.
Interest on indebtedness incurred or continued by shareholders to purchase
or carry shares of the Trust will not be deductible for federal income tax
purposes to the extent attributable to exempt-interest dividends. Exempt-
interest dividends are taken into account in calculating the amount of social
security and railroad retirement benefits that may be subject to federal income
tax, and a portion of the Trust's exempt-interest dividends may be treated as a
tax preference item for purposes of the federal individual alternative minimum
tax. All exempt-interest dividends may affect a corporate shareholder's
alternative minimum tax liability. All or a portion of exempt- interest
dividends may be subject to state and local income taxes. 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 bonds or who are related
to such "substantial users." Entities or persons who are "substantial users" (or
who are related to "substantial users") of facilities financed by private
activity bonds or industrial development bonds should consult their tax advisers
before purchasing shares of the Trust.
As described under the heading "Description of Municipal Preferred," above,
the Trust may be required to make Gross-up Payments to holders of Municipal
Preferred shares. Gross-up Payments are generally intended to put holders in the
same federal income tax position they would have been in had all of the
dividends paid to them consisted of exempt-interest dividends. However, Gross-up
Payments will not compensate for any foreign, state or local taxes on
distributions paid by the Trust, including foreign, state or local taxes on the
Gross-up Payments themselves. Gross-up Payments also will not compensate holders
in the event that the Internal Revenue Service recharacterizes as a taxable
distribution any payment that the Trust has designated as an exempt-interest
dividend (including a Gross-up Payment so designated).
The Trust intends to withhold U.S. federal income tax at the rate of 30% (or
any lower rate permitted by an applicable treaty) on any taxable dividends and
other payments that are subject to such withholding and that are made to persons
who are neither citizens nor residents of the U.S. Different tax consequences
may result if such person is engaged in a trade or business in the United States
and the dividends or other payments received are effectively connected with the
conduct of that trade or business. The Trust is also required under certain
circumstances to apply backup withholding at the rate of 31% on taxable
dividends paid to any shareholder (including a shareholder who is not a citizen
or resident of the U.S.) who does not furnish certain required information and
certifications to the Trust, or who is otherwise subject to backup withholding.
Backup withholding will not, however, be applied to payments that have been
subject to 30% withholding.
The Trust will send written notices to shareholders regarding the federal
income tax status of all dividends and distributions for each calendar year,
including the portion constituting exempt-interest dividends, the portion, if
any, taxable as ordinary income, the portion, if any, taxable as long-term
capital gain (as well as the rate category or categories under which such gain
is taxable), the portion, if any, representing a return of capital (which is
generally free of current taxes, but which results in a basis reduction), and
the amount, if any, of federal income tax withheld.
A shareholder's sale or disposition of Trust shares will ordinarily be a
taxable event for federal income tax purposes. A taxable disposition will result
in a capital gain or loss if the shares are held as a capital asset, which will
generally be a long-term capital gain or loss if the shares were held for more
than twelve months, and otherwise a short-term capital gain or loss. A loss
realized on a sale of shares held for six months or less will be disallowed to
the extent of exempt-interest dividends received on the shares, and any portion
allowed will be treated as a long-term capital loss to the extent of capital
gain dividends received on the shares (or the amount designated as undistributed
capital gain with respect to the shares). Losses may also be disallowed under
rules relating to wash sales. If shares are sold after tax-exempt income is
accrued but before it is paid as a dividend, the sales price generally will
reflect that accrued income, which will increase the taxable gain (or reduce the
loss) on the sale, even though the income would have been exempt from tax if
distributed as a dividend prior to the sale.
CUSTODIAN, AUCTION AGENT, TRANSFER AGENT,
DIVIDEND DISBURSING AGENT AND REGISTRAR
The Trust's securities and cash are held by State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02110, as custodian (the
"Custodian") under a custodian contract.
Bankers Trust Company, serves as auction agent for the Trust in connection
with the shares of Municipal Preferred. Bankers Trust Company also serves as the
transfer agent, registrar, dividend disbursing agent and redemption agent for
shares of Municipal Preferred.
MFS Service Center, Inc., 2 Avenue de Lafayette, Boston, Massachusetts
02111-1738, is the shareholder servicing agent, registrar and transfer agent for
the Common Shares of the Trust.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement between
Salomon Smith Barney Inc. (the "Underwriter") and the Trust (the "Underwriting
Agreement") dated the date hereof, the Underwriter has agreed to purchase, and
the Trust has agreed to sell, 2,800 shares of Series T and 2,800 shares of
Series TH Municipal Preferred offered hereby.
The Underwriting Agreement provides that the obligations of the Underwriter
are subject to the approval of certain legal matters by counsel and to certain
conditions precedent, and that the Underwriter is obligated to purchase all of
the shares of Municipal Preferred if any are purchased. In the Underwriting
Agreement, the Trust and the Adviser have agreed to indemnify the Underwriter
with respect to certain liabilities, including liabilities arising under the
Securities Act of 1933, as amended, and to contribute in respect thereof.
The Trust has been advised by the Underwriter that it proposes initially to
offer the shares of each series of Municipal Preferred offered hereby to the
public at the price set forth on the cover page of this Prospectus and to
selected dealers at such price less a concession not to exceed $ per share. The
underwriting commission to be paid by the Trust of $250 per share is equal to 1%
of the initial offering price. The Underwriter may allow, and such dealers may
re-allow, a concession not in excess of $ per share on sales to certain other
dealers. After the initial public offering, the public offering price and the
concession may be changed by the Underwriter. Investors must pay for any
Municipal Preferred purchased in the initial public offering on or before
, 2000.
The Trust anticipates that the Underwriter may from time to time act as a
broker or dealer in connection with the execution of its portfolio transactions
after it has ceased to be an Underwriter. The Trust anticipates that the
Underwriter or one of its affiliates may, from time to time, act in Auctions as
Broker-Dealers as set forth under "The Auction -- General" and will receive the
fees described under "The Auction -- Broker-Dealers" in the Statement of
Additional Information in exchange for so acting. The Underwriter is an active
underwriter of, and dealer in, securities and acts as a market maker in a number
of such securities and therefore can be expected to engage in portfolio
transactions with the Trust.
The principal business address of Salomon Smith Barney Inc. is 388
Greenwich Street, New York, New York 10010.
LEGAL OPINIONS
Certain legal matters in connection with the Series T and TH Municipal
Preferred offered hereby will be passed upon for the Trust by Bingham Dana LLP,
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 Bingham Dana LLP.
REPORTS TO SHAREHOLDERS
The Trust will send unaudited semiannual and audited annual reports to its
shareholders based on Generally Accepted Accounting Principals in the United
States of America, including, as currently required by regulations of the
Securities and Exchange Commission, a list of investments held.
EXPERTS
The Financial Statements included in the Statement of Additional Information
have been so included in reliance on the report of Deloitte & Touche LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing. The address of Deloitte & Touche LLP is 200 Berkeley
Street, Boston, Massachusetts 02116.
FURTHER INFORMATION
The Trust has filed with the Securities and Exchange Commission (the
"Commission"), Washington, DC 20549, a Registration Statement under the
Securities Act with respect to the shares of Municipal Preferred offered hereby.
Further information concerning these securities and the Trust may be found in
the Registration Statement, of which this Prospectus constitutes a part, on file
with the Commission. The Registration Statement may be inspected without charge
at the Commission's office in Washington, DC, and copies of all or any part
thereof may be obtained from such office after payment of the fees prescribed by
the Commission.
The Trust is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the 1940 Act, and in accordance therewith
files reports and other information with the Commission. Such reports, proxy and
information statements and other information can be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, DC 20549 and the Commission's regional offices, including
offices at Seven World Trade Center, New York, New York 10048. Call
1-202-942-8090 for information about the public reference facilities. Copies of
such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, DC 20549 at prescribed rates.
Such reports and other information concerning the Trust may also be inspected at
the offices of the Exchange. The Statement of Additional Information, material
incorporated by reference into this Prospectus and the Statement of Additional
Information, and reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission is also
available on the EDGAR Database on the SEC Internet site at http://www.sec.gov.
In addition, reports, proxy and information statements and other information
concerning the Trust can be inspected at the offices of the Exchange, 20 Broad
Street, New York, New York 10005.
GLOSSARY
" "AA" Composite Commercial Paper Rate," on any date for any Rate Period of
shares of a series of Municipal Preferred, means: (i)(A) in the case of any
Minimum Rate Period or any Special Rate Period of fewer than 49 Rate Period
Days, the interest equivalent of the 30-day rate; provided, however, that if
such Rate Period is a Minimum Rate Period and the "AA" Composite Commercial
Paper Rate is being used to determine the Applicable Rate for shares of such
series when all of the outstanding shares of such series of Municipal Preferred
are subject to Submitted Hold Orders, then the interest equivalent of the
seven-day rate, and (B) in the case of any Special Rate Period of (1) 49 or more
but fewer than 70 Rate Period Days, the interest equivalent of the 60-day rate;
(2) 70 or more but fewer than 85 Rate Period Days, the arithmetic average of the
interest equivalent of the 60-day and 90-day rates; (3) 85 or more but fewer
than 99 Rate Period Days, the interest equivalent of the 90-day rate; (4) 99 or
more but fewer than 120 Rate Period Days, the arithmetic average of the interest
equivalent of the 90-day and 120-day rates; (5) 120 or more but fewer than 141
Rate Period Days, the interest equivalent of the 120- day rate; (6) 141 or more
but fewer than 162 Rate Period Days, the arithmetic average of the 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 Standard & Poor's or the equivalent of such rating by Standard & Poor's
or another rating agency, as made available on a discount basis or otherwise by
the Federal Reserve Bank of New York for the Business Day 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 certain commercial paper dealers to
the Auction Agent for the close of business on the Business Day next preceding
such date.
"Agent Member" means a member of or participant in the Securities Depository
that will act on behalf of a Bidder.
"All Hold Order Rate," with respect to a Rate Period for which an Auction is
held, means the lesser of the Kenny Index (if the Rate Period for which the
Auction is held consists of fewer than 183 Rate Period Days) or the product of
(i)(1) the "AA" Composite Commercial Paper Rate on the Auction Date for such
Rate Period, if such Rate Period consists of fewer than 183 Rate Period Days,
(2) the Treasury Bill Rate on such Auction Date for such Rate Period, if such
Rate Period consists of more than 182 but fewer than 365 Rate Period Days or (3)
the Treasury Note Rate on such Auction Date for such Rate Period, if such Rate
Period is more than 364 Rate Period Days (the rate described in the foregoing
clause (i)(1), (2) or (3), as applicable, being referred to herein as the
"Benchmark Rate"), and (ii) 1 minus the 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,
whichever is greater; provided, however, that if the Trust has notified the
Auction Agent of its intent to allocate to shares of such series of Municipal
Preferred in such Rate Period any net capital gains or other income taxable for
federal income tax purposes ("Taxable Income"), the Applicable Rate on shares of
Municipal Preferred for such Rate Period will be (A) if the Taxable Yield Rate
(as defined below) is greater than the Benchmark Rate, then the Benchmark Rate,
or (B) if the Taxable Yield Rate is less than or equal to the Benchmark Rate,
then the rate equal to the sum of (x) the lesser of the Kenny Index (if such
Rate Period consists of fewer than 183 Rate Period Days) or the product of the
Benchmark Rate multiplied by the factor set forth in the preceding clause (ii)
and (y) the product of the 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, 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 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.
"Applicable Rate" means the rate per annum at which dividends are payable on
shares of Municipal Preferred for any Rate Period thereof.
"Auction Agency Agreement" means an 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
such shares is to be based on the results of an Auction.
"Auction Agent" means the entity appointed as such by a resolution of the
Board of Trustees.
"Bidder" means a Beneficial Owner or a Potential Beneficial Owner placing an
Order with its Broker-Dealer or an Existing Holder or Potential Holder placing
an order with the Auction Agent or on whose behalf an Order is placed with an
Auction Agent.
"Board of Trustees" means the Board of Trustees of the Trust or any duly
authorized committee thereof.
"Broker-Dealer" means any broker-dealer, commercial bank or other entity
permitted by law to perform the functions required of a Broker-Dealer, that is a
member of, or a participant in, the Securities Depository or is an affiliate of
such member or participant, has been selected by the Trust and has entered into
a Broker-Dealer Agreement that remains effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent and a
Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the Auction
Procedures.
"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.
"Code" means the Internal Revenue Code of 1986, as amended.
"Date of Original Issue" with respect to shares of a series of Municipal
Preferred means the Business Day on which the Trust initially issued such
shares.
"Dividend Payment Date" with respect to shares of a series of Municipal
Preferred means any Business Day on which dividends on shares of such series of
Municipal Preferred are payable as provided under "Description of Municipal
Preferred -- Dividends and Dividend Periods."
"Dividend Period" with respect to shares of a series of Municipal Preferred
means the period from and including the Date of Original Issue of shares of such
series of Municipal Preferred to but excluding the initial Dividend Payment Date
for such shares and any period thereafter from and including one Dividend
Payment Date for such shares to but excluding the next succeeding Dividend
Payment Date for such shares.
"Existing Holder" with respect to shares of a series of Municipal Preferred
means 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 of Municipal Preferred.
"Gross-Up Payment" has the meaning specified under "Dividends and Dividend
Periods - Gross-Up Payments."
"Initial Rate Period" means the period from and including the Date of
Original Issue of shares of Municipal Preferred to but excluding Wednesday,
, 2000 for Series T shares and Friday , 2000 for
Series TH shares.
"Kenny Index" has the meaning specified under "Taxable Equivalent of the
Short-Term Municipal Bond Rate."
"Maximum Rate" has the meaning specified under "Description of Municipal
Preferred -- Dividends and Dividend Periods" on page 18.
"Minimum Rate Period" means any Rate Period consisting of 7 Rate Period
Days.
"Potential Holder" with respect to shares of a series of Municipal Preferred
means a Broker-Dealer (or any such other person as may be permitted by the
Trust) that is not an Existing Holder of shares of Municipal Preferred or that
is an Existing Holder of such shares that wishes to become the Existing Holder
of additional shares.
"Rate Multiple" with respect to shares of a series of Municipal Preferred
means a percentage, determined as set forth below (depending on whether the
Trust has notified the Auction Agent of its intent to allocate any net capital
gain or other 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), based on the prevailing rating of shares of Municipal Preferred in
effect at the close of business on the Business Day next preceding the relevant
Auction Date:
APPLICABLE APPLICABLE
PERCENTAGE -- PERCENTAGE --
PREVAILING RATING NO NOTIFICATION NOTIFICATION
----------------- --------------- ------------
"aa3"/AA- or higher .................... 110% 150%
"a3"/A- ................................ 125% 160%
"baa3"/BBB- ............................ 150% 250%
"ba3"/BB- .............................. 200% 275%
Below "ba3"/BB- ........................ 250% 300%
"Rate Period" with respect to shares of a series of Municipal Preferred
means the Initial Rate Period of shares of such series of Municipal Preferred
and any Subsequent Rate Period of such shares.
"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 either
(i) the shortening or lengthening, as the case may be, of such Rate Period or
Dividend Period as set forth under "Description of Municipal Preferred --
Dividends and Dividend Periods" because the day on which dividends would
otherwise be payable is not a Business Day or (ii) the shortening of such Rate
Period pursuant to the provisions relating to the designation of Special Rate
Periods as set forth in the Statement of Additional Information under
"Description of Municipal Preferred -- Designation of Special Rate Periods."
"Reference Rate" means (i) the higher of the Taxable Equivalent of the
Short-Term Municipal Bond Rate and the "AA" Composite Commercial Paper Rate in
the case of Minimum Rate Periods and Special Rate Periods of 28 Rate Period Days
or fewer; (ii) the "AA" Composite Commercial Paper Rate in the case of Special
Rate Periods of more than 28 Rate Period Days but fewer than 183 Rate Period
Days; and (iii) the Treasury Bill Rate in the case of Special Rate Periods of
more than 182 Rate Period Days but fewer than 365 Rate Period Days.
"Securities Depository" means 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.
"Special Rate Period" with respect to shares of a series of Municipal
Preferred means any Subsequent Rate Period commencing on the date designated by
the Trust, as set forth under "Description of Municipal Preferred -- Designation
of Special Rate Periods," and ending on the last day of the last Dividend Period
thereof.
"Submission Deadline" means 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" means a valid Bid submitted or deemed submitted to the
Auction Agent by a Broker-Dealer by the Submission Deadline.
"Submitted Hold Order" means a valid Hold Order submitted or deemed
submitted to the Auction Agent by a Broker-Dealer by the Submission Deadline.
"Subsequent Rate Period" with respect to shares of a series of Municipal
Preferred means any period from and including the first day following the
Initial Rate Period of shares of such series of Municipal Preferred to but
excluding the next Dividend Payment Date for such shares and any period
thereafter from and including one Dividend Payment Date for such shares to but
excluding the next succeeding Dividend Payment Date for such shares; provided,
however, that if any Subsequent Rate Period is also a Special Rate Period, such
term shall mean the period commencing on the first day of such Special Rate
Period and ending on the last day of the last Dividend Period thereof.
"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,
means 90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Standard & Poor's Kenny 30-day High Grade Index or
any successor index (the "Kenny Index") (provided, however, that any such
successor index must be approved by Moody's (if Moody's is then rating the
shares of Municipal Preferred) and Standard & Poor's (if Standard & Poor's is
then rating the shares of Municipal Preferred)), made available for the Business
Day immediately preceding such date but in any event not later than 8:30 A.M.,
New York City time, on such date by Standard & Poor's J.J. Kenny Evaluation
Services or any successor thereto, based upon 30-day yield evaluations at par of
short-term bonds the interest on which is excludable for regular federal income
tax purposes under the Code, of "high grade" component issuers selected by
Standard & Poor's J.J. Kenny Evaluation Services or any such successor from time
to time in its discretion, which component issuers shall include, without
limitation, issuers of general obligation bonds but shall exclude any bonds the
interest on which constitutes an item of tax preference under Section 57(a)(5)
of the Code, or successor provisions, for purposes of the "alternative minimum
tax," divided by (B) 1.00 minus the 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), whichever is greater; 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 Standard & Poor's J.J. Kenny Evaluation Services or any successor, the
Taxable Equivalent of the Short-Term Municipal Bond Rate shall mean the quotient
of (A) the per annum rate expressed on an interest equivalent basis equal to the
most recent Kenny Index so made available for any preceding Business Day,
divided by (B) 1.00 minus the 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), whichever is greater.
"Treasury Bill" means 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, means: (i) the bond
equivalent yield, calculated in accordance with prevailing industry convention,
of the rate on the most recently auctioned Treasury Bill with a remaining
maturity closest to the length of such Rate Period, as quoted in The Wall Street
Journal on such date for the Business Day next preceding such date; or (ii) in
the event that any such rate is not published in The Wall Street Journal, then
the bond equivalent yield, calculated in accordance with prevailing industry
convention, as calculated by reference to the arithmetic average of the bid
price quotations of the most recently auctioned Treasury Bill with a remaining
maturity closest to the length of such Rate Period, as determined by bid price
quotations as of the close of business on the Business Day immediately preceding
such date obtained from certain U.S. Government securities dealers to the
Auction Agent.
"Treasury Note" means a direct obligation of the U.S. Government having a
maturity at the time of issuance of five years or less but more than 364 days.
"Treasury Note Rate," on any date for any Rate Period, means: (i) the yield
on the most recently auctioned Treasury Note with a remaining maturity closest
to the length of such Rate Period, as quoted in The Wall Street Journal on such
date for the Business Day next preceding such date; or (ii) in the event that
any such rate is not published in The Wall Street Journal, then the yield as
calculated by reference to the arithmetic average of the bid price quotations of
the most recently auctioned Treasury Note with a remaining maturity closest to
the length of such Rate Period, as determined by bid price quotations as of the
close of business on the Business Day immediately preceding such date obtained
from certain U.S. Government securities dealers to the Auction Agent.
<PAGE>
APPENDIX
INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, the Trust may engage in the following
principal and non-principal techniques and practices. Investment techniques and
practices which are the principal focus of the Trust are also described,
together with their risks, under "Investment Objective and Policies" and "Risk
Factors and Special Considerations" in the Prospectus. Both principal and
non-principal investment techniques and practices are described, together with
their risks in the SAI.
<TABLE>
<CAPTION>
INVESTMENT TECHNIQUES/PRACTICES
SYMBOLS x permitted -- not permitted
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Securities Inverse Floating Rate Obligations x
Asset-Backed Securities Investment in Other Investment Companies
Collateralized Mortgage Obligations and Open-End Funds --
Multiclass Pass-Through Securities x Closed-End Funds x
Corporate Asset-Backed Securities x Lending of Portfolio Securities --
Mortgage Pass-Through Securities x Leveraging Transactions
Stripped Mortgage-Backed Securities x Bank Borrowings --*
Corporate Securities x Mortgage "Dollar-Roll" Transactions x**
Loans and Other Direct Indebtedness x Reverse Repurchase Agreements --*
Lower Rated Bonds x Options
Municipal Bonds x Options on Foreign Currencies --*
Speculative Bonds x Options on Futures Contracts --*
U.S. Government Securities x Options on Securities --*
Variable and Floating Rate Obligations x Options on Stock Indices --*
Zero Coupon Bonds, Deferred Reset Options --*
Interest Bonds and PIK Bonds x "Yield Curve" Options --*
Equity Securities x Repurchase Agreements x
Foreign Securities Exposure Restricted Securities x
Brady Bonds -- Short Sales --*
Depositary Receipts -- Short Sales Against the Box --
Dollar-Denominated Foreign Debt Securities -- Short Term Instruments x
Emerging Markets -- Swaps and Related Derivative Instruments x
Foreign Securities -- Temporary Borrowings x
Forward Contracts -- Temporary Defensive Positions x
Futures Contracts x Warrants x
Indexed Securities/Structured Products x "When-Issued" Securities x
------------
* May only be changed with shareholder approval
** The Trust will only enter into "covered" mortgage dollar-roll transactions, meaning that the Trust
segregates liquid securities it will repurchase and does not use these transactions as a form of leverage.
</TABLE>
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
Page
Use of Proceeds ..................................................... 3
Investment Objective and Policies ................................... 3
Trust Charges and Expenses .......................................... 4
Management of the Trust ............................................. 5
Portfolio Transactions .............................................. 8
Net Asset Value ..................................................... 9
The Auction ......................................................... 9
Description of Municipal Preferred .................................. 19
Repurchase of Common Shares ......................................... 35
Tax Matters ......................................................... 35
Shareholder Liability ............................................... 38
Custodian and Shareholder Servicing Agent ........................... 38
Independent Accountants ............................................. 38
Glossary ............................................................ 38
Financial Statements ................................................ 44
Appendix A -- Description of Investments ............................ A-1
Appendix B -- Ratings of Investments ................................ B-1
Appendix C -- Auction Procedures .................................... C-1
Appendix D -- Settlement Procedures ................................. D-1
Appendix E -- Rating Agency Futures and Options Restrictions ........ E-1
<PAGE>
--------------------------------------------------------------------------------
$140,000,000
MFS MUNICIPAL INCOME TRUST
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
2,800 SHARES, SERIES T
2,800 SHARES, SERIES TH
--------
PROSPECTUS
DECEMBER , 2000
--------
SALOMON SMITH BARNEY
MFMCE-IRH-11/00-2M
--------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 27, 2000
[Red Herring]
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.
[Logo] M F S(R)
INVESTMENT MANAGEMENT STATEMENT OF ADDITIONAL
We invented the Mutual fund(R) INFORMATION
, 2000
MFS MUNICIPAL INCOME TRUST
This Statement of Additional Information ("SAI") relating to the Series T and
Series TH Municipal Auction Rate Cumulative Preferred shares ("Municipal
Preferred") offered by MFS Municipal Income Trust (the "Trust") contains
information which may be useful to investors but which is not included in the
Prospectus of the Trust. This SAI is not a prospectus and is authorized for
distribution only when accompanied or preceded by the Prospectus of the Trust
dated , 2000, describing the Municipal Preferred (the "Prospectus").
This SAI should be read together with the Prospectus. Investors may obtain a
free copy of the Prospectus by calling Massachusetts Financial Services
Company at 1-800-637-2304. Capitalized terms used but not defined in this SAI
have the meanings ascribed to them in the Prospectus.
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
MFMCE-IRH-11/00 100
<PAGE>
TABLE OF CONTENTS
PAGE
USE OF PROCEEDS ....................................................... 3
INVESTMENT OBJECTIVE AND POLICIES ..................................... 3
TRUST CHARGES AND EXPENSES ............................................ 4
MANAGEMENT OF THE TRUST ............................................... 5
PORTFOLIO TRANSACTIONS ................................................ 8
NET ASSET VALUE ....................................................... 9
THE AUCTION ........................................................... 9
DESCRIPTION OF MUNICIPAL PREFERRED .................................... 19
REPURCHASE OF COMMON SHARES ........................................... 35
TAX MATTERS ........................................................... 35
SHAREHOLDER LIABILITY ................................................. 38
CUSTODIAN AND SHAREHOLDER SERVICING AGENT ............................. 38
INDEPENDENT ACCOUNTANTS ............................................... 38
GLOSSARY .............................................................. 38
FINANCIAL STATEMENTS .................................................. 44
APPENDIX A -- Description of Investments .............................. A-1
APPENDIX B -- Ratings of Investments .................................. B-1
APPENDIX C -- Auction Procedures ...................................... C-1
APPENDIX D -- Settlement Procedures ................................... D-1
APPENDIX E -- Rating Agency Futures and Options Restrictions .......... E-1
This Statement of Additional Information is dated , 2000.
<PAGE>
USE OF PROCEEDS
The net proceeds of the offering of shares of Municipal Preferred will be
approximately $138,081,540 after payment of the sales load to Salomon Smith
Barney Inc. (the "Underwriter") and estimated offering costs.
The net proceeds of the offering will be invested as described under
"Use of Proceeds" in the Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
The Trust's Prospectus describes its investment objective and investment
policies. This SAI includes additional information concerning, among other
things, the investment policies of the Trust and information about certain
securities and investment techniques that are described or referred to in
the Prospectus or in which the Trust expects to engage. Except as indicated
under "Fundamental Investment Policies," the Trust's investment policies
are not fundamental and the Trustees may change the policies without
shareholder approval.
FUNDAMENTAL INVESTMENT POLICIES
The Trust has adopted the following policies which cannot be changed
without the approval of the holders of a "majority of the outstanding"
Common Shares and Preferred Shares, including shares of Municipal
Preferred, voting together as a single class, and of the holders of a
"majority of the outstanding" Preferred Shares, including shares of
Municipal Preferred, 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. All percentage
limitations set forth below apply immediately after a purchase or initial
investment and any subsequent change in any applicable percentage resulting
from market fluctuations does not require elimination of any security from
the portfolio. The Trust may not:
(1) borrow money or pledge, mortgage or hypothecate its assets,
except as a temporary measure for extraordinary or emergency
purposes or for a repurchase of its shares, and in no event in
excess of 1/3 of its assets (the Trust intends to borrow money
only from banks);
(2) purchase any security or evidence of interest therein on margin,
except that the Trust may obtain such short-term credit as may be
necessary for the clearance of purchases and sales of securities
and except that the Trust may make deposits on margin in
connection with interest rate futures contracts;
(3) purchase or sell any put or call option or any combination
thereof, provided that this shall not prevent the purchase,
ownership, holding or sale of contracts for the future delivery
of fixed income securities;
(4) underwrite securities issued by other persons except insofar as
the Trust may technically be deemed an underwriter under the
Securities Act of 1933 in selling a portfolio security;
(5) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or
interests therein), interests in oil, gas or mineral leases,
commodities or commodity contracts (except contracts for the
future acquisition or delivery of fixed income securities) in the
ordinary course of the business of the Trust (the Trust reserves
the freedom of action to hold and to sell real estate acquired as
a result of the ownership of securities);
(6) purchase securities of any issuer if such purchase at the time
thereof would cause more than 10% of the voting securities of
such issuer to be held by the Trust;
(7) issue any senior security (as that term is defined in the
Investment Company Act of 1940 (the "1940 Act"), if such issuance
is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder;
(8) make loans to other persons except through the use of repurchase
agreements, the purchase of commercial paper or the purchase of
all or a portion of an issue of debt securities in accordance
with its investment objective, policies and restrictions, and
provided that not more than 10% of the assets of the Trust will
be invested in repurchase agreements maturing in more than seven
days.
The requirement that at least 80% of the Trust's assets under normal
circumstances be invested in Municipal Bonds is a fundamental policy. In
addition, subject to these restrictions, the Trust may enter into
repurchase agreements only with member banks of the Federal Reserve System
and only collateralized by U.S. Government securities; however, this
operating policy is not fundamental and may be changed without shareholder
approval.
For purposes of the investment restrictions described above and the
state and federal restrictions described below, the issuer of a tax-exempt
security is deemed to be the entity (public or private) ultimately
responsible for the payment of the principal of and interest on the
security.
OTHER INVESTMENT POLICIES
In addition to the foregoing restrictions, the Trust will not, as a matter
of operating policy, (i) pledge, mortgage or hypothecate for any purpose in
excess of 15% of its assets (taken at market value), (ii) invest more than
5% of its total assets at the time of investment in unsecured obligations
of issuers which, including predecessors, controlling persons, general
partners and guarantors, have a record of less than three years' continuous
business operation or relevant business experience, (iii) purchase or
retain in its portfolio any securities issued by an issuer any of whose
officers, directors, trustees or security holders is an officer or Trustee
of the Trust, or is a member, partner, officer or Director of the Adviser
if, after the purchase of the securities of such issuer by the Trust, one
or more of such persons owns beneficially more than 1/2 of 1% of the
shares or securities, or both (all taken at market value), of such issuer
and such persons owning more than 1/2 of 1% of such shares or securities
together own beneficially more than 5% of such shares or securities, or
both (all taken at market value), (iv) sell any security which it does not
own unless by virtue of its ownership of other securities the Trust has at
the time of sale a right to obtain securities, without payment of further
consideration, equivalent in kind and amount to the securities sold and
provided that if such right is conditional the sale is made upon the same
conditions, (v) invest for the purpose of exercising control or management,
(vi) purchase securities issued by any registered investment company except
by purchase in the open market where no commission or profit to a sponsor
or dealer results from such purchase other than the customary broker's
commission, or except when such purchase, though not made in the open
market, is part of a plan of merger or consolidation, provided, however,
that the Trust shall not purchase the securities of any registered
investment company if such purchase at the time thereof would cause more
than 10% of the total assets of the Trust (taken at market value) to be
invested in the securities of such issuers or would cause more than 3% of
the outstanding voting securities of any such issuer to be held by the
Trust, and provided further, that the Trust shall not purchase securities
issued by any open-end investment company, or (vii) knowingly invest in
securities which are subject to legal or contractual restrictions on resale
(other than repurchase agreements) if, as a result thereof, more than 15%
of the total assets of the Trust (taken at market value) would be so
invested. These policies are not fundamental and may be changed by the
Trust without shareholder approval.
Restrictions imposed by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Ratings Group ("Standard & Poor's"), or both, on engaging
in futures and options transactions as described under "Description of
Municipal Preferred -- Asset Maintenance," are not fundamental policies and
may be changed by the Trust from time to time without shareholder approval;
provided, however, that if Moody's or Standard & Poor's, or both, are
rating the shares of Municipal Preferred, the Trust must receive written
confirmation from Moody's or Standard & Poor's, or both, as appropriate,
that any such change would not impair the ratings then assigned by Moody's
and Standard & Poor's to shares of Municipal Preferred. See also
"Description of Municipal Preferred -- Rating Agency Guidelines" for a
description of other rating agency restrictions, none of which is a
fundamental policy of the Trust and which may be changed by the Trust from
time to time without shareholder approval subject to the foregoing proviso.
TRUST CHARGES AND EXPENSES
For the services provided by Massachusetts Financial Services Company
("MFS" or the "Adviser") under the Advisory Agreement, the Trust pays MFS a
fee, as described under "Management of the Trust - The Adviser" in the
Prospectus.
Pursuant to the Registrar, Transfer Agency and Service Agreement with
respect to the Common Shares of the Trust, between the Trust and MFS
Service Center, Inc., for account maintenance, the Trust currently pays MFS
Service Center, Inc. ("MFSC") a fee based on the total number of accounts
for all closed-end funds advised by MFS for which MFSC acts as registrar
and transfer agent. If the total number of accounts is less than 75,000,
the annual account fee is $9.00. If the total number of accounts is 75,000
or more, the annual account fee is $8.00. For dividend services, MFSC
charges $0.75 per dividend reinvestment and $0.75 per cash infusion. If the
total amount of fees related to dividend services is less than $1,000 per
month for all closed-end funds advised by MFS for which MFSC acts as
registrar and transfer agent, the minimum fee for the Trust for these
services will be $167 per month. The Trust will reimburse MFSC for
reasonable out-of-pocket expenses and advances incurred by MFSC and for any
other expenses incurred by MFSC at the request, or with the consent, of the
Trust.
RECENT FEES PAID TO THE ADVISER AND MFSC
YEAR ENDED OCTOBER 31,
-------------------------
2000 1999 1998
(DOLLARS IN THOUSANDS)
Management fee .............................. $2,733 $2,856 $2,952
Transfer agent fee .......................... $ 94 $ 104 $ 111
BROKERAGE COMMISSIONS
The Trust did not pay any brokerage commissions for the fiscal years ended
October 31, 2000, 1999 and 1998.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust, their ages and their principal
occupations for at least the last five years are set forth below. (Their
titles may have varied during that period.) Unless otherwise noted, the
address of each Trustee and officer is 500 Boylston Street, Boston,
Massachusetts 02116. Trustees and officers who are "interested persons" of
the Trust, as defined in the 1940 Act, are denoted by an asterisk (*). The
Board of Trustees is divided into three classes, each class having a term
of three years ending with the annual meeting of shareholders (or any
adjournment thereof) held in the year of expiration, or until the election
of a successor. Each year, the term of office of one class expires: Mr.
Schmidt will continue in office until 2001; Messrs. Poorvu and Stone and
Ms. Smith will continue in office until 2002; and Messrs. Ives, Perera,
Scott and Shames will continue in office until 2003.
TRUSTEES AND OFFICERS
JEFFREY L. SHAMES*, (born 6/2/55) Trustee, Chairman and President
Chairman and President; Massachusetts Financial Services Company, Chairman
and Chief Executive Officer.
J. ATWOOD IVES, (born 5/1/36) Trustee
Eastern Enterprises (diversified services company), Chairman, Trustee and
Chief Executive Officer.
LAWRENCE T. PERERA, (born 6/23/35) Trustee
Hemenway & Barnes (attorneys), Partner.
WILLIAM J. POORVU, (born 4/10/35) Trustee
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (real estate investment
trust), Director; The Baupost Fund (a mutual fund), Vice Chairman and
Trustee.
CHARLES W. SCHMIDT, (born 3/18/28) Trustee
Private Investor; IT Group, Inc. (diversified environmental services and
consulting), Director.
ARNOLD D. SCOTT*, (born 12/16/42) Trustee
Massachusetts Financial Services Company, Senior Executive Vice President
and Director.
ELAINE R. SMITH, (born 4/25/46) Trustee
Independent consultant.
DAVID B. STONE, (born 9/2/27) Trustee
North American Management Corp. (Investment Adviser), Chairman and
Director; Eastern Enterprises (diversified services company).
STEPHEN E. CAVAN*, (born 11/6/53) Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Secretary.
JAMES R. BORDEWICK, JR.*, (born 3/6/59) Assistant Secretary and Assistant
Clerk
Massachusetts Financial Services Company, Senior Vice President and
Associate General Counsel
JAMES O. YOST*, (born 6/12/60) Treasurer
Massachusetts Financial Services Company, Senior Vice President.
ROBERT R. FLAHERTY*, (born 9/18/63) Assistant Treasurer
Massachusetts Financial Services Company, Vice President (since August
2000), UAM Fund Services, Senior Vice President (since 1996), Chase Global
Fund Services, Vice President (1995 to 1996).
LAURA F. HEALY*, (born 3/20/64) Assistant Treasurer
Massachusetts Financial Services Company, Vice President (since December
1996), State Street Bank Fund Administration Group, Assistant Vice
President (prior to December 1996).
ELLEN MOYNIHAN*, (born 11/13/57) Assistant Treasurer
Massachusetts Financial Services Company, Vice President (since September,
1996); Deloitte & Touche LLP, Senior Manager (until September 1996).
MARK E. BRADLEY*, (born 11/23/59) Assistant Treasurer
Massachusetts Financial Services Company, Vice President (since March,
1997); Putnam Investments, Vice President (prior to March 1997).
Each Trustee and officer holds comparable positions with certain MFS
affiliates or with certain other funds of which MFS or a subsidiary of MFS
is the investment adviser or distributor.
All Trustees serve as Trustees of 38 funds within the MFS fund complex
advised by MFS, investment adviser to the Trust, except for Mr. Scott, who
serves as Trustee of 79 funds within the MFS fund complex, and Mr. Shames,
who serves as Trustee of 108 funds within the MFS fund complex. Messrs.
Scott and Shames are "interested persons" (as defined under the 1940 Act)
of the Trust because they are each an officer and director of MFS; Messrs.
Scott and Shames each own shares of common stock of MFS.
At the next annual meeting of the Trust's shareholders, holders of
outstanding shares of Municipal Preferred, voting together as one separate
class, will elect two trustees, and holders of outstanding Common Shares
and shares of Municipal Preferred, voting together as a single class, will
elect one trustee. See "Description of Municipal Preferred -- Voting
Rights."
The Trust pays each Trustee who is not an officer of the Adviser a fee
of $7,000 per year plus $400 per meeting and $400 per committee meeting
attended, together with such Trustee's actual out-of-pocket expenses
relating to attendance at meetings. In addition, each Trustee who is not an
officer of the Adviser will be entitled to receive certain benefits
pursuant to the Trust's retirement plan. Under this plan, each such Trustee
(or his or her beneficiaries) will be entitled to receive an annual
retirement or death benefit in an amount of up to a maximum of 50% of such
Trustee's average annual compensation, depending on the Trustee's length of
service.
TRUSTEES AND TRUSTEES' FEES
Set forth below is certain information concerning the cash compensation
paid to these Trustees and benefits accrued, and estimated benefits
payable, under the retirement plan.
<TABLE>
<CAPTION>
RETIREMENT TOTAL
BENEFIT TRUSTEE
TRUSTEE ACCRUED ESTIMATED FEES FROM
FEES AS PART CREDITED TRUST
FROM OF TRUST YEARS OF AND FUND
TRUSTEE TRUST(1) EXPENSE(1) SERVICE(2) COMPLEX(3)
------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
J. Atwood Ives .................................................. $13,367 $4,876 17 $132,623
Lawrence T. Perera .............................................. $13,367 $6,094 21 $144,098
William J. Poorvu ............................................... $13,367 $6,161 21 $141,338
Charles W. Schmidt .............................................. $13,367 $6,161 14 $137,678
Arnold D. Scott ................................................. 0 0 N/A 0
Jeffrey L. Shames ............................................... 0 0 N/A 0
Elaine R. Smith ................................................. $13,367 $5,356 27 $144,098
David B. Stone .................................................. $15,767 $6,961 12 $151,418
----------
(1) For fiscal year ended October 31, 1999.
(2) Based on normal retirement age of 73 (age 74 for Mr. Stone).
(3) For calendar year 1999. All Trustees receiving compensation served as Trustees of 34 funds within the MFS fund complex
(having aggregate net assets at December 31, 1999, of approximately $58.6 billion).
<CAPTION>
ESTIMATED ANNUAL BENEFITS PAYABLE BY
THE TRUST UPON RETIREMENT(4)
AVERAGE YEARS OF SERVICE
TRUSTEE ----------------------------------------------------------------------------------------
FEES 3 5 7 10 OR MORE
---- --- --- --- ----------
<S> <C> <C> <C> <C>
$12,030 $1,805 $3,008 $4,211 $6,015
$13,093 $1,964 $3,273 $4,583 $6,546
$14,156 $2,123 $3,539 $4,954 $7,078
$15,218 $2,283 $3,805 $5,326 $7,609
$16,281 $2,442 $4,070 $5,698 $8,141
$17,344 $2,602 $4,336 $6,070 $8,672
----------
(4) Other funds in the MFS fund complex provide similar retirement benefits to the Trustees.
</TABLE>
In addition to the provisions discussed in the Prospectus under
"Certain Provisions in the Declaration of Trust," the Declaration provides
that the obligations of the Trust are not binding upon the Trustees of the
Trust individually, but only upon the assets and property of the Trust. The
Declaration also provides that the Trust 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
Trust but that such indemnification will not relieve any officer or Trustee
of any liability to the Trust or its shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of his or
her duties. The Trust, at its expense, provides liability insurance for the
benefit of its Trustees and officers.
As of November 20, 2000, all Trustees and officers as a group owned
less than 1% of the outstanding shares of the Trust. As of the same date,
the Trust did not have knowledge of any shareholder holding 5% or more of
the outstanding shares of the Trust.
INVESTMENT ADVISER
MFS, a Delaware corporation, is the Trust's Adviser. The principal business
address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser to each of the funds in the MFS
Family of Funds (the "MFS Funds"), to MFS Intermediate Income Trust, MFS
Government Markets Income Trust, MFS Multimarket Income Trust, MFS Charter
Income Trust, MFS Special Value Trust, MFS Institutional Trust, MFS
Variable Insurance Trust, Sun Growth Variable Annuity Fund, Inc., MFS/Sun
Life Series Trust and seven variable accounts, each of which is a
registered investment company established by Sun Life of Canada (U.S.) in
connection with the sale of Compass-2 and Compass-3 combination fixed/
variable annuity contracts. MFS and its wholly-owned subsidiary, MFS
Institutional Advisers, Inc., provide investment advice to substantial
private clients. Net assets under the management of the MFS organization
were approximately $151.19 billion on behalf of approximately 5.1 million
investors as of June 30, 2000. As of such date, the MFS organization
managed approximately $5.2 billion of assets in municipal obligations.
Michael Roberge, a Senior Vice President of MFS, has been the portfolio
manager of the Fund since December, 1997.
GENERAL. The Investment Advisory Agreement between MFS and the Trust (the
"Advisory Agreement") provides that, subject to the direction of the Board
of Trustees of the Trust, MFS is responsible for the actual management of
the Trust's portfolio. The responsibility for making decisions to buy, sell
or hold a particular security rests with the Adviser, subject to review by
the Board of Trustees. The Adviser also provides certain administrative
services and general office facilities.
The Adviser is not dependent on any other party in providing the
investment advisory services required in the management of the Trust. The
Adviser may, however, consider analyses from various sources, including
broker-dealers with which the Trust does business.
The Adviser pays the compensation of the Trust's officers and of the
Trustees who are affiliated with the Adviser. The Adviser also furnishes at
its own expense all necessary administrative services, including office
space, equipment, clerical personnel, investment advisory facilities and
all executive and supervisory personnel necessary for managing the Trust's
investments, effecting the Trust's portfolio transactions and, in general,
administrating its affairs.
The Advisory Agreement also provides that neither MFS or its personnel
shall be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in the execution
and management of the Trust, except for willful misfeasance, bad faith or
gross negligence in the performance of its or their duties or by reason of
reckless disregard of its or their obligations and duties under the
Advisory Agreement.
ADVISORY FEE. For the services provided by MFS under the Advisory
Agreement, the Trust pays it a fee computed and paid monthly in an amount
equal to the sum of 0.4% of the average daily net assets of the Trust and
6.32% of the gross income (i.e., income other than gains from the sale of
securities or gains received from futures contracts) of the Trust, in each
case on an annualized basis, for the Trust's then-current fiscal year. This
advisory fee may be higher than that paid by funds with similar investment
objectives.
PAYMENT OF EXPENSES. The Trust pays the compensation of the six Trustees
who are not affiliated with MFS and all the Trust's expenses (other than
those assumed by MFS), including governmental fees, interest charges,
taxes, membership dues in the Investment Company Institute allocable to the
Trust, fees and expenses of independent auditors, of legal counsel, and of
any transfer agent, registrar or dividend disbursing agent of the Trust, to
MFS as administrator to the Trust, expenses of repurchasing shares,
expenses of preparing, printing and mailing share certificates, shareholder
reports, notices, proxy statements and reports to governmental officers and
commissions, brokerage and other expenses connected with the execution,
recording and settlement of portfolio security transactions, insurance
premiums, fees and expenses of the Trust's custodian, for all services to
the Trust, including safekeeping of funds and securities and maintaining
required books and accounts, expenses of calculating the net asset value of
the Trust's shares, expenses of shareholder meetings, expenses in
connection with the Dividend Reinvestment and Cash Purchase Plan relating
to the Common Shares of the Trust and Securities and Exchange Commission
("SEC") fees.
USE OF NAME. The Advisory Agreement provides that if MFS ceases to serve as
the Adviser to the Trust, the Trust will change its name so as to delete
the initials "MFS" and that MFS may render services to others and may
permit fund clients in addition to the Trust to use the initials "MFS" in
their names.
The Advisory Agreement will continue in effect only if such continuance
is specifically approved at least annually by the Board of Trustees or by
vote of a majority of the Trust's outstanding voting securities and, in
either case, by a majority of the Trustees who are not parties to the
Advisory Agreement or interested persons of any such party. The Advisory
Agreement terminates automatically if it is assigned and may be terminated
without penalty by vote of a majority of the Trust's outstanding voting
securities or by either party on not more than 60 days' nor less than 30
days' written notice.
CODES OF ETHICS
The Trust, the Adviser and the Underwriter have adopted codes of ethics as
required under the 1940 Act. Subject to certain conditions and
restrictions, these codes permit personnel subject to the codes to invest
in securities for their own accounts, including securities that may be
purchased, held or sold by the Trust. Securities transactions by some of
these persons may be subject to prior approval of the Adviser's Compliance
Department. Securities transactions of certain personnel are subject to
quarterly reporting and review requirements. These codes of ethics can be
reviewed and copied at the SEC's Public Reference Room in Washington, D.C.
Information on the operation of the Public Reference Room may be obtained
by calling the Commission at 1-202-942-8090. These codes of ethics also are
available on the EDGAR Database on the SEC's Internet site at http://
www.sec.gov, and copies of these codes of ethics may be obtained, after
paying a duplicating fee, by electronic request at the following e-mail
address: [email protected], or by writing the SEC's Public Reference
Section, Washington, D.C. 20549-0102.
PORTFOLIO TRANSACTIONS
Specific decisions to purchase or sell securities for the Trust are made by
the Trust's portfolio manager who is an employee of MFS and who is
appointed and supervised by its senior officers. The portfolio manager may
serve other clients of the Trust's Adviser or any subsidiary of the Adviser
in a similar capacity.
The primary consideration in portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as
to the markets in and the broker-dealers through which it seeks this
result. Municipal Bonds and other debt securities are traded principally in
the over-the-counter market on a net basis through dealers acting for their
own account and not as brokers. The cost of securities purchased from
underwriters includes an underwriter's commission or concession, and the
prices at which securities are purchased and sold from and to dealers
include a dealer's mark-up or mark-down. The Adviser normally seeks to deal
directly with the primary market makers, unless in its opinion, better
execution is available elsewhere. Subject to the requirement of seeking
execution at the most favorable price, securities may, as authorized by the
Advisory Agreement, be bought from or sold to dealers who have furnished
statistical, research and other information or services to the Adviser or
who have sold shares of funds for which MFS serves as investment adviser.
At present no arrangements to recapture commission payments are in effect.
In certain instances, there may be securities which are suitable for
the Trust's portfolio as well as for that of one or more of the other
clients of the Trust's Adviser or any subsidiary of the Adviser. Investment
decisions for the Trust and for the Adviser's other clients are made with a
view to achieving their respective investment objectives. It may develop
that a particular security is bought or sold for only one client even
though it might be held by, or bought or sold for, other clients. Likewise,
a particular security may be bought for one or more clients when one or
more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice
from the same investment adviser, particularly when the same security is
suitable for the investment objectives of more than one client. When two or
more clients are simultaneously engaged in the purchase or sale of the same
security, the securities are allocated among clients in a manner believed
to be equitable to each. It is recognized that in some cases this system
could have a detrimental effect on the price or volume of the security as
far as the Trust is concerned. In other cases, however, it is believed that
the ability of the Trust to participate in volume transactions will produce
better executions for the Trust.
For the fiscal years ended October 31, 1998, 1999 and 2000, the Trust
paid no brokerage commissions for the execution of portfolio transactions.
The rates of portfolio turnover for each of the fiscal years ended October
31, 1998, 1999 and 2000 were 12%, 15% and 18%, respectively.
NET ASSET VALUE
Net asset value of the Trust will be determined no less frequently than as of
the close of regular trading on the New York Stock Exchange (the "Exchange")
(generally 4:00 p.m. New York City time) on the last Business Day of each
week (generally Friday), and at such other times as the Trust may authorize.
The net asset value of the Trust equals the value of the Trust's assets less
the Trust's liabilities. Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues, are valued on the
basis of valuations furnished by dealers or by a Pricing Service with
consideration to factors such as institutional-size trading in similar groups
of securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics, and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short-term obligations, which mature in
60 days or less, are valued at amortized cost, which approximates market
value. Securities for which there are no such quotations are valued at fair
value as determined in good faith by or at the direction of the Trustees.
In determining net asset value for the Trust, the Trust'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 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 Trust under the general supervision of the Board of
Trustees.
THE AUCTION
GENERAL
The Statement creating the Municipal Preferred shares (the "Statement"),
provides that the Applicable Rate for each Rate Period of Municipal
Preferred after the Initial Rate Period therefor shall be equal to the rate
per annum that the Auction Agent advises has resulted on the Business Day
preceding the first day of such Subsequent Rate Period (an "Auction Date")
from implementation of the auction procedures (the "Auction Procedures")
set forth in the Statement and summarized below, in which persons determine
to hold or offer to sell or, based on dividend rates bid by them, offer to
purchase or sell such shares. Each periodic implementation of the Auction
Procedures is referred to herein as an "Auction." The following summary is
qualified by reference to the Auction Procedures set forth in the
Statement.
As used herein with respect to shares of Municipal Preferred, (i)
"Applicable Rate" means the rate per annum at which dividends are payable on
such shares for any Rate Period thereof, (ii) "Beneficial Owner" means a
customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer (or, if applicable, the Auction Agent) as a holder of such
shares, (iii) "Business Day" means a day on which the New York Stock Exchange
is open for trading and is not a Saturday, Sunday or other day on which banks
in New York City are authorized by law to close, (iv) "Date of Original
Issue" means the date on which the Trust initially issued such shares, (v)
"Dividend Payment Date" means any date on which dividends on such shares are
payable as provided under "Description of Municipal Preferred -- Dividends --
General," (vi) "Dividend Period" means the period from and including the Date
of Original Issue of such shares to but excluding the initial Dividend
Payment Date for such shares and any period thereafter from and including one
Dividend Payment Date for such shares to but excluding the next succeeding
Dividend Payment Date for such shares, (vii) "Existing Holder" means a
Broker-Dealer (or any such other Person as may be permitted by the Trust)
that is listed on the records of the Auction Agent as a holder of such
shares, (viii) "Initial Rate Period" means the period from and including the
Date of Original Issue of such shares to but excluding the initial Dividend
Payment Date for such shares, (ix) "Potential Beneficial Owner" means a
customer of a Broker-Dealer that is not a Beneficial Owner of such shares
that wishes to purchase such shares, or that is a Beneficial Owner that
wishes to purchase additional such shares, (x) "Potential Holder" means a
Broker-Dealer (or any such other Person as may be permitted by the Trust)
that is not an Existing Holder of such shares or that is an Existing Holder
of such shares that wishes to become the Existing Holder of additional such
shares, (xi) "Rate Period" means the Initial Rate Period of such shares and
any Subsequent Rate Period, including any Special Rate Period, of such
shares, (xii) "Subsequent Rate Period" means any period from and including
the first day following the Initial Rate Period of such shares to but
excluding the next Dividend Payment Date for such shares and any period
thereafter from and including one Dividend Payment Date for such shares to
but excluding the next succeeding Dividend Payment Date for such shares;
provided, however, that if any Subsequent Rate Period is also a Special Rate
Period, such term shall mean the period commencing on the first day of such
Special Rate Period and ending on the last day of the last Dividend Period
thereof, (xiii) "Minimum Rate Period" means any Rate Period consisting of 7
Rate Period Days and (xiv) "Special Rate Period" means any Subsequent Rate
Period commencing on the date designated by the Trust, as set forth under
"Description of Municipal Preferred -- Dividends -- Designation of Special
Rate Periods," and ending on the last day of the last Dividend Period
thereof.
AUCTION AGENCY AGREEMENT. The Trust will enter into an agreement (the
"Auction Agency Agreement") with Bankers Trust Company (together with any
successor bank or trust company or other entity entering into a similar
agreement with the Trust, the "Auction Agent") which provides, among other
things, that the Auction Agent will follow the Auction Procedures for
purposes of determining the Applicable Rate for shares of Municipal
Preferred so long as the Applicable Rate for such shares is to be based on
the results of an Auction.
BROKER-DEALER AGREEMENTS. Each Auction requires the participation of one or
more broker-dealers. The Auction Agent will enter into an agreement with
Salomon Smith Barney Inc., and may enter into similar agreements
(collectively, the "Broker-Dealer Agreements") with one or more additional
broker-dealers (collectively, the "Broker-Dealers") selected by the Trust,
which provide for the participation of Broker-Dealers in Auctions. See
"Broker-Dealers" below.
SECURITIES DEPOSITORY. The Depository Trust Company ("DTC," together with
any successor securities depository selected by the Trust, the "Securities
Depository") will act as the Securities Depository for the Agent Members
with respect to shares of Municipal Preferred. One certificate for all of
the shares of Municipal Preferred will be registered in the name of Cede &
Co. ("Cede"), as nominee of the Securities Depository. Such certificate
will bear a legend to the effect that such certificate is issued subject to
the provisions restricting transfers of shares of Municipal Preferred
contained in the Statement. The Trust will also issue stop-transfer
instructions to the transfer agent for shares of Municipal Preferred. Prior
to the commencement of the right of holders of Preferred Shares to elect a
majority of the Trust's trustees, as described below under "Description of
Municipal Preferred -- Voting Rights," Cede will be the holder of record of
all shares of Municipal Preferred, and owners of shares of Municipal
Preferred will not be entitled to receive certificates representing their
ownership interest in such shares.
DTC, a New York-chartered limited purpose trust company, performs
services for its participants (including the Agent Members), some of whom
(and/or their representatives) own DTC. DTC maintains lists of its
participants and will maintain the positions (ownership interests) held by
each such participant (the "Agent Member") in shares of Municipal
Preferred, whether for its own account or as a nominee for another person.
AUCTION DATES; ADVANCE NOTICE OF ALLOCATION OF TAXABLE INCOME
The first Auction for shares of Series T Municipal Preferred will be held
on , , 2000, the Business Day preceding the Dividend
Payment Date for the Initial Rate Period of Series T shares of Municipal
Preferred. The first Auction for shares of Series TH Municipal Preferred
will be held on , , 2000, the Business Day preceding the
Dividend Payment Date for the Initial Rate Period of Series TH shares of
Municipal Preferred. See "Description of Municipal Preferred -- Dividends."
Thereafter, Auctions will normally be held every Tuesday for Series T
Municipal Preferred, and each Subsequent Rate Period will normally begin on
the following Wednesday, and every Thursday for Series TH Municipal
Preferred, and each Subsequent Rate Period will normally begin on the
following Friday, unless the then-current Rate Period is a Special Rate
Period or, in certain circumstances, the day that would normally be the
Auction Date or the first day of such Subsequent Rate Period is not a
Business Day. The Auction Date and the first day of the related Rate Period
(also a Dividend Payment Date) must be Business Days but need not be
consecutive days. See "Description of Municipal Preferred -- Dividends" for
information concerning the circumstances under which the first day of a
Rate Period or the Auction Date, or both, may be moved to a date other than
such specified days.
Except as noted below, 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
Minimum Rate Periods or Special Rate Periods of 28 Rate Period Days or
fewer, and may, in the case of any other Special Rate Period, notify the
Auction Agent of the amount to be so included not later than the Dividend
Payment Date next preceding the Auction Date on which the Applicable Rate
for such dividend is to be established. Whenever the Auction Agent receives
such notice from the 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 customers who
are Beneficial Owners and Potential Beneficial Owners believed by it to be
interested in submitting an Order in the Auction to be held on such Auction
Date. The Trust may also include such net capital gain or other income
taxable for federal income tax purposes in a dividend on shares of
Municipal Preferred without giving advance notice if the dividend is
increased by a Gross-Up Payment. The Trust must notify the Auction Agent of
the additional amounts to be included in such dividend at least five
Business Days prior to the applicable Dividend Payment Date. See also
"Description of Municipal Preferred -- Dividends -- Gross-up Payments"
below.
ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS
Prior to the Submission Deadline (as defined under "Submission of Orders by
Broker-Dealers to Auction Agent" below) on each Auction Date for shares of
Municipal Preferred:
(a) each Beneficial Owner of such shares may submit to its Broker-Dealer
by telephone or otherwise a:
(i) "Hold Order" -- indicating the number of outstanding shares
of Municipal Preferred, if any, that such Beneficial Owner desires
to continue to hold without regard to the Applicable Rate for such
shares for the next succeeding Rate Period;
(ii) "Bid" -- indicating the number of outstanding shares of
Municipal Preferred, if any, that such Beneficial Owner offers to
sell if the Applicable Rate for such shares for the next succeeding
Rate Period shall be less than the rate per annum specified by such
Beneficial Owner in such bid; and/or
(iii) "Sell Order" -- indicating the number of outstanding
shares of Municipal Preferred, if any, that such Beneficial Owner
offers to sell without regard to the Applicable Rate for such shares
for the next succeeding Rate Period; and
(b) Broker-Dealers shall contact customers who are Potential
Beneficial Owners by telephone or otherwise to determine whether such
customers desire to submit Bids, in which they will indicate the number
of shares of Municipal Preferred that they offer to purchase if the
Applicable Rate for such shares for the next succeeding Rate Period is
not less than the rate per annum specified in such Bids.
The communication to a Broker-Dealer of the foregoing information is
herein referred to as an "Order" and collectively as "Orders." A Beneficial
Owner or a Potential Beneficial Owner placing an Order with its
Broker-Dealer, and such Broker-Dealer placing an Order with the Auction
Agent, is herein referred to as a "Bidder" and collectively as "Bidders." The
submission by a Broker-Dealer of an Order to the Auction Agent shall likewise
be referred to herein as an "Order" and collectively as "Orders," and an
Existing Holder or Potential Holder who places an Order with the Auction
Agent or on whose behalf an Order is placed with the Auction Agent shall
likewise be referred to herein as a "Bidder" and collectively as "Bidders."
A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of Municipal Preferred then held by such
Beneficial Owner. A Bid placed by a Beneficial Owner specifying a rate higher
than the Applicable Rate determined in the Auction shall constitute an
irrevocable offer to sell the shares subject thereto. A Beneficial Owner that
submits a Bid to its Broker-Dealer having a rate higher than the Maximum Rate
on the Auction Date thereof will be treated as having submitted a Sell Order
to its Broker-Dealer. A Beneficial Owner that fails to submit to its
Broker-Dealer prior to the Submission Deadline for shares of Municipal
Preferred an Order or Orders covering all the outstanding shares of Municipal
Preferred held by such Beneficial Owner will be deemed to have submitted a
Hold Order to its Broker-Dealer covering the number of outstanding shares of
Municipal Preferred held by such Beneficial Owner and not subject to Orders
submitted to its Broker-Dealer; provided, however, that if a Beneficial Owner
fails to submit to its Broker-Dealer prior to the Submission Deadline for
shares of Municipal Preferred an Order or Orders covering all of the
outstanding shares of Municipal Preferred held by such Beneficial Owner for
an Auction relating to a Special Rate Period consisting of more than 28 Rate
Period Days, such Beneficial Owner will be deemed to have submitted a Sell
Order to its Broker-Dealer covering the number of outstanding shares of
Municipal Preferred held by such Beneficial Owner and not subject to Orders
submitted to its Broker-Dealer. A Sell Order shall constitute an irrevocable
offer to sell the shares of Municipal Preferred subject thereto at a price
per share equal to $25,000. A Beneficial Owner of shares of Municipal
Preferred that offers to become the Beneficial Owner of additional shares of
Municipal Preferred is, for purposes of such offer, a Potential Beneficial
Owner.
A Potential Beneficial Owner of shares of Municipal Preferred may
submit to its Broker-Dealer Bids in which it offers to purchase shares of
Municipal Preferred if the Applicable Rate for the next Rate Period is not
less than the rate specified in such Bid. A Bid placed by a Potential
Beneficial Owner specifying a rate not higher than the Maximum Rate shall
constitute an irrevocable offer to purchase the number of shares of
Municipal Preferred specified in such Bid if the rate determined in the
Auction is equal to or greater than the rate specified in such Bid.
As described more fully below under "Submission of Orders by
Broker-Dealers to Auction Agent," the Broker-Dealers will submit the Orders
of their respective customers who are Beneficial Owners and Potential
Beneficial Owners to the Auction Agent, designating themselves (unless
otherwise permitted by the Trust) as Existing Holders in respect of shares
subject to Orders submitted or deemed submitted to them by Beneficial Owners
and as Potential Holders in respect of shares subject to Orders submitted to
them by Potential Beneficial Owners. However, neither the Trust nor the
Auction Agent will be responsible for a Broker-Dealer's failure to comply
with the foregoing. Any Order placed with the Auction Agent by a
Broker-Dealer as or on behalf of an Existing Holder or a Potential Holder
will be treated in the same manner as an Order placed with a Broker-Dealer by
a Beneficial Owner or a Potential Beneficial Owner, as described in the
preceding paragraph. Similarly, any failure by a Broker- Dealer to submit to
the Auction Agent an Order in respect of any shares of Municipal Preferred
held by it or its customers who are Beneficial Owners will be treated in the
same manner as a Beneficial Owner's failure to submit to its Broker-Dealer an
Order in respect of shares of Municipal Preferred held by it, as described in
the second preceding paragraph. For information concerning the priority given
to different types of Orders placed by Existing Holders, see "Submission of
Orders by Broker-Dealers to Auction Agent" below.
Neither the Trust nor an affiliate may submit an Order in any Auction,
except that any Broker-Dealer that is an affiliate of the Trust may submit
Orders in an Auction, but only if such Orders are not for its own account.
The Auction Procedures include a pro rata allocation of shares for
purchase and sale, which may result in an Existing Holder continuing to
hold or selling, or a Potential Holder purchasing, a number of shares of
Municipal Preferred that is fewer than the number of shares of Municipal
Preferred specified in its Order. See "Acceptance and Rejection of
Submitted Bids and Submitted Sell Orders and Allocation of Shares" below.
To the extent the allocation procedures have that result, Broker-Dealers
that have designated themselves as Existing Holders or Potential Holders in
respect of customer Orders will be required to make appropriate pro rata
allocations among their respective customers. Each purchase or sale shall
be made for settlement on the Business Day next succeeding the Auction Date
at a price per share equal to $25,000. See "Notification of Results;
Settlement" below.
As described above, any Bid specifying a rate higher than the Maximum
Rate (as defined below) will (i) be treated as a Sell Order if submitted by
a Beneficial Owner or an Existing Holder and (ii) not be accepted if
submitted by a Potential Beneficial Owner or a Potential Holder.
Accordingly, the Auction Procedures establish the Maximum Rate as a maximum
rate per annum that can result from an Auction. See "Determination of
Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate" and
"Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares" below.
As used herein, "Maximum Rate," when used with respect to shares of
Municipal Preferred on an Auction Date, means:
(i) in the case of any Auction Date which is not the Auction Date
immediately prior to the first day of any proposed Special Rate Period,
the product of (1) the Reference Rate on such Auction Date for the next
Rate Period and (2) the Rate Multiple on such Auction Date, unless such
shares have or had a Special Rate Period (other than a Special Rate
Period of 28 Rate Period Days or fewer) and an Auction at which
Sufficient Clearing Bids existed has not yet occurred for a Minimum Rate
Period after such Special Rate Period, in which case the higher of:
(A) the dividend rate on such shares for the then-ending Rate
Period; and
(B) the product of (x) the higher of (I) the Reference Rate on
such Auction Date for a Rate Period equal in length to the then-ending
Rate Period, if such then-ending Rate Period was 364 Rate Period Days
or fewer, or the Treasury Note Rate on such Auction Date for a Rate
Period equal in length to the then-ending Rate Period, if such
then-ending Rate Period was more than 364 Rate Period Days, and (II)
the Reference Rate on such Auction Date for a Rate Period equal in
length to such Special Rate Period, if such Special Rate Period was
364 Rate Period Days or fewer, or the Treasury Note Rate on such
Auction Date for a Rate Period equal in length to such Special Rate
Period, if such Special Rate Period was more than 364 Rate Period Days
and (y) the Rate Multiple on such Auction Date; or
(ii) in the case of any Auction Date which is the Auction Date
immediately prior to the first day of any proposed Special Rate Period,
the product of (1) the highest of (x) the Reference Rate on such Auction
Date for a Rate Period equal in length to the then-ending Rate Period,
if such then-ending Rate Period was 364 Rate Period Days or fewer, or
the Treasury Note Rate on such Auction Date for a Rate Period equal in
length to the then-ending Rate Period, if such then-ending Rate Period
was more than 364 Rate Period Days, (y) the Reference Rate on such
Auction Date for the Special Rate Period for which the Auction is being
held if such Special Rate Period is 364 Rate Period Days or fewer or the
Treasury Note Rate on such Auction Date for the Special Rate Period for
which the Auction is being held if such Special Rate Period is more than
364 Rate Period Days, and (z) the Reference Rate on such Auction Date
for Minimum Rate Periods and (2) the Rate Multiple on such Auction Date.
As used herein, "Reference Rate" shall mean (i) the higher of the
Taxable Equivalent of the Short-Term Municipal Bond Rate and the "AA"
Composite Commercial Paper Rate in the case of Minimum Rate Periods and
Special Rate Periods of 28 Rate Period Days or fewer; (ii) the "AA"
Composite Commercial Paper Rate in the case of Special Rate Periods of more
than 28 Rate Period Days but fewer than 183 Rate Period Days; and (iii) the
Treasury Bill Rate in the case of Special Rate Periods of more than 182
Rate Period Days but fewer than 365 Rate Period Days.
As used herein, "Taxable Equivalent of the Short-Term Municipal Bond
Rate," on any date for any Minimum Rate Period or Special Rate Period of 28
Rate Period Days or fewer, shall mean 90% of the quotient of (A) the per
annum rate expressed on an interest equivalent basis equal to the Standard
& Poor's Kenny 30 day High Grade Index or any successor index (the "Kenny
Index") (provided, however, that any such successor index must be approved
by Moody's (if Moody's is then rating the shares of Municipal Preferred)
and Standard & Poor's (if Standard & Poor's is then rating the shares of
Municipal Preferred)), made available for the Business Day immediately
preceding such date but in any event not later than 8:30 A.M., New York
City time, on such date by Standard & Poor's J.J. Kenny Evaluation Services
or any successor thereto, based upon 30-day yield evaluations at par of
short-term bonds, the interest on which is excludable for regular federal
income tax purposes under the Code, of "high grade" component issuers
selected by Standard & Poor's J.J. Kenny Evaluation Services or any such
successor from time to time in its discretion, which component issuers
shall include, without limitation, issuers of general obligation bonds but
shall exclude any bonds the interest on which constitutes an item of tax
preference under Section 57(a)(5) of the Code, or successor provisions, for
purposes of the "alternative minimum tax," divided by (B) 1.00 minus the
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), whichever is greater; 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
Standard & Poor's J.J. Kenny Evaluation Services or any successor, the
Taxable Equivalent of the Short-Term Municipal Bond Rate shall mean the
quotient of (A) the per annum rate expressed on an interest equivalent
basis equal to the most recent Kenny Index so made available for any
preceding Business Day, divided by (B) 1.00 minus the 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), whichever is
greater.
As used herein, " 'AA" Composite Commercial Paper Rate," on any date
for any Rate Period, means:
(i) (A) in the case of any Minimum Rate Period or any Special Rate
Period of fewer than 49 Rate Period Days, the interest equivalent of the
30-day rate; provided, however, that if such Rate Period is a Minimum Rate
Period and the "AA" Composite Commercial Paper Rate is being used to
determine the Applicable Rate when all of the outstanding shares of
Municipal Preferred are subject to Submitted Hold Orders, then the
interest equivalent of the seven-day rate, and (B) in the case of any
Special Rate Period of (1) 49 or more but fewer than 70 Rate Period Days,
the interest equivalent of the 60-day rate; (2) 70 or more but fewer than
85 Rate Period Days, the arithmetic average of the interest equivalent of
the 60-day and 90-day rates; (3) 85 or more but fewer than 99 Rate Period
Days, the interest equivalent of the 90-day rate; (4) 99 or more but fewer
than 120 Rate Period Days, the arithmetic average of the interest
equivalent of the 90-day and 120-day rates; (5) 120 or more but fewer than
141 Rate Period Days, the interest equivalent of the 120-day rate; (6) 141
or more but fewer than 162 Rate Period Days, the arithmetic average of the
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 Standard & Poor's or the
equivalent of such rating by Standard & Poor's or another rating agency,
as made available on a discount basis or otherwise by the Federal Reserve
Bank of New York for the Business Day immediately preceding such date; or
(ii) in the event that the Federal Reserve Bank of New York does not
make available any such rate, then the arithmetic average of such rates,
as quoted on a discount basis or otherwise, by the Commercial Paper
Dealers to the Auction Agent for the close of business on the Business
Day next preceding such date.
If any Commercial Paper Dealer does not quote a rate required to determine
the "AA" Composite Commercial Paper Rate, the "AA" Composite Commercial
Paper Rate shall be determined on the basis of the quotation or quotations
furnished by the remaining Commercial Paper Dealer or Commercial Paper
Dealers and any Substitute Commercial Paper Dealer or Substitute Commercial
Paper Dealers selected by the 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 (0.001) of 1%) of (A) the discount rate divided by (B) the
difference between (x) 1.00 and (y) a fraction the numerator of which shall
be the product of the discount rate times the number of days in which such
commercial paper matures and the denominator of which shall be 360. As used
herein, "Commercial Paper Dealers" means [Lehman Commercial Paper
Incorporated, Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner &
Smith Incorporated] and such other commercial paper dealer or dealers as
the Trust may from time to time appoint, or, in lieu of any thereof, their
respective affiliates or successors. As used herein, "Substitute Commercial
Paper Dealer" means [CS First Boston Corporation or Morgan Stanley & Co.
Incorporated] or their respective affiliates or successors, if such entity
is a commercial paper dealer, provided that none of such entities shall be
a Commercial Paper Dealer.
As used herein, "Treasury Bill Rate," on any date for any Rate Period,
means:
(i) the bond equivalent yield, calculated in accordance with
prevailing industry convention, of the rate on the most recently
auctioned Treasury Bill with a remaining maturity closest to the length
of such Rate Period, as quoted in The Wall Street Journal on such date
for the Business Day next preceding such date; or
(ii) in the event that any such rate is not published in The Wall
Street Journal, then the bond equivalent yield, calculated in accordance
with prevailing industry convention, as calculated by reference to the
arithmetic average of the bid price quotations of the most recently
auctioned Treasury Bill with a remaining maturity closest to the length
of such Rate Period, as determined by bid price quotations as of the
close of business on the Business Day immediately preceding such date
obtained from the U.S. Government Securities Dealers to the Auction
Agent.
As used herein, "Treasury Note Rate," on any date for any Rate
Period, means:
(i) the yield on the most recently auctioned Treasury Note with
a remaining maturity closest to the length of such Rate Period, as
quoted in The Wall Street Journal on such date for the Business Day
next preceding such date; or
(ii) in the event that any such rate is not published in The
Wall Street Journal, then the yield as calculated by reference to
the arithmetic average of the bid price quotations of the most
recently auctioned Treasury Note with a remaining maturity closest
to the length of such Rate Period, as determined by bid price
quotations as of the close of business on the Business Day
immediately preceding such date obtained from the U.S. Government
Securities Dealers to the Auction Agent.
For purposes of the foregoing, "Treasury Bill" means a direct
obligation of the U.S. Government having a maturity at the time of issuance
of 364 days or less, and "Treasury Note" means a direct obligation of the
U.S. Government having a maturity at the time of issuance of five years or
less but more than 364 days. If any U.S. Government Securities Dealer does
not quote a rate required to determine the Treasury Bill Rate or the
Treasury Note Rate, such rate shall be determined on the basis of the
quotation or quotations furnished by the remaining U.S. Government
Securities Dealer or U.S. Government Securities Dealers and any Substitute
U.S. Government Securities Dealers selected by the 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. As used
herein, "U.S. Government Securities Dealer" means [Lehman Government
Securities Incorporated, Goldman, Sachs & Co., Salomon Smith Barney Inc.
and Morgan Guaranty Trust Company of New York] or their respective
affiliates or successors, if such entity is a U.S. Government securities
dealer. As used herein, "Substitute U.S. Government Securities Dealer"
shall mean [CS First Boston Corporation and Merrill Lynch, Pierce, Fenner &
Smith Incorporated] or their respective affiliates or successors, if such
entity is a U.S. Government securities dealer, provided that none of such
entities shall be a U.S. Government Securities Dealer.
The applicable "AA" Composite Commercial Paper Rates, Taxable
Equivalent of the Short-Term Municipal Bond Rates, Treasury Bill Rates and
Treasury Note Rates will be the rates announced on such Auction Date for
the Business Day immediately prior to such Auction Date.
The "Rate Multiple," when used with respect to shares of Municipal
Preferred, on an Auction Date, will be a percentage, determined as set
forth below (depending on whether the Trust has notified the Auction Agent
of its intent to allocate any net capital gain or other income taxable for
Federal income tax purposes to such shares prior to the Auction
establishing the Applicable Rate for such shares), based on the prevailing
rating of shares of Municipal Preferred in effect at the close of business
on the Business Day next preceding such Auction Date:
APPLICABLE APPLICABLE
PERCENTAGE- PERCENTAGE-
PREVAILING RATING NO NOTIFICATION NOTIFICATION
----------------- --------------- ------------
"aa3"/AA- or higher ...................... 110% 150%
"a3"/A- .................................. 125% 160%
"baa3"/BBB- .............................. 150% 250%
"ba3"/BB- ................................ 200% 275%
Below "ba3"/BB- .......................... 250% 300%
For purposes of this definition, the "prevailing rating" of shares of
Municipal Preferred shall be (i) "aa3"/AA- or higher if such shares have a
rating of "aa3" or better by Moody's and AA- or better by Standard & Poor's
or the equivalent of such ratings by such agencies or a substitute rating
agency or substitute rating agencies selected as provided below, (ii) if
not "aa3"/AA- or higher, then "a3"/A- if such shares have a rating of "a3"
or better by Moody's and A- or better by Standard & Poor's or the
equivalent of such ratings by such agencies or a substitute rating agency
or substitute rating agencies selected as provided below, (iii) if not
"aa3"/AA- or higher or "a3"/A-, then "baa3"/BBB- if such shares have a
rating of "baa3" or better by Moody's and BBB- or better by Standard &
Poor's or the equivalent of such ratings by such agencies or a substitute
rating agency or substitute rating agencies selected as provided below,
(iv) if not "aa3"/AA- or higher, "a3"/A- or "baa3"/BBB-, then "ba3"/BB- if
such shares have a rating of "ba3" or better by Moody's and BB- or better
by Standard & Poor's or the equivalent of such ratings by such agencies or
a substitute rating agency or substitute rating agencies selected as
provided below, and (v) if not "aa3"/AA- or higher, "a3"/A-, "baa3"/BBB-,
or "ba3"/BB-, then below "ba3"/BB-; provided, however, that if such shares
are rated by only one rating agency, the prevailing rating shall be
determined without reference to the rating of any other rating agency. The
Trust will take all reasonable action necessary to enable either Standard &
Poor's or Moody's to provide a rating for shares of Municipal Preferred. If
neither Standard & Poor's nor Moody's shall make such a rating available,
Salomon Smith Barney Inc. or its successor shall select at least one
nationally recognized statistical rating organization (as that term is used
in the rules and regulations of the SEC under the Securities Exchange Act
of 1934, as amended) to act as a substitute rating agency in respect of the
shares of Municipal Preferred, and the Trust shall take all reasonable
action to enable such rating agency to provide a rating for such shares.
SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT
Prior to 1:30 P.M., New York City time, on each Auction Date, or such other
time on the Auction Date specified by the Auction Agent (the "Submission
Deadline"), each Broker-Dealer will submit to the Auction Agent in writing
or over the internet all Orders obtained by it for the Auction to be
conducted on such Auction Date, designating itself (unless otherwise
permitted by the Trust) as the Existing Holder or Potential Holder, as the
case may be, in respect of the shares of Municipal Preferred subject to
such Orders. Any Order submitted by a Beneficial Owner or a Potential
Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction
Agent, prior to the Submission Deadline on any Auction Date, shall be
irrevocable.
If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent will round such rate to
the next highest one-thousandth (0.001) of 1%.
If one or more Orders of an Existing Holder is submitted to the Auction
Agent covering in the aggregate more than the number of outstanding shares
of Municipal Preferred subject to an Auction held by such Existing Holder,
such Orders will be considered valid in the following order of priority:
(a) all Hold Orders will be considered valid, but only up to and
including in the aggregate the number of shares of Municipal Preferred
held by such Existing Holder, and, if the number of shares subject to
such Hold Orders exceeds the number of shares held by such Existing
Holder, the number of shares subject to each such Hold Order shall be
reduced pro rata to cover the number of shares held by such Existing
Holder;
(b) (i) any Bid will be considered valid up to and including the
excess of the number of shares of Municipal Preferred held by such
Existing Holder over the number of shares of Municipal Preferred subject
to any Hold Orders referred to in clause (a) above;
(ii) subject to subclause (i), if more than one Bid of an Existing
Holder is submitted to the Auction Agent with the same rate and the
number of shares of Municipal Preferred subject to such Bids is greater
than such excess, such Bids will be considered valid up to and including
the amount of such excess, and the number of shares of Municipal
Preferred subject to each Bid with the same rate will be reduced pro
rata to cover the number of shares of Municipal Preferred equal to such
excess;
(iii) subject to subclauses (i) and (ii), if more than one Bid of an
Existing Holder is submitted to the Auction Agent with different rates,
such Bids shall be considered valid in the ascending order of their
respective rates up to and including the amount of such excess; and
(iv) in any such event, the number, if any, of such shares subject
to any portion of Bids considered not valid in whole or in part under
this clause (b) will be treated as the subject of a Bid by or on behalf
of a Potential Holder at the rate specified therein; and
(c) all Sell Orders will be considered valid up to and including the
excess of the number of outstanding shares of Municipal Preferred held
by such Existing Holder over the sum of shares of Municipal Preferred
subject to valid Hold Orders referred to in clause (a) above and valid
Bids referred to in clause (b) above.
If more than one Bid of a Potential Holder for shares of Municipal
Preferred is submitted to the Auction Agent by or on behalf of any
Potential Holder, each Bid submitted will be a separate Bid with the rate
and number of shares therein specified.
DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE
RATE
Not earlier than the Submission Deadline on each Auction Date, the Auction
Agent will assemble all valid Orders submitted or deemed submitted to it by
the Broker-Dealers (each such Hold Order, Bid or Sell Order as submitted or
deemed submitted by a Broker-Dealer being herein referred to as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as
the case may be, or as a "Submitted Order" and collectively as "Submitted
Hold Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may
be, or as "Submitted Orders") and will determine the excess of the number
of outstanding shares of Municipal Preferred over the number of outstanding
shares of Municipal Preferred subject to Submitted Hold Orders (such excess
being herein referred to as the "Available Municipal Preferred") and
whether Sufficient Clearing Bids have been made in the Auction. "Sufficient
Clearing Bids" will have been made if the number of outstanding shares of
Municipal Preferred that are the subject of Submitted Bids of Potential
Holders specifying rates not higher than the Maximum Rate equals or exceeds
the number of outstanding shares of Municipal Preferred that are the
subject of Submitted Sell Orders (including the number of shares subject to
Bids of Existing Holders specifying rates higher than the Maximum Rate).
If Sufficient Clearing Bids have been made, the Auction Agent will
determine the lowest rate specified in the Submitted Bids (the "Winning Bid
Rate") which, taking into account the rates in the Submitted Bids of
Existing Holders, would result in Existing Holders continuing to hold an
aggregate number of outstanding shares of Municipal Preferred which, when
added to the number of outstanding shares of Municipal Preferred to be
purchased by Potential Holders, based on the rates in their Submitted Bids,
would equal not less than the Available Municipal Preferred. In such event,
the Winning Bid Rate will be the Applicable Rate for the next Rate Period
for all shares of Municipal Preferred.
If Sufficient Clearing Bids have not been made (other than because all
of the outstanding shares of Municipal Preferred are subject to Submitted
Hold Orders), the Applicable Rate for the next Rate Period for all shares
of Municipal Preferred will be equal to the Maximum Rate. If Sufficient
Clearing Bids have not been made, Beneficial Owners that have submitted or
that are deemed to have submitted Sell Orders may not be able to sell in
the Auction all shares of Municipal Preferred subject to such Sell Orders
but will continue to own shares of Municipal Preferred for the next Rate
Period, dividends for which may include income taxable to such Beneficial
Owners. See "The Auction -- Auction Dates; Advance Notice of Allocation of
Taxable Income" above and "Acceptance and Rejection of Submitted Bids and
Submitted Sell Orders and Allocation of Shares" below.
If all of the outstanding shares of Municipal Preferred are subject to
Submitted Hold Orders, the Applicable Rate for the next Rate Period will be
the lesser of the Kenny Index (if such Rate Period consists of fewer than
183 Rate Period Days) or the product of (i) (1) the "AA" Composite
Commercial Paper Rate on the Auction Date for such Rate Period, if such
Rate Period consists of fewer than 183 Rate Period Days; (2) the Treasury
Bill Rate on such Auction Date for such Rate Period, if such Rate Period
consists of more than 182 but fewer than 365 Rate Period Days; or (3) the
Treasury Note Rate on such Auction Date for such Rate Period, if such Rate
Period is more than 364 Rate Period Days (the rate described in the
foregoing clause (i)(1), (2) or (3) as applicable, being referred to herein
as the "Benchmark Rate") and (ii) 1 minus the 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, whichever is greater; provided, however, that if the Trust
has notified the Auction Agent of its intent to allocate to shares of
Municipal Preferred in such Rate Period any net capital gain or other
income taxable for federal income tax purposes ("Taxable Income"), the
Applicable Rate for shares of Municipal Preferred for such Rate Period will
be (A) if the Taxable Yield Rate (as defined below) is greater than the
Benchmark Rate, then the Benchmark Rate, or (B) if the Taxable Yield Rate
is less than or equal to the Benchmark Rate, then the rate equal to the sum
of (x) the lesser of the Kenny Index (if such Rate Period consists of fewer
than 183 Rate Period Days) or the product of the Benchmark Rate multiplied
by the factor set forth in the preceding clause (ii) and (y) the product of
the 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 share of Municipal Preferred by the number
of days in the Dividend Period in respect of which such Taxable Income is
contemplated to be distributed, (b) multiplying the amount determined in
(a) above by 365 (in the case of a Dividend Period of 7 Rate Period Days)
or 360 (in the case of any other Dividend Period), and (c) dividing the
amount determined in (b) above by $25,000. In calculating the "AA"
Composite Commercial Paper Rate, the Treasury Bill Rate and the Treasury
Note Rate for such purpose, the rates used will be the rates or yields
specified in the applicable definitions of "AA" Composite Commercial Paper
Rate, Treasury Bill Rate and Treasury Note Rate set forth under "The
Auction -- Orders by Existing Holders and Potential Holders."
ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND
SUBMITTED SELL ORDERS AND ALLOCATION OF SHARES
Based on the determinations made under "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" above and, subject to
the discretion of the Auction Agent to round and allocate certain shares as
described below, Submitted Bids and Submitted Sell Orders will be accepted
or rejected in the order of priority set forth in the Auction Procedures,
with the result that Existing Holders and Potential Holders of shares of
Municipal Preferred will sell, continue to hold and/or purchase such shares
as set forth below. Existing Holders that submitted or were deemed to have
submitted Hold Orders (or on whose behalf Hold Orders were submitted or
deemed to have been submitted) will continue to hold the shares of
Municipal Preferred subject to such Hold Orders.
If Sufficient Clearing Bids have been made:
(a) Each Existing Holder that placed or on whose behalf was placed a
Submitted Sell Order or Submitted Bid specifying any rate higher than
the Winning Bid Rate will sell the outstanding shares of Municipal
Preferred subject to such Submitted Sell Order or Submitted Bid;
(b) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate lower than the Winning Bid Rate will
continue to hold the outstanding shares of Municipal Preferred subject
to such Submitted Bid;
(c) Each Potential Holder that placed or on whose behalf was placed
a Submitted Bid specifying a rate lower than the Winning Bid Rate will
purchase the number of outstanding shares of Municipal Preferred subject
to such Submitted Bid;
(d) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to the Winning Bid Rate will
continue to hold the shares of Municipal Preferred subject to such
Submitted Bid, unless the number of outstanding shares of Municipal
Preferred subject to all such Submitted Bids is greater than the number
of shares of Municipal Preferred in excess of the Available Municipal
Preferred over the number of shares of Municipal Preferred accounted for
in clauses (b) and (c) above, in which event each Existing Holder with
such a Submitted Bid will continue to hold a number of outstanding
shares of Municipal Preferred subject to such Submitted Bid determined
on a pro rata basis based on the number of outstanding shares of
Municipal Preferred subject to all such Submitted Bids of such Existing
Holders; and
(e) Each Potential Holder that placed or on whose behalf was placed
a Submitted Bid specifying a rate equal to the Winning Bid Rate will
purchase any shares of Available Municipal Preferred not accounted for
in clauses (b) through (d) above on a pro rata basis based on the
outstanding shares of Municipal Preferred subject to all such Submitted
Bids.
If Sufficient Clearing Bids have not been made (unless this results
because all outstanding shares of Municipal Preferred are subject to
Submitted Hold Orders):
(a) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to or lower than the Maximum Rate
will continue to hold the outstanding shares of Municipal Preferred
subject to such Submitted Bid;
(b) Each Potential Holder that placed or on whose behalf was placed
a Submitted Bid specifying a rate equal to or lower than the Maximum
Rate will purchase the number of outstanding shares of Municipal
Preferred subject to such Submitted Bid; and
(c) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate higher than the Maximum Rate or a
Submitted Sell Order will sell a number of shares of Municipal Preferred
determined on a pro rata basis based on the number of outstanding shares
of Municipal Preferred subject to all such Submitted Bids and Submitted
Sell Orders.
If, as a result of the pro rata allocation described in clauses (d) or
(e) of the second preceding paragraph or clause (c) of the next preceding
paragraph, any Existing Holder would be entitled or required to sell, or
any Potential Holder would be entitled or required to purchase, a fraction
of a share of Municipal Preferred, the Auction Agent will, in such manner
as, in its sole discretion, it will determine, round up or down to the
nearest whole share the number of shares of Municipal Preferred being sold
or purchased on such Auction Date so that the number of shares sold or
purchased by each Existing Holder or Potential Holder will be whole shares
of Municipal Preferred. If as a result of the pro rata allocation described
in clause (e) of the second preceding paragraph, any Potential Holder would
be entitled or required to purchase less than a whole share of Municipal
Preferred, the Auction Agent will, in such manner as, in its sole
discretion, it will determine, allocate shares of Municipal Preferred for
purchase among Potential Holders so that only whole shares of Municipal
Preferred are purchased by any such Potential Holder, even if such
allocation results in one or more of such Potential Holders not purchasing
shares of Municipal Preferred.
NOTIFICATION OF RESULTS; SETTLEMENT
The Auction Agent will be required to advise each Broker-Dealer that
submitted an Order of the Applicable Rate for the next Rate Period and, if
the Order was a Bid or Sell Order, whether such Bid or Sell Order was
accepted or rejected, in whole or in part, by telephone by approximately
3:00 P.M., New York City time, on each Auction Date. Each Broker-Dealer
that submitted an Order for the account of a customer will then be required
to advise such customer of the Applicable Rate for the next Rate Period
and, if such Order was a Bid or a Sell Order, whether such Bid or Sell
Order was accepted or rejected, in whole or in part, will be required to
confirm purchases and sales with each customer purchasing or selling shares
of Municipal Preferred as a result of the Auction and will be required to
advise each customer purchasing or selling shares of Municipal Preferred as
a result of the Auction to give instructions to its Agent Member of the
Securities Depository to pay the purchase price against delivery of such
shares or to deliver such shares against payment therefor, as appropriate.
The Auction Agent will be required to record each transfer of shares of
Municipal Preferred on the registry of Existing Holders to be maintained by
the Auction Agent. See "General" above.
In accordance with the Securities Depository's normal procedures, on
the Business Day after the Auction Date, the transactions described above
will be executed through the Securities Depository and the accounts of the
respective Agent Members at the Securities Depository will be debited and
credited and shares delivered as necessary to effect the purchases and
sales of shares of Municipal Preferred as determined in the Auction.
Purchasers will make payment through their Agent Members in same-day funds
to the Securities Depository against delivery through their Agent Members;
the Securities Depository will make payment in accordance with its normal
procedures, which now provide for payment against delivery by their Agent
Members in same-day funds. The settlement procedures to be used with
respect to Auctions for shares of Municipal Preferred are set forth in
Appendix D hereto.
If any Existing Holder selling shares of Municipal Preferred in an
Auction fails to deliver such shares, the Broker-Dealer of any person that
was to have purchased shares of Municipal Preferred in such Auction may
deliver to such person a number of whole shares of Municipal Preferred that
is less than the number of shares that otherwise was to be purchased by
such person. In such event, the number of shares of Municipal Preferred to
be so delivered shall be determined by such Broker-Dealer. Delivery of such
lesser number of shares shall constitute good delivery.
CONCERNING THE AUCTION AGENT
The Auction Agent is acting as agent for the Trust in connection with
Auctions. In the absence of bad faith or negligence on its part, the
Auction Agent will not be liable for any action taken, suffered, or omitted
or for any error of judgment made by it in the performance of its duties
under the Auction Agency Agreement and will not be liable for any error of
judgment made in good faith unless the Auction Agent will have been
negligent in ascertaining the pertinent facts.
The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of shares of Municipal Preferred, a list of initial owners
of such shares provided by the Trust, the results of Auctions, notices from
any Broker-Dealer (or other Person, if permitted by the Trust) with respect
to transfers described in the Prospectus under "The Auction -- Secondary
Market Trading and Transfer of Municipal Preferred" and notices from the
Trust. The Auction Agent is not required to accept any such notice for an
Auction unless it is received by the Auction Agent by 3:00 P.M., New York
City time, on the Business Day preceding such Auction.
The Auction Agent will be the transfer agent, registrar, dividend
disbursing agent and redemption agent for shares of Municipal Preferred.
The registrar for shares of Municipal Preferred will send notices to
holders of shares of Municipal Preferred of any special meetings at which
holders of Municipal Preferred have the right to elect trustees of the
Trust. See "Description of Municipal Preferred -- Voting Rights" below.
The Auction Agent may terminate the Auction Agency Agreement upon
notice to the Trust on a date no earlier than 60 days after such notice. If
the Auction Agent should resign, the Trust will use its best efforts to
enter into an agreement with a successor Auction Agent containing
substantially the same terms and conditions as the Auction Agency
Agreement. The Trust may remove the Auction Agent provided that prior to
such removal the Trust shall have entered into such an agreement with a
successor Auction Agent.
BROKER-DEALERS
The Auction Agent after each Auction for shares of Municipal Preferred will
pay to each Broker-Dealer, from funds provided by the Trust, a service charge
at the annual rate of 1/4 of 1% in the case of any Auction immediately
preceding a Rate Period of less than one year, or a percentage agreed to by
the Trust and the Broker-Dealers in the case of any Auction immediately
preceding a Rate Period of one year or longer, of the purchase price of
shares of Municipal Preferred placed by such Broker-Dealer at such Auction.
For the purposes of the preceding sentence, shares of Municipal Preferred
will be placed by a Broker-Dealer if such shares were (i) the subject of Hold
Orders deemed to have been submitted to the Auction Agent by the
Broker-Dealer and were acquired by such Broker-Dealer for its own account or
were acquired by such Broker-Dealer for its customers who are Beneficial
Owners or (ii) the subject of an Order submitted by such Broker-Dealer that
is (A) a Submitted Bid of an Existing Holder that resulted in such Existing
Holder continuing to hold such shares as a result of the Auction or (B) a
Submitted Bid of a Potential Holder that resulted in such Potential Holder
purchasing such shares as a result of the Auction or (C) a valid Hold Order.
The Trust may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one
Broker-Dealer Agreement is in effect after such termination.
The Broker-Dealer Agreements provide that a Broker-Dealer (other than
an affiliate of the Trust) may submit Orders in Auctions for its own
account, unless the Trust notifies all Broker-Dealers that they may no
longer do so, in which case Broker-Dealers may continue to submit Hold
Orders and Sell Orders for their own accounts. Any Broker-Dealer that is an
affiliate of the Trust may submit Orders in Auctions, but only if such
Orders are not for its own account. If a Broker-Dealer submits an Order for
its own account in any Auction, it might have an advantage over other
Bidders because it would have knowledge of all Orders submitted by it in
that Auction; such Broker-Dealer, however, would not have knowledge of
Orders submitted by other Broker-Dealers in that Auction.
The Broker-Dealers expect, but are not obligated, to maintain a
secondary trading market in shares of Municipal Preferred outside of
Auctions. There can be no assurance that a secondary trading market in
shares of Municipal Preferred will develop or, if it does develop, that it
will provide owners with liquidity of investment. The shares of Municipal
Preferred will not be registered on any stock exchange or on the National
Association of Securities Dealers Automated Quotations system.
DESCRIPTION OF MUNICIPAL PREFERRED
The descriptions of the shares of Municipal Preferred contained in the
Prospectus and this Statement of Additional Information do not purport to
be complete and are subject to and qualified in their entireties by
reference to the Declaration and the Statement. Copies of the Declaration
and the form of the Statement are filed as exhibits to the Registration
Statement of which the Prospectus and this Statement of Additional
Information are a part and may be inspected, and copies thereof may be
obtained, as described under "Further Information" in the Prospectus.
GENERAL
The shares of Municipal Preferred will rank on a parity with each other,
with shares of any other series of Municipal Preferred and with shares of
any other series of Preferred Shares as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust.
DIVIDENDS
GENERAL. The holders of shares of Municipal Preferred offered pursuant to
the Prospectus will be entitled to receive, when, as and if declared by the
Board of Trustees, out of funds legally available therefor in accordance
with the Declaration, the Statement and applicable law, cumulative cash
dividends at the Applicable Rate thereof, determined as set forth below
under "Determination of Dividend Rate," and no more (except as otherwise
provided below under "Gross-up Payments"), payable on the respective dates
determined as set forth below. Holders of shares of Municipal Preferred
shall not be entitled to any dividend, whether payable in cash, property or
shares, in excess of full cumulative dividends on shares of Municipal
Preferred. No interest, or sum of money in lieu of interest, will be
payable in respect of any dividend payment or payments on shares of
Municipal Preferred which may be in arrears, and, except as otherwise
provided herein, no additional sum of money will be payable in respect of
any such arrearage.
Dividends on shares of Municipal Preferred shall accumulate at the
Applicable Rate from the Date of Original Issue and, except as provided
below, shall be payable on Wednesday, , and each Wednesday
thereafter with respect to shares of Series T Municipal Preferred and
Friday, , and each Friday thereafter with respect to shares
of Series TH Municipal Preferred; provided, however, that (1) if the
Wednesday or Friday, as the case may be, on which dividends would otherwise
be payable on shares of such series is not a Business Day, then such
dividends shall be payable on shares of such series on the first Business
Day that falls after such Wednesday or Friday, as the case may be; and (2)
the Trust in its discretion may establish Dividend Payment Dates in respect
of any Special Rate Period of such shares consisting of more than 28 Rate
Period Days that differ from those set forth above; provided, however, that
such dates shall be set forth in the Notice of Special Rate Period relating
to such Special Rate Period, as delivered to the Auction Agent and filed
with the Secretary of the 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 as set forth below under "Designation of Special Rate Periods."
The amount of dividends per share payable on shares of Municipal
Preferred on any date on which dividends shall be payable on such shares
shall be computed by multiplying the Applicable Rate in effect for such
Dividend Period or Dividend Periods or part thereof for which dividends
have not been paid by a fraction, the numerator of which shall be the
number of days in such Dividend Period or Dividend Periods or part thereof
and the denominator of which shall be 365 if such Dividend Period consists
of 7 Rate Period Days and 360 for all other Dividend Periods, and applying
the rate obtained against $25,000. Any dividend payment made on shares of
Municipal Preferred shall first be credited against the earliest
accumulated but unpaid dividends due with respect to such shares.
Each dividend on shares of Municipal Preferred will be paid on the
Dividend Payment Date therefor to the holders of record as their names
appear on the record books of the Trust on the Business Day next preceding
such Dividend Payment Date. Dividends in arrears for any past Dividend
Period may be declared and paid at any time, without reference to any
regular Dividend Payment Date, to the holders of record as their names
appear on the record books of the Trust on such date, not exceeding 15 days
preceding the payment date thereof, as may be fixed by the Board of
Trustees.
The Securities Depository, in accordance with its current procedures,
is expected to credit on each Dividend Payment Date dividends received from
the Trust to the accounts of the respective Agent Members in next-day
funds. Each of the initial Broker-Dealers, however, has represented to the
Trust that such Broker-Dealer (or if such Broker-Dealer does not act as
Agent Member, the Agent Member designated by such Broker-Dealer) will make
such dividend payments available in same-day funds on each Dividend Payment
Date to Beneficial Owners that use such Broker-Dealer or its designee as
Agent Member. A Beneficial Owner of shares of Municipal Preferred that does
not use one of the initial Broker-Dealers or a designee thereof as its
Agent Member should contact the Agent Member used by such Beneficial Owner
to determine whether such Agent Member will make dividend payments
available to such Beneficial Owner in next-day or same-day funds. If any
Agent Member does not make such dividends available in same-day funds to a
Beneficial Owner, such Beneficial Owner who uses such Agent Member would
not have same-day funds available to it until the next Business Day, which,
in the case of a Dividend Payment Date that is a Wednesday, would be the
following Thursday if it is a Business Day, and which, in the case of a
Dividend Payment Date that is a Friday, would be the following Monday if it
is a Business Day.
DETERMINATION OF DIVIDEND RATE. The dividend rates on shares of Municipal
Preferred offered pursuant to the Prospectus during the period from and
after the Date of Original Issue thereof to and including the last day of
the Initial Rate Period therefor will be equal to the rate per annum set
forth with respect to such shares on the cover page of the Prospectus. For
each Subsequent Rate Period thereafter, the dividend rate on such shares
will be equal to the rate per annum that results from an Auction on the
Auction Date next preceding such Subsequent Rate Period; provided, however,
if:
(i) an Auction for any Subsequent Rate Period is not held for any
reason other than as described below, the dividend rate on such shares
for such Subsequent Rate Period will be the Maximum Rate on the Auction
Date therefor;
(ii) any Failure to Deposit shall have occurred with respect to
shares of Municipal Preferred during any Rate Period thereof (other than
any Special Rate Period of more than 364 Rate Period Days or any Rate
Period succeeding any Special Rate Period of more than 364 Rate Period
Days during which a Failure to Deposit occurred that has not been
cured), but, prior to 12:00 Noon, New York City time, on the third
Business Day next succeeding the date on which such Failure to Deposit
occurred, such Failure to Deposit shall have been cured in accordance
with the next succeeding paragraph, no Auction will be held in respect
of shares of Municipal Preferred for the Subsequent Rate Period thereof
and the dividend rate for such Subsequent Rate Period will be the
Maximum Rate on the Auction Date for such Subsequent Rate Period;
(iii) any Failure to Deposit shall have occurred with respect to
shares of Municipal Preferred during any Rate Period thereof (other than
any Special Rate Period of more than 364 Rate Period Days or any Rate
Period succeeding any Special Rate Period of more than 364 Rate Period
Days during which a Failure to Deposit occurred that has not been
cured), and, prior to 12:00 Noon, 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 the next succeeding paragraph, no Auction will be held
in respect of Municipal Preferred for the first Subsequent Rate Period
thereof thereafter (or for any Rate Period thereafter to and including
the Rate Period during which such Failure to Deposit is cured in
accordance with the next succeeding paragraph, 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 Municipal Preferred
for each such Subsequent Rate Period will be a rate per annum equal to
the Maximum Rate on the Auction Date for such Subsequent Rate Period
(but with the prevailing rating for such shares, for purposes of
determining such Maximum Rate, being deemed to be "Below 'ba3"/BB-");
or
(iv) any Failure to Deposit shall have occurred with respect to
shares of Municipal Preferred during a Special Rate Period thereof of
more than 364 Rate Period Days, or during any Rate Period thereof
succeeding any Special Rate Period of more than 364 Rate Period Days
during which a Failure to Deposit occurred that has not been cured, and,
prior to 12:00 Noon, 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 the next succeeding paragraph, no Auction will be held in respect
of shares of Municipal Preferred for such Subsequent Rate Period (or for
any Rate Period thereafter to and including the Rate Period during which
such Failure to Deposit is cured in accordance with the next succeeding
paragraph, 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 Municipal Preferred for each such Subsequent Rate
Period shall be a rate per annum equal to the Maximum Rate on the
Auction Date for such Subsequent Rate Period (but with the prevailing
rating for such shares, for purposes of determining such Maximum Rate,
being deemed to be "Below 'ba3"/BB-") (the rate per annum at which
dividends are payable on shares of Municipal Preferred for any Rate
Period being herein referred to as the "Applicable Rate" for such
shares).
A Failure to Deposit with respect to shares of Municipal Preferred
shall have been cured (if such Failure to Deposit is not solely due to the
willful failure of the Trust to make the required payments to the Auction
Agent) with respect to any Rate Period if, within the respective time
periods described immediately above, the Trust shall have paid to the
Auction Agent (i) all accumulated and unpaid dividends on the shares of
Municipal Preferred and (ii) without duplication, the Redemption Price for
the shares of Municipal Preferred, if any, for which a Notice of Redemption
has been mailed; provided, however, that the foregoing clause (ii) shall
not apply to the Trust's failure to pay the Redemption Price in respect of
shares of Municipal Preferred when the related Notice of Redemption
provides that redemption of such shares is subject to one or more
conditions precedent and any such condition precedent shall not have been
satisfied at the time or times and in the manner specified in such Notice
of Redemption.
The Trust shall pay to the Auction Agent, not later than 12:00 noon,
New York City time, on each Dividend Payment Date for shares of Municipal
Preferred, an aggregate amount of federal funds or similar same-day funds
in The City of New York, New York, equal to the dividends to be paid to all
Holders of such shares on such Dividend Payment Date. All moneys paid to
the Auction Agent for the payment of dividends shall be held in trust for
the payment of such dividends by the Auction Agent for the benefit of the
Holders specified above. Any moneys paid to the Auction Agent in accordance
with the foregoing but not applied by the Auction Agent to the payment of
dividends 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.
GROSS-UP PAYMENTS. Holders of shares of Municipal Preferred shall be
entitled to receive, when, as and if declared by the Board of Trustees, out
of funds legally available therefor in accordance with the Declaration, the
Statement and applicable law, dividends in an amount equal to the aggregate
Gross-up Payment in accordance with the following:
If, in the case of any Minimum Rate Period or any Special Rate Period
of 28 Rate Period Days or fewer, or in the case of any Special Rate Period,
the Trust allocates any net capital gain or other income taxable for
federal income tax purposes to a dividend paid on shares of Municipal
Preferred without having given advance notice thereof to the Auction Agent
as described above under "The Auction -- Auction Dates; Advance Notice of
Allocation of Taxable Income" (such allocation is referred to herein as a
"Taxable Allocation") solely by reason of the fact that such allocation is
made retroactively as a result of the redemption of all or a portion of the
outstanding shares of Municipal Preferred or the liquidation of the Trust,
the Trust shall, prior to the end of the fiscal year in which such dividend
was paid or within 90 days (and generally within 60 days) after the end of
the Trust's fiscal year for which a retroactive Taxable Allocation is made,
provide notice thereof to the Auction Agent and direct the Trust's dividend
disbursing agent to send such notice with a Gross-up Payment to each holder
of shares (initially Cede & Co., as nominee of the Securities Depository)
that was entitled to such dividend payment with respect to shares of
Municipal Preferred during such fiscal year at such holder's address as the
same appears or last appeared on the record books of the Trust. The Trust,
within 30 days after such notice is given to the Auction Agent, will pay to
the Auction Agent (who then will distribute to such holders of Municipal
Preferred), out of funds legally available therefor, an amount equal to the
aggregate Gross-up Payment with respect to all retroactive Taxable
Allocations made to such holder during the fiscal year in question.
If the Trust does not give advance notice of the amount of taxable
income to be included in a dividend on shares of Municipal Preferred in the
related Auction, the Trust may include such taxable income in a dividend on
shares of Municipal Preferred if it increases the dividend by an additional
amount calculated as if such income were a retroactive Taxable Allocation
and the additional amount was a Gross-up Payment.
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.
A "Gross-up Payment" in respect of any dividend means payment to a
holder of shares of Municipal Preferred of an amount which, giving effect
to the Taxable Allocations made with respect to such dividend, would cause
such holder's after-tax returns (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.
RESTRICTIONS ON DIVIDENDS AND OTHER PAYMENTS. Under the 1940 Act, the Board
of Trustees may not declare any dividend (except a dividend payable in
Common Shares), or declare any other distribution, upon Common Shares, or
purchase Common Shares, unless in every such case the Preferred Shares,
including the shares of Municipal Preferred, have, at the time of any such
declaration or purchase (and after giving effect thereto), an asset
coverage (as defined in and determined pursuant to the 1940 Act) of at
least 200% (or such other percentage as may in the future be required by
law).
In addition, for so long as any shares of Municipal Preferred are
outstanding, except as set forth in the following paragraph or otherwise
described herein, (A) the Trust may not declare, pay or set apart for
payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or in options, warrants or rights to
subscribe for or purchase, Common Shares or other shares, if any, ranking
junior to the shares of Municipal Preferred as to the payment of dividends
and the distribution of assets upon dissolution, liquidation or winding up
of the affairs of the Trust) in respect of 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 of the affairs of the
Trust, 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 of the
affairs of the Trust), or any such parity shares (except by conversion into
or exchange for shares of the Trust ranking junior to or on a parity with
the shares of Municipal Preferred as to payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust), unless (1) full cumulative dividends on shares of
Municipal Preferred through their most recently ended Dividend Period shall
have been paid or shall have been declared and sufficient funds for the
payment thereof deposited with the Auction Agent and (2) the 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) if either Moody's or Standard & Poor's is rating the shares of
Municipal Preferred, the Trust may not declare, pay or set apart for
payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or in options, warrants or rights to
subscribe for or purchase, Common Shares or other shares, if any, ranking
junior to shares of Municipal Preferred as to the payment of dividends and
the distribution of assets upon dissolution, liquidation or winding up of
the affairs of the Trust) 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 of the affairs of the Trust, 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 or the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Trust), unless
immediately after such transaction the Discounted Value of Moody's Eligible
Assets or Standard & Poor's Eligible Assets, or both, as the case may be,
would at least equal the Municipal Preferred Basic Maintenance Amount (see
"Description of Municipal Preferred -- Rating Agency Guidelines" and "--
Redemption").
Except as set forth in the next sentence, no dividends shall be
declared or paid or set apart for payment on any class or series of shares
of beneficial interest of the 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 Municipal Preferred through their most
recent Dividend Payment Date. When dividends are not paid in full upon the
shares of Municipal Preferred through their most recent Dividend Payment
Date or upon any other class or series of shares ranking on a parity as to
the payment of dividends with shares of Municipal Preferred through their
most recent respective dividend payment dates, all dividends declared upon
shares of Municipal Preferred and any other such class or series of shares
ranking on a parity as to the payment of dividends with shares of Municipal
Preferred shall be declared pro rata so that the amount of dividends
declared per share on shares of Municipal Preferred and such other class or
series of shares shall in all cases bear to each other the same ratio that
accumulated dividends per share on the shares of Municipal Preferred and
such other class or series of shares bear to each other (for purposes of
this sentence, the amount of dividends declared per share of Municipal
Preferred shall be based on the Applicable Rate for such share for the
Dividend Periods during which dividends were not paid in full).
Under the Code, the Trust must, among other things, distribute at least
90% of the sum of its net investment income (including the excess, if any,
of net short-term capital gain over net long-term capital loss) and its net
tax-exempt income each year in order to maintain its qualification for tax
treatment as a regulated investment company. The foregoing limitations on
dividends, distributions and purchases may under certain circumstances
impair the Trust's ability to maintain such qualification. See "Tax Matters
-- Federal Income Tax Matters."
DESIGNATION OF SPECIAL RATE PERIODS. The Trust, at its option, may
designate any succeeding Subsequent Rate Period of shares of Municipal
Preferred as a Special Rate Period consisting of a specified number of Rate
Period Days evenly divisible by seven and not more than 1,820
(approximately 5 years), subject to adjustment as described below. A
designation of a Special Rate Period shall be effective only if (i) notice
thereof shall have been given as provided herein, (ii) an Auction for such
shares shall have been held on the Auction Date immediately preceding the
first day of such proposed Special Rate Period and Sufficient Clearing Bids
for such shares shall have existed in such Auction and (iii) if the Trust
shall have mailed a Notice of Redemption with respect to any shares of
Municipal Preferred, as described under "Redemption -- Notice of
Redemption" below, the Redemption Price with respect to such shares shall
have been deposited with the Auction Agent. In the event the Trust wishes
to designate any succeeding Subsequent Rate Period for shares of Municipal
Preferred as a Special Rate Period consisting of more than 28 Rate Period
Days, the Trust shall notify Standard & Poor's (if Standard & Poor's is
then rating such shares) and Moody's (if Moody's is then rating such
shares) in advance of the commencement of such Subsequent Rate Period that
the Trust wishes to designate such Subsequent Rate Period as a Special Rate
Period and shall provide Standard & Poor's (if Standard & Poor's is then
rating such shares) and Moody's (if Moody's is then rating such shares)
with such documents as either may request.
In the event the 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) a Wednesday that is a
Business Day in the case of a series of Municipal Preferred designated as
"Series T Municipal Preferred," or (b) a Friday that is a Business Day in
the case of a series of Municipal Preferred designated as "Series TH
Municipal Preferred," then the Trust shall designate such Subsequent Rate
Period as a Special Rate Period consisting of the period commencing on the
first day following the end of the immediately preceding Rate Period and
ending (a) on the first Tuesday that is followed by a Wednesday that is a
Business Day proceeding what would otherwise be such last day, in the case
of Series T Municipal Preferred, or (b) on the first Thursday that is
followed by a Friday that is a Business Day proceeding what would otherwise
be such last day in the case of Series TH Municipal Preferred.
If the Trust proposes to designate any succeeding Subsequent Rate
Period of shares of Municipal Preferred as a Special Rate Period, not less
than 20 (or such lesser number of days as may be agreed to from time to
time by the Auction Agent) nor more than 30 days prior to the date the
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 Municipal Preferred. Each such notice shall state (A) that the
Trust may exercise its option to designate a succeeding Subsequent Rate
Period of shares of Municipal Preferred as a Special Rate Period,
specifying the first day thereof and (B) that the Trust will, by 11:00
A.M., New York City time, on the second Business Day next preceding such
date (or by such later time or date, or both, as may be agreed to by the
Auction Agent), notify the Auction Agent of either (x) its determination,
subject to certain conditions, to exercise such option, in which case the
Trust shall specify the Special Rate Period designated, or (y) its
determination not to exercise such option.
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 as to
which notice has been given as set forth in the preceding paragraph (or
such later time or date, or both, as may be agreed to by the Auction
Agent), the 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 Municipal Preferred as a Special Rate Period, specifying the
same and the first day thereof, (B) the Auction Date immediately prior
to the first day of such Special Rate Period, (C) that such Special Rate
Period shall not commence if (1) an Auction for such shares shall not be
held on such Auction Date for any reason or (2) an Auction for such
shares shall be held on such Auction Date but Sufficient Clearing Bids
for such shares shall not exist in such Action, (D) the scheduled
Dividend Payment Dates for such shares during such Special Rate Period
and (E) the Special Redemption Provisions, if any, applicable to such
shares in respect of such Special Rate Period; such notice to be
accompanied by a Municipal Preferred Basic Maintenance Report showing
that, as of the third Business Day next preceding such proposed Special
Rate Period, Moody's Eligible Assets (if Moody's is then rating such
shares) and Standard & Poor's Eligible Assets (if Standard & Poor's is
then rating such shares) each have an aggregate Discounted Value at
least equal to the Municipal Preferred Basic Maintenance Amount as of
such Business Day (assuming for purposes of the foregoing calculation
that (a) the Maximum Rate is the Maximum Rate on such Business Day as if
such Business Day were the Auction Date for the proposed Special Rate
Period, and (b) the Moody's Discount Factors applicable to Moody's
Eligible Assets will be determined by reference to the first Moody's
Exposure Period longer than the Moody's Exposure Period then applicable
to the Trust); or
(ii) a notice stating that the Trust has determined not to exercise
its option to designate a Special Rate Period of shares of Municipal
Preferred and that the next succeeding Rate Period shall be a Minimum
Rate Period.
If the Trust fails to deliver either such notice (and, in the case of
the notice described in clause (i) above, a Municipal Preferred Basic
Maintenance Report to the effect set forth in clause (i) (if either Moody's
or Standard & Poor's is then rating the shares of Municipal Preferred))
with respect to any designation of any proposed Special Rate Period to the
Auction Agent by 11:00 A.M., New York City time, on the second Business Day
next preceding the first day of such proposed Special Rate Period (or by
such later time or date, or both, as may be agreed to by the Auction
Agent), the 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
clause (ii) above. In the event the Trust delivers to the Auction Agent a
notice described in clause (i) above, it shall file a copy of such notice
with the Secretary of the 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 clause (ii) above, the Trust will provide Moody's (if
Moody's is then rating the shares of Municipal Preferred) and Standard &
Poor's (if Standard & Poor's is then rating the shares of Municipal
Preferred) a copy of such notice.
VOTING RIGHTS
Holders of shares of Municipal Preferred are entitled to vote on certain
matters as described herein under "Investment Objective and Policies --
Fundamental Investment Policies" and in the Prospectus under "Description
of Municipal Preferred -- Voting Rights" and "Certain Provisions in the
Declaration of Trust."
In connection with the election of the Trust's trustees, holders of
outstanding Preferred Shares, including shares of Municipal Preferred,
voting together as one separate class, shall be entitled to elect two of
the Trust's trustees, and the remaining trustees will be elected by holders
of Common Shares and Preferred Shares, including shares of Municipal
Preferred, voting together as a single class. In addition, if at any time
dividends (whether or not earned or declared) on outstanding Preferred
Shares, including shares of Municipal Preferred, shall be due and unpaid in
an amount equal to two full years' dividends thereon, and sufficient cash
or specified securities shall not have been deposited with the Auction
Agent for the payment of such dividends, then, as the sole remedy of
holders of outstanding Preferred Shares, including shares of Municipal
Preferred, the number of trustees constituting the Board of Trustees shall
be automatically increased by the smallest number that, when added to the
two trustees elected exclusively by the holders of Preferred Shares,
including shares of Municipal Preferred, as described above, would
constitute a majority of the Board of Trustees as so increased by such
smallest number; and at a special meeting of shareholders which will be
called and held as soon as practicable, and at all subsequent meetings at
which trustees are to be elected, the holders of Preferred Shares,
including shares of Municipal Preferred, voting as a separate class, will
be entitled to elect the smallest number of additional trustees that,
together with the two trustees which such holders will be in any event
entitled to elect, constitutes a majority of the total number of trustees
of the Trust as so increased. The terms of office of the persons who are
trustees at the time of that election will continue. If the Trust
thereafter shall pay, or declare and set apart for payment, in full all
dividends payable on all outstanding Preferred Shares, including shares of
Municipal Preferred, the voting rights stated in the preceding sentence
shall cease, and the terms of office of all of the additional trustees
elected by the holders of Preferred Shares, including shares of Municipal
Preferred (but not of the trustees with respect to whose election the
holders of Common Shares were entitled to vote or the two trustees the
holders of Preferred Shares have the right to elect in any event), will
terminate automatically.
So long as any shares of Municipal Preferred are outstanding, the Trust
may not, without the affirmative vote of the holders of at least a majority
of the shares of Municipal Preferred outstanding at the time, voting
together as one separate class:
(a) authorize, create or issue additional shares of Municipal
Preferred or classes or series of Preferred Shares ranking prior to or
on a parity with shares of Municipal Preferred with respect to the
payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Trust (except that the
Trust may, without the vote of the holders of shares of Municipal
Preferred, authorize, create or issue additional shares of Municipal
Preferred or classes or series of Preferred Shares ranking on a parity
with shares of Municipal Preferred with respect to the payment of
dividends and the distribution of assets upon dissolution, liquidation
or winding up of the affairs of the Trust if the Trust obtains written
confirmation from Moody's (if Moody's is then rating the shares of
Municipal Preferred) and Standard & Poor's (if Standard & Poor's is then
rating the shares of Municipal Preferred) that the issuance of any such
additional shares or class or series of shares would not impair the
rating then assigned by such rating agency to shares of Municipal
Preferred; provided, however, that if Moody's or Standard & Poor's is
not then rating the shares of Municipal Preferred the aggregate
liquidation preference of all Preferred Shares of the Trust outstanding
after any such issuance, exclusive of accumulated and unpaid dividends,
may not exceed $140,000,000); or
(b) amend, alter or repeal the provisions of the Declaration, the
By-Laws or the Statement, whether by merger, consolidation or otherwise,
so as to materially affect any preference, right or power of the shares
of Municipal Preferred or the holders thereof (provided, however, that a
division of a share of Municipal Preferred shall be deemed to affect any
such preference, right or power only if the terms of such division
adversely affect the holders of any shares of Municipal Preferred);
provided, however, that (i) none of the actions permitted by the exception
to (a) above will be deemed to affect such preferences, rights or powers
and (ii) the authorization, creation and issuance of classes or series of
shares ranking junior to the Municipal Preferred with respect to the
payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Trust will be deemed to
affect such preferences, rights or powers only if at least one of Moody's
or Standard & Poor's is then rating the shares of Municipal Preferred and
such issuance would, at the time thereof, cause the 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 may not, without the affirmative vote of the holders
of at least 66 2/3% of the shares of Municipal Preferred outstanding at the
time, voting as a separate class, file a voluntary application for relief
under Federal bankruptcy law or any similar application under state law for
so long as the Trust is solvent and does not foresee becoming insolvent. If
any action set forth in this paragraph would adversely affect the rights of
one or more series (the "Affected Series") of Municipal Preferred in a
manner different from any other series of Municipal Preferred, the Trust
will not approve any such action without the affirmative vote of the
holders of at least a majority of the shares of each such Affected Series
outstanding at the time (each such Affected Series voting as a separate
class).
Voting provisions will not apply with respect to shares of Municipal
Preferred if, at or prior to the time when a vote is required, such shares
shall have been (i) redeemed or (ii) called for redemption and sufficient
funds shall have been deposited in trust to effect such redemption.
The Board of Trustees may, without shareholder approval, amend, alter
or repeal any or all of the definitions and related provisions required to
be contained in the Statement by the rating agencies in the event the Trust
receives confirmation from Moody's or Standard & Poor's, or both, as
appropriate, that any such amendment, alteration or repeal would not impair
the ratings then assigned by Moody's and Standard & Poor's to shares of
Municipal Preferred.
RATING AGENCY GUIDELINES
The Trust intends that, so long as shares of Municipal Preferred are
outstanding, the composition of its portfolio will reflect guidelines
established by at least one of Moody's or Standard & Poor's in connection
with the Trust's receipt on the Date of Original Issue of the shares of
Municipal Preferred of ratings of "Aaa" from Moody's or AAA from Standard &
Poor's. Moody's and Standard & Poor's, nationally recognized independent
rating agencies, issue ratings for various securities reflecting their
perceived creditworthiness of such securities. The guidelines described below
have been developed by Moody's and Standard & Poor's in connection with other
issuances of asset-backed and similar securities, including debt obligations
and adjustable rate preferred shares, generally on a case-by-case basis
through discussions with the issuers of those securities. The guidelines are
designed to ensure that assets underlying outstanding debt or preferred
shares will be sufficiently varied and will be of sufficient quality and
amount to justify investment grade ratings. The guidelines do not have the
force of law, but have been adopted by the Trust in order to satisfy current
requirements necessary for Moody's or Standard & Poor's, or both, to issue
the above-described ratings for shares of Municipal Preferred, which ratings
are generally relied upon by investors in purchasing such securities. In the
context of a closed-end investment company such as the Trust, therefore, the
guidelines provide a set of tests for portfolio composition and asset
coverage that supplement (and in some cases are more restrictive than) the
applicable requirements under the 1940 Act. A rating agency's guidelines will
apply to shares of Municipal Preferred only so long as such rating agency is
rating such shares. The Board of Trustees may, without shareholder approval,
amend, alter or repeal any or all of the definitions and related provisions
which have been adopted by the Trust pursuant to the rating agency guidelines
in the event the Trust receives confirmation from Moody's or Standard &
Poor's, or both, as appropriate, that any such change would not impair the
ratings then assigned by Moody's and Standard & Poor's to shares of Municipal
Preferred.
So long as either Standard & Poor's or Moody's, or both, are rating the
shares of Municipal Preferred, the Trust may not, among other things, (1)
buy or sell futures contracts, write, purchase or sell options on futures
contracts or write put or call options on portfolio securities except to
the extent set forth in the Statement, which include the restrictions set
forth as Appendix E to this Statement of Additional Information, (2) borrow
money, except that the Trust may, without obtaining the written
confirmation described below, borrow money for the purpose of clearing
securities transactions if (a) the Municipal Preferred Basic Maintenance
Amount would continue to be satisfied after giving effect to such borrowing
(which shall mean, for purposes of the calculation of the Municipal
Preferred Basic Maintenance Amount, adding the amount of the liability for
such borrowing to the calculation of the Municipal Preferred Basic
Maintenance Amount) and (b) such borrowing (i) is privately arranged with a
bank or other person and is evidenced by a promissory note or other
evidence of indebtedness that is not intended to be publicly distributed or
(ii) is for "temporary purposes," is evidenced by a promissory note or
other evidence of indebtedness and is an amount not exceeding 5 per centum
of the value of the total assets of the 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), (3) issue additional shares of Municipal Preferred or any class
or series of shares ranking prior to or on a parity with the shares of
Municipal Preferred with respect to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up of the
Trust, or reissue any shares of Municipal Preferred previously purchased or
redeemed by the Trust, (4) engage in any short sales of securities, (5)
lend any securities, (6) merge or consolidate into or with any corporation,
(7) change the Trust's primary Pricing Services, or (8) enter into reverse
repurchase agreements, unless in each case (except as described above) it
has received confirmation from Standard & Poor's or Moody's, or both, as
appropriate, that any such action would not impair the rating then assigned
by such rating agency to shares of Municipal Preferred. While the Trust
does not presently intend to borrow, and while the Trust is restricted
under the 1940 Act from borrowing in excess of 33 1/3% of its total assets
and is otherwise restricted from borrowing pursuant to rating agency
guidelines, under certain circumstances and notwithstanding adverse
interest rate or market conditions, the Trust is permitted to borrow for
temporary or emergency purposes (e.g., to make required distributions or
pay dividends) or to repurchase shares when such borrowing is deemed to be
in the best interest of the common shareholders. See "Repurchase of Common
Shares" herein and "Repurchase of Common Shares; Conversion to Open-end
Fund" in the Prospectus for the circumstances under which the Trust may
purchase Common Shares and incur indebtedness in connection therewith.
Should the Trust borrow, the Trust would be required to pay when due the
interest obligation on any debt incurred by the Trust before it would be
able to pay dividends on shares of Municipal Preferred, and it is likely
that the Trust would be required to pay the principal amount of any such
debt prior to meeting the liquidation preference of the shares of Municipal
Preferred. Because the interest expense on borrowings by the Trust will
reduce the Trust's net investment earnings available to pay dividends on
shares of Municipal Preferred, borrowing may impair the Trust's ability to
pay such dividends on shares of Municipal Preferred. This risk is
heightened in the event the Trust incurs variable rate debt, the interest
rate on which may increase with increases in prevailing market rates.
ASSET MAINTENANCE
1940 ACT MUNICIPAL PREFERRED ASSET COVERAGE. The Trust will be required
under rating agency guidelines to maintain, as of the last Business Day of
each month on which any shares of Municipal Preferred are outstanding,
asset coverage of at least 200% with respect to such shares (or such other
asset coverage as may in the future be specified in or under the 1940 Act
as the minimum asset coverage for senior securities which are shares of a
closed-end investment company as a condition of declaring dividends on its
Common Shares). If the Trust fails to maintain such asset coverage in
accordance with the requirements of the rating agency or agencies then
rating the shares of Municipal Preferred ("1940 Act Municipal Preferred
Asset Coverage") and such failure is not cured as of the last Business Day
of the following month (the "1940 Act Cure Date"), the Trust will be
required under certain circumstances to redeem certain of the shares of
Municipal Preferred. See "Redemption" below.
MUNICIPAL PREFERRED BASIC MAINTENANCE AMOUNT. The Trust will be required
under rating agency guidelines to maintain, as of each Business Day (a
"Valuation Date") on which shares of Municipal Preferred are outstanding,
assets having in the aggregate a Discounted Value at least equal to the
Municipal Preferred Basic Maintenance Amount established by the rating
agency or agencies then rating the shares of Municipal Preferred. If the
Trust fails to meet such requirement on any Valuation Date and such failure
is not cured on or before the second Business Day after such Valuation Date
(the "Municipal Preferred Basic Maintenance Cure Date"), the Trust will be
required under certain circumstances to redeem certain of the shares of
Municipal Preferred. See "Redemption" below.
The "Municipal Preferred Basic Maintenance Amount" as of any Valuation
Date is defined as the dollar amount equal to the sum of:
(A) (i) the product of the number of shares of Municipal Preferred
outstanding on such date multiplied by $25,000 (plus the product of the
number of shares of any other series of Preferred Shares outstanding on
such date multiplied by the liquidation preference of such shares), plus
any redemption premium applicable to shares of Municipal Preferred (or
other Preferred Shares) then subject to redemption;
(ii) the aggregate amount of dividends that will have
accumulated at the Applicable Rate (whether or not earned or
declared) to (but not including) the first Dividend Payment Date for
each share of Municipal Preferred outstanding that follows such
Valuation Date (plus the aggregate amount of dividends, whether or
not earned or declared, that will have accumulated in respect of
other outstanding Preferred Shares to, but not including, the first
respective dividend payment dates for such other shares that follow
such Valuation Date);
(iii) subject to certain exceptions, the aggregate amount of
dividends that would accumulate on shares of Municipal Preferred
outstanding from such first Dividend Payment Date through the 49th
day after such Valuation Date, at the Maximum Rate (calculated as if
such Valuation Date were the Auction Date for the Rate Period
commencing on such Dividend Payment Date) for a Minimum Rate Period
thereof to commence on such Dividend Payment Date, assuming, solely
for purposes of the foregoing, that if on such Valuation Date the
Trust shall have delivered a Notice of Special Rate Period to the
Auction Agent with respect to such shares, such Maximum Rate shall
be the higher of (a) the Maximum Rate for the Special Rate Period of
such shares to commence on such Dividend Payment Date and (b) the
Maximum Rate for a Minimum Rate Period of such shares to commence on
such Dividend Payment Date, multiplied by the Volatility Factor
applicable to a Minimum Rate Period, or, in the event the Trust
shall have delivered a Notice of Special Rate Period to the Auction
Agent with respect to such shares designating a Special Rate Period
consisting of 49 Rate Period Days or more, the Volatility Factor
applicable to a Special Rate Period of that length (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);
(iv) the amount of anticipated Trust expenses for the 90 days
subsequent to such Valuation Date;
(v) the amount of the Trust's Maximum Potential Gross-up Payment
Liability as of such Valuation Date; and
(vi) any current liabilities as of such Valuation Date to the
extent not reflected in any of (A)(i) through (A)(v) (including,
without limitation, any payables for Municipal Obligations purchased
as of such Valuation Date and any liabilities incurred for the
purpose of clearing securities transactions) less
(B) the value of any Trust assets irrevocably deposited by the Trust
for the payment of any of (A)(i) through (A)(vi), all as calculated in
accordance with the requirements of the rating agency or agencies then
rating the shares of Municipal Preferred.
For purposes of the foregoing, "Maximum Potential Gross-up Payment
Liability," as of any Valuation Date, means the aggregate amount of Gross-up
Payments that would be due if the 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 gain 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.
In managing the Trust's portfolio, the Adviser will not alter the
composition of the Trust's portfolio if, in the reasonable belief of the
Adviser, the effect of any such alteration would be to cause the Trust to
have Eligible Assets with an aggregate Discounted Value, as of the
immediately preceding Valuation Date, less than the Municipal Preferred
Basic Maintenance Amount as of such Valuation Date; provided, however, that
in the event that, as of the immediately preceding Valuation Date, the
aggregate Discounted Value of the Trust's Eligible Assets exceeded the
Municipal Preferred Basic Maintenance Amount by 5% or less, the Adviser
will not alter the composition of the Trust's portfolio in a manner
reasonably expected to reduce the aggregate Discounted Value of the Trust's
Eligible Assets unless the Trust shall have confirmed that, after giving
effect to such alteration, the aggregate Discounted Value of the Trust's
Eligible Assets would exceed the Municipal Preferred Basic Maintenance
Amount.
Upon any failure to maintain the required Discounted Value, the Trust
will seek to alter the composition of its portfolio to reattain the
Municipal Preferred Basic Maintenance Amount on or prior to the Municipal
Preferred Basic Maintenance Cure Date, thereby incurring additional
transaction costs and possible losses and/or gains on dispositions of
portfolio securities.
On or before the third Business Day after a Valuation Date on which the
Trust fails to meet the Municipal Preferred Basic Maintenance Amount, and
on the third Business Day after the Municipal Preferred Basic Maintenance
Cure Date with respect to such Valuation Date, the Trust is required to
deliver to the Auction Agent (so long as either Moody's or Standard &
Poor's is rating the shares of Municipal Preferred) a report with respect
to the calculation of the Municipal Preferred Basic Maintenance Amount and
the value of its portfolio holdings as of the date of such failure or such
cure date, as the case may be (a "Municipal Preferred Basic Maintenance
Report"). The Trust will also deliver, as required, a Municipal Preferred
Basic Maintenance Report to the Auction Agent, Moody's (if Moody's is then
rating the shares of Municipal Preferred) and Standard & Poor's (if
Standard & Poor's is then rating the shares of Municipal Preferred) as of
the last Business Day of each January, April, July and October of each
year, commencing on January 31, 2001, in each case on or before the third
Business Day after such day, and Standard & Poor's, as of any biweekly
Valuation Date, in each case on or before the third Business Day after such
day for the first year. The Trust will also deliver a Municipal Preferred
Basic Maintenance Report to Moody's (if Moody's is then rating the shares
of the Municipal Preferred) and Standard & Poor's (if Standard & Poor's is
then rating the shares of the Municipal Preferred) if and when requested by
Standard & Poor's or Moody's for any Valuation Date, on or before the third
Business Day after such request. Within ten Business Days after delivery of
such report relating to the last Business Day of each January, April, July
and October of each year, commencing January 31, 2001, the Trust will
deliver a letter prepared by the Trust's independent accountants regarding
the accuracy of the calculations made by the Trust in its most recent
Municipal Preferred Basic Maintenance Report. If any such letter prepared
by the Trust's independent accountants shows that an error was made in the
most recent Municipal Preferred Basic Maintenance Report, the calculation
or determination made by the Trust's independent accountants will be
conclusive and binding on the Trust.
The Discount Factors and guidelines for determining the market value of
the Trust's portfolio holdings, described below, have been based by the
rating agencies on criteria such as the sensitivity of the market value of
the relevant asset to changes in interest rates, the liquidity and depth of
the market for the relevant asset, the credit quality of the relevant asset
(for example, the lower the rating of a debt obligation, the higher the
related discount factor) and the frequency with which the relevant asset is
marked to market. The ratings may be changed, suspended or withdrawn as a
result of changes in, or the unavailability of, such information.
STANDARD & POOR'S AAA RATING GUIDELINES. For purposes of calculating the
Discounted Value of the Trust's portfolio under current Standard & Poor's
guidelines, the fair market value of Municipal Obligations eligible for
consideration under such guidelines ("Standard & Poor's Eligible Assets")
must be discounted by certain discount factors set forth in the table below
("Standard & Poor's Discount Factors"). The Discounted Value of a Municipal
Obligation under Standard & Poor's guidelines is the fair market value
thereof divided by the Standard & Poor's Discount Factor. The Standard &
Poor's Discount Factor used to discount a particular Municipal Obligation
will be determined by reference to the "Standard & Poor's Exposure Period"
(currently, three Business Days) and the Standard & Poor's rating on such
Municipal Obligation. Standard & Poor's Discount Factors for a range of
exposure periods are set forth below:
<TABLE>
<CAPTION>
STANDARD & POOR'S DISCOUNT FACTORS RATING CATEGORY
-------------------------------------------------------------------
EXPOSURE PERIOD AAA* AA* A* BBB* UNRATED** ZEROS***
<S> <C> <C> <C> <C> <C> <C>
45 Business Days ..................... 190% 195% 210% 250% 220% 572%
25 Business Days ..................... 170 175 190 230 220 496
10 Business Days ..................... 155 160 175 215 220 426
7 Business Days ...................... 150 155 170 210 220 411
3 Business Days ...................... 130 135 150 190 220 388
------------
* Standard & Poor's rating.
** Standard & Poor's Eligible Assets not rated or rated less than BBB by Standard & Poor's and not rated at
least the equivalent of an "A" rating by another nationally recognized credit rating agency.
*** Municipal Obligations which are not interest bearing or do not pay interest at least semi-annually and
that are rated AAA by Standard & Poor's.
</TABLE>
Since the Standard & Poor's Exposure Period currently applicable to the
Trust is three Business Days, the Standard & Poor's Discount Factors
currently applicable to Standard & Poor's Eligible Assets will be
determined by reference to the factors set forth opposite the line entitled
"3 Business Days." Notwithstanding the foregoing, (i) the Standard & Poor's
Discount Factor for short-term Municipal Obligations will be 115%, so long
as such Municipal Obligations are rated A-1+ or SP-1+ by Standard & Poor's
and mature or have a demand feature exercisable within 30 days or less,
120% if such Municipal Obligations are rated A-1 or SP-1- by Standard &
Poor's and mature or have a demand feature exercisable within 30 days or
less, or 125% if such Municipal Obligations are not rated by Standard &
Poor's but are rated VMIG-1, P-1 or MIG-1 by Moody's; provided, however,
that any such Moody's-rated short-term Municipal Obligations which have
demand features exercisable within 30 days or less must be backed by a
letter of credit, liquidity facility or guarantee from a bank or other
financial institution with a short-term rating of at least A-1+ from
Standard & Poor's; (ii) no Standard & Poor's Discount Factor will be
applied to cash; and (iii) except as set forth in clause (i) above, in the
case of any Municipal Obligation that is not rated by Standard & Poor's or
rated less than BBB by Standard & Poor's but qualifies as a Standard &
Poor's Eligible Asset pursuant to clause (1)(c) of the following paragraph,
such Municipal Obligation will be deemed to have a Standard & Poor's rating
one full rating category lower than the Standard & Poor's rating category
that is the equivalent of the rating category in which such Municipal
Obligation is placed by another nationally recognized credit rating agency.
For purposes of the foregoing, Anticipation Notes rated SP-1+ or, if not
rated by Standard & Poor's, rated MIG-1 or VMIG-1 by Moody's, which do not
mature or have a demand feature at par exercisable in 30 days and which do
not have a long-term rating, will be considered to be short-term Municipal
Obligations. In calculating the Discounted Value of the Trust's portfolio
(1) Standard & Poor's Discount Factors will be applied to futures and
Inverse Floaters and (2) a Discount Factor of 388% will be applied to
Municipal Obligations rated AAA by Standard & Poor's which are not interest
bearing or do not pay interest at least semi-annually.
All Trust assets shall be valued at trade date in determining Standard &
Poor's Eligible Assets. The Standard & Poor's guidelines impose certain
minimum issue size, issuer, geographical diversification and other
requirements for purposes of determining Standard & Poor's Eligible Assets.
Solely for purposes of this definition, the term "Municipal Obligation" means
any obligation the interest on which is exempt from regular federal income
taxation and which is issued by any of the fifty United States, the District
of Columbia or any of the territories of the United States, their
subdivisions, counties, cities, towns, villages, school districts and
agencies (including authorities and special districts created by the states),
and federally sponsored agencies such as local housing authorities.
Notwithstanding the foregoing limitations:
(1) In order to be considered Standard & Poor's Eligible Assets,
Municipal Obligations owned by the Trust must:
(a) be interest bearing and pay interest at least semi-annually
(except as stated in number five (5) below);
(b) be payable in U.S. dollars with respect to principal and
interest;
(c) in the case of Anticipation Notes that are Grant
Anticipation Notes or Bond Anticipation Notes, be rated by Standard
& Poor's;
(d) not be private placements (except in the case of Inverse
Floaters);
(e) be part of an issue (excluding Escrowed Bonds that are
legally defeased) with an original issue size of at least $20
million or, if of an issue with an original issue size below $20
million (but in no event lower than $10 million), be issued by an
issuer with a total of at least $50 million of securities
outstanding; and
(f) is not subject to a covered call or covered put option
written by the Trust.
(2) Municipal Obligations (excluding Escrowed Bonds) of any one
issuer or guarantor (excluding bond insurers) will be considered
Standard & Poor's Eligible Assets only to the extent the Market Value of
such Municipal Obligations does not exceed 10% of the aggregate Market
Value of Standard & Poor's Eligible Assets, provided that 2% is added to
the applicable Standard & Poor's Discount Factor for every 1% by which
the Market Value of such Municipal Obligations exceeds 5% of the
aggregate Market Value of Standard & Poor's Eligible Assets, and
provided that Municipal Obligations (excluding Escrowed Bonds) not rated
or rated less than BBB by Standard & Poor's and not rated at least A by
another nationally recognized credit rating agency of any one issuer or
guarantor (excluding bond insurers) shall constitute Standard & Poor's
Eligible Assets only to the extent the Market Value of such Municipal
Obligations does not exceed 5% of the aggregate Market Value of Standard
& Poor's Eligible Assets.
(3) Municipal Obligations not rated at least BBB or not rated by
Standard & Poor's and not rated at least A by another nationally
recognized credit rating agency will be considered Standard & Poor's
Eligible Assets only to the extent the Market Value of such Municipal
Obligations does not exceed 50% of the aggregate Market Value of
Standard & Poor's Eligible Assets; provided, however, that if the Market
Value of such Municipal Obligations exceeds 50% of the aggregate Market
Value of Standard & Poor's Eligible Assets, a portion of such Municipal
Obligations (selected by the Trust) shall not be considered Standard &
Poor's Eligible Assets, so that the Market Value of such Municipal
Obligations (excluding such portion) does not exceed 50% of the
aggregate Market Value of Standard & Poor's Eligible Assets.
(4) Long-term Municipal Obligations (excluding Escrowed Bonds)
issued by issuers in any one state or territory will be considered
Standard & Poor's Eligible Assets only to the extent the Market Value of
such Municipal Obligations does not exceed 25% of the aggregate Market
Value of Standard & Poor's Eligible Assets.
(5) Municipal Obligations which are not interest bearing or do not
pay interest at least semi-annually shall be considered Standard &
Poor's Eligible Assets if rated AAA by Standard & Poor's.
MOODY'S "Aaa" RATING GUIDELINES. For purposes of calculating the
Discounted Value of the Trust's portfolio under current Moody's guidelines,
Municipal Obligations eligible for consideration under such guidelines
("Moody's Eligible Assets") must be discounted by certain discount factors
set forth in the table below ("Moody's Discount Factors"). All Trust assets
shall be valued at trade date in determining Moody's Eligible Assets. The
Discounted Value of a Municipal Obligation under Moody's guidelines is, as of
any Valuation Date, (i) with respect to a Moody's Eligible Asset that is not
currently callable as of such Valuation Date at the option of the issuer
thereof, the quotient of the market value thereof divided by the applicable
Moody's Discount Factor, or (ii) with respect to a Moody's Eligible Asset
that is currently callable as of such Valuation Date at the option of the
issuer thereof, the quotient of (a) the lesser of the market value or call
price thereof, including any call premium, divided by (b) the applicable
Moody's Discount Factor. The Moody's Discount Factor used to discount a
particular Municipal Obligation will be determined by reference to the
"Moody's Exposure Period" (currently, the period commencing on a given
Valuation Date and ending 49 days thereafter) and the Moody's rating on such
Municipal Obligation. Moody's Discount Factors for a range of exposure
periods are set forth below:
<TABLE>
<CAPTION>
MOODY'S DISCOUNT FACTORS RATING CATEGORY
EXPOSURE PERIOD AAA* Aa* A* Baa* OTHER** (V)MIG-1*** SP-1+**** UNRATED*****
<S> <C> <C> <C> <C> <C> <C> <C> <C>
7 weeks ........ 151% 159% 166% 173% 187% 136% 148% 225%
8 weeks or less
but greater
than 7 weeks . 154 161 168 176 190 137 149 231
9 weeks or less
but greater
than 8 weeks . 156 163 170 177 192 138 150 240
------------
* Moody's rating.
** Municipal Obligations not rated by Moody's but rated BBB by Standard & Poor's.
*** Municipal Obligations rated MIG-1 or VMIG-1, which do not mature or have a demand feature at par exercisable
in 30 days and which do not have a long-term rating.
**** Municipal Obligations not rated by Moody's but rated SP-1+ by Standard & Poor's, which do not mature or have a
demand feature at par exercisable in 30 days and which do not have a long-term rating.
***** Municipal Obligations not rated or rated lower than Baa3 by Moody's and not rated or rated lower than BBB by
Standard & Poor's.
</TABLE>
Since the Moody's Exposure Period currently applicable to the Trust is 49
days, the Moody's Discount Factors currently applicable to Moody's Eligible
Assets will be determined by reference to the factors set forth opposite
the line entitled "7 weeks." Notwithstanding the foregoing, (i) the Moody's
Discount Factor for short-term Municipal Obligations will be 115%, so long
as such Municipal Obligations are rated at least MIG-1, VMIG-1 or P-1 by
Moody's and mature or have a demand feature at par exercisable in 30 days
or less or 125% so long as such Municipal Obligations are rated at least
A-1+/AA or SP-1+/AA by Standard & Poor's and mature or have a demand
feature at par exercisable in 30 days or less and (ii) no Moody's Discount
Factor will be applied to cash or futures, options and similar instruments
(to the extent such securities are Moody's Eligible Assets).
The Moody's guidelines impose certain minimum issue size, issuer,
geographical diversification and other requirements for purposes of
determining Moody's Eligible Assets, as set forth in the table below:
MINIMUM MAXIMUM MAXIMUM
ISSUE SIZE UNDERLYING STATE OR TERRITORY
RATING ($ MILLIONS)* OBLIGOR (%) CONCENTRATION(%)
Aaa ................ 10 100 100
Aa ................. 10 20 60
A .................. 10 10 40
Baa ................ 10 6 20
Other** ............ 10 4 12
* Excludes Escrowed Bonds that are legally defeased.
** Municipal Obligations not rated by Moody's but rated BBB by Standard &
Poor's. Municipal Obligations issued by any one issuer (excluding
escrowed bonds) and not rated by Moody's or rated lower than Baa3 by
Moody's and not rated by Standard & Poor's or rated lower than BBB by
Standard & Poor's ("Unrated Moody's Municipal Obligations"), together
with any Municipal Obligations issued by the same issuer and rated BBB
by Standard & Poor's may comprise no more than 4% of total Moody's
Eligible Assets.
For purposes of the foregoing table, the percentages provided, for a
given rating, in the columns entitled "Maximum Underlying Obligor" and
"Maximum State or Territory Concentration" shall apply to the aggregate
total of the Municipal Obligations in the rating category indicated and all
rated Municipal Obligations in lower rating categories, as well as unrated
Municipal Obligations that are Moody's Eligible Assets.
Current Moody's guidelines require that Municipal Obligations
constituting Moody's Eligible Assets (i) pay interest in cash, (ii) if
applicable, not have suspended ratings, and (iii) not be subject to a
covered call or a covered put option written by the Trust. For purposes of
determining the Moody's Discount Factors applicable to such Standard &
Poor's-rated Municipal Obligations, any such Municipal Obligation
(excluding short-term Municipal Obligations) will be deemed to have a
Moody's rating which is one full rating category lower than its Standard &
Poor's rating. For purposes of applying the foregoing requirements,
Municipal Obligations shall be deemed to be rated BBB by Standard & Poor's
if rated BBB-, BBB or BBB+ by Standard & Poor's, 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 Standard & Poor's, will be considered to have a long-term
rating of A. In general, Municipal Obligations which are not rated by
Moody's or Standard & Poor's may comprise no more than 40% of the aggregate
Market Value of Moody's Eligible Assets.
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 [Massachusetts Financial Services
Company], [The Chase Manhattan Bank] or the Auction Agent and (d) Liens by
virtue of any repurchase agreement or future contract; or (ii) deposited
irrevocably for the payment of any liabilities for purposes of determining
the Municipal Preferred Basic Maintenance Amount. In addition, an asset
will not be considered a Moody's Eligible Asset if it is an Internally
Priced Security (as defined under "Market Value").
The Trust will enter into futures and options transactions only for
bona fide hedging purposes and not for leveraging or speculative purposes.
So long as either Standard & Poor's or Moody's is rating the Municipal
Preferred, the Trust will only engage in futures or options transactions in
accordance with guidelines of such ratings agencies and, to the extent
transactions would not be permitted by such guidelines, only after it has
received written confirmation from Standard & Poor's or Moody's, as
appropriate, that such transactions would not impair the ratings then
assigned by such rating agency to shares of Municipal Preferred. The
guidelines in effect with respect to futures and options transactions in
which the Trust may engage are set forth in the Statement and are included
as Appendix E to this Statement of Additional Information.
REDEMPTION
OPTIONAL REDEMPTION. Except as described below,
(i) shares of Municipal Preferred are redeemable, at the option of
the Trust, as a whole or from time to time in part, on the second
Business Day preceding any Dividend Payment Date therefor, out of funds
legally available therefor in accordance with the Declaration, the
Statement and applicable law, at a redemption price per share equal to
the sum of $25,000 plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption; provided, however, that (1)
shares of Municipal Preferred may not be redeemed in part if after such
partial redemption fewer than 500 shares remain outstanding; (2) unless
otherwise provided in the Statement, shares 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 the next succeeding
sentence, the Notice of Special Rate Period relating to a Special Rate
Period of shares of Municipal Preferred, as delivered to the Auction
Agent and filed with the Secretary of the Trust, may provide that such
shares shall not be redeemable during the whole or any part of such
Special Rate Period (except as provided in (ii) below) or shall be
redeemable during the whole or any part of such Special Rate Period only
upon payment of such redemption premium or premiums as shall be
specified therein ("Special Redemption Provisions"); and
(ii) shares of Municipal Preferred are redeemable, at the option of
the Trust, as a whole but not in part, out of funds legally available
therefor in accordance with the Declaration, the Statement and
applicable law, on the first day following any Dividend Period thereof
included in a Rate Period of more than 364 Rate Period Days if, on the
date of determination of the Applicable Rate for such shares for such
Rate Period, such Applicable Rate equaled or exceeded on such date of
determination the Treasury Note Rate for such Rate Period, at a
redemption price of $25,000 per share plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or
declared) to (but not including) the date fixed for redemption.
A Notice of Special Rate Period relating to shares of Municipal Preferred for
a Special Rate Period may contain Special Redemption Provisions only if the
Board of Trustees, after consultation with the Broker-Dealer or
Broker-Dealers for such Special Rate Period of such shares, determines that
such Special Redemption Provisions are in the best interest of the Trust.
If fewer than all of the outstanding shares of Municipal Preferred are
to be redeemed as set forth above, the number of shares to be redeemed
shall be determined by the Board of Trustees, and such shares shall be
redeemed pro rata from the holders of record of shares of such series
(initially Cede & Co. as nominee of the Securities Depository) in
proportion to the number of such shares held by such holders. Since the
nominee of the Securities Depository is the only record holder of shares of
Municipal Preferred, the Securities Depository will determine the number of
shares to be redeemed from the accounts of the Agent Members. The Agent
Members, in turn, may determine to redeem shares from some persons listed
on their records as beneficial owners (which may include an Agent Member
holding shares for its own account) without redeeming shares from the
accounts of other persons listed on their records as beneficial owners.
The Trust may not mail a Notice of Redemption relating to an optional
redemption as described above on any date unless on such date (a) the Trust
has available certain Deposit Securities with maturity or tender dates not
later than the day preceding the applicable redemption date and having a
value not less than the amount (including any applicable premium) due to
holders of shares of Municipal Preferred by reason of the redemption of
such shares on such redemption date and (b) the Discounted Value of Moody's
Eligible Assets (if Moody's is then rating the shares of Municipal
Preferred) and the Discounted Value of Standard & Poor's Eligible Assets
(if Standard & Poor's is then rating the shares of Municipal Preferred)
each at least equal the Municipal Preferred Basic Maintenance Amount and
would at least equal the Municipal Preferred Basic Maintenance Amount
immediately subsequent to such redemption if such redemption were to occur
on such date. For purposes of determining in clause (b) of the preceding
sentence whether the Discounted Value of Moody's Eligible Assets at least
equals the Municipal Preferred Basic Maintenance Amount, the Moody's
Discount Factors applicable to Moody's Eligible Assets will be determined
by reference to the first Moody's Exposure Period longer than the Moody's
Exposure Period then applicable to the Trust.
MANDATORY REDEMPTION. The Trust will be required to redeem, at a redemption
price equal to $25,000 per share plus accumulated but unpaid dividends
thereon (whether or not earned or declared) to (but not including) the date
fixed by the Board of Trustees for redemption (such amount, together with
the redemption prices described above under "Optional Redemption," being
herein referred to as the "Redemption Price"), certain of the shares of
Municipal Preferred to the extent permitted under the 1940 Act, the
Declaration, the Statement and any applicable law, if the Trust fails to
maintain the Municipal Preferred Basic Maintenance Amount or the 1940 Act
Municipal Preferred Asset Coverage in accordance with the requirements of
the rating agency or rating agencies then rating the shares of Municipal
Preferred and such failure is not cured on or before the Municipal
Preferred Basic Maintenance Cure Date or the 1940 Act Cure Date (herein
respectively referred to as a "Cure Date"), as the case may be. The number
of shares of Municipal Preferred to be redeemed will be equal to the lesser
of (a) the minimum number of shares of Municipal Preferred, together with
all other Preferred Shares subject to redemption or retirement, the
redemption of which, if deemed to have occurred immediately prior to the
opening of business on the Cure Date, would have resulted in the
satisfaction of the Municipal Preferred Basic Maintenance Amount or the
1940 Act Municipal Preferred Asset Coverage, as the case may be, on such
Cure Date (provided, however, that, if there is no such minimum number of
shares of Municipal Preferred and other Preferred Shares the redemption or
retirement of which would have had such result, all shares of Municipal
Preferred and Preferred Shares then outstanding will be redeemed), and (b)
the maximum number of shares of Municipal Preferred, together with all
other Preferred Shares subject to redemption or retirement, that can be
redeemed out of funds expected to be legally available therefor. In
determining the shares of Municipal Preferred required to be redeemed in
accordance with the foregoing, the Trust will allocate the number of shares
required to be redeemed to satisfy the Municipal Preferred Basic
Maintenance Amount or the 1940 Act Municipal Preferred Asset Coverage, as
the case may be, pro rata among shares of Municipal Preferred and any other
Preferred Shares subject to redemption or retirement.
The Trust is required to effect such a mandatory redemption not earlier
than 20 days and not later than 40 days after such Cure Date, except that
if the Trust does not have funds legally available under the Declaration,
the Statement and applicable law for the redemption of all of the required
number of shares of Municipal Preferred and other Preferred Shares which
are subject to mandatory redemption or retirement or the Trust otherwise is
unable to effect such redemption on or prior to 40 days after such Cure
Date, the Trust will redeem those shares of Municipal Preferred and other
Preferred Shares which it was unable to redeem on the earliest practicable
date on which it is able to effect such redemption. If fewer than all of
the outstanding shares of Municipal Preferred are to be redeemed pursuant
to a mandatory redemption, the number of shares to be redeemed shall be
redeemed pro rata from the holders of such shares in proportion to the
number of such shares held by such holders, in the same manner as described
above in respect of optional redemptions of fewer than all outstanding
shares of Municipal Preferred.
NOTICE OF REDEMPTION. Notice of redemption shall be given by mailing the
same to each holder of the shares to be redeemed (initially Cede & Co. as
nominee of the Securities Depository), not less than 20 nor more than 45
days prior to the date fixed for redemption thereof, to the respective
addresses of such holders as the same shall appear on the record books of
the Trust ("Notice of Redemption"). Each such notice shall state (i) the
redemption date; (ii) the number of shares of Municipal Preferred to be
redeemed; (iii) the CUSIP number for such shares; (iv) the Redemption
Price; (v) the place or places where certificate(s) for such shares
(properly endorsed or assigned for transfer, if the Board of Trustees shall
so require and the notice shall so state) are to be surrendered for payment
of the Redemption Price; (vi) that dividends on the shares to be redeemed
will cease to accumulate on such redemption date; and (vii) the provisions
of the Statement under which such redemption is made. If fewer than all
shares of Municipal Preferred held by any holder are to be redeemed, the
notice mailed to such holder shall also specify the number of shares to be
redeemed from such holder. The Trust may provide in any Notice of
Redemption relating to an optional redemption that such redemption is
subject to one or more conditions precedent and that the Trust shall not be
required to effect such redemption unless each such condition shall have
been satisfied at the time or times and in the manner specified in such
Notice of Redemption.
OTHER REDEMPTION PROCEDURES. To the extent that any redemption for which a
Notice of Redemption has been mailed is not made by reason of the absence
of legally available funds therefor, such redemption will be made as soon
as practicable to the extent such funds become available. Failure to redeem
shares of Municipal Preferred will be deemed to exist at any time after the
date specified for redemption in a Notice of Redemption when the Trust
shall have failed, for any reason whatsoever, to deposit with the Auction
Agent the Redemption Price with respect to any shares for which such Notice
of Redemption has been mailed. Notwithstanding the fact that the 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 will include those shares of Municipal Preferred
for which a Notice of Redemption has been mailed. The first two sentences
of this paragraph shall not apply in the event the Trust provides in any
Notice of Redemption relating to an optional redemption that such
redemption is subject to one or more conditions precedent and any such
condition precedent shall not have been satisfied at the time or times and
in the manner specified in such Notice of Redemption.
Provided a Notice of Redemption has been mailed as described above,
upon the deposit with the Auction Agent (by noon on the Business Day fixed
for redemption thereby, in funds available on that Business Day in The City
of New York, New York) of funds sufficient to redeem the shares of
Municipal Preferred that are the subject of such notice, dividends on such
shares will cease to accumulate and such shares will no longer be deemed
outstanding for any purpose, and all rights of the holders of the shares so
called for redemption will cease and terminate, except the right of the
holders thereof to receive the Redemption Price, but without any interest
or other additional amount, except as otherwise provided above under
"Dividends -- Determination of Dividend Rate" and "-- Gross-up Payments."
Upon surrender in accordance with the Notice of Redemption of the
certificates for any shares so redeemed (properly endorsed or assigned for
transfer, if the Board of Trustees shall so require and the notice shall so
state), the Redemption Price shall be paid by the Auction Agent to the
holders of shares of Municipal Preferred subject to redemption. In the case
that fewer than all of the shares represented by any such certificate are
redeemed, a new certificate shall be issued, representing the unredeemed
shares, without cost to the holder thereof. The Trust will be entitled to
receive from the Auction Agent, promptly after the date fixed for
redemption, any cash deposited with the Auction Agent in excess of (i) the
aggregate Redemption Price of the shares of Municipal Preferred called for
redemption on such date and (ii) all other amounts to which holders of
shares of Municipal Preferred called for redemption may be entitled. Any
funds so deposited that are unclaimed at the end of 90 days from such
redemption date will, to the extent permitted by law, be repaid to the
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 will be entitled to receive, from time to time after the date fixed
for redemption, any interest on the funds so deposited.
Notwithstanding the foregoing, if any dividends on shares of Municipal
Preferred (whether or not earned or declared) are in arrears, no shares of
Municipal Preferred shall be redeemed unless all outstanding shares of
Municipal Preferred are simultaneously redeemed, and the Trust shall not
purchase or otherwise acquire any shares of Municipal Preferred; provided,
however, that the foregoing shall not prevent the purchase or acquisition
of all outstanding shares of Municipal Preferred pursuant to the successful
completion of an otherwise lawful purchase or exchange offer made on the
same terms to, and accepted by, holders of all outstanding shares of
Municipal Preferred.
Except as described above with respect to redemptions and under "The
Auction -- Orders by Existing Holders and Potential Holders," the
Declaration and the Statement do not prohibit the Trust or any affiliate of
the Trust from purchasing or otherwise acquiring any shares of Municipal
Preferred.
The Trust has the right to arrange for third parties to purchase from
the holders thereof shares of Municipal Preferred which are to be redeemed
as described above.
LIQUIDATION
Upon a dissolution, liquidation or winding up of the affairs of the Trust,
whether voluntary or involuntary, the holders of shares of Municipal
Preferred then outstanding will be entitled to receive and to be paid out
of the assets of the 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. The liquidation
preference for shares of Municipal Preferred shall be $25,000 per share,
plus an amount equal to all dividends thereon (whether or not earned or
declared) accumulated but unpaid to (but not including) the date of final
distribution in same-day funds, together with any applicable Gross-up
Payments in connection with the dissolution, liquidation or winding up of
the Trust. After the payment to the holders of the shares of Municipal
Preferred of the full preferential amounts provided for as described
herein, the holders of Municipal Preferred as such shall have no right or
claim to any of the remaining assets of the Trust. 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,
no such distribution shall be made on account of any other class or series
of Preferred Shares ranking on a parity with the shares of Municipal
Preferred upon such dissolution, liquidation or winding up unless
proportionate distributive amounts shall be paid on account of the shares
of Municipal Preferred, ratably, in proportion to the full distributable
amounts for which holders of all such parity shares are respectively
entitled upon such dissolution, liquidation or winding up. Subject to the
rights of the holders of any series or class or classes of shares ranking
on a parity with the shares of Municipal Preferred with respect to the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust, after payment shall have been made in full to the
holders of the shares of Municipal Preferred as described herein, but not
prior thereto, any other series or class or classes of shares ranking
junior to the shares of Municipal Preferred with respect to the
distribution of assets upon dissolution, liquidation or winding up shall,
subject to the respective terms and provisions (if any) applying thereto,
be entitled to receive any and all assets remaining to be paid or
distributed, and the holders of the shares of Municipal Preferred shall not
be entitled to share therein.
Neither the sale of all or substantially all the property or business
of the Trust, nor the merger or consolidation of the Trust into or with any
trust, corporation or other entity nor the merger or consolidation of any
trust, corporation or other entity into or with the Trust shall be a
dissolution, liquidation or winding up of the affairs of the Trust, whether
voluntary or involuntary, for the purposes of the foregoing paragraph.
REPURCHASE OF COMMON SHARES
The Trust is a closed-end management investment company and as such its
shareholders do not, and will not, have the right to redeem their shares of
the Trust. The Trust, however, may repurchase its common shares from time
to time in the open market or otherwise as and when it is deemed advisable
by the Trustees. Such repurchases will be made only when the Trust's common
shares are trading at a discount of 5 percent or more from the net asset
value of those shares. The Trust may incur debt to finance share repurchase
transactions.
The common shares of the Trust trade in the open market at a price
which is a function of several factors, including their net asset value and
yield. The common shares of closed-end investment companies generally sell
at market prices varying from their net asset values. If the Trust
repurchases its common shares for a price below their net asset value, the
net asset value of those common shares that remain outstanding will be
enhanced, but this does not necessarily mean that the market price of those
outstanding shares will be affected, either positively or negatively.
Further, interest on borrowings to finance share repurchase transactions
will reduce the Trust's net income.
TAX MATTERS
FEDERAL INCOME TAX MATTERS
The Trust has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, by meeting all
applicable requirements of Subchapter M, including requirements as to the
nature of the Trust's gross income, the amount of Trust distributions (as a
percentage of both the Trust's net investment income and its tax-exempt
income), and the composition of the Trust's portfolio assets. Because the
Trust intends to distribute all of its net investment income and net realized
capital gains to shareholders in accordance with the timing requirements
imposed by the Code, it is not expected that the Trust will be required to
pay any federal income or excise taxes.
However, if at any time when shares of Municipal Preferred are
outstanding, the Trust does not meet applicable asset coverage
requirements, the Trust will be required to suspend distributions to
holders of Common Shares until the requisite asset coverage is restored.
Such a suspension of distributions may cause the Trust to fail applicable
distribution requirements under the Code, which could result in liability
for a 4% federal excise tax on undistributed amounts, or could cause the
Trust to fail to qualify as a regulated investment company. If the Trust
should fail to qualify as a regulated investment company in any year for
this or any other reason, the Trust would incur a regular corporate federal
income tax upon its taxable income and Trust distributions would generally
be taxable as ordinary dividend income to the shareholders.
The portion of the Trust's distributions of income that is attributable
to interest from tax-exempt securities will be designated by the Trust as an
"exempt-interest dividend" under the Code and will generally be exempt from
federal income tax in the hands of shareholders so long as at least 50% of
the total value of the Trust's assets consists of obligations described in
Section 103(a) of the Code at the close of each quarter of the Trust's
taxable year. Distributions of tax-exempt interest earned from certain
securities may, however, be treated as an item of tax preference for
shareholders under the federal alternative minimum tax, and all
exempt-interest dividends may increase a corporate shareholder's alternative
minimum tax. The percentage of income designated as tax-exempt will be
applied uniformly to all distributions by the Trust of income made during
each fiscal year of the Trust and may differ from the percentage of
distributions consisting of tax-exempt interest in any particular month.
Shareholders are required to report exempt-interest dividends received from
the Trust on their federal income tax returns.
In order for any distributions to holders of Municipal Preferred to be
eligible to be treated as exempt-interest dividends, the shares of
Municipal Preferred must be treated as equity for federal income tax
purposes. Based in part on certain representations made by the Trust to
Bingham Dana LLP relating to the lack of any present intention to redeem or
purchase shares of Municipal Preferred at any time in the future, it is the
opinion of Bingham Dana LLP that the shares of Municipal Preferred will
constitute equity for federal income tax purposes. This opinion relies in
part on a published ruling of the Internal Revenue Service stating that
certain auction rate preferred stock similar in many material respects to
the Municipal Preferred represents equity. The opinion of Bingham Dana LLP
represents only its best legal judgment and is not binding on the Internal
Revenue Service or the courts. If the Internal Revenue Service were
successfully to assert that variable rate preferred stock such as the
Municipal Preferred should be treated as debt for federal income tax
purposes, dividends on shares of Municipal Preferred would be treated as
taxable interest for federal income tax purposes. In such event, dividends
on shares of Municipal Preferred would not be increased by the Trust and
holders of shares of Municipal Preferred would not be entitled to any
additional distributions from the Trust (including any Gross-up Payments)
to offset the effect of paying federal income tax on Trust distributions so
recharacterized as interest. Bingham Dana LLP has advised the Trust that,
should the Internal Revenue Service pursue in court the position that the
shares of Municipal Preferred should be treated as debt for federal income
tax purposes, the Internal Revenue Service would be unlikely to prevail.
The Trust may also recognize some ordinary income that is not tax-exempt,
as well as capital gains and losses as a result of the disposition of
securities and from certain futures transactions. Shareholders of the Trust
normally will have to pay federal income taxes, and any state or local taxes,
on the non exempt-interest dividends and capital gain distributions they
receive from the Trust; however, the Trust does not expect that the
non-tax-exempt portion of its ordinary income, if any, will be substantial.
Because the Trust expects to earn primarily tax-exempt interest income, it is
expected that no Trust dividends will qualify for the dividends received
deduction for corporations. Distributions of net capital gain (i.e., the
excess of net long-term capital gain over net short-term capital loss),
whether paid in cash or reinvested in additional shares, are taxable to
shareholders as long-term capital gains for federal income tax purposes
without regard to the length of time the shareholders have held their shares.
Any Trust dividend that is declared in October, November, or December of any
calendar year, that is payable to shareholders of record in such a month, and
that is paid the following January will be treated as if received by the
shareholders on December 31 of the year in which the dividend is declared.
The Trust will notify shareholders regarding the federal tax status of its
distributions after the end of each calendar year.
The Internal Revenue Service requires that a regulated investment
company that has two or more classes of shares designate to each such class
proportionate amounts of each type of its income for each tax year based
upon the percentage of total dividends distributed to each class for such
year. The Trust intends each year to allocate, to the fullest extent
practicable, net tax-exempt interest income, net capital gain and other
taxable income, if any, between its Common Shares and Municipal Preferred
shares, in proportion to the total dividends paid to each class with
respect to such year. To the extent permitted under applicable law, the
Trust reserves the right to make special allocations of income within a
class, consistent with the objective of the Trust.
Any Trust distribution will have the effect of reducing the per share
net asset value of shares in the Trust by the amount of the distribution.
Shareholders purchasing shares shortly before the record date of any
distribution other than an exempt-interest dividend may thus pay the full
price for the shares and then effectively receive a portion of the purchase
price back as a taxable distribution. In addition, shareholders disposing
of shares after tax-exempt income has been accrued but not yet declared as
a dividend should be aware that a portion of the sales proceeds realized
upon disposition of the shares may reflect the existence of such accrued
tax-exempt income, and that this portion of the proceeds may be subject to
tax as a capital gain even though it would have been tax-exempt had it been
declared as a dividend prior to the disposition.
Interest on indebtedness incurred or continued by shareholders to
purchase or carry shares of the Trust will not be deductible for federal
income tax purposes to the extent attributable to exempt-interest
dividends. Exempt-interest dividends are taken into account in calculating
the amount of social security and railroad retirement benefits that may be
subject to federal income tax. Exempt-interest dividends paid from interest
on certain private activity bonds and certain industrial development bonds
will not be tax-exempt to any shareholder that is a "substantial user" (or
is related to a "substantial user") of the facilities financed by those
bonds; persons who are, or are related to, substantial users of such
facilities should consult their tax advisers before purchasing shares of
the Trust.
In general, any gain or loss realized upon a taxable disposition of
shares of the Trust by a shareholder that holds such shares as a capital
asset will be treated as a long-term capital gain or loss if the shares
have been held for more than twelve months and otherwise as a short-term
capital gain or loss. However, any loss realized upon a disposition of
shares in the Trust held for six months or less will be disallowed to the
extent of any exempt-interest dividends received with respect to those
shares. If not disallowed, any such loss will be treated as a long-term
capital loss to the extent of any distributions of net capital gain made
with respect to those shares (or the amount designated as undistributed
capital gain with respect to those shares). Any loss realized upon a
disposition of shares may also be disallowed under rules relating to wash
sales.
From time to time the Trust 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 Trust. Likewise, if the Trust 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 Trust.
Any investment in zero coupon bonds, deferred interest bonds,
payment-in-kind bonds, certain stripped securities, and certain securities
purchased at a market discount will cause the Trust to recognize income prior
to the receipt of cash payments with respect to those securities. In order to
distribute this income and avoid a tax on the Trust, the Trust may be
required to borrow or to liquidate portfolio securities that it might
otherwise have continued to hold.
The Trust's transactions in options, if any, and futures contracts will
be subject to special tax rules that may affect the amount, timing, and
character of Trust income and distributions to shareholders. For example,
certain positions held by the Trust on the last business day of each
taxable year will be marked to market (i.e., treated as if closed out) on
that day, and any gain or loss associated with the positions will be
treated as 60% long-term and 40% short-term capital gain or loss. Certain
positions held by the Trust that substantially diminish its risk of loss
with respect to other positions in its portfolio may constitute
"straddles," and may be subject to special tax rules that would cause
deferral of Trust losses, adjustments in the holding periods of Trust
securities, and conversion of short-term capital losses into long-term
capital losses. Certain tax elections exist for straddles that may alter
the effects of these rules. The Trust will limit its activities in options,
if any, and futures contracts to the extent necessary to meet the
requirements of Subchapter M of the Code.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. The Trust
intends to withhold U.S. federal income tax at the rate of 30% (or any
lower rate permitted under an applicable treaty) on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding.
Different tax consequences may result if such Non-U.S. Person is engaged in
a trade or business in the United States and the dividends or other
payments received are effectively connected with the conduct of that trade
or business. Any amounts overwithheld may be recovered by such persons by
filing a claim for refund with the U.S. Internal Revenue Service within the
time period appropriate to such claims. Distributions received from the
Trust by Non-U.S. Persons also may be subject to tax under the laws of
their own jurisdictions.
The Trust is also required in certain circumstances to apply backup
withholding at the rate of 31% on taxable dividends and redemption proceeds
paid to any shareholder (including a Non-U.S. Person) who does not furnish
to the Trust certain information and certifications or who is otherwise
subject to backup withholding. Backup withholding will not, however, be
applied to payments that have been subject to 30% withholding. Backup
withholding is not an additional tax. Any amounts withheld from payments
made to a shareholder may be refunded or credited against such
shareholder's United States federal income tax liability, provided that the
required information is furnished to the Internal Revenue Service.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect, as
interpreted by rulings published by the Internal Revenue Service and
judicial decisions, that directly govern the taxation of the Trust and
owners of shares of Municipal Preferred. These provisions are subject to
change, possibly with retroactive effect. Shareholders are urged to consult
their tax advisers for more detailed information regarding the federal
income tax consequences of any investment in the Trust.
STATE INCOME TAX MATTERS
As long as it qualifies as a regulated investment company under the Code,
the Trust will not be required to pay Massachusetts income or excise taxes.
The exemption of exempt-interest dividends for federal income tax
purposes does not necessarily result in exemption under the tax laws of any
state or local taxing authority. Some states do exempt from tax that
portion of the exempt-interest dividend which represents interest received
by a regulated investment company on its holdings of tax-exempt securities
of that state and its political subdivisions and instrumentalities.
Therefore, the Trust will report annually to its shareholders the
percentage of interest income earned by the Trust during the preceding year
from Municipal Bonds and will indicate, on a state-by-state basis only, the
source of such income. Residents of certain states may be subject to an
intangibles tax or a personal property tax on all or a portion of the value
of their shares.
Distributions of the Trust that are derived from interest on
obligations of the U.S. Government and certain of its agencies and
instrumentalities (but generally not from capital gains realized upon the
disposition of such obligations) may be exempt from state and local taxes.
The Trust intends to advise shareholders of the extent, if any, to which
its distributions consist of such interest. Shareholders are urged to
consult their tax advisers regarding the possible exclusion of a portion of
their dividends for state and local income tax purposes as well as more
generally regarding the state and local tax consequences of an investment
in the Trust.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust
and provides for indemnification and reimbursement of expenses out of the
Trust's property for any shareholder held personally liable for the
obligations of the Trust. The Declaration of Trust also provides that the
Trust shall maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the Trust, its
shareholders, Trustees, officers, employees and agents covering possible
tort and other liabilities. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to
circumstances in which both inadequate insurance existed and the Trust
itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust
are not binding upon the Trustees individually but only upon the property
of the Trust and that the Trustees will not be liable for errors of
judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct of his office.
CUSTODIAN AND SHAREHOLDER SERVICING AGENT
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110 is the custodian and dividend disbursing agent for the
Trust. MFS Service Center, Inc., 2 Avenue de Lafayette, Boston,
Massachusetts 02111-1738, is the shareholder servicing agent.
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP are the Trust's independent public accountants and
certify financial statements of the Trust as required to be certified by
any law or regulation and provide certain other tax-related services for
the Trust (such as tax return preparation and assistance and consultation
with respect to the preparation of filings with the SEC). The principal
business address of Deloitte & Touche LLP is 200 Berkeley Street, Boston,
Massachusetts 02116. The financial statements included in this SAI have
been so included, and the financial highlights included in the Prospectus
have been so included, in reliance upon the report of Deloitte & Touche LLP
given on the authority of said firm as experts in accounting and auditing.
GLOSSARY
""AA" Composite Commercial Paper Rate" has the meaning set forth on page
13 of this Statement of Additional Information.
"Adviser" means Massachusetts Financial Services Company.
"Affected Series" has the meaning set forth on page 25 of this
Statement of Additional Information.
"Affiliate" means, for purposes of the definition of "Outstanding," any
Person known to the Auction Agent to be controlled by, in control of or under
common control with the 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
directors, trustees or executive officers of which is a trustee of the Trust
be deemed to be an Affiliate solely because such director, trustee or
executive officer is also a trustee of the Trust.
"Agent Member" means a member of or participant in the Securities
Depository that will act on behalf of a Bidder.
"Anticipation Notes" means Tax Anticipation Notes (TANs), Revenue
Anticipation Notes (RANs), Tax and Revenue Anticipation Notes (TRANs),
Grant Anticipation Notes (GANs) that are rated by Standard & Poor's and
Bond Anticipation Notes (BANs).
"Applicable Rate" has the meaning set forth on page 9 of this Statement
of Additional Information.
"Auction" means each periodic implementation of the Auction Procedures.
"Auction Agency Agreement" has the meaning set forth on page 10 of this
Statement of Additional Information.
"Auction Agent" means the entity appointed as such by a resolution of
the Board of Trustees.
"Auction Date," with respect to any Rate Period, means the Business Day
next preceding the first day of such Rate Period.
"Auction Procedures" means the procedures for conducting Auctions as
described in this Statement of Additional Information, including Appendix C
hereto.
"Available Municipal Preferred" has the meaning set forth on page 16 of
this Statement of Additional Information.
"Benchmark Rate" has the meaning set forth on page 16 of this Statement
of Additional Information.
"Beneficial Owner" has the meaning set forth on page 9 of this
Statement of Additional Information.
"Bid" has the meaning set forth on page 11 of this Statement of
Additional Information.
"Bidder" and "Bidders" have the respective meanings set forth on page
11 of this Statement of Additional Information.
"Board of Trustees" or "Board" means the Board of Trustees of the Trust
or any duly authorized committee thereof.
"Broker-Dealer" means any broker-dealer, commercial bank or other entity
permitted by law to perform the functions required of a Broker-Dealer, that
is a member of, or a participant in, the Securities Depository or is an
affiliate of such member or participant, has been selected by the Trust and
has entered into a Broker-Dealer Agreement that remains effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent
and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow
the procedures specified in the Statement, the Prospectus and this
Statement of Additional Information.
"Business Day" has the meaning set forth on page 9 of this Statement of
Additional Information.
"By-Laws" means the Amended and Restated By-Laws of MFS Municipal
Income Trust, as may be further amended from time to time.
"Cede" means Cede & Co., the nominee of DTC in whose name the shares of
Municipal Preferred initially will be registered.
"CFTC" means Commodity Futures Trading Commission.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" has the meaning set forth on page 13 of
this Statement of Additional Information.
"Common Shares" means the common shares of beneficial interest, without
par value, of the Trust.
"Cure Date" means the Municipal Preferred Basic Maintenance Cure Date
or the 1940 Act Cure Date, as the case may be.
"Date of Original Issue" has the meaning set forth on page 9 of this
Statement of Additional Information.
"Declaration" means the Amended and Restated Declaration of Trust dated
November 6, 2000 of the Trust, on file with the Secretary of The
Commonwealth of Massachusetts and as hereafter restated or amended from
time to time.
"Deposit Securities" means cash and Municipal Obligations rated at
least A-1+ or SP-1+ by Standard & Poor's, except that, for purposes of
determining whether the Trust may mail a Notice of Redemption, such
Municipal Obligations shall be considered "Deposit Securities" only if they
are also rated P-1, MIG-1 or VMIG-1 by Moody's.
"Discount Factor" means a Moody's Discount Factor or a Standard &
Poor's Discount Factor, as the case may be.
"Discounted Value" means, as of any Valuation Date, (i) with respect to
a Standard & Poor's Eligible Asset, the quotient of the Market Value
thereof divided by the applicable Standard & Poor's Discount Factor and
(ii)(a) with respect to a Moody's Eligible Asset that is not currently
callable as of such Valuation Date at the option of the issuer thereof, the
quotient of the Market Value thereof divided by the applicable Moody's
Discount Factor, or (b) with respect to a Moody's Eligible Asset that is
currently callable as of such Valuation Date at the option of the issuer
thereof, the quotient of (1) the lesser of the Market Value or call price
thereof, including any call premium, divided by (2) the applicable Moody's
Discount Factor.
"Dividend Payment Date" has the meaning set forth on page 9 of this
Statement of Additional Information.
"Dividend Period" has the meaning set forth on page 9 of this Statement
of Additional Information.
"DTC" has the meaning set forth on page 10 of this Statement of
Additional Information.
"Eligible Assets" means Moody's Eligible Assets or Standard & Poor's
Eligible Assets, as the case may be.
"Escrowed Bonds" means Municipal Obligations that (i) have been
determined to be legally defeased in accordance with Standard & Poor's/
Moody's legal defeasance criteria, (ii) have been determined to be
economically defeased in accordance with Standard & Poor's economic
defeasance criteria and assigned a rating of AAA by Standard & Poor's and a
rating of Aaa by Moody's, (iii) are not rated by Standard & Poor's but have
been determined to be legally defeased by Moody's or not rated by Moody's
but have been determined to be legally defeased by Standard & Poor's, or
(iv) have been determined to be economically defeased by Moody's and
assigned a rating no lower than the rating that is Moody's equivalent of
Standard & Poor's AAA rating or have been determined to be economically
defeased by Standard & Poor's and assigned a rating no lower than the
rating that is Standard & Poor's equivalent of Moody's Aaa rating.
"Exchange" has the meaning set forth on page 9 of this Statement of
Additional Information.
"Existing Holder" has the meaning set forth on page 9 of this Statement
of Additional Information.
"Failure to Deposit," with respect to shares of Municipal Preferred,
means a failure by the Trust to pay to the Auction Agent, not later than
12:00 noon, New York City time, (A) on any Dividend Payment Date for such
shares, in funds available on such Dividend Payment Date in The City of New
York, New York, the full amount of any dividend (whether or not earned or
declared) to be paid on such Dividend Payment Date on any share or (B) on
any redemption date in funds available on such redemption date for such
shares in The City of New York, New York, the Redemption Price to be paid
on such redemption date for any share after notice of redemption is mailed
as set forth in the Statement, the Prospectus or this Statement of
Additional Information; 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.
"Gross-up Payment" has the meaning set forth on page 22 of this
Statement of Additional Information.
"Hold Order" has the meaning set forth on page 11 of this Statement of
Additional Information.
"Holder" means the registered holder of shares of Municipal Preferred
as the same appears on the record books of the Trust.
"Initial Margin" means the amount of cash or securities deposited with
a broker as a margin payment at the time of purchase or sale of a futures
contract.
"Initial Rate Period" has the meaning set forth on page 9 of this
Statement of Additional Information.
"IRS" means the Internal Revenue Service.
"Inverse Floater" shall mean trust certificates or other instruments
evidencing interests in one or more municipal securities that qualify as
Standard & Poor's Eligible Assets and Moody's Eligible Assets (and satisfy
the issuer and size requirements of the definition of Standard & Poor's
Eligible Assets) the interest rates on which are adjusted at short-term
intervals on a basis that is inverse to the simultaneous readjustment of
the interest rates on corresponding floating rate trust certificates or
other instruments issued by the same issuer, provided that the ratio of the
aggregate dollar amount of floating rate instruments to inverse floating
rate instruments issued by the same issuer does not exceed one to one at
their time or original issuance unless the floating rate instrument has
only one reset remaining until maturity.
"Kenny Index" has the meaning set forth on page 13 of this Statement of
Additional Information.
"Liquidation Preference," with respect to a given number of shares of
Municipal Preferred, means $25,000 times that number.
"Market Value" of any asset of the Trust means the market value thereof
determined by the Pricing Services. Market Value of any asset shall include
any interest accrued thereon. The Pricing Services will use current
industry standards to value portfolio securities. The Pricing Services may
employ electronic data processing techniques or a matrix system, or both,
to determine valuations. Futures contracts and options shall be valued at
closing prices for such instruments established by the exchange or board of
trade on which they are traded. Securities for which quotations are not
readily available ("Internally Priced Securities") shall be valued at fair
value on a consistent basis using methods determined in good faith by the
Board of Trustees.
"Maximum Potential Gross-up Payment Liability" has the meaning set
forth on pages 27-28 of this Statement of Additional Information.
"Maximum Rate" has the meaning set forth on page 12 of this Statement
of Additional Information.
"Minimum Rate Period" means any Rate Period consisting of 7 Rate Period
Days.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Moody's Discount Factors" has the meaning set forth on page 30 of this
Statement of Additional Information.
"Moody's Eligible Assets" has the meaning set forth on page 30 of this
Statement of Additional Information.
"Moody's Exposure Period" has the meaning set forth on page 30 of this
Statement of Additional Information.
"Moody's Volatility Factor" means, as of any Valuation Date, (i) in the
case of any Minimum Rate Period, any Special Rate Period of 28 Rate Period
Days or fewer, or any Special Rate Period of 57 Rate Period Days or more, a
multiplicative factor equal to 275%, except as otherwise provided in the
last sentence of this definition; (ii) in the case of any Special Rate
Period of more than 28 but fewer than 36 Rate Period Days, a multiplicative
factor equal to 203%; (iii) in the case of any Special Rate Period of more
than 35 but fewer than 43 Rate Period Days, a multiplicative factor equal
to 217%; (iv) in the case of any Special Rate Period of more than 42 but
fewer than 50 Rate Period Days, a multiplicative factor equal to 226%; and
(v) in the case of any Special Rate Period of more than 49 but fewer than
57 Rate Period Days, a multiplicative factor equal to 235%. If, as a result
of the enactment of changes to the Code, the greater of the maximum
marginal Federal individual income tax rate applicable to ordinary income
and the maximum marginal Federal corporate income tax rate applicable to
ordinary income will increase, such increase being rounded up to the next
five percentage points, until the effective date of such increase, the
Moody's Volatility Factor in the case of any Rate Period described in (i)
above in this definition instead shall be determined by reference to the
following table:
FEDERAL VOLATILITY
TAX RATE INCREASE FACTOR
----------------- ------
5% 295%
10% 317%
15% 341%
20% 369%
25% 400%
30% 436%
35% 477%
40% 525%
"Municipal Preferred" means the Municipal Auction Rate Cumulative
Preferred Shares, Series T and/or Series TH without par value, liquidation
preference $25,000 per share, of the Trust.
"Municipal Preferred Basic Maintenance Amount" has the meaning set
forth on page 27 of this Statement of Additional Information.
"Municipal Preferred Basic Maintenance Cure Date" has the meaning set
forth on page 27 of this Statement of Additional Information.
"Municipal Preferred Basic Maintenance Report" has the meaning set
forth on page 28 of this Statement of Additional Information.
"1940 Act" means the Investment Company Act of 1940, as amended.
"1940 Act Cure Date" has the meaning set forth on page 27 of this
Statement of Additional Information.
"1940 Act Municipal Preferred Asset Coverage" has the meaning set forth
on page 27 of this Statement of Additional Information.
"Notice of Redemption" has the meaning set forth on page 33 of this
Statement of Additional Information.
"Notice of Special Rate Period" has the meaning set forth on page 24 of
this Statement of Additional Information.
"Order" and "Orders" have the respective meanings set forth on page 11
of this Statement of Additional Information.
"Outstanding" means, as of any Auction Date with respect to shares of
Municipal Preferred, the number of such shares theretofore issued by the
Trust except, without duplication, (i) any shares of Municipal Preferred
theretofore canceled or delivered to the Auction Agent for cancellation or
redeemed by the Trust, (ii) any shares of Municipal Preferred as to which
the Trust or any Affiliate thereof shall be an Existing Holder, and (iii)
any shares of Municipal Preferred represented by any certificate in lieu of
which a new certificate has been executed and delivered by the Trust.
"Person" means and includes an individual, a partnership, a
corporation, a trust, an unincorporated association, a joint venture or
other entity or a government or any agency or political subdivision
thereof.
"Potential Beneficial Owner" has the meaning set forth on page 9 of
this Statement of Additional Information.
"Potential Holder" has the meaning set forth on page 9 of this
Statement of Additional Information.
"Preferred Shares" means the preferred shares of beneficial interest,
without par value of the Trust, and includes the Municipal Preferred.
"Pricing Services" shall mean those pricing services which are both
designated from time to time by the Board of Trustees and approved from
time to time for use by Standard & Poor's (the pricing services approved
for use by Standard & Poor's as of the date of this Statement of Additional
Information are Bloomberg, Bridge Information Services, Interactive Data
Corporation, Merrill Lynch Securities Pricing Service, Standard and Poor's,
JJ Kenny (Municipal securities only) and CIBC Wood Gundy (Canadian
government and provincial securities only)).
"Rate Multiple" has the meaning set forth on page 14 of this Statement
of Additional Information.
"Rate Period" has the meaning set forth on page 9 of this Statement of
Additional Information.
"Rate Period Days," for any Rate Period or Dividend Period, means the
number of days that would constitute such Rate Period or Dividend Period
but for the application of the second paragraph under "Description of
Municipal Preferred -- Dividends -- General" or the second paragraph under
"Description of Municipal Preferred -- Dividends -- Designation of Special
Rate Periods."
"Redemption Price" has the meaning set forth on page 33 of this
Statement of Additional Information.
"Reference Rate" has the meaning set forth on page 12 of this Statement
of Additional Information.
"SEC" means the Securities and Exchange Commission.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any other securities depository selected by the
Trust which agrees to follow the procedures required to be followed by such
securities depository in connection with shares of Municipal Preferred.
"Sell Order" has the meaning set forth on page 11 of this Statement of
Additional Information.
"Special Rate Period" has the meaning set forth on page 9 of this
Statement of Additional Information.
"Special Redemption Provisions" has the meaning set forth on page 32 of
this Statement of Additional Information.
"Standard & Poor's" means Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, and its successors.
"Standard & Poor's Discount Factors" has the meaning set forth on
page 28 of this Statement of Additional Information.
"Standard & Poor's Eligible Assets" has the meaning set forth on
page 28 of this Statement of Additional Information.
"Standard & Poor's Exposure Period" has the meaning set forth on
page 28 of this Statement of Additional Information.
"Standard & Poor's Volatility Factor" means, as of any Valuation Date,
a multiplicative factor equal to (i) 305% in the case of any Minimum Rate
Period or any Special Rate Period of 28 Rate Period Days or fewer, (ii)
268% in the case of any Special Rate Period of more than 28 Rate Period
Days but fewer than 183 Rate Period Days, and (iii) 204% in the case of any
Special Rate Period of more than 182 Rate Period Days.
"Statement" means the Statement creating the Municipal Preferred
shares.
"Submission Deadline" means 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" have the respective meanings set
forth on page 16 of this Statement of Additional Information.
"Submitted Hold Order" and "Submitted Hold Orders" have the respective
meanings set forth on page 16 of this Statement of Additional Information.
"Submitted Order" and "Submitted Orders" have the respective meanings
set forth on page 16 of this Statement of Additional Information.
"Submitted Sell Order" and "Submitted Sell Orders" have the respective
meanings set forth on page 16 of this Statement of Additional Information.
"Subsequent Rate Period" has the meaning set forth on page 9 of this
Statement of Additional Information.
"Substitute Commercial Paper Dealer" has the meaning set forth on page
13 of this Statement of Additional Information.
"Substitute U.S. Government Securities Dealer" has the meaning set
forth on page 14 of this Statement of Additional Information.
"Sufficient Clearing Bids" has the meaning set forth on page 16 of this
Statement of Additional Information.
"Taxable Allocation" has the meaning set forth on page 21 of this
Statement of Additional Information.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" has the
meaning set forth on page 13 of this Statement of Additional Information.
"Taxable Income" has the meaning set forth on page 16 of this Statement
of Additional Information.
"Taxable Yield Rate" has the meaning set forth on pages 16-17 of this
Statement of Additional Information.
"Treasury Bill" has the meaning set forth on page 14 of this Statement
of Additional Information.
"Treasury Bill Rate" has the meaning set forth on page 14 of this
Statement of Additional Information.
"Treasury Note" has the meaning set forth on page 14 of this Statement
of Additional Information.
"Treasury Note Rate" has the meaning set forth on page 14 of this
Statement of Additional Information.
"Trust" means MFS Municipal Income Trust, a Massachusetts business
trust, which is the issuer of the shares of Municipal Preferred.
"U.S. Government Securities Dealer" has the meaning set forth on page
14 of this Statement of Additional Information.
"Valuation Date" has the meaning set forth on page 27 of this Statement
of Additional Information.
"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" means, as of any Valuation Date, the greater of the
Moody's Volatility Factor and the Standard & Poor's Volatility Factor.
"Voting Period" means a period that shall commence (A) if at the close
of business on any dividend payment date accumulated dividends (whether or
not earned or declared) on any outstanding Preferred Share, including
Municipal Preferred, equal to at least two full years' dividends shall be
due and unpaid and sufficient cash or specified securities shall not have
been deposited with the Auction Agent for the payment of such accumulated
dividends; or (B) if at any time holders of Preferred Shares are entitled
under the 1940 Act to elect a majority of the trustees of the Trust.
"Winning Bid Rate" has the meaning set forth on page 16 of this
Statement of Additional Information.
FINANCIAL STATEMENTS
The financial statements for the Trust contained in the Trust's Annual
Report to Shareholders, dated October 31, 1999 (audited) and Semi-Annual
Report to Shareholders, dated April 30, 2000 (unaudited), have been
incorporated by reference into this Statement of Additional Information.
The financial statements contained in the Trust's Annual Report to
Shareholders, dated October 31, 1999, and notes thereto have been so
incorporated in reliance upon the reports of Deloitte & Touche LLP, the
Trust's independent accountants.
<PAGE>
APPENDIX A
DESCRIPTION OF INVESTMENTS
Set forth below is a description of investment techniques and practices
which the Trust may generally use in pursuing its investment objective and
principal investment policies, and the risks associated with these
investment techniques and practices.
DEBT SECURITIES
To the extent the Trust invests in the following types of debt securities,
its net asset value may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of debt securities can
be expected to rise. Conversely, when interest rates rise, the value of
debt securities can be expected to decline. The Trust's investment in debt
securities with longer terms to maturity are subject to greater volatility
than the Trust's shorter-term obligations. Debt securities may have all
types of interest rate payment and reset terms, including fixed rate,
adjustable rate, zero coupon, contingent, deferred, payment in kind and
auction rate features.
ASSET-BACKED SECURITIES: The Trust may purchase the following types of
asset-backed securities:
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES: The Trust may invest a portion of its assets in collateralized
mortgage obligations or "CMOs," which are debt obligations collateralized
by mortgage loans or mortgage pass-through securities (such collateral
referred to collectively as "Mortgage Assets"). Unless the context
indicates otherwise, all references herein to CMOs include multiclass
pass-through securities.
Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the
Mortgage Assets may be allocated among the several classes of a CMO in
innumerable ways. In a common structure, payments of principal, including
any principal prepayments, on the Mortgage Assets are applied to the
classes of a CMO in the order of their respective stated maturities or
final distribution dates, so that no payment of principal will be made on
any class of CMOs until all other classes having an earlier stated
maturity or final distribution date have been paid in full. Certain CMOs
may be stripped (securities which provide only the principal or interest
factor of the underlying security). See "Stripped Mortgage-Backed
Securities" below for a discussion of the risks of investing in these
stripped securities and of investing in classes consisting of interest
payments or principal payments.
The Trust may also invest in parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the
stated maturity date or final distribution date of each class, which, as
with other CMO structures, must be retired by its stated maturity date or
final distribution date but may be retired earlier.
CORPORATE ASSET-BACKED SECURITIES: The Trust may invest in corporate
asset-backed securities. These securities, issued by trusts and special
purpose corporations, are backed by a pool of assets, such as credit card
and automobile loan receivables, representing the obligations of a number
of different parties. These securities present certain risks. For
instance, in the case of credit card receivables, these securities may not
have the benefit of any security interest in the related collateral.
Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer
credit laws, many of which give such debtors the right to set off certain
amounts owed on the credit cards, thereby reducing the balance due. Most
issuers of automobile receivables permit the servicers to retain
possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under
state laws, the trustee for the holders of the automobile receivables may
not have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support
payments on these securities. The underlying assets (e.g., loans) are also
subject to prepayments which shorten the securities' weighted average life
and may lower their return.
Corporate asset-backed securities are backed by a pool of assets
representing the obligations of a number of different parties. To lessen
the effect of failures by obligors on underlying assets to make payments,
the securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default ensures payment through
insurance policies or letters of credit obtained by the issuer or sponsor
from third parties. The Trust will not pay any additional or separate fees
for credit support. The degree of credit support provided for each issue
is generally based on historical information respecting the level of
credit risk associated with the underlying assets. Delinquency or loss in
excess of that anticipated or failure of the credit support could
adversely affect the return on an investment in such a security.
MORTGAGE PASS-THROUGH SECURITIES: The Trust may invest in mortgage
pass-through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage
pools are paid off. The average lives of mortgage pass-throughs are variable
when issued because their average lives depend on prepayment rates. The
average life of these securities is likely to be substantially shorter than
their stated final maturity as a result of unscheduled principal prepayment.
Prepayments on underlying mortgages result in a loss of anticipated
interest, and all or part of a premium if any has been paid, and the actual
yield (or total return) to the Trust may be different than the quoted yield
on the securities. Mortgage premiums generally increase with falling
interest rates and decrease with rising interest rates. Like other fixed
income securities, when interest rates rise the value of a mortgage
pass-through security generally will decline; however, when interest rates
are declining, the value of mortgage pass-through securities with prepayment
features may not increase as much as that of other fixed-income securities.
In the event of an increase in interest rates which results in a decline in
mortgage prepayments, the anticipated maturity of mortgage pass-through
securities held by the Trust may increase, effectively changing a security
which was considered short or intermediate-term at the time of purchase into
a long-term security. Long-term securities generally fluctuate more widely
in response to changes in interest rates than short or intermediate-term
securities.
Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. Government (in the
case of securities guaranteed by the Government National Mortgage
Association ("GNMA")); or guaranteed by agencies or instrumentalities of
the U.S. Government (such as the Federal National Mortgage Association
"FNMA") or the Federal Home Loan Mortgage Corporation, ("FHLMC") which are
supported only by the discretionary authority of the U.S. Government to
purchase the agency's obligations). Mortgage pass-through securities may
also be issued by non-governmental issuers (such as commercial banks,
savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers). Some of these
mortgage pass-through securities may be supported by various forms of
insurance or guarantees.
Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified
call dates. Instead, these securities provide a monthly payment which
consists of both interest and principal payments. In effect, these
payments are a "pass-through" of the monthly payments made by the
individual borrowers on their mortgage loans, net of any fees paid to the
issuer or guarantor of such securities. Additional payments are caused by
prepayments of principal resulting from the sale, refinancing or
foreclosure of the underlying property, net of fees or costs which may be
incurred. Some mortgage pass-through securities (such as securities issued
by the GNMA) are described as "modified pass-through." These securities
entitle the holder to receive all interests and principal payments owed on
the mortgages in the mortgage pool, net of certain fees, at the scheduled
payment dates regardless of whether the mortgagor actually makes the
payment.
The principal governmental guarantor of mortgage pass-through
securities is GNMA. GNMA is a wholly owned U.S. Government corporation
within the Department of Housing and Urban Development. GNMA is authorized
to guarantee, with the full faith and credit of the U.S. Government, the
timely payment of principal and interest on securities issued by
institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of Federal
Housing Administration ("FHA") insured or Veterans Administration ("VA")
guaranteed mortgages. These guarantees, however, do not apply to the
market value or yield of mortgage pass-through securities. GNMA securities
are often purchased at a premium over the maturity value of the underlying
mortgages. This premium is not guaranteed and will be lost if prepayment
occurs.
Government-related guarantors (i.e., whose guarantees are not backed
by the full faith and credit of the U.S. Government) include FNMA and
FHLMC. FNMA is a government-sponsored corporation owned entirely by
private stockholders. It is subject to general regulation by the Secretary
of Housing and Urban Development. FNMA purchases conventional residential
mortgages (i.e., mortgages not insured or guaranteed by any governmental
agency) from a list of approved seller/servicers which include state and
federally chartered savings and loan associations, mutual savings banks,
commercial banks, credit unions and mortgage bankers. Pass-through
securities issued by FNMA are guaranteed as to timely payment by FNMA of
principal and interest.
FHLMC is also a government-sponsored corporation owned by private
stockholders. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages (i.e., not federally insured
or guaranteed) for FHLMC's national portfolio. FHLMC guarantees timely
payment of interest and ultimate collection of principal regardless of the
status of the underlying mortgage loans.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers
also create pass through pools of mortgage loans. Such issuers may also be
the originators and/or servicers of the underlying mortgage-related
securities. Pools created by such non-governmental issuers generally offer
a higher rate of interest than government and government-related pools
because there are no direct or indirect government or agency guarantees of
payments in the former pools. However, timely payment of interest and
principal of mortgage loans in these pools may be supported by various
forms of insurance or guarantees, including individual loan, title, pool
and hazard insurance and letters of credit. The insurance and guarantees
are issued by governmental entities, private insurers and the mortgage
poolers. There can be no assurance that the private insurers or guarantors
can meet their obligations under the insurance policies or guarantee
arrangements. The Trust may also buy mortgage-related securities without
insurance or guarantees.
STRIPPED MORTGAGE-BACKED SECURITIES: The Trust may invest a portion
of its assets in stripped mortgage-backed securities ("SMBS") which are
derivative multiclass mortgage securities issued by agencies or
instrumentalities of the U.S. Government, or by private originators of, or
investors in, mortgage loans, including savings and loan institutions,
mortgage banks, commercial banks and investment banks.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage assets. A common type of SMBS will have one class receiving some
of the interest and most of the principal from the Mortgage Assets, while
the other class will receive most of the interest and the remainder of the
principal. In the most extreme case, one class will receive all of the
interest (the interest-only or "IO class) while the other class will
receive all of the principal (the principal-only or "PO class). The yield
to maturity on an IO is extremely sensitive to the rate of principal
payments, including prepayments on the related underlying Mortgage Assets,
and a rapid rate of principal payments may have a material adverse effect
on such security's yield to maturity. If the underlying Mortgage Assets
experience greater than anticipated prepayments of principal, the Trust
may fail to fully recoup its initial investment in these securities. The
market value of the class consisting primarily or entirely of principal
payments generally is unusually volatile in response to changes in
interest rates. Because SMBS were only recently introduced, established
trading markets for these securities have not yet developed, although the
securities are traded among institutional investors and investment banking
firms.
CORPORATE SECURITIES: The Trust may invest in debt securities, such
as convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Trust may purchase loans and
other direct indebtedness. In purchasing a loan, the Trust acquires some
or all of the interest of a bank or other lending institution in a loan to
a corporate, governmental or other borrower. Many such loans are secured,
although some may be unsecured. Such loans may be in default at the time
of purchase. Loans that are fully secured offer the Trust more protection
than an unsecured loan in the event of non-payment of scheduled interest
or principal. However, there is no assurance that the liquidation of
collateral from a secured loan would satisfy the corporate borrowers
obligation, or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has
negotiated and structured the loan and is responsible for collecting
interest, principal and other amounts due on its own behalf and on behalf
of the others in the syndicate, and for enforcing its and their other
rights against the borrower. Alternatively, such loans may be structured
as a novation, pursuant to which the Trust would assume all of the rights
of the lending institution in a loan or as an assignment, pursuant to
which the Trust would purchase an assignment of a portion of a lenders
interest in a loan either directly from the lender or through an
intermediary. The Trust may also purchase trade or other claims against
companies, which generally represent money owned by the company to a
supplier of goods or services. These claims may also be purchased at a
time when the company is in default.
Certain of the loans and the other direct indebtedness acquired by the
Trust may involve revolving credit facilities or other standby financing
commitments which obligate the Trust to pay additional cash on a certain
date or on demand. These commitments may have the effect of requiring the
Trust to increase its investment in a company at a time when the Trust
might not otherwise decide to do so (including at a time when the
company's financial condition makes it unlikely that such amounts will be
repaid). To the extent that the Trust is committed to advance additional
funds, it will at all times hold and maintain in a segregated account cash
or other high grade debt obligations in an amount sufficient to meet such
commitments.
The Trust's ability to receive payment of principal, interest and
other amounts due in connection with these investments will depend
primarily on the financial condition of the borrower. In selecting the
loans and other direct indebtedness which the Trust will purchase, the
Adviser will rely upon its own (and not the original lending
institution's) credit analysis of the borrower. As the Trust may be
required to rely upon another lending institution to collect and pass onto
the Trust amounts payable with respect to the loan and to enforce the
Trust's rights under the loan and other direct indebtedness, an
insolvency, bankruptcy or reorganization of the lending institution may
delay or prevent the Trust from receiving such amounts. In such cases, the
Trust will evaluate as well the creditworthiness of the lending
institution and will treat both the borrower and the lending institution
as an "issuer" of the loan for purposes of certain investment restrictions
pertaining to the diversification of the Trust's portfolio investments.
The highly leveraged nature of many such loans and other direct
indebtedness may make such loans and other direct indebtedness especially
vulnerable to adverse changes in economic or market conditions.
Investments in such loans and other direct indebtedness may involve
additional risk to the Trust.
LOWER RATED BONDS: The Trust may invest in fixed income securities
rated Ba or lower by Moody's or BB or lower by S&P or Fitch IBCA, Duff &
Phelps and comparable unrated securities (commonly known as "junk bonds").
See Appendix D for a description of bond ratings. No minimum rating
standard is required by the Trust. These securities are considered
speculative and, while generally providing greater income than investments
in higher rated securities, will involve greater risk of principal and
income (including the possibility of default or bankruptcy of the issuers
of such securities) and may involve greater volatility of price
(especially during periods of economic uncertainty or change) than
securities in the higher rating categories and because yields vary over
time, no specific level of income can ever be assured. These lower rated
high yielding fixed income securities generally tend to reflect economic
changes (and the outlook for economic growth), short-term corporate and
industry developments and the market's perception of their credit quality
(especially during times of adverse publicity) to a greater extent than
higher rated securities which react primarily to fluctuations in the
general level of interest rates (although these lower rated fixed income
securities are also affected by changes in interest rates). In the past,
economic downturns or an increase in interest rates have, under certain
circumstances, caused a higher incidence of default by the issuers of
these securities and may do so in the future, especially in the case of
highly leveraged issuers. The prices for these securities may be affected
by legislative and regulatory developments. The market for these lower
rated fixed income securities may be less liquid than the market for
investment grade fixed income securities. Furthermore, the liquidity of
these lower rated securities may be affected by the market's perception of
their credit quality. Therefore, the Adviser's judgment may at times play
a greater role in valuing these securities than in the case of investment
grade fixed income securities, and it also may be more difficult during
times of certain adverse market conditions to sell these lower rated
securities to meet redemption requests or to respond to changes in the
market.
While the Adviser may refer to ratings issued by established credit
rating agencies, it is not the Trust's policy to rely exclusively on
ratings issued by these rating agencies, but rather to supplement such
ratings with the Adviser's own independent and ongoing review of credit
quality. To the extent the Trust invests in these lower rated securities,
the achievement of its investment objectives may be a more dependent on
the Adviser's own credit analysis than in the case of a fund investing in
higher quality fixed income securities. These lower rated securities may
also include zero coupon bonds, deferred interest bonds and PIK bonds.
MUNICIPAL BONDS: The Trust will invest in debt securities issued by
or on behalf of states, territories and possessions of the United States
and the District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from federal income tax
("Municipal Bonds"). Municipal Bonds include debt securities which pay
interest income that is subject to the alternative minimum tax. The Trust
may invest in Municipal Bonds whose issuers pay interest on the Bonds from
revenues from projects such as multifamily housing, nursing homes,
electric utility systems, hospitals or life care facilities.
If a revenue bond is secured by payments generated from a project, and
the revenue bond is also secured by a lien on the real estate comprising
the project, foreclosure by the indenture trustee on the lien for the
benefit of the bondholders creates additional risks associated with owning
real estate, including environmental risks.
Housing revenue bonds typically are issued by a state, county or local
housing authority and are secured only by the revenues of mortgages
originated by the authority using the proceeds of the bond issue. Because
of the impossibility of precisely predicting demand for mortgages from the
proceeds of such an issue, there is a risk that the proceeds of the issue
will be in excess of demand, which would result in early retirement of the
bonds by the issuer. Moreover, such housing revenue bonds depend for their
repayment upon the cash flow from the underlying mortgages, which cannot
be precisely predicted when the bonds are issued. Any difference in the
actual cash flow from such mortgages from the assumed cash flow could have
an adverse impact upon the ability of the issuer to make scheduled
payments of principal and interest on the bonds, or could result in early
retirement of the bonds. Additionally, such bonds depend in part for
scheduled payments of principal and interest upon reserve funds
established from the proceeds of the bonds, assuming certain rates of
return on investment of such reserve funds. If the assumed rates of return
are not realized because of changes in interest rate levels or for other
reasons, the actual cash flow for scheduled payments of principal and
interest on the bonds may be inadequate. The financing of multi-family
housing projects is affected by a variety of factors, including
satisfactory completion of construction within cost constraints, the
achievement and maintenance of a sufficient level of occupancy, sound
management of the developments, timely and adequate increases in rents to
cover increases in operating expenses, including taxes, utility rates and
maintenance costs, changes in applicable laws and governmental regulations
and social and economic trends.
Electric utilities face problems in financing large construction
programs in inflationary periods, cost increases and delay occasioned by
environmental considerations (particularly with respect to nuclear
facilities), difficulty in obtaining fuel at reasonable prices, the cost
of competing fuel sources, difficulty in obtaining sufficient rate
increases and other regulatory problems, the effect of energy conservation
and difficulty of the capital market to absorb utility debt.
Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term housing
for the elderly which offer residents the independence of condominium life
style and, if needed, the comprehensive care of nursing home services.
Bonds to finance these facilities have been issued by various state
industrial development authorities. Since the bonds are secured only by
the revenues of each facility and not by state or local government tax
payments, they are subject to a wide variety of risks. Primarily, the
projects must maintain adequate occupancy levels to be able to provide
revenues adequate to maintain debt service payments. Moreover, in the case
of life care facilities, since a portion of housing, medical care and
other services may be financed by an initial deposit, there may be risk if
the facility does not maintain adequate financial reserves to secure
estimated actuarial liabilities. The ability of management to accurately
forecast inflationary cost pressures weighs importantly in this process.
The facilities may also be affected by regulatory cost restrictions
applied to health care delivery in general, particularly state regulations
or changes in Medicare and Medicaid payments or qualifications, or
restrictions imposed by medical insurance companies. They may also face
competition from alternative health care or conventional housing
facilities in the private or public sector. Hospital bond ratings are
often based on feasibility studies which contain projections of expenses,
revenues and occupancy levels. A hospital's gross receipts and net income
available to service its debt are influenced by demand for hospital
services, the ability of the hospital to provide the services required,
management capabilities, economic developments in the service area,
efforts by insurers and government agencies to limit rates and expenses,
confidence in the hospital, service area economic developments,
competition, availability and expense of malpractice insurance, Medicaid
and Medicare funding, and possible federal legislation limiting the rates
of increase of hospital charges.
The Trust may invest in municipal lease securities. These are
undivided interests in a portion of an obligation in the form of a lease
or installment purchase which is issued by state and local governments to
acquire equipment and facilities. Municipal leases frequently have special
risks not normally associated with general obligation or revenue bonds.
Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt-issuance
limitations are deemed to be inapplicable because of the inclusion in many
leases or contracts of "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. Although
the obligations will be secured by the leased equipment or facilities, the
disposition of the property in the event of non-appropriation or
foreclosure might, in some cases, prove difficult. There are, of course,
variations in the security of municipal lease securities, both within a
particular classification and between classifications, depending on
numerous factors.
The Trust may also invest in bonds for industrial and other projects,
such as sewage or solid waste disposal or hazardous waste treatment
facilities. Financing for such projects will be subject to inflation and
other general economic factors as well as construction risks including
labor problems, difficulties with construction sites and the ability of
contractors to meet specifications in a timely manner. Because some of the
materials, processes and wastes involved in these projects may include
hazardous components, there are risks associated with their production,
handling and disposal.
SPECULATIVE BONDS: The Trust may invest in fixed income and
convertible securities rated Baa by Moody's or BBB by S&P or Fitch IBCA,
Duff & Phelps and comparable unrated securities. See Appendix D for a
description of bond ratings. These securities, while normally exhibiting
adequate protection parameters, have speculative characteristics and
changes in economic conditions or other circumstances are more likely to
lead to a weakened capacity to make principal and interest payments than
in the case of higher grade securities.
U.S. GOVERNMENT SECURITIES: U.S. Government Securities are bonds or
other debt obligations issued by, or whose principal or interest payments
are guaranteed by, the U.S. Government or one of its agencies or
instrumentalities. U.S. Government Securities also include interests in
trust or other entities representing interests in obligations that are
issued or guaranteed by the U.S. Government, its agenices, authorities or
instrumentalities.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: The Trust
may invest in zero coupon bonds, deferred interest bonds and bonds on
which the interest is payable in kind ("PIK bonds"). Zero coupon and
deferred interest bonds are debt obligations which are issued at a
significant discount from face value. The discount approximates the total
amount of interest the bonds will accrue and compound over the period
until maturity or the first interest payment date at a rate of interest
reflecting the market rate of the security at the time of issuance. While
zero coupon bonds do not require the periodic payment of interest,
deferred interest bonds provide for a period of delay before the regular
payment of interest begins. PIK bonds are debt obligations which provide
that the issuer may, at its option, pay interest on such bonds in cash or
in the form of additional debt obligations. Such investments benefit the
issuer by mitigating its need for cash to meet debt service, but also
require a higher rate of return to attract investors who are willing to
defer receipt of such cash. Such investments may experience greater
volatility in market value than debt obligations which make regular
payments of interest. The Trust will accrue income on such investments for
tax and accounting purposes, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the Trust's
distribution obligations.
EQUITY SECURITIES
The Trust may invest in all types of equity securities, including the
following: common stocks, preferred stocks and preference stocks; and
securities such as bonds, warrants or rights that are convertible into
stocks. These securities may be listed on securities exchanges, traded in
various over-the-counter markets or have no organized market.
FUTURES CONTRACTS
The Trust may purchase and sell futures contracts ("Futures Contracts") on
interest rates or interest-rate related instruments. The Trust may also
purchase and sell Futures Contracts on foreign or domestic fixed income
securities or indices of such securities including municipal bond indices
and any other indices of foreign or domestic fixed income securities that
may become available for trading. Such investment strategies will be used
for hedging purposes and for non-hedging purposes, subject to applicable
law.
A Futures Contract is a bilateral agreement providing for the purchase
and sale of a specified type and amount of a financial instrument or
commodity, or for the making and acceptance of a cash settlement, at a
stated time in the future for a fixed price. By its terms, a Futures
Contract provides for a specified settlement month in which, in the case
of the majority of commodities and interest rate futures contracts, the
underlying commodities or fixed income securities are delivered by the
seller and paid for by the purchaser, or on which, in the case of index
futures contracts and certain interest rate futures contracts, the
difference between the price at which the contract was entered into and
the contract's closing value is settled between the purchaser and seller
in cash. Futures Contracts differ from options in that they are bilateral
agreements, with both the purchaser and the seller equally obligated to
complete the transaction. Futures Contracts call for settlement only on
the expiration date and cannot be "exercised" at any other time during
their term.
The purchase or sale of a Futures Contract differs from the purchase
or sale of a security or the purchase of an option in that no purchase
price is paid or received. Instead, an amount of cash or cash equivalents,
which varies but may be as low as 5% or less of the value of the contract,
must be deposited with the broker as "initial margin." Subsequent payments
to and from the broker, referred to as "variation margin," are made on a
daily basis as the value of the index or instrument underlying the Futures
Contract fluctuates, making positions in the Futures Contract more or less
valuable -- a process known as "mark-to-market."
Interest rate Futures Contracts may be purchased or sold to attempt to
protect against the effects of interest rate changes on the Trust's
current or intended investments in fixed income securities. For example,
if the Trust owned long-term bonds and interest rates were expected to
increase, the Trust might enter into interest rate futures contracts for
the sale of debt securities. Such a sale would have much the same effect
as selling some of the long-term bonds in the Trust's portfolio. If
interest rates did increase, the value of the debt securities in the
portfolio would decline, but the value of the Trust's interest rate
futures contracts would increase at approximately the same rate, subject
to the correlation risks described below, thereby keeping the net asset
value of the Trust from declining as much as it otherwise would have.
Similarly, if interest rates were expected to decline, interest rate
futures contracts may be purchased to hedge in anticipation of subsequent
purchases of long-term bonds at higher prices. Since the fluctuations in the
value of the interest rate futures contracts should be similar to that of
long-term bonds, the Trust could protect itself against the effects of the
anticipated rise in the value of long-term bonds without actually buying
them until the necessary cash became available or the market had stabilized.
At that time, the interest rate futures contracts could be liquidated and
the Trust's cash reserves could then be used to buy long-term bonds on the
cash market. The Trust could accomplish similar results by selling bonds
with long maturities and investing in bonds with short maturities when
interest rates are expected to increase. However, since the futures market
may be more liquid than the cash market in certain cases or at certain
times, the use of interest rate futures contracts as a hedging technique may
allow the Trust to hedge its interest rate risk without having to sell its
portfolio securities.
The use by the Trust of Futures Contracts also involves the risks
described under the caption "Special Risk Factors -- Futures, Swaps and
Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
The Trust may purchase securities with principal and/or interest payments
whose prices are indexed to the prices of other securities, securities
indices, precious metals or other commodities, or other financial
indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined
by reference to a specific instrument or statistic. The Trust may also
purchase indexed deposits with similar characteristics. Gold-indexed
securities, for example, typically provide for a maturity value that depends
on the price of gold, resulting in a security whose price tends to rise and
fall together with gold prices. Certain indexed securities may expose the
Trust to the risk of loss of all or a portion of the principal amount of its
investment and/or the interest that might otherwise have been earned on the
amount invested.
The performance of indexed securities depends to a great extent on the
performance of the security or other instrument to which they are indexed,
and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit
risks associated with the issuer of the security, and their values may
decline substantially if the issuer's creditworthiness deteriorates.
Recent issuers of indexed securities have included banks, corporations,
and certain U.S. Government-sponsored entities.
INVERSE FLOATING RATE OBLIGATIONS
The Trust may invest in so-called "inverse floating rate obligations" or
"residual interest bonds" or other obligations or certificates relating
thereto structured to have similar features. In creating such an
obligation, a municipality issues a certain amount of debt and pays a
fixed interest rate. Half of the debt is issued as variable rate short
term obligations, the interest rate of which is reset at short intervals,
typically 35 days. The other half of the debt is issued as inverse
floating rate obligations, the interest rate of which is calculated based
on the difference between a multiple of (approximately two times) the
interest paid by the issuer and the interest paid on the short-term
obligation. Under usual circumstances, the holder of the inverse floating
rate obligation can generally purchase an equal principal amount of the
short term obligation and link the two obligations in order to create
long-term fixed rate bonds. Because the interest rate on the inverse
floating rate obligation is determined by subtracting the short-term rate
from a fixed amount, the interest rate will decrease as the short-term
rate increases and will increase as the short-term rate decreases. The
magnitude of increases and decreases in the market value of inverse
floating rate obligations may be approximately twice as large as the
comparable change in the market value of an equal principal amount of
long-term bonds which bear interest at the rate paid by the issuer and
have similar credit quality, redemption and maturity provisions.
INVESTMENT IN OTHER INVESTMENT COMPANIES
The Trust may invest in other investment companies. The total return on
such investment will be reduced by the operating expenses and fees of such
other investment companies, including advisory fees.
CLOSED-END FUNDS. The Trust may invest in closed-end investment
companies. Such investment may involve the payment of substantial premiums
above the value of such investment companies" portfolio securities.
LEVERAGING TRANSACTIONS
The Trust may engage in the types of transactions described below, which
involve "leverage" because in each case the Trust receives cash which it
can invest in portfolio securities and has a future obligation to make a
payment. The use of these transactions by the Trust will generally cause
its net asset value to increase or decrease at a greater rate than would
otherwise be the case. Any investment income or gains earned from the
portfolio securities purchased with the proceeds from these transactions
which is in excess of the expenses associated from these transactions can
be expected to cause the net asset value of the Trust's shares and
distributions on the Trust's shares to rise more quickly than would
otherwise be the case. Conversely, if the investment income or gains
earned from the portfolio securities purchased with proceeds from these
transactions fail to cover the expenses associated with these
transactions, the net asset value of the Trust's shares is likely to
decrease more quickly than otherwise would be the case and distributions
thereon will be reduced or eliminated. Hence, these transactions are
speculative, involve leverage and increase the risk of owning or investing
in the shares of the Trust. These transactions also increase the Trust's
expenses because of interest and similar payments and administrative
expenses associated with them. Unless the appreciation and income on
assets purchased with proceeds from these transactions exceed the costs
associated with them, the use of these transactions by the Trust would
diminish the investment performance of the Trust compared with what it
would have been without using these transactions.
BANK BORROWINGS: The Trust may borrow money for investment purposes from
banks and invest the proceeds in accordance with its investment objectives
and policies.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Trust may enter into mortgage
"dollar roll" transactions pursuant to which it sells mortgage-backed
securities for delivery in the future and simultaneously contracts to
repurchase substantially similar securities on a specified future date.
During the roll period, the Trust foregoes principal and interest paid on
the mortgage-backed securities. The Trust is compensated for the lost
interest by the difference between the current sales price and the lower
price for the future purchase (often referred to as the "drop") as well as
by the interest earned on, and gains from, the investment of the cash
proceeds of the initial sale. The Trust may also be compensated by receipt
of a commitment fee.
If the income and capital gains from the Trust's investment of the
cash from the initial sale do not exceed the income, capital appreciation
and gain or loss that would have been realized on the securities sold as
part of the dollar roll, the use of this technique will diminish the
investment performance of the Trust compared with what the performance
would have been without the use of the dollar rolls. Dollar roll
transactions involve the risk that the market value of the securities the
Trust is required to purchase may decline below the agreed upon repurchase
price of those securities. If the broker/dealer to whom the Trust sells
securities becomes insolvent, the Trust's right to purchase or repurchase
securities may be restricted. Successful use of mortgage dollar rolls may
depend upon the Adviser's ability to correctly predict interest rates and
prepayments. There is no assurance that dollar rolls can be successfully
employed. The Trust will only enter into "covered" mortgage dollar-roll
transactions, meaning that the Trust segregates liquid securities it will
repurchase and does not use these transactions as a form of leverage.
REPURCHASE AGREEMENTS
The Trust may enter into repurchase agreements with sellers who are member
firms (or a subsidiary thereof) of the New York Stock Exchange or members
of the Federal Reserve System, recognized primary U.S. Government
securities dealers or institutions which the Adviser has determined to be
of comparable creditworthiness. The securities that the Trust purchases
and holds through its agent are U.S. Government Securities, the values of
which are equal to or greater than the repurchase price agreed to be paid
by the seller. The repurchase price may be higher than the purchase price,
the difference being income to the Trust, or the purchase and repurchase
prices may be the same, with interest at a standard rate due to the Trust
together with the repurchase price on repurchase. In either case, the
income to the Trust is unrelated to the interest rate on the U.S.
Government Securities.
The repurchase agreement provides that in the event the seller fails
to pay the amount agreed upon on the agreed upon delivery date or upon
demand, as the case may be, the Trust will have the right to liquidate the
securities. If at the time the Trust is contractually entitled to exercise
its right to liquidate the securities, the seller is subject to a
proceeding under the bankruptcy laws or its assets are otherwise subject
to a stay order, the Trust's exercise of its right to liquidate the
securities may be delayed and result in certain losses and costs to the
Trust. The Trust has adopted and follows procedures which are intended to
minimize the risks of repurchase agreements. For example, the Trust only
enters into repurchase agreements after the Adviser has determined that
the seller is creditworthy, and the Adviser monitors that seller's
creditworthiness on an ongoing basis. Moreover, under such agreements, the
value of the securities (which are marked to market every business day) is
required to be greater than the repurchase price, and the Trust has the
right to make margin calls at any time if the value of the securities
falls below the agreed upon collateral.
RESTRICTED SECURITIES
The Trust may purchase securities that are not registered under the
Securities Act of 1933, as amended ("1933 Act") ("restricted securities"),
including those that can be offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act ("Rule 144A securities") and
commercial paper issued under Section 4(2) of the 1933 Act ("4(2) Paper").
A determination is made, based upon a continuing review of the trading
markets for the Rule 144A security or 4(2) Paper, whether such security is
liquid and thus not subject to the Trust's limitation on investing in
illiquid investments. The Board of Trustees has adopted guidelines and
delegated to MFS the daily function of determining and monitoring the
liquidity of Rule 144A securities and 4(2) Paper. The Board, however,
retains oversight of the liquidity determinations focusing on factors such
as valuation, liquidity and availability of information. Investing in Rule
144A securities could have the effect of decreasing the level of liquidity
in the Trust to the extent that qualified institutional buyers become for
a time uninterested in purchasing these Rule 144A securities held in the
Trust's portfolio. Subject to the Trust's limitation on investments in
illiquid investments, the Trust may also invest in restricted securities
that may not be sold under Rule 144A, which presents certain risks. As a
result, the Trust might not be able to sell these securities when the
Adviser wishes to do so, or might have to sell them at less than fair
value. In addition, market quotations are less readily available.
Therefore, judgment may at times play a greater role in valuing these
securities than in the case of unrestricted securities.
SHORT TERM INSTRUMENTS
The Trust may hold cash and invest in cash equivalents, such as short-term
U.S. Government Securities, commercial paper and bank instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Trust may enter into interest rate swaps and other types of available
swap agreements, including swaps on securities, commodities and indices,
and related types of derivatives, such as caps, collars and floors. A swap
is an agreement between two parties pursuant to which each party agrees to
make one or more payments to the other on regularly scheduled dates over a
stated term, based on different interest rates, security or commodity
prices, the prices or rates of other types of financial instruments or
assets or the levels of specified indices. Under a typical swap, one party
may agree to pay a fixed rate or a floating rate determined by reference
to a specified instrument, rate or index, multiplied in each case by a
specified amount (the "notional amount"), while the other party agrees to
pay an amount equal to a different floating rate multiplied by the same
notional amount. On each payment date, the obligations of parties are
netted, with only the net amount paid by one party to the other. All swap
agreements entered into by the Trust with the same counterparty are
generally governed by a single master agreement, which provides for the
netting of all amounts owed by the parties under the agreement upon the
occurrence of an event of default, thereby reducing the credit risk to
which such party is exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging
purposes and therefore may increase or decrease the Trust's exposure to the
underlying instrument, rate, asset or index. Swap agreements can take many
different forms and are known by a variety of names. The Trust is not
limited to any particular form or variety of swap agreement if the Adviser
determines it is consistent with the Trust's investment objective and
policies.
For example, the Trust may enter into an interest rate swap in order
to protect against declines in the value of fixed income securities held
by the Trust. In such an instance, the Trust would agree with a
counterparty to pay a fixed rate (multiplied by a notional amount) and the
counterparty would agree to pay a floating rate multiplied by the same
notional amount. If interest rates rise, resulting in a diminution in the
value of the Trust's portfolio, the Trust would receive payments under the
swap that would offset, in whole or part, such diminution in value. The
Trust might also enter into a swap on a particular security, or a basket
or index of securities, in order to gain exposure to the underlying
security or securities, as an alternative to purchasing such securities.
Such transactions could be more efficient or less costly in certain
instances than an actual purchase or sale of the securities.
The Trust may enter into other related types of over-the-counter
derivatives, such as "caps", "floors" and "collars", for the same types of
hedging or non-hedging purposes. Caps and floors are similar to swaps,
except that one party pays a fee at the time the transaction is entered
into and has no further payment obligations, while the other party is
obligated to pay an amount equal to the amount by which a specified fixed
or floating rate exceeds or is below another rate (multiplied by a
notional amount). A collar is in effect a combination of a cap and a
floor, with payments made only within or outside a specified range of
prices or rates.
The Trust will maintain liquid and unencumbered assets to cover its
current obligations under swap and other over-the-counter derivative
transactions. If the Trust enters into a swap agreement on a net basis
(i.e., the two payment streams are netted out, with the Trust receiving or
paying, as the case may be, only the net amount of the two payments), the
Trust will maintain liquid and unencumbered assets with a daily value at
least equal to the excess, if any, of the Trust's accrued obligations
under the swap agreement over the accrued amount the Trust is entitled to
receive under the agreement. If the Trust enters into a swap agreement on
other than a net basis, it will maintain liquid and unencumbered assets
with a value equal to the full amount of the Trust's accrued obligations
under the agreement.
The most significant factor in the performance of swaps, caps, floors
and collars is the change in the underlying price, rate or index level
that determines the amount of payments to be made under the arrangement.
If the Adviser is incorrect in its forecasts of such factors, the
investment performance of the Trust would be less than what it would have
been if these investment techniques had not been used. If a swap agreement
calls for payments by the Trust, the Trust must be prepared to make such
payments when due. In addition, if the counterparty's creditworthiness
would decline, the value of the swap agreement would be likely to decline,
potentially resulting in losses.
If the counterparty defaults, the Trust's risk of loss consists of the
net amount of payments that the Trust is contractually entitled to
receive. The Trust anticipates that it will be able to eliminate or reduce
its exposure under these arrangements by assignment or other disposition
or by entering into an offsetting agreement with the same or another
counterparty, but there can be no assurance that it will be able to do so.
The uses by the Trust of swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Futures, Swaps and Other Derivative Transactions" in this Appendix.
TEMPORARY BORROWINGS
The Trust may borrow money for temporary purposes (e.g., to meet
redemption requests or settle outstanding purchases of portfolio
securities).
TEMPORARY DEFENSIVE POSITIONS
The Trust may temporarily invest either in tax-exempt securities in the
higher rating categories of recognized rating agencies or in cash or cash
equivalent short-term obligations of similar quality, including, but not
limited to, short-term municipal obligations, certificates of deposit,
commercial paper, short-term notes, obligations issued or guaranteed by
the U.S. Government, its agencies, authorities or instrumentalities and
repurchase agreements. Interest on certain of these short-term obligations
will be subject to federal income tax.
"WHEN-ISSUED" SECURITIES
The Trust may purchase securities on a "when-issued" or on a "forward
delivery" basis which means that the securities will be delivered to the
Trust at a future date usually beyond customary settlement time. The
commitment to purchase a security for which payment will be made on a
future date may be deemed a separate security. In general, the Trust does
not pay for such securities until received, and does not start earning
interest on the securities until the contractual settlement date. While
awaiting delivery of securities purchased on such bases, the Trust will
identify liquid and unencumbered assets equal to its forward delivery
commitment.
SPECIAL RISK FACTORS -- FUTURES, SWAPS AND OTHER DERIVATIVE TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE TRUST'S
PORTFOLIO: The Trust's ability effectively to hedge all or a portion of
its portfolio through transactions in derivatives, including Futures
Contracts, swaps and other types of derivatives depends on the degree to
which price movements in the underlying index or instrument correlate with
price movements in the relevant portion of the Trust's portfolio. In the
case of derivative instruments based on an index, the portfolio will not
duplicate the components of the index, and in the case of derivative
instruments on fixed income securities, the portfolio securities which are
being hedged may not be the same type of obligation underlying such
derivatives. The use of derivatives for "cross hedging" purposes may
involve greater correlation risks. Consequently, the Trust bears the risk
that the price of the portfolio securities being hedged will not move in
the same amount or direction as the underlying index or obligation.
The trading of derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative and the price of the underlying index or obligation. The
anticipated spread between the prices may be distorted due to the
differences in the nature of the markets such as differences in margin
requirements, the liquidity of such markets and the participation of
speculators in the derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict, particularly
near the expiration of such instruments.
RISKS OF NON-HEDGING TRANSACTIONS: The Trust may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes.
Non-hedging transactions in such instruments involve greater risks and may
result in losses which may not be offset by increases in the value of
portfolio securities or declines in the cost of securities to be acquired.
The Trust will only write covered options, such that liquid and unencumbered
assets necessary to satisfy an option exercise will be identified, unless
the option is covered in such other manner as may be in accordance with the
rules of the exchange on which, or the counterparty with which, the option
is traded and applicable laws and regulations. Nevertheless, the method of
covering an option employed by the Trust may not fully protect it against
risk of loss and, in any event, the Trust could suffer losses on the option
position which might not be offset by corresponding portfolio gains. The
Trust may also enter into futures, Forward Contracts or swaps for
non-hedging purposes. For example, the Trust may enter into such a
transaction as an alternative to purchasing or selling the underlying
instrument or to obtain desired exposure to an index or market. In such
instances, the Trust will be exposed to the same economic risks incurred in
purchasing or selling the underlying instrument or instruments. However,
transactions in futures, Forward Contracts or swaps may be leveraged, which
could expose the Trust to greater risk of loss than such purchases or sales.
Entering into transactions in derivatives for other than hedging purposes,
therefore, could expose the Trust to significant risk of loss if the prices,
rates or values of the underlying instruments or indices do not move in the
direction or to the extent anticipated.
With respect to the writing of straddles on securities, the Trust
incurs the risk that the price of the underlying security will not remain
stable, that one of the options written will be exercised and that the
resulting loss will not be offset by the amount of the premiums received.
Such transactions, therefore, create an opportunity for increased return
by providing the Trust with two simultaneous premiums on the same
security, but involve additional risk, since the Trust may have an option
exercised against it regardless of whether the price of the security
increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET: Prior to exercise
or expiration, a futures or option position can only be terminated by
entering into a closing purchase or sale transaction. This requires a
secondary market for such instruments on the exchange on which the initial
transaction was entered into. While the Trust will enter into options or
futures positions only if there appears to be a liquid secondary market
therefor, there can be no assurance that such a market will exist for any
particular contract at any specific time. In that event, it may not be
possible to close out a position held by the Trust, and the Trust could be
required to purchase or sell the instrument underlying an option, make or
receive a cash settlement or meet ongoing variation margin requirements.
Under such circumstances, if the Trust has insufficient cash available to
meet margin requirements, it will be necessary to liquidate portfolio
securities or other assets at a time when it is disadvantageous to do so.
The inability to close out options and futures positions, therefore, could
have an adverse impact on the Trust's ability effectively to hedge its
portfolio, and could result in trading losses.
The liquidity of a secondary market in a Futures Contract or option
thereon may be adversely affected by "daily price fluctuation limits,"
established by exchanges, which limit the amount of fluctuation in the
price of a contract during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price
beyond the limit, thus preventing the liquidation of open futures or
option positions and requiring traders to make additional margin deposits.
Prices have in the past moved to the daily limit on a number of
consecutive trading days.
The trading of Futures Contracts and options is also subject to the
risk of trading halts, suspensions, exchange or clearinghouse equipment
failures, government intervention, insolvency of a brokerage firm or
clearinghouse or other disruptions of normal trading activity, which could
at times make it difficult or impossible to liquidate existing positions
or to recover excess variation margin payments.
MARGIN: Because of low initial margin deposits made upon the
establishment of a futures, forward or swap position (certain of which may
require no initial margin deposits) and the writing of an option, such
transactions involve substantial leverage. As a result, relatively small
movements in the price of the contract can result in substantial
unrealized gains or losses. Where the Trust enters into such transactions
for hedging purposes, any losses incurred in connection therewith should,
if the hedging strategy is successful, be offset, in whole or in part, by
increases in the value of securities or other assets held by the Trust or
decreases in the prices of securities or other assets the Trust intends to
acquire. Where the Trust enters into such transactions for other than
hedging purposes, the margin requirements associated with such
transactions could expose the Trust to greater risk.
POTENTIAL BANKRUPTCY OF A CLEARINGHOUSE OR BROKER: When the Trust enters
into transactions in exchange-traded futures or options, it is exposed to
the risk of the potential bankruptcy of the relevant exchange
clearinghouse or the broker through which the Trust has effected the
transaction. In that event, the Trust might not be able to recover amounts
deposited as margin, or amounts owed to the Trust in connection with its
transactions, for an indefinite period of time, and could sustain losses
of a portion or all of such amounts. Moreover, the performance guarantee
of an exchange clearinghouse generally extends only to its members and the
Trust could sustain losses, notwithstanding such guarantee, in the event
of the bankruptcy of its broker.
TRADING AND POSITION LIMITS: The exchanges on which futures and options
are traded may impose limitations governing the maximum number of
positions on the same side of the market and involving the same underlying
instrument which may be held by a single investor, whether acting alone or
in concert with others (regardless of whether such contracts are held on
the same or different exchanges or held or written in one or more accounts
or through one or more brokers). Further, the CFTC and the various
contract markets have established limits referred to as "speculative
position limits" on the maximum net long or net short position which any
person may hold or control in a particular futures or option contract. An
exchange may order the liquidation of positions found to be in violation
of these limits and it may impose other sanctions or restrictions. The
Adviser does not believe that these trading and position limits will have
any adverse impact on the strategies for hedging the portfolios of the
Trust.
RISKS OF OPTIONS ON FUTURES CONTRACTS: The amount of risk the Trust
assumes when it purchases an Option on a Futures Contract is the premium
paid for the option, plus related transaction costs. In order to profit
from an option purchased, however, it may be necessary to exercise the
option and to liquidate the underlying Futures Contract, subject to the
risks of the availability of a liquid offset market described herein. The
writer of an Option on a Futures Contract is subject to the risks of
commodity futures trading, including the requirement of initial and
variation margin payments, as well as the additional risk that movements
in the price of the option may not correlate with movements in the price
of the underlying security, index, currency or Futures Contract.
<PAGE>
APPENDIX B
RATINGS OF INVESTMENTS
The ratings of Moody's, S&P and Fitch IBCA, Duff & Phelps represent their
opinions as to the quality of various debt instruments. It should be
emphasized, however, that ratings are not absolute standards of quality.
Consequently, debt instruments with the same maturity, coupon and rating
may have different yields while debt instruments of the same maturity and
coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risk appear
somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time 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.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to
meet its financial commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality
and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than
obligations rated BB, but the obligor currently has the capacity to meet
its financial commitment on the obligation. Adverse business, financial,
or economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and
is dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation. In the
event of adverse business, financial, or economic conditions the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: Subordinated debt or preferred stock obligation rated C is CURRENTLY
HIGHLY VULNERABLE to nonpayment. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being continued. A C
rating will also be assigned to a preferred stock issue in arrears on
dividends or sinking Trust payments, but that is currently paying.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the
major rating categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, currencies, or
commodities; obligations exposed to severe prepayment risk -- such as
interest-only or principal-only mortgage securities; and obligations with
unusually risky interest terms, such as inverse floaters.
FITCH IBCA, DUFF & PHELPS
AAA
HIGHEST CREDIT QUALITY. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA
VERY HIGH CREDIT QUALITY. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A
HIGH CREDIT QUALITY. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB
GOOD CREDIT QUALITY. "BBB" ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this capacity. This
is the lowest investment-grade category.
SPECULATIVE GRADE
BB
SPECULATIVE. "BB" ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in this category
are not investment grade.
B
HIGHLY SPECULATIVE. "B" ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favourable business and economic environment.
CCC, CC, C
HIGH DEFAULT RISK. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon sustained, favourable
business or economic developments. A "CC" rating indicates that default of
some kind appears probable. "C" ratings signal imminent default.
DDD, DD, D
DEFAULT. The ratings of obligations in this category are based on their
prospects for achieving partial or full recovery in a reorganization or
liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following
serve as general guidelines. "DDD" obligations have the highest potential
for recovery, around 90% - 100% of outstanding amounts and accrued
interest. "DD" indicates potential recoveries in the range of 50% - 90%
and "D" the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption
of performance or continued operation with or without a formal
reorganization process. Entities rated "DD" and "D" are generally undergoing
a formal reorganization or liquidation process; those rated "DD" are likely
to satisfy a higher portion of their outstanding obligations, while entities
rated "D" have a poor prospect of repaying all obligations.
NOTES TO LONG-TERM AND SHORT-TERM RATINGS:
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the "AAA" Long-term
rating category, to categories below "CCC", or to Short-term ratings other
than "F1".
"NR" indicates that Fitch does not rate the issuer or issue in question.
"Withdrawn": A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch to notify investors that
there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for a potential downgrade, or "Evolving",
if ratings may be raised, lowered or maintained. Rating Watch is typically
resolved over a relatively short period.
<PAGE>
APPENDIX C
AUCTION PROCEDURES
The following procedures will be set forth in the Statement. The terms not
defined below are defined in the Glossary or in the Prospectus or this
Statement of Additional Information.
1. ORDERS.
(a) Prior to the Submission Deadline on each Auction Date for shares
of a series of Municipal Preferred:
(i) each Beneficial Owner of shares of such series may submit to its
Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares, if any, of such series held
by such Beneficial Owner which such Beneficial 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 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) herein if
the Applicable Rate for shares of such series determined on such
Auction Date shall be equal to the rate specified therein; or
(C) the number of Outstanding shares of such series specified in
such Bid if the rate specified therein shall be higher than the
Maximum Rate for shares of such series, or such number or a lesser
number of Outstanding shares of such series to be determined as set
forth in paragraph 4(b)(iii) herein if the rate specified therein
shall be higher than the Maximum Rate for shares of such series and
Sufficient Clearing Bids for shares of such series do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder of
shares of a series of Municipal Preferred subject to an Auction on any
Auction Date shall constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified in
such Sell Order; or
(B) such number or a lesser number of Outstanding shares of such
series as set forth in paragraph 4(b)(iii) herein if Sufficient
Clearing Bids for shares of such series do not exist;
provided, however, that a Broker-Dealer that is an Existing Holder with
respect to shares of a series of Municipal Preferred shall not be liable
to any Person for failing to sell such shares pursuant to a Sell Order
described in the proviso to paragraph 2(c) herein if (1) such shares were
transferred by the Beneficial Owner thereof without compliance by such
Beneficial Owner or its transferee Broker-Dealer (or other transferee
person, if permitted by the Trust) with the provisions of paragraph 7
herein or (2) such Broker-Dealer has informed the Auction Agent pursuant
to the terms of its Broker-Dealer Agreement that, according to such
Broker-Dealer's records, such Broker-Dealer believes it is not the
Existing Holder of such shares.
(iii) A Bid by a Potential Beneficial Holder or a Potential Holder
of shares of a series of Municipal Preferred subject to an Auction on
any Auction Date shall constitute an irrevocable offer to purchase:
(A) the number of Outstanding shares of such series specified in
such Bid if the Applicable Rate for shares of such series determined
on such Auction Date shall be higher than the rate specified therein;
or
(B) such number or a lesser number of Outstanding shares of such
series as set forth in paragraph 4(a)(v) herein if the Applicable Rate
for shares of such series determined on such Auction Date shall be
equal to the rate specified therein.
(c) No Order for any number of shares of Municipal Preferred other
than whole shares shall be valid.
2. SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.
(a) Each Broker-Dealer shall submit in writing or over the internet 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:
(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 such Existing Holder, and if
the number of shares of such series subject to such Hold Orders exceeds
the number of Outstanding shares of such series held by such Existing
Holder, the number of shares subject to each such Hold Order shall be
reduced pro rata to cover the number of Outstanding shares of such
series held by such Existing Holder;
(ii) (A) any Bid for shares of such series shall be considered valid
up to and including the excess of the number of Outstanding shares of
such series held by such Existing Holder over the number of shares of
such series subject to any Hold Orders referred to in clause (i) above;
(B) subject to subclause (A), if more than one Bid of an Existing
Holder for shares of such series is submitted to the Auction Agent
with the same rate and the number of Outstanding shares of such series
subject to such Bids is greater than such excess, such Bids shall be
considered valid up to and including the amount of such excess, and
the number of shares of such series subject to each Bid with the same
rate shall be reduced pro rata to cover the number of shares of such
series equal to such excess;
(C) subject to subclauses (A) and (B), if more than one Bid of an
Existing Holder for shares of such series is submitted to the Auction
Agent with different rates, such Bids shall be considered valid in the
ascending order of their respective rates up to and including the
amount of such excess; and
(D) in any such event, the number, if any, of such Outstanding
shares of such series subject to any portion of Bids considered not
valid in whole or in part under this clause (ii) shall be treated as
the subject of a Bid for shares of such series by or on behalf of a
Potential Holder at the rate therein specified; and
(iii) all Sell Orders for shares of such series shall be considered
valid up to and including the excess of the number of Outstanding shares
of such series held by such Existing Holder over the sum of shares of
such series subject to valid Hold Orders referred to in clause (i) above
and valid Bids referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of a series of
Municipal Preferred is submitted to the Auction Agent by or on behalf of
any Potential Holder, each such Bid submitted shall be a separate Bid with
the rate and number of shares therein specified.
(f) Any Order submitted by a Beneficial Owner or a Potential
Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, prior to the Submission Deadline on any Auction Date, shall
be irrevocable.
3. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND
APPLICABLE RATE.
(a) Not earlier than the Submission Deadline on each Auction Date for
shares of a series of Municipal Preferred, the Auction Agent shall
assemble all valid Orders submitted or deemed submitted to it by the
Broker-Dealers in respect of shares of such series (each such Order as
submitted or deemed submitted by a Broker-Dealer being hereinafter
referred to individually as a "Submitted 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 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 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,
whichever is greater; 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 paragraph 3(a)
herein, the Submitted Bids and Submitted Sell Orders shall be accepted or
rejected by the Auction Agent and the Auction Agent shall take such other
action as set forth below:
(a) If Sufficient Clearing Bids for shares of a series of Municipal
Preferred have been made, all Submitted Sell Orders with respect to shares
of such series shall be accepted and, subject to the provisions of
subparagraphs (d) and (e) of this paragraph 4, Submitted Bids with respect
to shares of such series shall be accepted or rejected as follows in the
following order of priority and all other Submitted Bids with respect to
shares of such series shall be rejected:
(i) Existing Holders" Submitted Bids for shares of such series
specifying any rate that is higher than the Winning Bid Rate for shares
of such series shall be accepted, thus requiring each such Existing
Holder to sell the shares of Municipal Preferred subject to such
Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares
of such series shall be rejected, thus entitling each such Existing
Holder to continue to hold the shares of Municipal Preferred subject to
such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares
of such series shall be accepted;
(iv) Existing Holders' Submitted Bids 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) Potential Holder's Submitted Bids 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;
(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) Existing Holder's Submitted Bids 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
subparagraph (a) of this paragraph 4, any Potential Holder would be
entitled or required to purchase less than a whole share of series of
Municipal Preferred on any Auction Date, the Auction Agent shall, in such
manner as it shall determine in its sole discretion, allocate shares of
Municipal Preferred of such series for purchase among Potential Holders so
that only whole shares of Municipal Preferred of such series are purchased
on such Auction Date as a result of such procedures by any Potential
Holder, even if such allocation results in one or more Potential Holders
not purchasing shares of Municipal Preferred of such series on such
Auction Date.
(f) Based on the results of each Auction for shares of a series of
Municipal Preferred, the Auction Agent shall determine the aggregate
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 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 Beneficial 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. Except as noted below, 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. The Trust may also include such net capital gain or other
income taxable for federal income tax purposes in a dividend on shares of
Municipal Preferred without giving advance notice if the dividend is
increased by a Gross-Up Payment. The Trust must notify the Auction Agent
of the additional amounts to be included in such dividend at least five
Business Days prior to the applicable Dividend Payment Date.
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
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 herein or to a Broker-Dealer;
provided, however, that (a) a sale, transfer or other disposition of shares
of Municipal Preferred from a customer of a Broker-Dealer who is listed on
the records of that Broker-Dealer as the holder of such shares to that
Broker-Dealer or another customer of that Broker- Dealer shall not be deemed
to be a sale, transfer or other disposition for purposes of this paragraph 7
if such Broker-Dealer remains the Existing Holder of the shares so sold,
transferred or disposed of immediately after such sale, transfer or
disposition and (b) in the case of all transfers other than pursuant to
Auctions, the Broker-Dealer (or other Person, if permitted by the 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.
<PAGE>
APPENDIX D
SETTLEMENT PROCEDURES
Capitalized terms used herein have the respective meanings specified in
the forepart of the Prospectus or the Glossary included in the Prospectus,
as the case may be.
(a) On each Auction Date for shares of Municipal Preferred, the
Auction Agent shall notify by telephone the Broker-Dealers that
participated in the Auction held on such Auction Date and submitted an
Order to the Auction Agent as or on behalf of an Existing Holder or
Potential Holder of:
(i) the Applicable Rate fixed for the next Rate Period;
(ii) whether Sufficient Clearing Bids existed for the determination
of the Applicable Rate;
(iii) if such Broker-Dealer submitted a Bid or a Sell Order to the
Auction Agent as or on behalf of an Existing Holder, whether such Bid or
Sell Order was accepted or rejected, in whole or in part, and the number
of shares, if any, of Municipal Preferred then outstanding to be sold by
such Existing Holder;
(iv) if such Broker-Dealer submitted a Bid to the Auction Agent as or
on behalf of a Potential Holder, whether such Bid was accepted or
rejected, in whole or in part, and the number of shares, if any, of
Municipal Preferred to be purchased by such Potential Holder;
(v) if the aggregate number of shares of Municipal Preferred to be
sold by all Existing Holders with respect to whom such Broker-Dealer
submitted Bids or Sell Orders to the Auction Agent is different than the
aggregate number of shares of Municipal Preferred to be purchased by all
Potential Holders with respect to whom such Broker-Dealer submitted Bids
to the Auction Agent, the name or names of one or more other
Broker-Dealers (and the Agent Member, if any, of each such other
Broker-Dealer) and the number of shares of Municipal Preferred to be (x)
purchased from one or more Existing Holders with respect to whom such
other Broker- Dealers submitted Bids or Sell Orders to the Auction Agent,
or (y) sold to one or more Potential Holders with respect to whom such
other Broker- Dealers submitted Bids to the Auction Agent; and
(vi) the scheduled Auction Date of the next succeeding Auction for
shares of Municipal Preferred.
(b) On each Auction Date for shares of Municipal Preferred, each
Broker-Dealer that submitted an Order to the Auction Agent as or on behalf
of any Existing Holder or Potential Holder shall:
(i) advise each Existing Holder and Potential Holder (and each
Beneficial Owner and Potential Beneficial Owner) with respect to whom
such Broker-Dealer submitted a Bid or Sell Order to the Auction Agent
whether such Bid or Sell Order was accepted or rejected, in whole or in
part;
(ii) instruct each Potential Holder (and each Potential Beneficial
Owner) with respect to whom such Broker-Dealer submitted a Bid to the
Auction Agent that was accepted, in whole or in part, to instruct such
Bidder's Agent Member to pay to such Broker-Dealer (or its Agent Member)
through the Securities Depository the amount necessary to purchase the
number of shares of Municipal Preferred to be purchased pursuant to such
Bid against receipt of such shares;
(iii) instruct each Existing Holder (and each Beneficial Owner) with
respect to whom such Broker-Dealer submitted a Bid to the Auction Agent
that was accepted, in whole or in part, or a Sell Order that was
accepted, in whole or in part, to instruct such Bidder's Agent Member to
deliver to such Broker-Dealer (or its Agent Member) through the
Securities Depository the number of shares of Municipal Preferred to be
sold pursuant to such Bid or Sell Order against payment therefor;
(iv) advise each Existing Holder (and each Beneficial Owner) with
respect to whom such Broker-Dealer submitted an Order to the Auction
Agent and each Potential Holder (and each Potential Beneficial Owner)
with respect to whom such Broker-Dealer submitted a Bid to the Auction
Agent of the Applicable Rate for the next succeeding Rate Period;
(v) advise each Existing Holder (and each Beneficial Owner) with
respect to whom such Broker-Dealer submitted an Order to the Auction
Agent of the Auction Date of the next succeeding Auction; and
(vi) advise each Potential Holder (and each Potential Beneficial
Owner) with respect to whom such Broker-Dealer submitted a Bid to the
Auction Agent that was accepted, in whole or in part, of the Auction
Date of the next succeeding Auction for Municipal Preferred.
(c) On the basis of the information provided to it pursuant to
paragraph (a) above, each Broker-Dealer that submitted a Bid or Sell Order
to the Auction Agent for any shares of Municipal Preferred shall allocate
any funds received by it (or its Agent Member) in respect of such shares
pursuant to paragraph (b)(ii) above and any shares of Municipal Preferred
received by it (or its Agent Member) pursuant to paragraph (b)(iii) above
among the Potential Holders and Potential Beneficial Owners, if any, with
respect to whom such Broker-Dealer submitted Bids to the Auction Agent for
such shares, the Existing Holders and Beneficial Owners, if any, with
respect to whom such Broker-Dealer submitted Bids or Sell Orders to the
Auction Agent for such shares, and any Broker-Dealers identified to it by
the Auction Agent pursuant to paragraph (a)(v) above.
(d) On the Business Day after the Auction Date, the Securities
Depository shall execute the transactions described above, debiting and
crediting the accounts of the respective Agent Members as necessary to
effect the purchases and sales of shares of Municipal Preferred as
determined in the Auction for shares of Municipal Preferred.
<PAGE>
APPENDIX E
RATING AGENCY FUTURES AND OPTIONS RESTRICTIONS
The following restrictions will be set forth in the Statement creating the
preferred shares (the "Statement") of the Trust. The terms not defined
below are defined in the Glossary, the Prospectus, the Statement of
Additional Information or the Statement, filed as an exhibit to the
Registration Statement of the Trust. Reference is made to the Statement
for the full text of the rating agency restrictions on futures and options
transactions and certain other actions or investments by the Trust.
(a) For so long as any shares of Municipal Preferred are outstanding
and Moody's or Standard & Poor's, or both, are rating such shares, the
Trust will not, unless it has received confirmation from Moody's or
Standard & Poor's, 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: 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;
(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 the two-year United
States Treasury Note) or (B) outstanding futures contracts based on
Treasury Bonds exceeding in number 10% of the average number of daily
traded futures contracts based on Treasury Bonds in the 30 days
preceding the time of effecting such transaction as reported by The Wall
Street Journal;
(iii) the Trust will engage in Closing Transactions to close out any
outstanding futures contract which the Trust owns or has sold or any
outstanding option thereon owned by the Trust in the event (A) the Trust
does not have Standard & Poor's Eligible Assets or Moody's Eligible
Assets, as the case may be, with an aggregate Discounted Value equal to
or greater than the Municipal Preferred Basic Maintenance Amount on two
consecutive Valuation Dates and (B) the 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 Standard & Poor's 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 Standard & Poor's
Eligible Assets or Moody's Eligible Assets, as the case may be, Initial
and Variation Margin will not constitute eligible assets. Segregated
Securities will constitute eligible assets, discounted at the factor equal
to the exposure period.
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
Included in Part A
Financial Highlights
Included in Part B
Included in Part B are the financial statements contained in
the Registrant's Annual Report dated October 31, 1999 (which
were previously filed electronically pursuant to Section
30(b)(2) of the Investment Company Act of 1940 - Accession
Number: 0000950146-00-000009); and the financial statements
contained in the Registrant's Semi-Annual Report dated April
30, 2000 (which were previously filed electronically pursuant
to Section 30(b)(2) of the Investment Company Act of 1940 -
Accession Number: 0000950156-00-000321).
The Financial Statements contained in Part B are as follows:
Investment Portfolio, October 31, 1999; Statement of Assets
and Liabilities, October 31, 1999; Statement of Operations,
October 31, 1999; Statement of Changes in Net Assets, years
ended October 31, 1998 and 1999; Notes to Financial
Statements; Financial Highlights; Report of Independent
Accountants.
Investment Portfolio, April 30, 2000; Statement of Assets and
Liabilities, April 30, 2000; Statement of Operations, April
30, 2000; Statement of Changes in Net Assets, six months ended
April 30, 2000 and year ended October 31, 1999; Notes to
Financial Statements; Financial Highlights.
(2) Exhibits
(a)(1) Amended and Restated Declaration of Trust
(a)(2) Statement Creating the Municipal Preferred shares
(b) Amended and Restated By-Laws dated December 21, 1994
(previously filed as Exhibit (b)(2) to Amendment No.
8 to the Registrant's Registration Statement on Form
N-2 filed with the Securities and Exchange
Commission on February 28, 1995 ("Amendment No. 8")
and incorporated herein by reference)
(c) Not applicable
(d)(1) Portions of the Amended and Restated Declaration of
Trust, included as Exhibit (a)(1), Statement
Creating the Municipal Preferred shares, included as
Exhibit (a)(2), and the Amended and Restated By-Laws
of the Registrant, included as Exhibit (b)
(d)(2) Form of specimen certificate for the municipal
auction rate cumulative preferred shares
(previously filed)
(e) The section "Dividend Reinvestment and Cash Purchase
Plan" in the Registrant's Annual Report to its
Shareholders, for its fiscal year ended October 31,
1999 (incorporated herein by reference)
(f) Not applicable
(g)(1) Investment Advisory Agreement with Massachusetts
Financial Services Company (previously filed as
Exhibit (g)(1) to Amendment No. 9 to the
Registrant's Registration Statement on Form N-2
filed with the Securities and Exchange Commission on
January 27, 1998 ("Amendment No. 9") and
incorporated herein by reference)
(g)(2) Master Administrative Services Agreement dated March
1, 1997, as amended and restated April 1, 1999, by
and among Massachusetts Financial Services Company
and the Registrant (incorporated by reference to MFS
Series Trust III (File Nos. 2-60491 and 811-2794)
Post-Effective Amendment No. 28 filed with the SEC
via EDGAR on March 30, 1999)
(h) Form of Underwriting Agreement with Salomon Smith
Barney Inc.
(i) Form of Retirement Plan for Non-Interested Person
Trustees, as amended and restated February 17, 1999
(incorporated by reference to MFS Growth
Opportunities Fund (File Nos. 2-36431 and 811-2032)
Post-Effective Amendment No. 29 filed with the SEC
via EDGAR on February 26, 1999)
(j)(1) Custodian Agreement between the Registrant and State
Street Bank and Trust Company (previously filed as
Exhibit (j)(1) to Amendment No. 9 and incorporated
herein by reference)
(j)(2) Amendments to the Custodian Agreement between the
Registrant and State Street Bank and Trust Company
(previously filed as Exhibits (j)(1)-(4) to
Amendment No. 9 and incorporated herein by
reference)
(k)(1) Form of Auction Agency Agreement with Banks Trust
Company
(k)(2) Form of Broker-Dealer Agreement with Bankers Trust
Company
(k)(3) Loan Agreement by and among the Banks named therein,
and The First National Bank of Boston, and the MFS
Funds named therein (previously filed as Exhibit
(k)(3) to Amendment No. 8 and incorporated herein by
reference)
(k)(4) Registrar, Transfer Agency and Service Agreement
between Registrant and MFS Service Center, Inc.,
dated August 15, 1994 (previously filed as Exhibit
(k)(2) to Amendment No. 8 and incorporated herein by
reference)
(l) Opinion and consent of Bingham Dana LLP, counsel to
Registrant
(m) Not applicable
(n) Consent of independent accountants
(o) Not applicable
(p) Not applicable
(q) Not applicable
(r) Codes of Ethics under rule 17j-1 of the Investment
Company Act of 1940 of the Registrant and the
Registrant's adviser, Massachusetts Financial
Services Company (incorporated by reference to
Massachusetts Investors Growth Stock Fund (File Nos.
2-14677 and 811-859) Post-Effective Amendment No. 67
filed with the SEC via EDGAR on March 29, 2000)
(s) Powers of Attorney (previously filed)
Item 25. Marketing Arrangements.
Contained in the Form of Underwriting Agreement filed
herewith .
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 $ 36,960
Printing $100,000
Accounting fees and expenses $ 60,000
Legal fees and expenses $201,500
Miscellaneous $120,000
Total $518,460
Item 27. Persons Controlled by or under Common Control with
Registrant.
None.
Item 28. Number of Holders of Securities
Number of Record Holders
Title of Class as of October 16, 2000
Shares of Beneficial Interest 4,772
Municipal Auction Rate Cumulative
Preferred Shares -0-
Item 29. Indemnification.
Article V of the Registrant's Declaration of Trust provides
that the Registrant 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 Registrant, unless as to liabilities to the
Registrant or its shareholders, it is finally adjudicated that
they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in
their offices, or with respect to any matter unless it is
adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interest
of the Registrant. In the case of a settlement, such
indemnification will not be provided unless it has been
determined in accordance with the Declaration of Trust that
such officers or Trustees have not engaged in misfeasance, bad
faith, gross negligence or reckless disregard of the duties
involved in their offices.
The Trustees and officers of the Registrant and the personnel
of the Investment Adviser are insured under an errors and
omissions liability insurance policy. The Registrant and its
officers are also insured under the fidelity bond required by
Rule 17g-1 under the Investment Company Act of 1940.
Item 30. Business and Other Connections of Adviser.
MFS serves as investment adviser to the following open-end
Funds comprising the MFS Family of Funds (except the Vertex
Funds mentioned below): Massachusetts Investors Trust;
Massachusetts Investors Growth Stock Fund; MFS Growth
Opportunities Fund; MFS Government Securities Fund; MFS
Government Limited Maturity Fund; MFS Series Trust I (which
has 12 series: MFS Managed Sectors Fund, MFS Cash Reserve
Fund, MFS Global Asset Allocation Fund, MFS Strategic Growth
Fund, MFS Research Growth and Income Fund, MFS Core Growth
Fund, MFS Equity Income Fund, MFS New Discovery Fund, MFS
Technology Fund, MFS Research International Fund, MFS Global
Telecommunications Fund and MFS Japan Equity Fund); MFS Series
Trust II (which has two series: MFS Emerging Growth Fund and
MFS Large Cap Growth Fund); MFS Series Trust III (which has
three series: MFS High Income Fund, MFS Municipal High Income
Fund and MFS High Yield Opportunities Fund); MFS Series Trust
IV (which has four series: MFS Money Market Fund, MFS
Government Money Market Fund, MFS Municipal Bond Fund and MFS
Mid Cap Growth Fund); MFS Series Trust V (which has five
series: MFS Total Return Fund, MFS Research Fund, MFS
International New Discovery Fund, MFS International Strategic
Growth Fund and MFS International Value Fund); MFS Series
Trust VI (which has three series: MFS Global Total Return
Fund, MFS Utilities Fund and MFS Global Equity Fund); MFS
Series Trust VII (which has two series: MFS Global Governments
Fund and MFS Capital Opportunities Fund); MFS Series Trust
VIII (which has two series: MFS Strategic Income Fund and MFS
Global Growth Fund); MFS Series Trust IX (which has eight
series: MFS Bond Fund, MFS Limited Maturity Fund, MFS
Municipal Limited Maturity Fund, MFS Research Bond Fund, MFS
Intermediate Investment Grade Bond Fund, MFS Emerging
Opportunities Fund, MFS Large Cap Value Fund and MFS High
Quality Bond Fund); MFS Series Trust X (which has 11 series:
MFS Government Mortgage Fund, MFS Emerging Markets Equity
Fund, MFS International Growth Fund, MFS International Growth
and Income Fund, MFS Strategic Value Fund, MFS Emerging
Markets Debt Fund, MFS Income Fund, MFS European Equity Fund,
MFS High Yield Fund, MFS Concentrated Growth Fund and MFS New
Endeavor Fund); MFS Series Trust XI (which has four series:
MFS Union Standard Equity Fund, Vertex All Cap Fund, Vertex
Contrarian Fund and Vertex Income Fund); and MFS Municipal
Series Trust (which has 18 series: MFS Alabama Municipal Bond
Fund, MFS Arkansas Municipal Bond Fund, MFS California
Municipal Bond Fund, MFS Florida Municipal Bond Fund, MFS
Georgia Municipal Bond Fund, MFS Maryland Municipal Bond Fund,
MFS Massachusetts Municipal Bond Fund, MFS Mississippi
Municipal Bond Fund, MFS New York Municipal Bond Fund, MFS
North Carolina Municipal Bond Fund, MFS Pennsylvania Municipal
Bond Fund, MFS South Carolina Municipal Bond Fund, MFS
Tennessee Municipal Bond Fund, MFS Virginia Municipal Bond
Fund, MFS West Virginia Municipal Bond Fund, MFS Municipal
Income Fund, MFS New York High Income Tax Free Fund and MFS
Massachusetts High Income Tax Free Fund) (the "MFS Funds").
The principal business address of each of the MFS Funds is 500
Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following
open-end Funds: MFS Institutional Trust ("MFSIT") (which has
11 series) and MFS Variable Insurance Trust ("MVI") (which has
16 series). The principal business address of each of the
aforementioned funds is 500 Boylston Street, Boston,
Massachusetts 02116.
In addition, MFS serves as investment adviser to the
following closed-end funds: MFS Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust,
MFS Intermediate Income Trust, MFS Charter Income Trust and
MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the MFS Closed-End Funds
is 500 Boylston Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life
Series Trust ("MFS/SL") (which has 30 series), Money Market
Variable Account, High Yield Variable Account, Capital
Appreciation Variable Account, Government Securities Variable
Account, Global Governments Variable Account, Total Return
Variable Account and Managed Sectors Variable Account
(collectively, the "Accounts"). The principal business address
of MFS/SL is 500 Boylston Street, Boston, Massachusetts 02116.
The principal business address of each of the aforementioned
Accounts is One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
VERTEX INVESTMENT MANAGEMENT, INC., a Delaware corporation
and a wholly owned subsidiary of MFS, whose principal business
address is 500 Boylston Street, Boston, Massachusetts 02116
("Vertex"), serves as investment adviser to Vertex All Cap
Fund, Vertex Contrarian Fund and Vertex Income Fund, each a
series of MFS Series Trust XI. The principal business address
of the aforementioned Funds is 500 Boylston Street, Boston,
Massachusetts 02116.
MFS INTERNATIONAL LTD. ("MIL"), a limited liability
company organized under the laws of Bermuda and a subsidiary
of MFS, whose principal business address is Cedar House, 41
Cedar Avenue, Hamilton HM12 Bermuda, serves as investment
adviser to and distributor for MFS American Funds known as the
MFS Funds after January 1999 (which will have 11 portfolios as
of January 1999): U.S. Equity Fund, U.S. Emerging Growth Fund,
U.S. High Yield Bond Fund, U.S. Dollar Reserve Fund, Charter
Income Fund, U.S. Research Fund, U.S. Strategic Growth Fund,
Global Equity Fund, European Equity Fund and European
Corporate Bond Fund) (the "MIL Funds"). The MIL Funds are
organized in Luxembourg and qualify as an undertaking for
collective investments in transferable securities (UCITS). The
principal business address of the MIL Funds is 47, Boulevard
Royal, L-2449 Luxembourg. MIL also serves as investment
adviser to and distributor for MFS Meridian U.S. Government
Bond Fund, MFS Meridian Charter Income Fund, MFS Meridian
Global Governments Fund, MFS Meridian U.S. Emerging Growth
Fund, MFS Meridian Global Equity Fund, MFS Meridian Limited
Maturity Fund, MFS Meridian Global Growth Fund, MFS Meridian
Money Market Fund, MFS Meridian Global Balanced Fund, MFS
Meridian U.S. Equity Fund, MFS Meridian Research Fund, MFS
Meridian U.S. High Yield Fund, MFS Meridian Emerging Markets
Debt Fund, MFS Meridian Strategic Growth Fund and MFS Meridian
Global Asset Allocation Fund and the MFS Meridian Research
International Fund (collectively the "MFS Meridian Funds").
Each of the MFS Meridian Funds is organized as an exempt
company under the laws of the Cayman Islands. The principal
business address of each of the MFS Meridian Funds is P.O. Box
309, Grand Cayman, Cayman Islands, British West Indies.
MFS INTERNATIONAL (U.K.) LTD. ("MIL-UK"), a private
limited company registered with the Registrar of Companies for
England and Wales whose current address is Eversheds, Senator
House, 85 Queen Victoria Street, London, England EC4V 4JL, is
involved primarily in marketing and investment research
activities with respect to private clients and the MIL Funds
and the MFS Meridian Funds.
MFS INSTITUTIONAL ADVISORS (AUSTRALIA) LTD.
("MFSI-AUSTRALIA"), a private limited company organized under
the Corporations Law of New South Wales, Australia whose
current address is Level 27, Australia Square, 264 George
Street, Sydney, NSW2000, Australia, is involved primarily in
investment management and distribution of Australian
superannuation unit trusts and acts as an investment adviser
to institutional accounts.
MFS HOLDINGS AUSTRALIA PTY LTD. ("MFS HOLDINGS
AUSTRALIA"), a private limited company organized pursuant to
the Corporations Law of New South Wales, Australia whose
current address is Level 27, Australia Square, 264 George
Street, Sydney, NSW2000 Australia, and whose function is to
serve primarily as a holding company.
MFS FUND DISTRIBUTORS, INC. ("MFD"), a wholly owned
subsidiary of MFS, serves as distributor for the MFS Funds,
MVI and MFSIT.
MFS SERVICE CENTER, INC. ("MFSC"), a wholly owned
subsidiary of MFS, serves as shareholder servicing agent to
the MFS Funds, the MFS Closed-End Funds, MFSIT and MVI.
MFS INSTITUTIONAL ADVISORS, INC. ("MFSI"), a wholly owned
subsidiary of MFS, provides investment advice to substantial
private clients.
MFS RETIREMENT SERVICES, INC. ("RSI"), a wholly owned
subsidiary of MFS, markets MFS products to retirement plans
and provides administrative and record keeping services for
retirement plans.
MFS INVESTMENT MANAGEMENT K.K. ("MIMCO"), a wholly owned
subsidiary of MFS, is a corporation incorporated in Japan.
MIMCO, whose address is Kamiyacho-Mori Building, 3-20,
Tranomon 4-chome, Minato-ku, Tokyo, Japan, is involved in
investment management activities.
MFS HERITAGE TRUST COMPANY ("MFS TRUST"), a New
Hampshire-chartered limited-purpose trust company whose
current address is 650 Elm Street, Suite 404, Manchester, NH
03101, provides directed trustee services to retirement plans.
MFS ORIGINAL RESEARCH PARTNERS, LLC, a Delaware limited
liability company and a wholly owned subsidiary of MFS whose
address is 500 Boylston Street, Boston, Massachusetts 02116,
is an adviser to domestic pooled private investment vehicles.
MFS ORIGINAL RESEARCH ADVISORS, LLC, a Delaware limited
liability company and a wholly owned subsidiary of MFS whose
address is 500 Boylston Street, Boston, Massachusetts 02116,
is an adviser to offshore pooled private investment vehicles.
MFS
The Directors of MFS are Jeffrey L. Shames, Arnold D.
Scott, John W. Ballen, Kevin R. Parke, Thomas J. Cashman, Jr.,
Joseph W. Dello Russo, William W. Scott, Donald A. Stewart,
James Prieur and William W. Stinson. Mr. Shames is the
Chairman and Chief Executive Officer, Mr. Ballen is President
and Chief Investment Officer, Mr. Arnold Scott is a Senior
Executive Vice President, Mr. William Scott, Mr. Cashman, Mr.
Dello Russo and Mr. Parke are Executive Vice Presidents (Mr.
Dello Russo is also Chief Financial Officer and Chief
Administrative Officer and Mr. Parke is also Chief Equity
Officer), Stephen E. Cavan is a Senior Vice President, General
Counsel and Secretary of MFS, Robert T. Burns is a Senior Vice
President, Associate General Counsel and an Assistant
Secretary of MFS, and Thomas B. Hastings is a Vice President
and Treasurer of MFS.
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS GROWTH OPPORTUNITIES FUND
MFS GOVERNMENT SECURITIES FUND
MFS GOVERNMENT LIMITED MATURITY FUND
MFS SERIES TRUST I
MFS SERIES TRUST II
MFS SERIES TRUST III
MFS SERIES TRUST IV
MFS SERIES TRUST V
MFS SERIES TRUST VI
MFS SERIES TRUST VII
MFS SERIES TRUST VIII
MFS SERIES TRUST IX
MFS SERIES TRUST X
MFS SERIES TRUST XI
MFS MUNICIPAL SERIES TRUST
MFS VARIABLE INSURANCE TRUST
MFS INSTITUTIONAL TRUST
MFS MUNICIPAL INCOME TRUST
MFS MULTIMARKET INCOME TRUST
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
MFS CHARTER INCOME TRUST
MFS SPECIAL VALUE TRUST
Jeffrey L. Shames is Chairman and President, Stephen E.
Cavan is the Secretary and Clerk, James O. Yost, a Senior Vice
President of MFS, is the Treasurer, Ellen M. Moynihan, Laura
F. Healy, Robert R. Flaherty and Mark E. Bradley, Vice
Presidents of MFS, are the Assistant Treasurers, James R.
Bordewick, Jr., Senior Vice President and Associate General
Counsel of MFS, is the Assistant Secretary and Assistant
Clerk.
MFS/SUN LIFE SERIES TRUST
C. James Prieur, President and Director of Sun Life
Assurance Company of Canada, is the President, S Stephen E.
Cavan is the Secretary and Clerk, James O. Yost is the
Treasurer, Ellen M. Moynihan, Laura F. Healy, Robert R.
Flaherty and Mark E. Bradley are the Assistant Treasurers,
James R. Bordewick, Jr., is the Assistant Secretary and
Assistant Clerk.
MONEY MARKET VARIABLE ACCOUNT
HIGH YIELD VARIABLE ACCOUNT
CAPITAL APPRECIATION VARIABLE ACCOUNT
GOVERNMENT SECURITIES VARIABLE ACCOUNT
TOTAL RETURN VARIABLE ACCOUNT
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
MANAGED SECTORS VARIABLE ACCOUNT
C. James Prieur is the President, Stephen E. Cavan is the
Secretary, and James R. Bordewick, Jr., is the Assistant
Secretary.
MIL FUNDS
Jeffrey L. Shames is Chairman, Richard W. S. Baker, Arnold
D. Scott and William F. Waters are Directors, Stephen E. Cavan
is the Secretary, James O. Yost is the Treasurer, Ellen M.
Moynihan, Laura F. Healy, Robert R. Flaherty and Mark E.
Bradley are the Assistant Treasurers, and James R. Bordewick,
Jr. is the Assistant Secretary.
MFS MERIDIAN FUNDS
Jeffrey L. Shames is Chairman, Richard W. S. Baker, Arnold
D. Scott and William F. Waters are Directors, Stephen E. Cavan
is the Secretary, James O. Yost is the Treasurer, James R.
Bordewick, Jr. is the Assistant Secretary and Ellen M.
Moynihan, Laura F. Healy, Robert R. Flaherty and Mark E.
Bradley are the Assistant Treasurers.
VERTEX
Jeffrey L. Shames is the Chairman and President, Arnold D.
Scott is a Director, Kevin R. Parke and John W. Ballen are
Executive Vice Presidents, John D. Laupheimer is a Senior Vice
President, Brian E. Stack is a Vice President, Joseph W. Dello
Russo is the Treasurer, Thomas B. Hastings is the Assistant
Treasurer, Stephen E. Cavan is the Secretary and Robert T.
Burns is the Assistant Secretary.
MIL
Peter D. Laird is President and a Director, Arnold D.
Scott, Jeffrey L. Shames and Thomas J. Cashman, Jr. are
Directors, Stephen E. Cavan is a Director, Senior Vice
President and the Clerk, Robert T. Burns is an Assistant
Clerk, Joseph W. Dello Russo, Executive Vice President and
Chief Financial Officer of MFS, is the Treasurer and Thomas B.
Hastings is the Assistant Treasurer.
MIL-UK
Peter D. Laird is President and a Director, Thomas J.
Cashman, Arnold D. Scott and Jeffrey L. Shames are Directors,
Stephen E. Cavan is a Director and the Secretary, Joseph W.
Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer and Robert T. Burns is the Assistant
Secretary.
MFSI - AUSTRALIA
Thomas J. Cashman, Jr. is President and a Director, Graham
E. Lenzer, John A. Gee and David Adiseshan are Directors,
Stephen E. Cavan is the Secretary, Joseph W. Dello Russo is
the Treasurer, Thomas B. Hastings is the Assistant Treasurer,
and Robert T. Burns is the Assistant Secretary.
MFS HOLDINGS - AUSTRALIA
Jeffrey L. Shames is the President and a Director, Arnold
D. Scott, Thomas J. Cashman, Jr., and Graham E. Lenzer are
Directors, Stephen E. Cavan is the Secretary, Joseph W. Dello
Russo is the Treasurer, Thomas B. Hastings is the Assistant
Treasurer, and Robert T. Burns is the Assistant Secretary.
MFD
Arnold D. Scott and Jeffrey L. Shames are Directors,
William W. Scott, Jr., an Executive Vice President of MFS, is
the President, Stephen E. Cavan is the Secretary, Robert T.
Burns is the Assistant Secretary, Joseph W. Dello Russo is the
Treasurer, and Thomas B. Hastings is the Assistant Treasurer.
MFSC
Arnold D. Scott and Jeffrey L. Shames are Directors,
Joseph A. Recomendes, a Senior Vice President and Chief
Information Officer of MFS, is Vice Chairman and a Director,
Janet A. Clifford is the President, Joseph W. Dello Russo is
the Treasurer, Thomas B. Hastings is the Assistant Treasurer,
Stephen E. Cavan is the Secretary, and Robert T. Burns is the
Assistant Secretary.
MFSI
Thomas J. Cashman, Jr. is Chairman and a Director, Jeffrey
L. Shames, and Arnold D. Scott are Directors, Joseph J.
Trainor is the President and a Director, Leslie J. Nanberg is
a Senior Vice President, a Managing Director and a Director,
Kevin R. Parke is the Executive Vice President and a Managing
Director, George F. Bennett, Jr., John A. Gee, Brianne Grady,
Joseph A. Kosciuszek and Joseph J. Trainor are Senior Vice
Presidents and Managing Directors, Joseph W. Dello Russo is
the Treasurer, Thomas B. Hastings is the Assistant Treasurer
and Robert T. Burns is the Secretary.
RSI
Arnold D. Scott is the Chairman and a Director, Martin E.
Beaulieu is the President, William W. Scott, Jr. is a
Director, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, Stephen E. Cavan is the
Secretary and Robert T. Burns is the Assistant Secretary.
MIMCO
Jeffrey L. Shames, Arnold D. Scott and Mamoru Ogata are
Directors, Shaun Moran is the Representative Director, Joseph
W. Dello Russo is the Statutory Auditor, Robert DiBella is the
President and Thomas B. Hastings is the Assistant Statutory
Auditor.
MFS TRUST
The Directors of MFS Trust are Martin E. Beaulieu, Stephen
E. Cavan, Janet A. Clifford, Joseph W. Dello Russo and Joseph
A. Kosciuszek. Mr. Cavan is President, Mr. Dello Russo is
Treasurer, and Robert T. Burns is Clerk of MFS Trust.
MFS ORIGINAL RESEARCH PARTNERS, LLC
Joseph J. Trainor is the President and a Manager, Jeffrey
L. Shames, John W. Ballen and Kevin R. Parke are Managers,
Joseph W. Dello Russo is the Treasurer, Stephen E. Cavan is
the Secretary, Thomas B. Hastings is the Assistant Treasurer
and Robert T. Burns is the Assistant Secretary.
MFS ORIGINAL RESEARCH ADVISORS, LLC
Joseph J. Trainor is the President and a Manager, Jeffrey
L. Shames, John W. Ballen and Kevin R. Parke are Managers,
Joseph W. Dello Russo is the Treasurer, Stephen E. Cavan is
the Secretary, Thomas B. Hastings is the Assistant Treasurer
and Robert T. Burns is the Assistant Secretary.
In addition, the following persons, Directors or officers
of MFS, have the affiliations indicated:
Donald A. Stewart Chairman, Sun Life Assurance Company
of Canada, Sun Life Centre, 150
King Street West, Toronto, Ontario,
Canada (Mr. Stewart is also an
officer and/or Director of various
subsidiaries and affiliates of Sun
Life)
C. James Prieur President and a Director, Sun Life
Assurance Company of Canada, Sun
Life Centre, 150 King Street West,
Toronto, Ontario, Canada (Mr.
Prieur is also an officer and/or
Director of various subsidiaries
and affiliates of Sun Life)
William W. Stinson Director, Sun Life Assurance Company
of Canada, Sun Life Centre, 150
King Street West, Toronto, Ontario,
Canada; Director, United Dominion
Industries Limited, Charlotte,
N.C.; Director, PanCanadian
Petroleum Limited, Calgary,
Alberta; Director, LWT Services,
Inc., Calgary Alberta; Director,
Western Star Trucks, Inc., Kelowna,
British Columbia; Director,
Westshore Terminals Income Fund,
Vancouver, British Columbia;
Director (until 4/99), Canadian
Pacific Ltd., Calgary, Alberta
Item 31. Location of Accounts and Records:
Adviser: Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116
Custodian: State Street Bank and Trust Company
5-West
North Quincy, Massachusetts 02171
Transfer Agent: MFS Service Center, Inc.
(for common 2 Avenue de Lafayette
shares) Boston, Massachusetts 02111-1738
Item 32. Management Services.
Not applicable.
Item 33. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To suspend the offering of its preferred shares until
it amends its prospectus contained herein if (i)
subsequent to the effective date of this Registration
Statement, its 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 a 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,
the Statement of Additional Information.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Boston and The Commonwealth of
Massachusetts on the 28th day of November, 2000.
MFS MUNICIPAL INCOME TRUST
By: James R. Bordewick, Jr.
---------------------------------------
Name: James R. Bordewick, Jr.
Title: Assistant Clerk and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form N-2 has been signed below by the following
persons in the capacities indicated on November 28, 2000.
SIGNATURE TITLE
JEFFREY L. SHAMES* Chairman, President (Principal
-------------------------- Executive Officer) and Trustee
Jeffrey L. Shames
JAMES O. YOST* Treasurer (Principal Financial Officer
-------------------------- and Principal Accounting Officer)
JAMES O. YOST
J. ATWOOD IVES* Trustee
--------------------------
J. Atwood Ives
LAWRENCE T. PERERA* Trustee
--------------------------
Lawrence T. Perera
WILLIAM J. POORVU* Trustee
--------------------------
William J. Poorvu
CHARLES W. SCHMIDT* Trustee
--------------------------
Charles W. Schmidt
ARNOLD D. SCOTT* Trustee
--------------------------
Arnold D. Scott
ELAINE R. SMITH* Trustee
--------------------------
Elaine R. Smith
DAVID B. STONE* Trustee
--------------------------
David B. Stone
*By: James R. Bordewick, Jr.
--------------------------------------
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr. on behalf
of those indicated pursuant to a Power of
Attorney dated July 1, 2000; incorporated
herein by reference to Registrant's
Post-Effective Amendment No. 10, filed with
the SEC via EDGAR on July 27, 2000.
<PAGE>
INDEX OF EXHIBITS
(a)(1) Amended and Restated Declaration of Trust
(a)(2) Statement Creating the Municipal Preferred shares
(h) Form of Underwriting Agreement with Salomon Smith Barney Inc.
(k)(1) Form of Auction Agent Agreement with Bankers Trust Company
(k)(2) Form of Broker-Dealer Agreement with Bankers Trust Company
(l) Opinion and consent of Bingham Dana LLP, counsel to the Registrant
(n) Consent of independent accountants
