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AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON JULY 15, 1999
SECURITIES ACT FILE NO. 333-77261
INVESTMENT COMPANY ACT FILE NO. 811-4992
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. 2 [X]
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Post-Effective Amendment No. [ ]
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 10 [X]
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COLONIAL MUNICIPAL INCOME TRUST
(Exact Name of Registrant as Specified in Charter)
One Financial Center, Boston, Massachusetts 02111
(Address of Principal Executive Offices)
(617) 426-3750
(Registrant's Telephone Number, including Area Code)
Name and Address of
Agent for Service Copies to
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William J. Ballou, Esq. John M. Loder, Esq. Gary Schpero, Esq.
Colonial Management Associates, Inc. Ropes & Gray Simpson Thacher & Bartlett
One Financial Center One International Place 425 Lexington Avenue
Boston, Massachusetts 02111-2621 Boston, Massachusetts 02110-2624 New York, New York 10017-3954
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [ ]
It is proposed that this filing will become effective (check appropriate box):
[ ] when declared effective pursuant to Section 8(c)
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED (1) UNIT (1) PRICE (1) REGISTRATION FEE (2)
- ---------------------- -------------------- --------------------- --------------------- --------------------
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Municipal Auction 3,600 $25,000 $90,000,000 $25,020
Rate Cumulative
Preferred Shares
No Par Value
Per Share
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(1) Estimated solely for purposes of calculating the registration fee.
(2) Previously paid.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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COLONIAL MUNICIPAL INCOME TRUST
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
CROSS REFERENCE SHEET
ITEMS REQUIRED BY FORM N-2
PART A
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ITEM NO. ITEM CAPTION PROSPECTUS CAPTION
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1 Outside Front Cover Front Cover Page
2 Inside Front and Outside Front and Back Cover Page
Back Cover Page
3 Fee Table and Synopsis Not Applicable
4 Financial Highlights Financial Highlights
5 Plan of Distribution Underwriting
6 Selling Shareholders Not Applicable
7 Use of Proceeds Use of Proceeds
8 General Description of the Prospectus Summary; The
Trust; Management of the
Trust; Investment
Objectives and Policies;
Risk Factors and Special
Considerations
9 Management Management of the Trust;
Custodian, Transfer Agent,
Dividend Disbursing Agent
and Registrar
10 Capital Stock, Long-Term Debt, Capitalization at May 31,
Other Securities 1999; and Description
of Municipal Preferred;
Description of Common
Shares; Certain Provisions
in the Agreement and
Declaration of Trust
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11 Defaults and Arrears on Senior Not Applicable
Securities
12 Legal Proceedings Not Applicable
13 Table of Contents of the Table of Contents of the
Statement of Additional Statement of Additional
Information Information
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PART B
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STATEMENT OF ADDITIONAL
ITEM NO. ITEM CAPTION INFORMATION CAPTION
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14 Cover Page Cover Page
15 Table of Contents Table of Contents
16 General Information and History Not Applicable
17 Investment Objective and Investment Objectives and
Policies Policies; Miscellaneous
Investment Practices
18 Management Management of the Trust
19 Control Persons and Principal Management of the Trust
Holders of Securities
20 Investment Advisory and Other Management of the Trust
Services
21 Brokerage Allocation and Other Portfolio Transactions
Practices
22 Tax Status Tax Matters
23 Financial Statements Financial Statements
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JULY 15, 1999
PROSPECTUS
$90,000,000
COLONIAL MUNICIPAL INCOME TRUST
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED ("MUNICIPAL PREFERRED") SHARES
3,600 SHARES, SERIES F
LIQUIDATION PREFERENCE $25,000 PER SHARE
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Colonial Municipal Income Trust is selling 3,600 Series F Municipal Auction
Rate Cumulative Preferred Shares. The Trust is a nondiversified, closed-end
management investment company that seeks, as its primary investment objective,
to provide high current income generally exempt from federal income tax. The
Trust's secondary investment objective is to seek total return. The bonds and
notes purchased by the Trust generally are issued by or on behalf of state and
local governmental units, whose interest is exempt from federal income tax.
Under normal circumstances, the Trust will invest at least 80% of its assets in
debt securities that are consistent with its objectives of high current income
and total return. Typically, these investments include tax-exempt bonds that are
rated to be of medium and lower quality or, if unrated, are considered by the
Trust's investment advisor to be of comparable quality. The Trust's investments
in medium and lower quality bonds and notes involve special risks. An investment
in the Trust is not appropriate for all investors.
Investors in Municipal Preferred shares will be entitled to receive cash
dividends at an annual rate that may vary for the successive dividend periods
for such shares. The dividend rate on the Municipal Preferred shares for the
period between the date of issue and , 1999 will be % per year.
For each subsequent period, the auction agent will determine the dividend rate
for a particular period by an auction conducted on the business day prior to
that period. Investors in 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 you 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 , 1999, 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 Colonial Management Associates, Inc. at 1-800-426-3750. See page 42 of
this Prospectus for a table of contents of the Statement of Additional
Information.
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INVESTING IN THE SHARES OF MUNICIPAL PREFERRED INVOLVES CERTAIN RISKS. SEE
THE "RISK FACTORS AND SPECIAL CONSIDERATIONS" SECTION BEGINNING ON PAGE 6 OF
THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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PER
SHARE TOTAL
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Public Price.................................. $25,000 $90,000,000
Sales Load....................................
Proceeds to Trust (before expenses)...........
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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
, 1999.
------------------
SALOMON SMITH BARNEY
, 1999
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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.
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.......................................... 1
RISK FACTORS AND SPECIAL CONSIDERATIONS..................... 6
FINANCIAL HIGHLIGHTS........................................ 8
THE TRUST................................................... 9
USE OF PROCEEDS............................................. 9
CAPITALIZATION AT MAY 31, 1999.............................. 10
PORTFOLIO COMPOSITION....................................... 10
INVESTMENT OBJECTIVES AND POLICIES.......................... 11
MANAGEMENT OF THE TRUST..................................... 19
THE AUCTION................................................. 21
DETERMINATION OF NET ASSET VALUE............................ 23
DESCRIPTION OF MUNICIPAL PREFERRED.......................... 24
RATING AGENCY GUIDELINES.................................... 29
DESCRIPTION OF COMMON SHARES................................ 31
CERTAIN PROVISIONS IN THE AGREEMENT AND DECLARATION OF
TRUST..................................................... 31
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND.... 32
TAX MATTERS................................................. 33
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND
REGISTRAR................................................. 36
UNDERWRITING................................................ 36
LEGAL OPINIONS.............................................. 37
REPORTS TO SHAREHOLDERS..................................... 37
EXPERTS..................................................... 37
FURTHER INFORMATION......................................... 37
GLOSSARY.................................................... 38
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION.... 42
</TABLE>
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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 this 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.................. Colonial Municipal Income Trust (the "Trust")
is offering a total of 3,600 shares of Series F
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. Salomon Smith Barney is
offering the shares as underwriter.
The Municipal Preferred shares 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 such shares. In general,
except as described under "-- Dividends and
Dividend Periods" and "Description of the
Municipal Preferred -- Dividends and Dividend
Periods," each dividend period will be seven
days. An auction agent will determine the
dividend rate for a particular period by an
auction conducted on the business day
immediately prior to the start of that dividend
period.
Investors and potential investors in the
Municipal Preferred shares may participate in
auctions for the Municipal Preferred shares
through their broker-dealers.
Generally, investors in Municipal Preferred
shares will not receive certificates
representing ownership of their shares. The
securities depository (The Depository Trust
Company or any successor) or its nominee for
the account of the investor's agent member
(generally the investor's broker-dealer) will
maintain ownership of the Municipal Preferred
shares in book-entry form. An investor's agent
member, in turn, will maintain records of that
investor's beneficial ownership of Municipal
Preferred shares.
THE TRUST..................... Colonial Municipal Income Trust has operated as
a nondiversified, closed-end management
investment company since 1987. See "The Trust."
The Trust was organized as a Massachusetts
business trust on January 22, 1987 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 "CMU."
DIVIDENDS AND DIVIDEND
PERIODS....................... Dividends on 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 , 1999.
After the initial dividend period, each
dividend period for the shares of Municipal
Preferred will generally consist of seven days;
provided, however, that before any auction, the
Trust may
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decide, subject to certain limitations and only
if it gives certain notices, to declare a
special dividend period of up to five years.
Accordingly, in the case of dividend periods
that are not special dividend periods,
dividends generally will be payable on each
succeeding Monday. The Trust may specify
different dividend payment dates for certain
special dividend periods.
The Trust will pay dividends through the
securities depository (The Depository Trust
Company) on each dividend payment date.
The dividend rate on the shares of Municipal
Preferred for the period between the date of
issue and , 1999 will be % per
year. For each subsequent dividend period, the
auction agent (Bankers Trust Company) will
determine the dividend rate on the shares of
Municipal Preferred through an auction.
MAXIMUM DIVIDEND RATE......... Generally, the rate at which the Trust pays
dividends on shares 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 that may vary over time.
If the number of shares of Municipal Preferred
available during an auction exceeds the total
number of shares subject to bids for that
auction at less than or equal to the maximum
dividend rate, then the dividend rate for the
subsequent dividend period will be the maximum
dividend rate. In addition, if the Trust fails
to pay a dividend on shares of Municipal
Preferred, or if the Trust fails to pay the
full redemption price for shares of Municipal
Preferred when due, then the dividend rate for
the subsequent dividend period 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 Trust's Amended and Restated By-Laws,
which establish and fix the rights and
preferences of the shares of Municipal
Preferred, the Trust must maintain
- asset coverage of the Municipal
Preferred shares as required by the
rating agency or agencies rating the
Municipal Preferred shares, and
- asset coverage of the Municipal
Preferred shares of at least 200% as
required by the Investment Company Act
of 1940.
Based on the composition of the Trust's
portfolio and market conditions as of May 31,
1999, the asset coverage of the Municipal
Preferred shares as measured pursuant to the
Investment Company Act of 1940 would be
approximately 327% if the Trust were to issue
all Municipal Preferred shares offered in this
Prospectus, representing approximately 31% of
the Trust's capital.
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2
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MANDATORY REDEMPTION.......... If the Trust does not maintain its required
asset coverage, it must redeem shares of
Municipal Preferred at $25,000 per share plus
any dividends that accumulate and remain unpaid
up to the date fixed for redemption. The Trust
will 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
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
dividend 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 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 Municipal Preferred shares,
and the holders of any other preferred shares
of the Trust, voting as a separate class, have
the right to
- elect at least two trustees at all
times, and
- elect a majority of the trustees at any
time when dividends on the Municipal
Preferred shares, or any other preferred
shares of the Trust, are unpaid for two
full years.
In each case, the holders of common shares,
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 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 Agreement and
Declaration of Trust, the Investment Company
Act of 1940, and Massachusetts law. Each common
share, each Municipal Preferred share, and each
share of any other class of preferred shares of
the Trust is entitled to one vote per share.
TAXATION...................... 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 payable from
tax-exempt income earned on the Trust's
investments. All or a portion of the Trust's
dividends may be subject to the federal
alternative
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minimum tax. The Trust is currently required to
allocate net capital gain 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 dividend
period of 28 days or fewer for the shares of
Municipal Preferred, and may, in the case of
any other special dividend period for such
shares, give notice of the amount of any income
taxable for federal income tax purposes to be
included in a dividend on shares of Municipal
Preferred in advance of the related auction.
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 OBJECTIVES......... The Trust's primary investment objective is to
provide high current income generally exempt
from Federal income tax. The Trust's secondary
objective is to seek total return.
INVESTMENT STRATEGIES......... The interest on the instruments in which the
Trust primarily invests is exempt from federal
income tax (other than the possible incidence
of any alternative minimum tax).
Under normal circumstances, the Trust will
invest at least 80% of its assets in debt
securities that are consistent with its
objectives of seeking high current income and
total return. Typically, the Trust's
investments include municipal obligations rated
Baa or lower by Moody's Investors Service, Inc.
("Moody's") or BBB or lower by Standard &
Poor's Ratings Services, a division of The
McGraw-Hill Companies ("Standard & Poor's"), or
comparably rated by any other national bond
rating service, or which are unrated but
considered by the Trust's investment advisor,
Colonial Management Associates, Inc., to be of
comparable quality.
The Trust may invest in bonds in the lowest
rating categories (bonds rated C by Moody's or
D by Standard & Poor's), but will do so only
when the Trust's investment advisor believes
the true quality of the credit of the issuer of
such bonds is stronger than the rating
indicates. The Trust may invest in bonds on
which the issuer has defaulted or failed to pay
principal or interest when due.
The Trust may also invest in higher quality
issues, particularly when the difference in
returns between quality classifications is very
narrow or when management expects interest
rates to change.
In addition to investing in municipal
obligations, the Trust may hedge against
changes in interest rates by engaging in the
following:
- interest rate futures contracts,
- index futures, and
- options on interest rate futures
contracts, tax-exempt indices, and index
futures.
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INVESTMENT ADVISOR............ Colonial Management Associates, Inc., an
investment advisor registered under the
Investment Advisers Act of 1940, as amended,
has served as the Trust's investment advisor
since the Trust's inception. The investment
advisor is a wholly owned subsidiary of Liberty
Funds Group LLC, which is an indirect wholly
owned subsidiary of Liberty Mutual Insurance
Company.
RATINGS....................... The Trust will not issue shares of Municipal
Preferred unless such shares have a rating of
aaa from Moody's and AAA from Standard &
Poor's.
SECONDARY MARKET TRADING...... Broker-dealers may, but are not obligated to,
maintain a secondary market in shares 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 Municipal Preferred may
be transferred outside of auctions only to a
broker-dealer or such other persons who may be
permitted by the Trust.
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RISK FACTORS AND SPECIAL CONSIDERATIONS
You should consider the following risk factors and other special
considerations in deciding whether to invest in shares of Municipal Preferred:
LOWER-RATED SECURITIES. Municipal obligations offering the high current
income sought by Colonial Municipal Income Trust (the "Trust") are ordinarily in
the medium and lower rating categories of recognized rating agencies or are
unrated and, therefore, generally involve greater volatility of price and risk
of nonpayment of principal and interest than securities in higher rating
categories. The possibility of defaults by or bankruptcies of issuers of
securities cause, in part, this risk of principal and interest and may result in
nonpayment of principal or interest or restructuring of the debt obligation and,
possibly, a reduction in the Trust's net asset value. The medium and lower
quality municipal obligations in which the Trust will invest are speculative to
varying degrees. While such securities may have some quality and protective
characteristics, large uncertainties or major risk exposures to adverse
conditions are expected to outweigh such characteristics. Municipal obligations
in the lower rating categories are regarded as predominantly speculative in
character. With respect to unrated tax-exempt securities, the Trust will rely
more on the judgment, analysis and experience of the Trust's investment advisor,
Colonial Management Associates, Inc. (the "Advisor"), than for rated securities.
In evaluating the creditworthiness of an issue, whether rated or unrated,
the Advisor may consider, among other things, the following factors:
- the issuer's financial resources;
- its sensitivity to economic conditions and trends;
- any operating history of and the community support for the facility
financed by the issue;
- the ability of the issuer's management; and
- regulatory matters.
The Trust may invest in bonds in the lowest rating categories (for example,
bonds rated C by Moody's, which Moody's regards as having extremely poor
prospects of ever attaining any real investment standing, or bonds rated D by
Standard & Poor's), but will do so only when the Advisor believes the rating
does not accurately reflect the true quality of the credit of the issuer of such
bonds. The Trust may invest in bonds that are in default or on which the issuer
has not made required payments of principal or interest, or both.
In addition, medium and lower rated or unrated municipal obligations are
frequently traded only in markets where the number of potential purchasers and
sellers, if any, is very limited. This may limit the availability of such
securities for the Trust to purchase and the ability of the Trust to sell such
securities at their fair value. The Advisor will attempt to reduce the risks of
investing in medium or lower rated or unrated municipal obligations to the
greatest extent practicable through the use of credit analysis.
NON-DIVERSIFICATION. The Trust is registered as a "non-diversified"
investment company. This means that the Trust may invest a greater percentage of
its assets in a single issuer than a diversified investment company. Even as a
non-diversified investment company, the Trust must still meet the
diversification requirements of applicable Federal income tax laws. Because the
Trust may invest a relatively high percentage of its assets in a limited number
of issuers, the Trust may be more exposed to any single economic, political or
regulatory occurrence than a more widely-diversified investment company.
PRIVATE ACTIVITY BONDS. The Trust may invest in certain tax-exempt
securities classified as "private activity bonds." These bonds may subject
certain investors in the Trust to the alternative minimum tax. The Trust may
invest all or any part of its assets in such private activity bonds.
OPTIONS AND FUTURES TRANSACTIONS. The Trust may seek to hedge its
portfolio against changes in interest rates using options, index options and
futures and financial futures contracts. The Trust's hedging transactions are
designed to reduce volatility but come at some cost. However, the Trust must pay
for the
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<PAGE> 12
option, and the price of the security may not in fact drop. In large part, the
success of the Trust's hedging activities depends on its ability to forecast
movements in securities prices and interest rates. The Trust does not, however,
intend to enter into options and futures transactions for speculative purposes.
The Trust is not required to hedge its portfolio.
ANTITAKEOVER PROVISIONS. The Trust's Agreement and 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:
- The credit ratings of the shares of Municipal Preferred could be
reduced while an investor holds such shares.
- 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.
- 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 Municipal Preferred outside of auctions;
however, they have no obligation to do so and there can be no assurance that a
secondary market for the Municipal Preferred will develop or, if it does
develop, that it will provide holders with a liquid trading market. The shares
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.
YEAR 2000 COMPLIANCE. Like other investment companies, financial and
business organizations and individuals around the world, the Trust could be
adversely affected if the computer systems used by the Advisor, other service
providers and the issuers in which the Trust invests do not properly process and
calculate date-related information and data from and after January 1, 2000. This
is commonly known as the "Year 2000 Problem." The Advisor is taking steps that
it believes are reasonably designed to address the Year 2000 Problem, including
communicating with vendors who provide services, software and systems to the
Trust to provide that date-related information and data can be properly
processed and calculated on and after January 1, 2000. Many Trust service
providers and vendors, including the Advisor, are in the process of making Year
2000 modifications to their services, software and systems and believe that such
modifications will be completed on a timely basis prior to January 1, 2000. In
addition, Year 2000 readiness information, if available, is one of the factors
considered by the Advisor in its assessment of the issuers in which the Trust
invests. There can be no assurance that these steps will be sufficient to avoid
any adverse impact on the Trust.
7
<PAGE> 13
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 each period presented have been audited
by PricewaterhouseCoopers LLP, the Trust's independent accountants, whose
unqualified report on the periods from 1994 through 1998 is included in the
Trust's November 30, 1998 Annual Report and in "Report of Independent
Accountants" in the "Financial Statements" section of the Statement of
Additional Information. 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>
FOR THE FISCAL YEARS ENDED NOVEMBER 30,
---------------------------------------------------------------
1998 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value -- beginning of
period............................... $ 7.410 $ 7.410 $ 7.480 $ 7.150 $ 7.830 $ 7.890
-------- -------- -------- -------- -------- --------
Net investment income.................. 0.469 0.509 0.508 0.547 0.609 0.639
Net realized and unrealized gain
(loss)............................... 0.183 (0.002) (0.068) 0.335 (0.707) (0.063)
-------- -------- -------- -------- -------- --------
Total from investment
operations.................. 0.652 0.507 0.440 0.882 (0.098) 0.576
-------- -------- -------- -------- -------- --------
Distributions:
From net investment income........... (0.487) (0.507) (0.510) (0.552) (0.582) (0.632)
In excess of net investment income..... (0.005) -- -- -- -- (0.004)
-------- -------- -------- -------- -------- --------
Total distributions........... (0.492) (0.507) (0.510) (0.552) (0.582) (0.636)
-------- -------- -------- -------- -------- --------
Net asset value -- end of period....... $ 7.570 $ 7.410 $ 7.410 $ 7.480 $ 7.150 $ 7.830
-------- -------- -------- -------- -------- --------
Per share market value:
End of Period........................ $ 8.125 $ 7.560 $ 7.250 $ 6.750 $ 6.750 $ 8.000
-------- -------- -------- -------- -------- --------
Total return based on net asset
value(b)............................. 8.99% 7.07% 6.38% 12.96% (0.42)% 7.42%
-------- -------- -------- -------- -------- --------
Total return based on market
value(c)............................. 14.57% 11.67% 15.36% 8.04% (10.06)% 11.56%
-------- -------- -------- -------- -------- --------
Net assets, end of period (000)........ $208,931 $203,533 $202,793 $204,666 $195,444 $213,292
Ratio of operating expenses to average
net assets(d)........................ 0.82% 0.86% 0.91% 0.98% 0.90% 0.87%
Ratio of net investment income to
average net assets(d)................ 6.20% 6.83% 6.87% 7.47% 8.12% 8.03%
Portfolio turnover rate................ 34% 15% 22% 24% 24% 21%
<CAPTION>
FOR THE FISCAL YEARS ENDED NOVEMBER 30,
-----------------------------------------------
1992 1991 1990 1989
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value -- beginning of
period............................... $ 8.060 $ 8.370 $ 8.650 $ 8.980
-------- -------- -------- --------
Net investment income.................. 0.636 0.682 0.751 0.768
Net realized and unrealized gain
(loss)............................... (0.170) (0.279) (0.311) (0.321)
-------- -------- -------- --------
Total from investment
operations.................. 0.466 0.403 0.440 0.447
-------- -------- -------- --------
Distributions:
From net investment income........... (0.636) (0.713) (0.720) (0.777)
In excess of net investment income..... -- -- -- --
-------- -------- -------- --------
Total distributions........... (0.636) (0.713) (0.720) (0.777)
-------- -------- -------- --------
Net asset value -- end of period....... $ 7.890 $ 8.060 $ 8.370 $ 8.650
-------- -------- -------- --------
Per share market value:
End of Period........................ $ 7.875 $ 8.375 (a) (a)
-------- -------- -------- --------
Total return based on net asset
value(b)............................. (b) (b) (b) (b)
-------- -------- -------- --------
Total return based on market
value(c)............................. 1.82% 17.77% (12.27)% 7.19%
-------- -------- -------- --------
Net assets, end of period (000)........ $213,420 $216,394 $223,091 $229,209
Ratio of operating expenses to average
net assets(d)........................ 0.87% 0.87% 0.86% 0.87%
Ratio of net investment income to
average net assets(d)................ 7.99% 8.29% 8.92% 8.66%
Portfolio turnover rate................ 10% 12% 20% 18%
</TABLE>
- ---------------
(a) Per share market value: End of period of the Trust was not included in the
audited financial statements for years prior to 1991.
(b) Total return at net asset value assuming all distributions reinvested. Total
return at net asset value for the Trust was not included in the audited
financial statements for years prior to 1993.
(c) Total return at market value assuming all distributions reinvested and
excluding brokerage commissions.
(d) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Ratios for years prior to 1995 are net of
benefits received, if any.
8
<PAGE> 14
THE TRUST
The Trust is a closed-end, nondiversified management investment company.
The Trust's primary investment objective is to provide high income, generally
exempt from Federal income tax. The Trust's secondary investment objective is to
seek total return. The bonds and notes purchased by the Trust generally are
issued by or on behalf of state and local governmental units, whose interest is
exempt from Federal income tax (other than the possible incidence of any
alternative minimum tax) ("Municipal Obligations"). See "Investment Objectives
and Policies." No assurance can be given that the Trust's investment objectives
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 January
22, 1987, and is registered under the Investment Company Act of 1940, as amended
(the "1940 Act"). In March 1987, the Trust issued 26,000,000 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 "CMU." The Trust's
principal office is located at One Financial Center, Boston, MA 02111, and its
telephone number is (617) 426-3750.
USE OF PROCEEDS
The net proceeds of this offering will be approximately $ , after
payment of the sales load to Salomon Smith Barney Inc. (the "Underwriter") and
offering costs.
The net proceeds of the offering will be invested in accordance with the
Trust's investment objectives 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 objectives 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 money
market securities, the income on which will be exempt from Federal income taxes
(other than the possible incidence of any alternative minimum tax), or in
high-quality Municipal Obligations with relatively low volatility (such as
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 Objectives and
Policies -- Temporary and Defensive Investments," the income on which is subject
to Federal income taxes.
9
<PAGE> 15
CAPITALIZATION
AT MAY 31, 1999
The following table sets forth the unaudited capitalization of the Trust at
May 31, 1999 and as adjusted to give effect to the issuance of the shares of
Series F Municipal Preferred offered hereby (including estimated offering
expenses and sales loads of $1,282,520).
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Shareholders' Equity:
Preferred Shares, no par value per share; 3,600 shares
authorized (no shares issued; 3,600 shares of Municipal
Auction Rate Cumulative Preferred Shares issued, as
adjusted, at $25,000 per share liquidation
preference)............................................ $ -- $ 90,000,000
Common Shares, no par value per share; unlimited shares
authorized; 27,623,344 shares outstanding*............. 244,992,130 243,709,610
Undistributed (overdistributed) net investment income..... (1,047,827) (1,047,827)
Net realized gain (loss) from investment transactions..... (43,213,559) (43,213,559)
Net unrealized appreciation of investments................ 4,417,498 4,417,498
------------ ------------
Net Assets............................................. $205,148,242 $293,865,722
============ ============
</TABLE>
- ---------------
* None of these outstanding shares are held by or for the account of the Trust.
PORTFOLIO COMPOSITION
As of May 31, 1999, approximately 99.40% of the market value of the Trust's
portfolio was invested in long and intermediate-term Municipal Obligations and
approximately 0.60% of the market value of the Trust's portfolio was invested in
short-term securities. For purposes of the foregoing sentence, futures in which
the Trust has invested are not included as long and intermediate-term Municipal
Obligations or as short-term securities and 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 May 31, 1999.
<TABLE>
<CAPTION>
STANDARD & NUMBER OF MARKET NUMBER OF MARKET
POOR'S* ISSUES VALUE PERCENT MOODY'S* ISSUES VALUE PERCENT
- ---------- --------- --------------- ------- -------- --------- --------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
AAA 15 $ 20,629,552.56 10.30% Aaa 16 $ 21,977,378.85 10.97%
AA 1 2,060,200.00 1.03 Aa 1 2,060,200.00 1.03
A 6 9,359,207.50 4.67 A 3 4,796,270.00 2.39
BBB 35 35,546,881.80 17.74 Baa 27 28,536,150.75 14.25
BB 8 7,505,218.76 3.75 Ba 8 8,241,093.76 4.11
B 2 1,785,625.00 0.89 B 3 2,922,000.00 1.46
NR** 122 123,437,093.57 61.62 NR** 131 131,790,685.83 65.79
--- --------------- ------ --- --------------- ------
Total 189 $200,323,779.19 100.00% Total 189 $200,323,779.19 100.00%
=== =============== ====== === =============== ======
</TABLE>
- ---------------
* Standard & Poor's rating categories may be modified further by a plus (+) or
minus (-) in AA, A, BBB, BB, B and C ratings. Moody's rating categories may
be modified further by a 1, 2 or 3 in Aa, A, Baa, Ba and B ratings.
** 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 $108,810,907, which represents
54.32% of the market value of the Trust's portfolio (excluding short-term
securities and futures) as of May 31, 1999.
10
<PAGE> 16
INVESTMENT OBJECTIVES AND POLICIES
The Trust's primary investment objective is to provide high current income,
generally exempt from Federal income tax. The Trust's secondary objective is to
seek total return. The Trust may seek to achieve its objectives by engaging in
hedging transactions.
Under normal circumstances, the Trust will invest at least 80% of its
assets in debt securities that are consistent with its objectives of seeking
high current income and total return. Typically, the Trust's investments include
medium and lower quality Municipal Obligations (which are considered to be bonds
which are rated Baa or lower by Moody's or BBB or lower by Standard & Poor's or
comparably rated by any other national bond rating service, or which are unrated
but considered by the Advisor to be of comparable quality). The high yields the
Trust seeks are generally available from such securities. These obligations are
considered to be speculative to varying degrees. For example, bonds rated Ba or
BB are regarded, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of the
obligation. For a more complete description of bond ratings, see Appendix A in
the Statement of Additional Information. As noted above under "Risk Factors and
Special Considerations," the Trust may invest in bonds in the lowest rating
categories (bonds rated C by Moody's or D by Standard & Poor's), but will do so
only when the Advisor believes such rating does not accurately reflect the true
quality of the credit of the issuer of such bonds. The Trust may invest in bonds
that are in default or on which the payment of principal or interest, or both,
is in arrears.
The medium and lower rated or unrated Municipal Obligations that the Trust
intends to purchase are frequently traded in markets where the number of
potential purchasers and sellers, if any, is very limited. This consideration
may limit the availability of such securities for the Trust to purchase and may
also limit the ability of the Trust to sell such securities at their fair value
in response to changes in the economy or the financial markets.
In addition to its investments in medium and lower quality Municipal
Obligations, the Trust may invest in higher quality issues, particularly when
the difference in returns between quality classifications is very narrow or when
management expects interest rates to change. These investments may lessen the
risk of decline in net asset value due to credit deterioration but may also
affect the amount of current income, since yields on high quality securities are
usually lower than yields on medium and lower quality securities.
The Trust may invest in a relatively high percentage of Municipal
Obligations issued by entities having similar characteristics. The issuers may
be located in the same geographic area or may pay their interest obligations
from revenues of similar projects. This may make the Trust more susceptible to
similar economic, political or regulatory occurrences. As the similarity in
issuers increases, the potential for fluctuation of the net asset value of the
Trust's securities also increases.
The Trust's policy is not to concentrate in any industry, but the Trust may
invest up to 25% of its assets in industrial development revenue bonds or
private activity revenue bonds that are based, directly or indirectly, on the
credit of private entities in any one industry, or in securities of private
issuers in any one industry (governmental issuers are not considered to be part
of any "industry"). See "Investment Objectives and Policies -- Fundamental
Investment Policies" and "Investment Objectives and Policies -- Other Investment
Policies" in the Statement of Additional Information.
It is a fundamental policy of the Trust, which may not be changed without
approval of holders of a majority of the Trust's outstanding voting securities
(as defined in "Investment Objectives and Policies -- Fundamental Investment
Policies" and "Investment Objectives and Policies -- Other Investment Policies"
in the Statement of Additional Information), to invest, under normal
circumstances, at least 80% of its assets in tax-exempt bonds and tax-exempt
notes. Except for this policy and the investment policies listed in the
Statement of Additional Information under "Investment Objectives and
Policies -- Fundamental Investment Policies," the Trust's investment policies
and its investment objectives may be changed without shareholder approval.
In addition to investing in Municipal Obligations, the Trust may engage in
transactions involving interest rate futures contracts ("financial futures"),
index futures and options on financial futures, tax-
11
<PAGE> 17
exempt indices and index futures, as a hedge against changes in interest rates.
See "Investment Objectives and Policies -- Hedging Activities." The costs of and
possible losses incurred from such transactions may reduce the Trust's current
return.
The Trust may also purchase securities on a "when-issued" basis, enter into
repurchase agreements and invest in other taxable instruments, subject to
certain limitations. See "Investment Objectives and Policies -- Forward
Commitments," "Investment Objectives and Policies -- Repurchase Agreements" and
"Investment Objectives and Policies -- Temporary and Defensive Investments."
DESCRIPTION OF MUNICIPAL OBLIGATIONS
As used in this Prospectus, the term "Municipal Obligations" refers to debt
obligations the interest on which was at the time of issuance, in the opinion of
bond counsel to the issuer, exempt from Federal income tax (other than the
possible incidence of any alternative minimum tax). (For a description of the
Federal alternative minimum tax, see "Tax Matters -- Federal Taxation of
Shareholders.") Municipal Obligations include debt obligations issued by a state
(including the District of Columbia), a territory or a possession of the United
States, or any political subdivision thereof, to obtain funds for various public
purposes, including the construction of a wide range of public facilities such
as airports, bridges, highways, housing, mass transportation, roads, schools and
water and sewer works or for other public purposes. Interest on industrial
development bonds used to fund the construction, equipment, repair or
improvement of privately-operated industrial or commercial facilities may also
be exempt from Federal income tax, but the size of such issues is limited under
current Federal tax law. The Trust may not be a desirable investment for
"substantial users" of facilities financed by industrial development bonds or
private activity bonds or for "related persons" of substantial users. See "Tax
Matters" in this Prospectus and "Tax Matters" in the Statement of Additional
Information. The Trust has no present intention of investing in Municipal
Obligations the interest on which is not exempt from Federal income tax (other
than the possible incidence of any alternative minimum tax).
The two principal classifications of Municipal Obligations are general
obligation bonds and limited obligation (or revenue) bonds. General obligation
bonds are obligations involving the credit of an issuer possessing taxing power
and are payable from the issuer's general unrestricted revenues and not from any
particular fund or source. The characteristics and method of enforcement of
general obligation bonds vary according to the law applicable to the particular
issuer, and payment may be dependent upon appropriation by the issuer's
legislative body. Limited obligation bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source.
Tax-exempt industrial development bonds and private activity bonds also
generally are revenue bonds and thus not payable from the unrestricted revenues
of the issuer. The credit quality of industrial development bonds and private
activity bonds is usually directly related to the credit of the corporate user
of the facilities. Payment of principal of and interest on industrial
development bonds and private activity bonds is the responsibility of the
corporate user (and any guarantor).
Prices and yields on Municipal Obligations are dependent on a variety of
factors, including general money market conditions, the financial condition of
the issuer, general conditions in the tax-exempt bond market, the size of a
particular offering, the maturity of the obligation and the ratings of
particular issues, and are subject to change from time to time. Information
about the financial condition of an issuer of Municipal Obligations may not be
as extensive as that which is made available by corporations whose securities
are publicly traded.
The ratings of Moody's, Standard & Poor's and other national bond rating
services represent their opinions and are not absolute standards of quality.
Municipal Obligations with the same maturity, interest rate and rating may have
different yields while Municipal Obligations of the same maturity and interest
rate with different ratings may have the same yield.
Obligations of issuers of Municipal Obligations are subject to the
provisions of bankruptcy, insolvency and other laws, such as the Federal
Bankruptcy Reform Act of 1978, affecting the rights and remedies of creditors.
Congress or state legislatures may seek to extend the time for payment of
principal or interest, or
12
<PAGE> 18
both, or to impose other constraints upon enforcement of such obligations. There
is also the possibility that, as a result of litigation or other conditions, the
power or ability of issuers to meet their obligations to pay interest on and
principal of their Municipal Obligations may be materially impaired or their
obligations may be found to be invalid or unenforceable. Such litigation or
conditions may from time to time have the effect of introducing uncertainties in
the market for Municipal Obligations or certain segments thereof, or materially
affecting the credit risk with respect to particular bonds. Adverse economic,
business, legal or political developments might affect all or a substantial
portion of the Trust's Municipal Obligations in the same manner.
HEDGING ACTIVITIES
Hedging is a means of transferring risk that an investor does not desire to
assume in an uncertain interest rate environment. The Advisor believes it is
possible to reduce or enhance the effects of interest rate fluctuations through
the use of futures contracts and options on financial instruments. However, so
long as either Standard & Poor's or Moody's is rating the shares of 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. Thus, the ability of the Trust to
engage in hedging activities may be limited by such rating agency restrictions.
The Trust may purchase and sell financial futures and tax-exempt bond index
futures contracts ("index futures") to hedge against changes, caused by changing
interest rates, in the market value of Municipal Obligations in its portfolio or
that it intends to acquire. In order to hedge, the Trust may also purchase and
write put and call options on financial futures, tax-exempt bond indices and
index futures. The costs of and possible losses incurred from these transactions
may reduce the Trust's current return.
Income earned by the Trust from its hedging activities will be treated as
capital gain and, if not offset by net realized capital loss, will be
distributed to shareholders in taxable distributions. See "Tax
Matters -- Federal Taxation of Shareholders."
The Trust will not engage in transactions in futures contracts or related
options for speculative purposes but only as a hedge against changes resulting
from market conditions in the values of securities in its portfolio or that it
intends to acquire. In addition, the Trust will not purchase or sell futures
contracts or purchase or sell related options if immediately thereafter the sum
of the amount of its initial margin deposits on its existing futures and related
options positions and premiums paid for related options would exceed 5% of its
total assets (taken at current value). In instances involving the purchase of
futures contracts or call options thereon or the writing of put options thereon
by the Trust, an amount of cash or liquid high-grade debt securities, equal to
the underlying commodity value of the futures contracts and options (less any
related margin deposits), will be deposited in a segregated account with the
Trust's custodian to collateralize the position and thereby ensure that the use
of such futures contracts and options is unleveraged.
FINANCIAL FUTURES. In connection with its hedging activities, the Trust
may engage in transactions involving financial futures. A financial future is a
contract that obligates the seller to deliver and the purchaser to take delivery
of a specified type of financial instrument at a specified future time and at a
specified price. Although financial futures contracts by their terms require
actual delivery and acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract purchase or sale is effected by
entering into an offsetting transaction. Financial futures trade on boards of
trade that have been designated "contracts markets" by the Commodity Futures
Trading Commission. Financial futures trade on these markets in a manner that is
similar to the way a stock trades on a stock exchange. The boards of trade,
through their clearing corporations, guarantee performance of the contracts.
Currently, there are financial futures based on long-term U.S. Treasury bonds,
U.S. Treasury notes, Government National Mortgage Association ("GNMA")
certificates, three-month U.S. Treasury bills and three-month domestic bank
certificates of
13
<PAGE> 19
deposit. The Trust expects other financial futures to be developed and traded.
The Trust expects to engage in transactions involving financial futures if, in
the opinion of the Advisor, they are appropriate hedging instruments for the
Trust.
The sale of financial futures by the Trust is for the purpose of hedging
the Trust's holdings of long-term debt securities. In the event of a rise in
interest rates, the value of the Trust's short position in financial futures
would increase at approximately the same rate as the value of the long-term
bonds in its portfolio would decline, thereby keeping the net asset value of the
Trust from declining as much as it otherwise would have.
If, on the other hand, the Trust held cash reserves and interest rates were
expected to decline, the Trust might purchase futures contracts and thus take
advantage of the anticipated rise in the value of long-term securities without
actually buying them. In such an event, the futures contracts could be
liquidated and the Trust's cash reserves could then be used to buy long-term
securities in the cash market.
Unlike when the Trust purchases or sells a security, no price is paid or
received by the Trust upon the sale or purchase of a financial future. The Trust
will initially be required to deposit with the Trust's custodian an amount of
"initial margin" of cash or U.S. Treasury bills equal to a small percentage of
the contract amount. The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that initial margin
on financial futures does not involve the borrowing of funds by the customer to
finance the transactions. Rather, the initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned to the
Trust upon termination of the financial future, assuming all contractual
obligations have been satisfied. Subsequent payments, called maintenance margin,
to and from the broker, will be made on a daily basis as the price of the
underlying debt security fluctuates, making the long and short positions in the
financial future more or less valuable, a process known as "marking to market."
For example, when the Trust has sold a financial future and the price of the
underlying debt security has declined, that position will have increased in
value and the Trust will receive from the broker a maintenance margin payment
equal to that increase. Conversely, where the Trust has sold a financial future
and the price of the underlying debt security has increased, the position would
be less valuable, and the Trust would be required to make a maintenance margin
payment to the broker. At any time prior to expiration of the financial future,
the Trust may elect to close the position by taking an opposite position in the
financial future. A final determination of maintenance margin is then made,
additional cash is required to be paid by or released to the Trust, and the
Trust realizes a loss or a gain. While financial futures based on debt
securities do provide for the delivery and acceptance of securities, such
deliveries and acceptances are very seldom made. Generally, the financial future
is terminated by entering into an offsetting transaction. An offsetting
transaction for a financial future sale is effected by the Trust entering into a
financial future purchase for the same aggregate amount of the specific type of
financial instrument and same delivery date. If the price in the sale exceeds
the price in the offsetting purchase, the Trust immediately is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Trust pays the difference and realizes a loss.
There are several risks in connection with the use of financial futures by
the Trust as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the financial future and movements
in the price of the debt securities that are the subject of the hedge. Financial
futures based on U.S. Government securities and GNMA certificates historically
have reacted to an increase or decrease in interest rates in a similar fashion
to the underlying U.S. Government securities and GNMA certificates. To the
extent, however, that the Trust enters into financial futures on other than
Municipal Obligations, which are the only financial futures currently available,
there is a possibility that the value of such financial futures would not vary
in direct proportion to the value of the Trust's holdings of Municipal
Obligations.
Another result of the imperfect correlation between movements in the prices
of the financial future and of the debt securities being hedged is that the
price of the financial future may move more or less than the price of the debt
securities being hedged. If the price of the financial future moves less than
the price of the securities that are the subject of the hedge, the hedge will
not be fully effective, but if the
14
<PAGE> 20
price of the securities being hedged has moved in an unfavorable direction, the
Trust would be in a better position than if it had not hedged at all. If the
price of the securities being hedged has moved in a favorable direction, the
advantage will be partially offset by the futures contract. If the price of the
financial future moves more than the price of the security, the Trust will
experience either a loss or a gain on the future which will not be completely
offset by movements in the prices of the debt securities which are the subject
of the hedge. To compensate for the imperfect correlation of movements in the
price of debt securities being hedged and movements in the price of related
financial futures, the Trust may sell financial futures in a greater or lesser
dollar amount than the dollar amount of the securities being hedged.
The market prices of financial futures may be affected by several factors
other than interest rates. First, all participants in the futures market are
subject to margin deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors may close financial futures
through offsetting transactions, which could distort the normal relationship
between the debt securities and futures markets. Second, from the point of view
of speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause temporary
price distortions. Due to the possibility of price distortions in the futures
market and the imperfect correlation between movements in the prices of debt
securities and movements in the prices of related financial futures, a correct
forecast of interest rate trends by the Trust's investment advisor may still not
result in a successful hedging transaction.
Positions in futures contracts may be closed out only on an exchange or
board of trade that provides a secondary market for such futures. Although the
Trust intends to engage in futures transactions only on exchanges or boards of
trade where there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange or board of trade will
exist for any particular contract or at any particular time. If there is not a
liquid secondary market at a particular time, it may not be possible to close a
futures position at such time, and in the event of adverse price movements, the
Trust would continue to be required to make daily cash payments of maintenance
margin. However, in the event financial futures are used to hedge portfolio
securities, such securities will not be sold until the financial futures can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the financial futures.
OPTIONS ON FINANCIAL FUTURES. The Trust may also purchase put and call
options on financial futures which are traded on a U.S. exchange or board of
trade and enter into closing transactions with respect to such options to
terminate an existing position. The purchase of put options on financial futures
is analogous to the sale of futures so as to hedge the Trust's portfolio of debt
securities against the risk of rising interest rates. The purchase of call
options on financial futures is analogous to the purchase of futures contracts
and represents a means of obtaining temporary exposure to market appreciation at
limited risk. Such options may be used to protect against a market advance when
the Trust is not fully invested.
The Trust may write call options on futures contracts, which constitutes a
partial hedge against any declining price of long-term debt securities. If the
futures price at expiration is below the exercise price, the Trust will retain
the full amount of the option premium, which provides a partial hedge against
any decline that may have occurred in the Trust's holdings of debt securities.
If the futures price at expiration exceeds the exercise price, the Trust will
ordinarily realize a loss equal to the amount of such excess.
The Trust may write put options on futures contracts, which constitutes a
partial hedge against an increase in the price of long-term debt securities when
the Trust is not fully invested. If the futures price at expiration is above the
exercise price, the Trust will retain the full amount of the option premium,
which provides a partial hedge against any increase in the market price of
long-term debt securities. If the futures price at expiration is less than the
exercise price, the Trust will ordinarily realize a loss equal to the difference
between the futures price and the exercise price.
An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will
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be accompanied by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option on the futures contract.
If an option is exercised on the last trading day prior to the expiration date
of the option, the settlement will be made entirely in cash in an amount equal
to the difference between the exercise price of the option and the closing price
of the futures contract on the expiration date. Currently options can be
purchased or written with respect to futures contracts on U.S. Treasury bonds on
the Chicago Board of Trade. The holder or writer of an option may terminate his
position by selling or purchasing an option of the same series. There is no
guarantee that such closing transactions can be effected.
Several special risks relate to transactions in options on futures. The
ability to establish and close out positions on such options will be subject to
the maintenance of a liquid secondary market. Compared to the sale of financial
futures, the purchase of put options on financial futures involves less
potential risk to the Trust because the maximum amount at risk is the premium
paid for the options (plus transaction costs). However, there may be
circumstances when the purchase of a put option on a financial future would
result in a loss to the Trust when the sale of a financial future would not,
such as when there is no movement in the price of debt securities.
An option position may be closed out only on an exchange or board of trade
that provides a secondary market for an option of the same series. Although the
Trust generally will purchase only those options for which there appears to be
an active secondary market, there is no assurance that a liquid secondary market
on an exchange or board of trade will exist for any particular option, or at any
particular time, and for some options, no secondary market on an exchange or
board of trade may exist. In such event, it might not be possible to effect
closing transactions in particular options, with the result that the Trust would
have to exercise its options in order to realize any profit and would incur
transaction costs upon closing out the futures positions acquired pursuant to
the exercise of such option.
Reasons for the absence of a liquid secondary market on an exchange or
board of trade include the following:
- there may be insufficient trading interest in certain options;
- restrictions may be imposed by an exchange or board of trade on opening
transactions or closing transactions or both;
- trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options;
- unusual or unforeseen circumstances may interrupt normal operations on an
exchange or board of trade;
- the facilities of an exchange or board of trade or the Options Clearing
Corporation (the "Clearing Corporation") may not at all times be adequate
to handle current trading volume; or
- one or more exchanges or boards of trade could, for economic or other
reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which
event the secondary market on that exchange or board of trade (or in that
class or series of options) would cease to exist, although outstanding
options on that exchange or board of trade which had been issued by the
Clearing Corporation as a result of trades on that exchange or board of
trade could continue to be exercisable in accordance with their terms.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Clearing Corporation inadequate, and thereby result in the institution by an
exchange or board of trade of special procedures that may interfere with the
timely execution of customers' orders.
TAX-EXEMPT BOND INDEX TRANSACTIONS. The Trust anticipates utilizing
tax-exempt bond index futures as a hedge against changes in the market value of
the Municipal Obligations in its portfolio or which it
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intends to acquire. A tax-exempt bond index assigns relative values to the
Municipal Obligations included in the index. A tax-exempt bond index fluctuates
with changes in the market values of the Municipal Obligations included in the
index. An index future is a bilateral agreement pursuant to which two parties
agree to receive or deliver at settlement an amount of cash equal to a specified
dollar amount multiplied by the difference between the value of the index at the
close of the last trading day of the contract and the price at which the future
was originally written. An index future has similar characteristics to financial
futures discussed above except that settlement is made through delivery of cash
rather than the underlying securities.
The Trust's strategies in employing index futures will be similar to the
strategies involved in financial futures transactions. Tax-exempt bond index
futures transactions also will be subject to risks similar to those described
above with respect to financial futures, except that the correlation between
movements in the price of a futures contract and movements in the price of the
Trust's portfolio securities is likely to be higher for index futures than for
financial futures.
The Trust may also purchase and write put and call options on tax-exempt
bond indices and on tax-exempt bond index futures and enter into closing
transactions with respect to such options. An option on an index gives the
holder the right to receive cash upon exercise of the option in an amount equal
to a specified multiple times the amount by which the fixed exercise price of
the option exceeds, in the case of a put, or is less than, in the case of a
call, the closing value of the underlying index on the date of exercise. An
option on an index future gives the purchaser the right, in return for the
premium paid, to assume a position in an index contract rather than to sell (in
the case of a put option) or buy (in the case of a call option) a debt
instrument at a specified exercise price at any time during the period of the
option. Upon exercise of the put option, the delivery of the futures position by
the holder of the option to the writer of the option will be accompanied by
delivery of the accumulated balance of the writer's futures margin account,
which represents the amount by which the market price of the index futures
contract, at exercise, is less than the exercise price of the put option on the
index future.
FORWARD COMMITMENTS
New issues of Municipal Obligations are often purchased on a "when-issued"
or delayed delivery basis. The payment obligations and the interest rate that
will be received on the securities are fixed at the time the buyer enters into
the commitment. The Trust will not begin earning interest on such securities,
however, until the securities are scheduled for settlement. The Trust may enter
into such "forward commitments" if it holds and maintains until the settlement
date, in a segregated account, cash or short-term debt obligations in an amount
sufficient to meet the purchase price provided such obligations are rated A-1 +
or SP-1+ by Standard & Poor's or the long-term debt of the issuers of such
obligations is rated AAA by Standard & Poor's. Forward commitments involve a
risk of loss if the value of the Municipal Obligation to be purchased declines
prior to the settlement date. Such a decline in value could result from, among
other things, changes in the level of interest rates or other market factors.
This risk is in addition to the risk of decline in the value of the Trust's
other assets. Although the Trust generally will enter into forward commitments
with the intention of acquiring Municipal Obligations for its portfolio, the
Trust may dispose of a commitment prior to settlement if the Advisor deems it
appropriate to do so. The Trust may realize capital gain or loss upon the sale
of forward commitments. Any such gains, if not offset by net realized capital
losses, will be distributed to shareholders in taxable distributions.
REPURCHASE AGREEMENTS
The Trust may purchase U.S. Government securities and concurrently enter
into so-called "repurchase agreements" with the seller, usually a bank or
broker-dealer, whereby the seller agrees to repurchase such securities at the
Trust's cost plus interest within a specified time (normally one day). While
repurchase agreements involve certain risks not associated with direct
investments in U.S. Government securities, the Trust will follow procedures
designed to minimize such risks. These procedures include effecting repurchase
transactions only with the member banks of the Federal Reserve System and
registered broker-dealers having creditworthiness substantially equivalent to
that of the issuers of
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investment grade debt securities. In addition, the Trust's repurchase agreements
will always be at least equal to the repurchase price, including any accrued
interest earned on the repurchase agreement. In the event of a default or
bankruptcy by a seller, the Trust will seek to liquidate such collateral.
However, the exercise of the Trust's right to liquidate such collateral could
involve certain costs or delays and, to the extent that proceeds from any sale
upon a default of the obligation to repurchase were less than the repurchase
price, the Trust could suffer a loss.
ZERO COUPON SECURITIES (ZEROS)
The Trust may invest in zero coupon securities, which are securities issued
at a significant discount from face value and pay interest only at maturity
rather than at intervals during the life of the security and in certificates
representing undivided interests in the interest or principal of mortgage-backed
securities (interest only/principal only), which tend to be more volatile than
other types of securities. The Trust will accrue and distribute income from zero
coupon and stripped securities and certificates on a current basis and may have
to sell securities to generate cash for distributions.
TEMPORARY AND DEFENSIVE INVESTMENTS
A portion of the Trust's assets will be held in cash or invested in
short-term securities for day-to-day operating purposes. It is the intention of
the Trust that short-term investments will also be in tax-exempt securities.
However, if suitable short-term tax-exempt securities are not available or if
short-term tax-exempt securities are available only on a when-issued basis, the
Trust may invest up to 20% of its assets in short-term obligations of the U.S.
Government or in repurchase agreements, or short-term notes and obligations
rated A-1+, of banks that have or whose parent holding companies have long-term
debt ratings of AAA or of corporations with long-term debt ratings of AAA, the
interest on all of which is not exempt from Federal income taxes.
Notwithstanding the foregoing, the Trust may temporarily invest more than 20% of
its assets in such taxable obligations for defensive purposes. The ability of
the Trust to invest in securities other than tax-exempt securities (as well as
its ability to enter into repurchase agreements) is limited, however, by a
requirement of the Code that at least 50% of its total assets be invested in
tax-exempt securities at the end of each quarter in order to pass through to
shareholders the Federal income tax exemption for dividends derived from net
investment income on tax-exempt securities. See "Tax Matters -- Federal Taxation
of Shareholders."
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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 Advisor
under its Management Agreement (as defined below) with the Trust. There are 13
trustees of the Trust, five of whom are "interested persons" (as defined in the
1940 Act) of the Trust, the Advisor or the Underwriter. 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 ADVISOR
The Advisor is Colonial Management Associates, Inc., a Massachusetts
corporation having its principal offices at One Financial Center, Boston,
Massachusetts 02111. The Advisor is a wholly owned subsidiary of Liberty Funds
Group LLC ("Liberty Funds Group") and both Liberty Funds Group and the Advisor
are indirect wholly owned subsidiaries of Liberty Mutual Insurance Company
("Liberty"), an underwriter of workers' compensation insurance and a property
and casualty insurer in the U.S. The Advisor has been an investment advisor
since 1931. As of the date of this Prospectus, the Advisor serves as investment
advisor or sub-advisor for 35 open-end and 5 closed-end management investment
companies and manages over $16 billion in assets.
The Advisor's investment advisory business is managed together with the
mutual funds and institutional investment advisory businesses of its affiliate,
Stein Roe & Farnham Incorporated ("Stein Roe"), by a combined management team of
employees from both companies. Stein Roe also shares personnel, facilities and
systems with Colonial that may be used in providing administrative services to
the Trust. Both the Advisor and Stein Roe are subsidiaries of Liberty Financial
Companies, Inc.
Maureen Newman, a Senior Vice President of the Advisor, has managed the
Trust since July 1998. Ms. Newman joined the Advisor in May 1996 as Vice
President, Portfolio Manager and Director of Municipal Research and has served
in that capacity since that date. Prior to joining the Advisor, Ms. Newman was a
portfolio manager and bond analyst at Fidelity Investments from May 1985 until
May 1996.
MANAGEMENT AGREEMENT
The Management Agreement between the Advisor and the Trust (the "Management
Agreement") provides that, subject to the direction of the Board of Trustees of
the Trust and the applicable provisions of the 1940 Act, the Advisor is
responsible for the actual management of the Trust's portfolio. The
responsibility for making decisions to buy, sell or hold a particular investment
rests with the Advisor, subject to review by the Board of Trustees of the Trust
and compliance with the applicable provisions of the 1940 Act.
The Advisor provides the Trust with accounting, bookkeeping and pricing
services and other services and office facilities (the expenses of which are
borne by the Trust as specified below), except to the extent these services are
provided by an administrator or an accounting firm hired by the Trust.
Under the Management Agreement with the Trust, the Advisor receives a
monthly advisory fee at the annual rate of 0.65% of the average weekly net
assets of the Trust. Since the Advisor's fee is based on the average weekly net
assets of the Trust, the Advisor will benefit from the increase in the Trust's
net assets resulting from the offering of the shares of Municipal Preferred. It
is not possible to state precisely the amount of additional compensation the
Advisor will receive as a result of the offering because the proceeds of the
offering will be invested in additional portfolio securities which will
fluctuate in value. However, based on the estimated proceeds from the offering,
assuming all the shares of Municipal Preferred offered hereby are purchased, the
Advisor would receive additional annual advisory fees of approximately $576,663
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as a result of the increase in average weekly net assets under management over
the Trust's current net assets under management, assuming no fluctuations in the
value of Trust portfolio securities.
The Advisor places all orders for the purchase and sale of portfolio
securities. In selecting broker-dealers, the Advisor may consider research and
brokerage services furnished by such broker-dealers to the Advisor and its
affiliates. In recognition of the research and brokerage services provided, the
Advisor may cause the Trust to pay the selected broker-dealer a higher
commission than would have been charged by another broker-dealer not providing
such services. Subject to seeking best execution, the Advisor may consider sales
of shares of certain other funds distributed by affiliates of Liberty in
selecting broker-dealers for portfolio security transactions.
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THE AUCTION
GENERAL
The proposed provisions of the Amended and Restated By-Laws of the Trust
(the "By-Laws") 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 By-Laws and summarized below, in which persons determine to hold or offer to
sell or, based on dividend rates bid by them, offer to purchase or sell such
shares. Each periodic implementation of the Auction Procedures is referred to
herein as an "Auction."
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 shares 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:
- Hold Order -- indicating its desire to hold shares of Municipal Preferred
without regard to the Applicable Rate for the next Rate Period.
- 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).
- 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 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
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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 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. 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 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 C to the Statement of Additional Information.
The first Auction for shares of Municipal Preferred will be held on Friday,
, 1999, the Business Day preceding the Dividend Payment Date for the
Initial Rate Period thereof. Thereafter, except during Special Rate Periods,
Auctions will normally be held every Friday, and each Subsequent Rate Period
will normally begin on the following Monday.
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
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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.
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. 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 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. Eastern 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. Portfolio securities for which market quotations are readily
available are valued at current market value. Short-term investments maturing in
60 days or less are valued at amortized cost when the Advisor determines,
pursuant to procedures adopted by the Board of Trustees, that such cost
approximates current market value. All other securities and assets are valued at
their fair value following procedures adopted by the Board of Trustees.
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DESCRIPTION OF MUNICIPAL PREFERRED
GENERAL
The Agreement and Declaration of Trust of the Trust (the "Declaration")
provides that the Trust may authorize separate classes of shares of beneficial
interest. The By-Laws of the Trust will, at the time they are amended and
restated, authorize the issuance of 3,600 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 By-Laws authorize the issuance of up to 3,600
shares of Series F 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 "Certain Provisions in the Agreement and
Declaration of Trust," 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 shares of Municipal Preferred 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 By-Laws and applicable law on Monday,
, 1999, and thereafter on each Monday; provided, however, that (1)
if the Monday 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 Monday 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 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 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 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
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<PAGE> 30
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 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.
If any Auction for any Subsequent Rate Period is not held for any reason
other than as described below, the dividend rate 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 and the Trust shall have paid a late charge, each as described more fully
in the Statement of Additional Information, no Auction will be held 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 or the Trust shall not have paid a late charge, each as described
more fully in the Statement of Additional Information, no Auction will be held
in respect of such shares 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 and such late charge so paid (such
late charge to be paid only in the event Moody's is rating such shares at the
time the Trust cures such failure)), 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-").
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<PAGE> 31
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, and
such failure shall not have been cured or, in the event Moody's is then rating
such shares, the Trust shall not have paid a late charge, in each case prior to
12:00 Noon, Eastern time, on the fourth Business Day preceding the Auction Date
for the Rate Period subsequent to such Rate Period and as more fully described
in the Statement of Additional Information, no Auction will be held 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 such late
charge is so paid (such late charge to be paid only in the event that Moody's is
rating the shares at the time and the Trust cures such failure)), 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, 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 and (ii) without duplication, the redemption price for the
shares of Municipal Preferred, 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 By-Laws
and applicable law, dividends in an amount equal to the aggregate Gross-up
Payment in accordance with the following:
If, in the case of any Minimum Rate Period or any Special Rate Period of 28
Rate Period Days or fewer, the 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 will, prior to the end of the calendar year in which such dividend was
paid, provide notice thereof to the Auction Agent and direct the 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 calendar year at such holder's address as the same appears
or last appeared on the record books of the Trust.
If, in the case of any Special Rate Period of more than 28 Rate Period
Days, the Trust makes a Taxable Allocation to a dividend paid on shares of
Municipal Preferred, the Trust shall, prior to the end of the calendar year in
which such dividend was paid, provide notice thereof to the Auction Agent and
direct the Trust's dividend disbursing agent to send such notice with a Gross-up
Payment to each holder of such shares that was entitled to such dividend payment
during such calendar year at such holder's address as the same appears or last
appeared on the record books of the Trust.
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
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<PAGE> 32
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.
VOTING RIGHTS
In addition to voting rights described below under "Certain Provisions in
the Agreement and Declaration of Trust" and in the Statement of Additional
Information under "Investment Objectives 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
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<PAGE> 33
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 Agreement and 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 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 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.
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 $90,000,000. 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 By-Laws and applicable law, at the
redemption price of $25,000 per share plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption. Any such redemption will be limited to
the number of shares of Municipal Preferred necessary to restore the required
Discounted Value or the 1940 Act Municipal Preferred Asset Coverage, as the case
may be.
In determining the number of shares of Municipal Preferred required to be
redeemed in accordance with the foregoing, the 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.
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<PAGE> 34
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 By-Laws and applicable
law, at the redemption price of $25,000 per share plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or
declared) to (but not including) the date fixed for redemption; provided,
however, that (1) 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 By-Laws and applicable
law, on the first day following any Dividend Period included in a Rate
Period of more than 364 Rate Period Days if, on the date of determination
of the Applicable Rate for 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
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.
LIQUIDATION
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, 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, before any
payment or distribution shall be made on the Common Shares, an amount equal to
the liquidation preference with respect to such shares ($25,000 per share), plus
an amount equal to all dividends thereon (whether or not earned or declared)
accumulated but unpaid to (but not including) the date of final distribution in
same-day funds, together with any applicable Gross-up Payments in connection
with the liquidation of the 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
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<PAGE> 35
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 May 31, 1999, 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 $1,282,520, would be computed as follows:
<TABLE>
<S> <C> <C> <C> <C>
Value of Trust assets less liabilities not
constituting senior securities $293,865,722
- ------------------------------------------- ------------
= = 327%
Senior securities representing indebtedness
plus $ 90,000,000
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 Advisor, and information obtained from other sources. The ratings may be
changed, suspended or withdrawn as a result of changes in, or the unavailability
of, such information.
A rating agency's guidelines will apply to 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.
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<PAGE> 36
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.
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 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 at a discount from net asset
value.
CERTAIN PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST
The Board of Trustees is divided into three classes, each having a term of
three years. Each year the term of one class expires. This may make it more
difficult to change the 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. In
addition, the Declaration provides that the affirmative vote or consent of
two-thirds of the outstanding Common Shares and any Preferred Shares of the
Trust (including shares of Municipal Preferred), voting together as a single
class, and of the Preferred Shares (including shares of Municipal Preferred)
voting together as a single 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.
Reference should be made to the Declaration on file with the Commission for
the full text of these provisions.
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<PAGE> 37
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), voting
together as a single class, and of the Preferred Shares (including shares of
Municipal Preferred) voting together as a single class, entitled to be voted on
the matter. This two-thirds vote requirement is higher than the vote required
under the 1940 Act. Shareholders of an open-end investment company may require
the company to redeem their shares at any time (except in certain circumstances
as authorized by or under the 1940 Act) at their net asset value, less such
redemption charges, if any, as might be in effect at the time of redemption. If
the 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.
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<PAGE> 38
TAX MATTERS
The following Federal tax discussion is based on the advice of Ropes &
Gray, counsel to the Trust, and reflects provisions of the Code, existing
Treasury regulations, rulings published by the Internal Revenue Service, and
other applicable authority, as of the date of this Prospectus. These authorities
are subject to change by legislative or administrative action. The following
discussion is only a summary of some of the important tax considerations
generally applicable to investments in the Trust. There may be other tax
considerations applicable to particular investors. In addition, income earned
through an investment in the Trust may be subject to foreign, state and local
taxes. Prospective shareholders are therefore urged to consult their tax
advisors with respect to the tax consequences to them of an investment in the
Trust. For more information on Federal income tax considerations, see "Tax
Matters" in the Statement of Additional Information.
FEDERAL TAXATION OF THE TRUST
The Trust intends to qualify each year for taxation as a regulated
investment company under Subchapter M of the Code. If the Trust so qualifies,
the Trust will not be subject to Federal income tax on income distributed in a
timely manner to Trust shareholders in the form of dividends or capital gain
distributions.
The Trust's investments and hedging activities are subject to certain
special Federal tax rules. Code rules governing the Trust's hedging transactions
(including hedging transactions in futures and options) may alter the character
of distributions to holders of shares of Municipal Preferred. Income earned as a
result of the Trust's hedging transactions will not be eligible to be treated as
"exempt-interest dividends" when distributed to shareholders. The Trust's
investment in securities issued at a discount will (and investments in
securities purchased at a discount may) require the Trust to accrue and
distribute income not yet received. Therefore, in order to generate sufficient
cash to make the requisite distributions, the Trust may be required to sell
securities in its portfolio that it otherwise would have continued to hold.
FEDERAL TAXATION OF SHAREHOLDERS
DIVIDENDS AND OTHER DISTRIBUTIONS. Assuming that the Trust qualifies for
taxation as a regulated investment company under Subchapter M of the Code and
that, at the close of each quarter of the Trust's taxable year, at least 50% of
the value of the Trust's total assets consists of obligations the interest on
which is exempt from Federal income tax under Code section 103(a), the Trust
will qualify to pay "exempt-interest dividends" to its shareholders to the
extent of its tax-exempt interest income (less applicable expenses).
Distributions of net tax-exempt interest income that the Trust properly
designates as exempt-interest dividends are treated by shareholders as interest
excludable from their gross income for Federal income tax purposes but may be
taxable for Federal alternative minimum tax purposes (discussed below) and for
foreign, state and local tax purposes.
Under the Code, the interest on certain "private activity bonds" issued
after August 7, 1986 is treated as a preference item and is (after reduction by
applicable expenses) included in the Federal alternative minimum taxable income
of both individuals and corporations. The Trust will furnish to shareholders
annually a report indicating the percentage of Trust income treated as a
preference item for alternative minimum tax purposes. In addition, for
corporations, alternative minimum taxable income is increased by a percentage of
the amount by which an alternative measure of income that includes interest on
all tax-exempt securities exceeds the amount otherwise determined to be
alternative minimum taxable income. Accordingly, the portion of the Trust's
dividends that would otherwise be tax-exempt to shareholders may cause certain
shareholders to be subject to the Federal alternative minimum tax or may
increase the tax liability of a shareholder who is subject to such tax.
Investors should thus consider the possible effect of an investment in the Trust
on their Federal alternative minimum tax liability.
Exempt-interest dividends attributable to interest received on certain
private activity bonds and certain industrial development bonds will not be
tax-exempt to any shareholders who are, within the meaning of
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<PAGE> 39
Section 147(a) of the Code, "substantial users" of the facilities financed by
such obligations or bonds or who are "related persons" of such substantial
users.
The receipt of exempt-interest dividends may affect the portion, if any, of
an individual shareholder's Social Security and Railroad Retirement benefits
that will be includable in gross income subject to Federal income tax. Up to 85
percent of Social Security and Railroad Retirement benefits may be included in
gross income in cases where the recipient's combined income, consisting of
adjusted gross income (with certain adjustments), tax-exempt interest income and
one-half of any Social Security and Railroad Retirement benefits, exceeds a base
amount ($25,000 for a single individual and $32,000 for individuals filing a
joint return). Individual shareholders receiving Social Security or Railroad
Retirement benefits should consult their tax advisors.
All or a portion of interest on indebtedness incurred or continued by a
shareholder to purchase or carry Trust shares may not be deductible by the
shareholder. See "Tax Matters -- Federal Income Tax Matters -- Federal Taxation
of Shareholders" in the Statement of Additional Information.
Distributions of net investment income that do not qualify as
exempt-interest dividends (including the excess, if any, of net short-term
capital gain over net long-term capital loss), will be taxable to shareholders
as ordinary income, and will not qualify for the corporate dividends-received
deduction. Distributions of net capital gain will be taxable to shareholders as
long-term capital gain, without regard to how long a shareholder has held shares
of the Trust, and will not qualify for the corporate dividends-received
deduction.
Due to certain of the Trust's hedging and other investment activities, the
net investment income calculated for accounting purposes and distributed to
shareholders may in certain circumstances exceed or be less than the Trust's net
tax-exempt and taxable income. If the Trust distributes amounts in excess of the
Trust's "earnings and profits" (which provides the measure of the Trust's
dividend-paying capacity for tax purposes), such distributions to shareholders
will be treated as a return of capital to the extent of a shareholder's basis in
his or her shares of Municipal Preferred, and thereafter as gain from the sale
or exchange of a capital asset. A return of capital is not taxable to a
shareholder and has the effect of reducing a shareholder's basis in the relevant
shares, which basis reduction would cause shareholders of Municipal Preferred to
realize gain if their shares of Municipal Preferred were sold for an amount
equal to the liquidation price. Conversely, because Trust expenses attributable
to earning tax-exempt income do not reduce the Trust's current earnings and
profits, a portion of any distribution in excess of the Trust's net tax-exempt
and taxable income may be considered paid out of the Trust's earnings and
profits and may therefore be treated as a taxable dividend (even though that
portion economically represents a return of the Trust's capital).
The Internal Revenue Service has taken the position in a published revenue
ruling indicating that the Trust is required to designate distributions paid
with respect to its Common Shares and its Preferred Shares as consisting of a
portion of each type of income distributed by the Trust. The portion of each
type of income deemed received by the holders of each class of shares will be
equal to the portion of total Trust distributions received by such class. Thus,
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 such class during or with respect to the taxable year, or otherwise
as required by applicable law. Long-term capital gain distributions and other
income subject to regular Federal income tax will similarly be allocated between
the two classes. The amount of taxable income allocable to shares of Municipal
Preferred will depend on the amount of such income realized by the Trust, but
generally is not expected to be significant. No dividend that the Trust pays
will be increased to compensate for the fact that it may be subject to foreign,
state or local taxes.
If for any reason it is determined after the payment of any dividend that a
portion of that dividend was subject to Federal income tax, the Trust will not
be required to pay any additional amount to compensate for any tax payable on
the dividend (other than Gross-up Payments payable under the circumstances
described in this Prospectus). See "Description of Municipal
Preferred -- Dividends and
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<PAGE> 40
Dividend Periods -- Gross-up Payments." The Trust will generally designate
Gross-up Payments as exempt-interest dividends to the extent it determines such
designation is consistent with the allocation principles set forth above. The
federal income tax consequences of Gross-up Payments under existing law are
uncertain. For example, existing authorities, including the revenue ruling
discussed in the above paragraph, do not specifically address whether dividends
(including possibly Gross-up Payments) that are paid following the close of a
taxable year, but that are treated for tax purposes as derived from the income
of such prior taxable year, are treated as dividends "paid" during such prior
taxable year for purposes of determining each class's proportionate share of a
particular type of income. The Trust currently intends to treat such dividends
as having been "paid" in the prior taxable year for purposes of determining each
class's proportionate share of a particular type of income with respect to such
prior taxable year. Existing authorities also do not specifically address the
allocation of taxable income among the dividends paid to holders of a class of
shares during or with respect to a taxable year. It is possible that the
Internal Revenue Service could disagree with the Trust's position concerning the
treatment of dividends paid after the close of a taxable year or with the
Trust's method of allocation, in which case the Internal Revenue Service could
attempt to recharacterize a portion of the dividends paid to the holders of
shares of Municipal Preferred and designated by the Trust as exempt-interest
dividends as consisting instead of capital gain or other taxable income. If the
Internal Revenue Service were to prevail with respect to any such attempted
recharacterization, holders of shares of Municipal Preferred could be subject to
tax on amounts so recharacterized and the Trust could be subject to Federal
income and excise tax. In such event, no additional amounts (including Gross-up
Payments) would be paid by the Trust with respect to dividends so
recharacterized to compensate for any additional tax owed by holders of shares
of Municipal Preferred. Gross-up Payments will not include any amount to
compensate for the fact that the Gross-up Payments or the Taxable Allocations
(see "Description of Municipal Preferred -- Dividends and Dividend
Periods -- Gross-up Payments") may themselves be subject to foreign, state or
local taxes. No provision will be made to compensate holders of shares of
Municipal Preferred for any alternative minimum tax liability in respect of
distributions on such shares of Municipal Preferred. Ropes & Gray has advised
the Trust that, should the Internal Revenue Service attempt to so recharacterize
amounts allocated by the Trust to shares of Municipal Preferred, the Internal
Revenue Service would be unlikely to prevail. However, such advice represents
only Ropes & Gray's best legal judgment and is not binding on the Internal
Revenue Service.
Any dividend paid by the Trust during January of a given year generally is
deemed to have been received by shareholders on December 31 of the preceding
year, provided that the dividend actually was declared by the Trust in October,
November or December of such preceding year and payable to shareholders of
record on a date in such a month.
The Trust will notify shareholders each year of the amount and tax status
of dividends and other distributions, including the amount of any distribution
of net capital gain.
The Code provides that every shareholder required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Trust) during the taxable
year.
SALE OR REDEMPTION OF SHARES. In certain circumstances, the sale or
exchange of shares of Municipal Preferred may give rise to gain or loss. In
general, any gain or loss realized upon a taxable disposition of shares of
Municipal Preferred by a shareholder will be treated as long-term capital gain
or loss if the shares have been held for more than twelve months, and otherwise
as short-term capital gain or loss. However, if a shareholder buys shares of
Municipal Preferred and sells them at a loss within six months, any loss will be
disallowed for Federal income tax purposes to the extent of any exempt-interest
dividends received on such shares. In addition, any loss (not already disallowed
as provided in the preceding sentence) realized upon a taxable disposition of
shares of Municipal Preferred held for six months or less will be treated as
long-term, rather than short-term, capital loss to the extent of any net capital
gain distributions received by the shareholder with respect to those shares. All
or a portion of any loss realized upon a taxable disposition of shares of
Municipal Preferred will be disallowed if other shares of Municipal
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<PAGE> 41
Preferred are purchased within 30 days before or after the disposition. In such
a case, the basis of the newly purchased shares of Municipal Preferred will be
adjusted to reflect the disallowed loss.
Gain or loss, if any, resulting from a redemption of shares of Municipal
Preferred generally will be treated as gain or loss from the sale or exchange of
a capital asset under Code Section 302, rather than as a dividend, but only if
the redemption distribution (i) is deemed not to be essentially equivalent to a
dividend, (ii) is in complete redemption of an owner's interest in the Trust,
(iii) is substantially disproportionate with respect to the owner, or (iv) with
respect to non-corporate owners, is in partial liquidation of the Trust. For
purposes of (i), (ii) and (iii) above, an owner's common share ownership will be
taken into account.
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The Trust's securities and cash are held by The Chase Manhattan Bank, whose
principal business address is 270 Park Avenue, New York, New York 10017-2070, as
custodian (the "Custodian") under a custodian contract.
Bankers Trust Company, whose principal business address is Four Albany
Street, New York, New York 10006, serves as auction agent for the Trust in
connection with the shares of Municipal Preferred. State Street Bank and Trust
Company, whose principal business address is 225 Franklin Street, Boston,
Massachusetts 02110, serves as dividend disbursing agent, as agent under the
Trust's Dividend Reinvestment Plan and as transfer agent and registrar for the
Trust's Common Shares.
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, 3,600 shares of Series F 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 Advisor 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 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 $ per share is equal to % of the
initial offering price. After the initial public offering, the public offering
price and the concession may be changed by the Underwriter.
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.
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<PAGE> 42
LEGAL OPINIONS
Certain legal matters in connection with the Series F Municipal Preferred
offered hereby will be passed upon for the Trust by Ropes & Gray, Boston,
Massachusetts, and for the Underwriters by Simpson Thacher & Bartlett, New York,
New York. Simpson Thacher & Bartlett will rely, as to certain matters of
Massachusetts law in its opinion, on the opinion of Ropes & Gray.
REPORTS TO SHAREHOLDERS
The Trust will send unaudited semiannual and audited annual reports to its
shareholders, including, as currently required by regulations of the Securities
and Exchange Commission, a list of investments held.
EXPERTS
The Financial Statements included in the Statement of Additional
Information have been so included in the reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing. The address of
PricewaterhouseCoopers LLP is 160 Federal Street, Boston, Massachusetts 02110.
FURTHER INFORMATION
The 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
1-800-SEC-0330 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 Commission maintains a Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference into this Prospectus and the Statement of
Additional Information, and reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
In addition, 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.
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GLOSSARY
" 'AA' Composite Commercial Paper Rate," on any date for any Rate Period,
means: (i)(A) in the case of any Minimum Rate Period or any Special Rate Period
of fewer than 49 Rate Period Days, the interest equivalent of the 30-day rate;
provided, however, that if such Rate Period is a Minimum Rate Period and the
"AA" Composite Commercial Paper Rate is being used to determine the Applicable
Rate when all of the outstanding shares of Municipal Preferred are subject to
Submitted Hold Orders, then the interest equivalent of the seven-day rate, and
(B) in the case of any Special Rate Period of (1) 49 or more but fewer than 70
Rate Period Days, the interest equivalent of the 60-day rate; (2) 70 or more but
fewer than 85 Rate Period Days, the arithmetic average of the interest
equivalent of the 60-day and 90-day rates; (3) 85 or more but fewer than 99 Rate
Period Days, the interest equivalent of the 90-day rate; (4) 99 or more but
fewer than 120 Rate Period Days, the arithmetic average of the interest
equivalent of the 90-day and 120-day rates; (5) 120 or more but fewer than 141
Rate Period Days, the interest equivalent of the 120-day rate; (6) 141 or more
but fewer than 162 Rate Period Days, the arithmetic average of the 120-day and
180-day rates; and (7) 162 or more but fewer than 183 Rate Period Days, the
interest equivalent of the 180-day rate, in each case on commercial paper placed
on behalf of issuers whose corporate bonds are rated "AA" by Standard & Poor's
or the equivalent of such rating by Standard & Poor's or another rating agency,
as made available on a discount basis or otherwise by the Federal Reserve Bank
of New York for the Business Day immediately preceding such date; or (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 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.
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<PAGE> 44
"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 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 among the Trust, 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" means the date on which the Trust initially issued
shares of Municipal Preferred.
"Dividend Payment Date" means any date on which dividends on shares of
Municipal Preferred are payable as provided under "Description of Municipal
Preferred -- Dividends and Dividend Periods."
"Dividend Period" means the period from and including the Date of Original
Issue of shares 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" 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 Municipal Preferred.
"Initial Rate Period" means the period from and including the Date of
Original Issue of shares of Municipal Preferred to but excluding ,
1999.
"Kenny Index" has the meaning specified under "Taxable Equivalent of the
Short-Term Municipal Bond Rate."
"Minimum Rate Period" means any Rate Period consisting of 7 Rate Period
Days.
"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 shares of Municipal
Preferred or that is an Existing Holder of such shares that wishes to become the
Existing Holder of additional shares.
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<PAGE> 45
"Rate Multiple" means a percentage, determined as set forth below, based on
the prevailing rating of shares of Municipal Preferred in effect at the close of
business on the Business Day next preceding the relevant Auction Date:
<TABLE>
<CAPTION>
PREVAILING RATING PERCENTAGE
- ----------------- ----------
<S> <C>
"aa3"/AA- or higher......................................... 110%
"a3"/A-..................................................... 125%
"baa3"/BBB-................................................. 150%
"ba3"/BB-................................................... 200%
Below "ba3"/BB-............................................. 250%
</TABLE>
provided, however, that in the event the Trust has notified the Auction Agent of
its intent to allocate income taxable for Federal income tax purposes to shares
of Municipal Preferred prior to the Auction establishing the Applicable Rate for
such shares, the applicable percentage in the foregoing table shall be divided
by the quantity 1 minus the maximum 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.
If the ratings for shares of Municipal Preferred are split between two of the
foregoing categories, the lower rating will determine the prevailing rating. If
the shares of Municipal Preferred are rated by only one rating agency, such
rating will be the prevailing rating.
"Rate Period" means the Initial Rate Period of shares 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 -- Dividends -- 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" 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. Eastern time, on any Auction Date or
such other time on any Auction Date by which Broker-Dealers are required to
submit Orders to the Auction Agent as specified by the Auction Agent from time
to time.
"Submitted Bid" 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" means any period from and including the first day
following the Initial Rate Period of shares 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
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<PAGE> 46
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.,
Eastern time, on such date by Standard & Poor's J.J. Kenny Evaluation Services
or any successor thereto, based upon 30-day yield evaluations at par of
short-term bonds the interest on which is excludable for regular Federal income
tax purposes under the Code, of "high grade" component issuers selected by
Standard & Poor's J.J. Kenny Evaluation Services or any such successor from time
to time in its discretion, which component issuers shall include, without
limitation, issuers of general obligation bonds but shall exclude any bonds the
interest on which constitutes an item of tax preference under Section 57(a)(5)
of the Code, or successor provisions, for purposes of the "alternative minimum
tax," divided by (B) 1.00 minus the 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., Eastern time, on such date by
Standard & Poor's J.J. Kenny Evaluation Services or any successor, the Taxable
Equivalent of the Short-Term Municipal Bond Rate shall mean the quotient of (A)
the per annum rate expressed on an interest equivalent basis equal to the most
recent Kenny Index so made available for any preceding Business Day, divided by
(B) 1.00 minus the 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.
41
<PAGE> 47
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Use of Proceeds............................................. B-2
Investment Objectives and Policies.......................... B-2
Trust Charges and Expenses.................................. B-4
Management of the Trust..................................... B-5
Portfolio Transactions...................................... B-11
Net Asset Value............................................. B-12
The Auction................................................. B-13
Description of Municipal Preferred.......................... B-25
Repurchase of Common Shares................................. B-44
Miscellaneous Investment Practices.......................... B-46
Tax Matters................................................. B-56
Shareholder Liability....................................... B-59
Custodian................................................... B-59
Independent Accountants..................................... B-59
Glossary.................................................... B-60
Financial Statements........................................ F-1
Appendix A -- Ratings of Investments........................ A-1
Appendix B -- Auction Procedures............................ B-1
Appendix C -- Settlement Procedures......................... C-1
Appendix D -- Rating Agency Futures and Options
Restrictions.............................................. D-1
</TABLE>
42
<PAGE> 48
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$90,000,000
COLONIAL MUNICIPAL INCOME TRUST
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
3,600 SHARES, SERIES F
---------------
PROSPECTUS
, 1999
---------------
SALOMON SMITH BARNEY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 49
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND
IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JULY 15, 1999
COLONIAL MUNICIPAL INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") relating to the Series F
Municipal Auction Rate Cumulative Preferred Shares ("Municipal Preferred")
offered by Colonial 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
, 1999, describing the Municipal Preferred (the "Prospectus").
This SAI should be read together with the Prospectus. Investors may obtain a
free copy of the Prospectus by calling Colonial Management Associates, Inc. at
1-800-426-3750. Capitalized terms used but not defined in this SAI have the
meanings ascribed to them in the Prospectus.
TABLE OF CONTENTS
<TABLE>
<S> <C>
USE OF PROCEEDS............................................. B-2
INVESTMENT OBJECTIVES AND POLICIES.......................... B-2
TRUST CHARGES AND EXPENSES.................................. B-4
MANAGEMENT OF THE TRUST..................................... B-5
PORTFOLIO TRANSACTIONS...................................... B-11
NET ASSET VALUE............................................. B-12
THE AUCTION................................................. B-13
DESCRIPTION OF MUNICIPAL PREFERRED.......................... B-25
REPURCHASE OF COMMON SHARES................................. B-44
MISCELLANEOUS INVESTMENT PRACTICES.......................... B-46
TAX MATTERS................................................. B-56
SHAREHOLDER LIABILITY....................................... B-59
CUSTODIAN................................................... B-59
INDEPENDENT ACCOUNTANTS..................................... B-59
GLOSSARY.................................................... B-60
FINANCIAL STATEMENTS........................................ F-1
APPENDIX A -- Ratings of Investments........................ A-1
APPENDIX B -- Auction Procedures............................ B-1
APPENDIX C -- Settlement Procedures......................... C-1
APPENDIX D -- Rating Agency Futures and Options
Restrictions.............................................. D-1
</TABLE>
<PAGE> 50
USE OF PROCEEDS
The net proceeds of the offering of shares of Municipal Preferred will be
approximately $ after payment of the sales load to Salomon Smith Barney
(the "Underwriter") and estimated offering costs. A portion of the offering
costs has been advanced by the Trust's investment advisor, Colonial Management
Associates, Inc. (the "Advisor").
The net proceeds of the offering will be invested in accordance with the
Trust's investment objectives 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 objectives at or shortly (within
six to eight weeks) after the completion of the offering. To the extent that all
of the proceeds cannot be so invested, pending such investment, they will be
invested initially in high-quality, short-term tax-exempt money market
securities, the income on which will be exempt from Federal income taxes, or in
high-quality Municipal Obligations with relatively low volatility (such as
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 Objectives and
Policies -- Temporary and Defensive Investments" in the Prospectus, the income
on which is subject to Federal income taxes.
INVESTMENT OBJECTIVES AND POLICIES
The Trust's Prospectus describes its investment objectives 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 following fundamental restrictions are for the protection of the
Trust's shareholders and 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.
The Trust may:
1. Issue senior securities or borrow money to the extent permitted by the
1940 Act;
2. Only own real estate acquired as a result of owning securities;
3. Purchase and sell futures contracts and related options;
4. Underwrite securities issued by others only when disposing of portfolio
securities;
5. Make loans through lending of securities, through the purchase of debt
instruments or similar evidences of indebtedness typically sold to
financial institutions and through repurchase agreements;
6. Not concentrate more than 25% of its total assets in any one industry,
or with respect to 50% of total assets purchase any security (other than
obligations of the U.S. Government and cash items including receivables)
if as a result more than 5% of its total assets would then be invested
in securities of a single issuer or purchase the voting securities of an
issuer if, as a result of such purchase, the Trust would own more than
10% of the outstanding voting shares of such issuer. (The Trust will
treat each state and each separate political subdivision, agency,
authority or instrumentality of such state, each multistate agency or
authority, and each guarantor, if any, as
B-2
<PAGE> 51
separate issuers. In the utilities category, gas, electric, water and telephone
companies will be considered as separate industries);
7. And will, under normal circumstances, invest at least 80% of its assets
in tax-exempt bonds and tax-exempt notes.
For the purpose of applying the limitation set forth above in subparagraph
(6), an issuer shall be deemed the sole issuer of a security when its assets and
revenues are separate from other governmental entities and its securities are
backed only by its assets and revenues. Similarly, in the case of a non-
governmental issuer, such as an industrial corporation or a privately owned or
operated hospital, if the security is backed only by the assets and revenues of
the non-governmental issuer, then such non-governmental issuer would be deemed
to be the sole issuer. Where a security is also backed by the enforceable
obligation of a superior or unrelated governmental or other entity (other than a
bond insurer), it shall also be included in the computation of securities owned
that are issued by such governmental or other entity. Where a security is
guaranteed by a governmental entity or some other facility, such as a bank
guarantee or letter of credit, such a guarantee or letter of credit would be
considered a separate security and would be treated as an issue of such
government, other entity or bank. When a Municipal Obligation is insured by bond
insurance, it shall not be considered a security that is issued or guaranteed by
the insurer; instead, the issuer of such Municipal Obligation will be determined
in accordance with the principles set forth above. The foregoing restrictions do
not limit the percentage of the Trust's assets that may be invested in Municipal
Obligations insured by any given insurer.
The restrictions and other limitations set forth above will apply only at
the time of purchase of securities and will not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of an
acquisition of securities.
OTHER INVESTMENT POLICIES
As non-fundamental investment policies which may be changed by the Trust
without a shareholder vote, the Trust may not:
1. Purchase securities on margin, but it may receive short-term credit to
clear securities transactions and may make initial or maintenance margin
deposits in connection with futures transactions;
2. Have a short securities position, unless the Trust owns, or owns rights
(exercisable without payment) to acquire, an equal amount of such
securities;
3. Purchase or sell commodities or commodity contracts, except that,
consistent with its investment policies, the Trust may purchase and sell
financial futures contracts and options and may enter into swap
agreements, foreign exchange contracts and other financial transactions
not requiring the delivery of physical commodities;*
4. Own securities of any company if the Trust knows that officers and
Trustees of the Trust or officers and directors of the Advisor who
individually own more than 0.5% of such securities together own more
than 5% of such securities; and
5. Invest in interests in oil, gas or other mineral exploration or
development programs, including leases.
- ---------------
* The Trust deems the investment policy regarding commodities and commodities
contracts to be a fundamental investment policy of the Trust and will not
change this policy without the vote of the shareholders necessary to change a
fundamental investment policy of the Trust.
Restrictions imposed by Moody's or Standard & Poor's, or both, on engaging
in futures and options transactions as described under "Description of Municipal
Preferred -- Asset Maintenance," are not fundamental policies and may be changed
by the 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
B-3
<PAGE> 52
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
Under the Trust's management agreement, the Trust pays the Advisor a
monthly fee based on the average weekly net assets of the Trust, including the
proceeds of the offering of the shares of Municipal Preferred, for such month at
the annual rate of 0.65%.
RECENT FEES PAID TO THE ADVISOR AND STATE STREET BANK AND TRUST COMPANY
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Management fee.............................................. $1,353 $1,315 $1,311
Bookkeeping fee............................................. 55 54 53
Transfer agent fee.......................................... 65 91 105
</TABLE>
BROKERAGE COMMISSIONS
The Trust did not pay any brokerage commissions for the fiscal years ended
November 30, 1998, 1997 and 1996.
B-4
<PAGE> 53
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The names and business addresses of the Trustees and officers of the Trust
and their principal occupations and other affiliations during the past five
years are set forth below.
<TABLE>
<CAPTION>
NAME (AGE) POSITIONS AND PRINCIPAL OCCUPATIONS
AND ADDRESS OFFICES WITH TRUST DURING PAST FIVE YEARS
- ----------- ------------------ ----------------------
<S> <C> <C>
Robert J. Birnbaum (71).............. Trustee Consultant (formerly Special Counsel,
313 Bedford Road Dechert Price & Rhoads (law firm) from
Ridgewood, NJ 07450 September, 1988 to December 1993;
President, New York Stock Exchange from
May, 1985 to June, 1988; President,
American Stock Exchange, Inc. from 1977
to May, 1985).
Tom Bleasdale (68)................... Trustee Retired (formerly Chairman of the Board
502 Woodlands Drive and Chief Executive Officer, Shore Bank &
Linville, NC 28646 Trust Company from 1992 to 1993);
Director of The Empire Company since
June, 1995.
John V. Carberry* (51)............... Trustee Senior Vice President of Liberty
56 Woodcliff Road Financial Companies, Inc. (formerly
Wellesley Hills, MA 02481 Managing Director, Salomon Brothers
(investment banking) from January, 1988
to January, 1998).
Lora S. Collins (63)................. Trustee Attorney (formerly Attorney, Kramer,
1175 Hill Road Levin, Naftalis & Frankel (law firm) from
Southold, NY 11971 September, 1986 to November, 1996).
James E. Grinnell (69)............... Trustee Private Investor since November, 1988.
22 Harbor Avenue
Marblehead, MA 01945
Richard W. Lowry* (62)............... Trustee Private Investor since August, 1987.
Seven Winter Street
Nantucket, MA 02554
Salvatore Macera (67)................ Trustee Private Investor (formerly Executive Vice
26 Little Neck Lane President and Director of Itek
New Seabury, MA 02649 Corporation (electronics) from 1975 to
1981).
William E. Mayer* (58)............... Trustee Partner, Development Capital, LLC
500 Park Avenue, 5th Floor (venture capital) (formerly Dean, College
New York, NY 10022 of Business and Management, University of
Maryland from October, 1992 to November,
1996; Dean, Simon Graduate School of
Business, University of Rochester from
October, 1991 to July, 1992).
James L. Moody, Jr.* (67)............ Trustee Retired (formerly Chairman of the Board,
16 Running Tide Road Hannaford Bros. Co. (food retailer) from
Cape Elizabeth, ME 04107 May, 1984 to May, 1997, and Chief
Executive Officer, Hannaford Bros. Co.
from May, 1973 to May, 1992).
John J. Neuhauser (55)............... Trustee Dean, Boston College School of Management
140 Commonwealth Avenue since September, 1977.
Chestnut Hill, MA 02167
</TABLE>
B-5
<PAGE> 54
<TABLE>
<CAPTION>
NAME (AGE) POSITIONS AND PRINCIPAL OCCUPATIONS
AND ADDRESS OFFICES WITH TRUST DURING PAST FIVE YEARS
- ----------- ------------------ ----------------------
<S> <C> <C>
Thomas E. Stitzel* (63).............. Trustee Professor of Finance, College of
2208 Tawny Woods Place Business, Boise State University (higher
Boise, ID 83706 education); Business consultant and
author.
Robert L. Sullivan (71).............. Trustee Retired (formerly Partner, KPMG Peat
45 Sankaty Avenue Marwick LLP, from July, 1966 to June,
Siasconset, MA 02564 1985).
Anne-Lee Verville (53)............... Trustee Consultant (formerly General Manager,
359 Stickney Hill Road Global Education Industry from 1994 to
Hopkinton, NH 03229 1997, and President, Applications
Solutions Division from 1991 to 1994, IBM
Corporation (global education and global
applications)).
Stephen E. Gibson (45)............... President President of the Trust and the Liberty
Funds since June, 1998, Chairman of the
Board since July, 1998, Chief Executive
Officer and President since December
1996, and Director since 1996 of the
Advisor (formerly Executive Vice
President from July, 1996 to December,
1996); Director, Chief Executive Officer
and President of Liberty Funds Group LLC
(formerly known as COGRA, LLC) ("LFG")
since December, 1998 (formerly Director,
Chief Executive Officer and President of
The Colonial Group, Inc. ("TCG") from
December, 1996 to December, 1998);
Assistant Chairman of Stein Roe & Farnham
Incorporated ("SR&F") since August, 1998
(formerly Managing Director of Marketing
of Putnam Investments from June, 1992 to
July, 1996).
J. Kevin Connaughton (34)............ Controller and Chief Controller and Chief Accounting Officer
Accounting Officer of the Trust and the Liberty Funds,
except Liberty Funds Trust IX, since
February, 1998; Controller, Liberty Funds
Trust IX, since December, 1998; Vice
President of the Advisor since February,
1998 (formerly Senior Tax Manager,
Coopers & Lybrand, LLP from April, 1996
to January, 1998; Vice President, 440
Financial Group/First Data Investor
Services Group from March, 1994 to April,
1996.
</TABLE>
B-6
<PAGE> 55
<TABLE>
<CAPTION>
NAME (AGE) POSITIONS AND PRINCIPAL OCCUPATIONS
AND ADDRESS OFFICES WITH TRUST DURING PAST FIVE YEARS
- ----------- ------------------ ----------------------
<S> <C> <C>
Timothy J. Jacoby (46)............... Treasurer and Chief Treasurer and Chief Financial Officer of
Financial Officer the Trust and the Liberty Funds, except
Liberty Funds Trust IX, since October,
1996 (formerly Controller and Chief
Accounting Officer from October, 1997 to
February, 1998); Treasurer of Liberty
Funds Trust IX since December, 1998;
Senior Vice President of the Advisor
since September, 1996; Vice President,
Chief Financial Officer and Treasurer of
LFG since December, 1998 (formerly Vice
President, Chief Financial Officer and
Treasurer of TCG from July, 1997 to
December, 1998); Senior Vice President of
SR&F since August, 1998 (formerly Senior
Vice President, Fidelity Accounting and
Custody Services from September, 1993 to
September, 1996).
Nancy L. Conlin (45)................. Secretary Secretary of the Trust and the Liberty
Funds, except Liberty Funds Trust IX
since April, 1998 (formerly Assistant
Secretary from July, 1994 to April,
1998); Director, Senior Vice President,
General Counsel, Clerk and Secretary of
the Advisor since April, 1998 (formerly
Vice President, Counsel, Assistant
Secretary and Assistant Clerk from July,
1994 to April, 1998); Vice President,
General Counsel and Secretary of LFG
since December, 1998 (formerly Vice
President, General Counsel and Clerk of
TCG from April, 1998 to December, 1998;
formerly Assistant Clerk from July, 1994
to April, 1998).
</TABLE>
- ---------------
* Denotes those Trustees who are "interested persons" (as defined in the
Investment Company Act of 1940, as amended (the "1940 Act")) of the Trust, the
Advisor or the Underwriter. Mr. Carberry is an "interested person" as defined
in the 1940 Act because of his affiliation with Liberty Financial Companies,
Inc., an indirect parent company of the Advisor. Mr. Mayer is an "interested
person" as defined in the 1940 Act because he is a director of Hambrecht &
Quist Incorporated, a registered broker-dealer. Messrs. Lowry, Moody and
Stitzel are "interested persons" as defined in the 1940 Act because each has a
direct or indirect beneficial interest in, or is designated as trustee,
executor or guardian of a legal interest in, the Underwriter or a controlling
person (as such term is defined in the 1940 Act) of the Underwriter.
The business address of the officers of the Trust is One Financial Center,
Boston, MA 02111.
The Trustees of the Trust are also directors or trustees, as the case may
be, of Liberty Funds Trust I, Liberty Funds Trust II, Liberty Funds Trust III,
Liberty Funds Trust IV, Liberty Funds Trust V, Liberty Funds Trust VI, Liberty
Funds Trust VII, Liberty Funds Trust VIII (formerly known as LFC Utilities
Trust), Liberty Variable Investment Trust ("LVIT"), Colonial High Income
Municipal Trust, Colonial Investment Grade Municipal Trust, Colonial
Intermediate High Income Fund, and Colonial Intermarket Income Trust I,
(collectively, each trust or any series thereof termed the "Liberty Funds").
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
B-7
<PAGE> 56
Common Shares and shares of Municipal Preferred, voting together as a single
class, will elect five trustees. See "Description of Municipal
Preferred -- Voting Rights."
The Trustees serve as trustees of all Liberty Funds for which each Trustee
(except Mr. Carberry) receives an annual retainer of $45,000 and attendance fees
of $8,000 for each regular joint meeting and $1,000 for each special joint
meeting. Committee chairs and the lead Trustee receive an annual retainer of
$5,000, and Committee chairs receive $1,000 for each special meeting attended on
a day other than a regular joint meeting day. Committee members receive an
annual retainer of $1,000 and $1,000 for each special meeting attended on a day
other than a regular joint meeting day. Two-thirds of the Trustee fees are
allocated among the Liberty Funds based on each Liberty Fund's relative net
assets, and one-third of the fees are divided equally among the Liberty Funds.
TRUSTEES AND TRUSTEES' FEES
For the fiscal year ended November 30, 1998 and the calendar year ended
December 31, 1998 the Trustees received the following compensation for serving
as Trustees(a):
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
AGGREGATE COMPENSATION FROM THE FUND COMPLEX PAID TO THE
THE TRUST FOR THE FISCAL YEAR TRUSTEES FOR THE CALENDAR YEAR
TRUSTEE ENDED NOVEMBER 30, 1998 ENDED DECEMBER 31, 1998(B)
- ------- ----------------------------- ------------------------------
<S> <C> <C>
Robert J. Birnbaum(c)..................... $1,564 $ 99,429
Tom Bleasdale(c).......................... 1,812(d) 115,000(e)
John V. Carberry(f)(g).................... N/A N/A
Lora S. Collins(c)........................ 1,534 97,429
James E. Grinnell(c)...................... 1,621(h) 103,071
William D. Ireland, Jr.(i)................ 683 35,333
Richard W. Lowry(c)....................... 1,545 98,214
Salvatore Macera(j)....................... 0 25,250
William E. Mayer(c)....................... 1,624 99,286
James L. Moody, Jr.(c).................... 1,665(k) 105,857(l)
John J. Neuhauser(c)...................... 1,658 105,323
George L. Shinn(i)........................ 617 31,334
Thomas E. Stitzel(j)...................... 0 25,250
Robert L. Sullivan(c)..................... 1,654 104,100
Anne-Lee Verville(c)(f)................... 1,269(m) 23,445(n)
Sinclair Weeks, Jr.(i).................... 668 34,333
</TABLE>
- ---------------
(a) The Trust does not currently provide pension or retirement plan benefits to
the Trustees.
(b) At December 31, 1998, the complex consisted of 47 open-end and 5 closed-end
management investment portfolios in the Liberty Funds and 9 open-end
management investment portfolios in LVIT (together, the "Fund Complex").
(c) Elected by the shareholders of LVIT on October 30, 1998.
(d) Includes $795 payable in later years as deferred compensation.
(e) Includes $52,000 payable in later years as deferred compensation.
(f) Elected by the trustees of the closed-end Liberty Funds on June 18, 1998,
and by the shareholders of the open-end Liberty Funds on October 30, 1998.
(g) Does not receive compensation because he is an affiliated Trustee and
employee of Liberty Financial Companies, Inc. ("Liberty Financial").
B-8
<PAGE> 57
(h) Includes $12 payable in later years as deferred compensation.
(i) Retired as a Trustee of the Trust on April 24, 1998.
(j) Elected by the shareholders of the open-end Liberty Funds on October 30,
1998, and by the trustees of the closed-end Liberty Funds on December 17,
1998.
(k) Total compensation of $1,665 for the fiscal year ended November 30, 1998,
will be payable in later years as deferred compensation.
(l) Total compensation of $105,857 for the calendar year ended December 31,
1998, will be payable in later years as deferred compensation.
(m) Total compensation of $1,269 for the fiscal year ended November 30, 1998,
will be payable in later years as deferred compensation.
(n) Total compensation of $23,445 for the calendar year ended December 31,
1998, will be payable in later years as deferred compensation.
For the fiscal year ended December 31, 1998, certain of the Trustees received
the following compensation in their capacities as Trustees or Directors of
Liberty All-Star Equity Fund, Liberty All-Star Growth Fund, Inc. and Liberty
Funds Trust IX (formerly known as LAMCO Trust I) (together, the "Liberty All-
Star Funds"):
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
LIBERTY ALL-STAR FUNDS FOR THE CALENDAR
TRUSTEE YEAR ENDED DECEMBER 31, 1998 (O)
------- ---------------------------------------
<S> <C>
Robert J. Birnbaum(p)................................. $25,000
John V. Carberry(p)(q)(r)............................. N/A
James E. Grinnell(p).................................. $25,000
Richard W. Lowry(p)................................... $25,000
William E. Mayer(p)(s)................................ $14,000
John J. Neuhauser(p)(t)............................... $25,000
</TABLE>
- ---------------
(o) The Liberty All-Star Funds are advised by Liberty Asset Management Company
("LAMCO"). LAMCO is an indirect wholly-owned subsidiary of Liberty
Financial (an intermediate parent of the Advisor).
(p) Elected by the sole trustee of Liberty Funds Trust IX on December 17, 1998.
(q) Does not receive compensation because he is an affiliated Trustee and
employee of Liberty Financial.
(r) Elected by the trustees of the Liberty All-Star Funds on June 30, 1998.
(s) Elected by the shareholders of the Liberty All-Star Equity Fund on April
22, 1998, and by the trustees of the Liberty All-Star Growth Fund, Inc. on
December 17, 1998.
(t) Elected by the shareholders of the Liberty All-Star Funds on April 22,
1998.
At May 31, 1999, the Trust's officers and Trustees as a group owned less
than 1% of the outstanding Common Shares.
At May 31, 1999, CEDE & CO. WT FAST, P.O. Box 20, Bowling Green Station,
New York, New York 10274-0020, owned of record 21,247,905.0000 shares,
representing 76.86%, of the Trust's outstanding shares.
In addition to the provisions discussed in the Prospectus under "Certain
Provisions in the Agreement and Declaration of Trust," the Declaration provides
that the obligations of the 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
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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.
INVESTMENT ADVISOR
Colonial Management Associates, Inc. (the "Advisor"), and/or its affiliate,
Colonial Advisory Services, Inc. ("CASI"), has rendered investment advisory
services to investment company, institutional and other clients since 1931. The
Advisor currently serves as investment advisor, sub-advisor or administrator for
64 open-end and 5 closed-end management investment company portfolios. Trustees
and officers of the Trust, who are also officers of the Advisor or its
affiliates, will benefit from the advisory fees, sales commissions and agency
fees paid or allowed by the Trust. More than 30,000 financial advisors have
recommended the Liberty Funds to over 800,000 clients worldwide, representing
more than $16.3 billion in assets.
The Advisor is a subsidiary of Liberty Funds Group LLC ("LFG"), One
Financial Center, Boston, MA 02111. LFG is an indirect wholly owned subsidiary
of Liberty Financial Companies, Inc. ("Liberty Financial"), which in turn is a
direct majority-owned subsidiary of LFC Management Corporation, which in turn is
a direct wholly-owned subsidiary of Liberty Corporate Holdings, Inc., which in
turn is a direct wholly-owned subsidiary of LFC Holdings, Inc., which in turn is
a direct wholly-owned subsidiary of Liberty Mutual Equity Corporation, which in
turn is a direct wholly owned subsidiary of Liberty Mutual Insurance Company
("Liberty Mutual"). Liberty Mutual is an underwriter of workers' compensation
insurance and a property and casualty insurer in the United States. Liberty
Financial's address is 600 Atlantic Avenue, Boston, MA 02210. Liberty Mutual's
address is 175 Berkeley Street, Boston, MA 02117.
Under a Management Agreement (the "Agreement"), the Advisor has contracted
to furnish the Trust with investment research and recommendations or trust
management, respectively, and accounting and administrative personnel and
services, and with office space, equipment and other facilities. For these
services and facilities, the Trust pays a monthly fee based on the average
weekly net assets of the Trust for such month. Under the Agreement, any
liability of the Advisor to the Trust and/or its shareholders is limited to
situations involving the Advisor's own willful misfeasance, bad faith, gross
negligence or reckless disregard of its duties.
The Agreement may be terminated with respect to the Trust at any time on 60
days' written notice by the Advisor or by the Trustees of the Trust or by a vote
of a majority of the outstanding voting securities of the Trust. The Agreement
will automatically terminate upon any assignment thereof and shall continue in
effect from year to year only so long as such continuance is approved at least
annually (i) by the Trustees of the Trust or by a vote of a majority of the
outstanding voting securities of the Trust and (ii) by vote of a majority of the
Trustees who are not interested persons (as such term is defined in the 1940
Act) of the Advisor or the Trust, cast in person at a meeting called for the
purpose of voting on such approval.
The Advisor pays all salaries of officers of the Trust. The Trust pays all
expenses not assumed by the Advisor, including, but not limited to, auditing,
legal, custodial, investor servicing and shareholder reporting expenses. The
Trust pays the cost of printing and mailing any Prospectuses sent to
shareholders.
The Advisor also provides the Trust with bookkeeping and pricing services,
and for these services, the Trust pays the Advisor a monthly fee of $1,500 for
the first $50 million of Trust assets, plus a monthly percentage fee at the
following annual rates: 0.0233% on the next $950 million; 0.0167% on the next $1
billion; 0.0100% on the next $1 billion; and 0.0007% on the excess over $3
billion of the average net assets of the Trust for such month.
The Advisor also acts as investment advisor to the other Liberty Funds
(described under "Fund Charges and Expenses -- Trustees' Fees"). The Advisor's
affiliate, CASI, advises other institutional, corporate, fiduciary and
individual clients for which CASI performs various services. Various officers
and Trustees of the Trust also serve as officers, directors or trustees of other
Liberty Funds and the other corporate or fiduciary clients of the Advisor. The
other investment companies and clients advised by the
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Advisor may sometimes invest in securities and options in which the Trust will
also invest. If the Trust, such other investment companies and such clients
desire to buy or sell the same portfolio securities or options at about the same
time, the purchases and sales will normally be made as nearly as practicable on
a pro rata basis in proportion to the amounts desired to be purchased or sold by
each. Although in some cases these practices may have a detrimental effect on
the price or volume of the securities or options as far as the Trust is
concerned, in most cases it is believed that these practices should produce
better executions. It is the opinion of the Trustees that the desirability of
retaining the Advisor as investment advisor to the Liberty Funds outweighs the
disadvantages, if any, which might result from these practices.
PORTFOLIO TRANSACTIONS
The Advisor is responsible for decisions to buy and sell securities and
other portfolio holdings for the Trust, the selection of brokers and dealers to
effect the transactions and the negotiation of brokerage commissions, if any.
Fixed-income securities are generally traded on a "net" basis with dealers
acting as principals for their own accounts without a stated commission,
although the price of the security will likely include a profit to the dealer.
In underwritten offerings, securities are usually purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
In placing orders for portfolio securities of the Trust, the Advisor is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Advisor will seek to execute each
transaction at a price and commission, if any, which provides the most favorable
total cost or proceeds reasonably attainable under the circumstances. In seeking
the most favorable price and execution, the Advisor, having in mind the Trust's
best interests, will consider all factors it deems relevant, including, by way
of illustration, price, the size of the transaction, the nature of the market
for the security, the amount of commission, the timing of the transaction taking
into account market prices and trends, the reputation, experience and financial
stability of the broker-dealer involved and the quality of service rendered by
the broker-dealer in other transactions. Though the Advisor generally seeks
reasonably competitive spreads or commissions, the Trust will not necessarily be
paying the lowest spread or commission available. Within the framework of the
policy of obtaining the most favorable price and efficient execution, the
Advisor will consider research and investment services provided by brokers and
dealers who effect or are parties to portfolio transactions with the Trust, the
Advisor or the Advisor's other clients. Such research and investment services
are those which brokerage houses customarily provide to institutional investors
and include statistical and economic data and research reports on particular
issuers and industries. Such services are used by the Advisor in connection with
all of its investment activities, and some of such services obtained in
connection with the execution of transactions for the Trust may be used in
managing other investment accounts. Conversely, brokers furnishing such services
may be selected for the execution of transactions for such other accounts, and
the services furnished by such brokers may be used by the Advisor in providing
investment management for the Trust. Commission rates are established pursuant
to negotiations based on the quality and quantity of execution services provided
by the broker or dealer in light of generally prevailing rates. The management
fee paid by the Trust will not be reduced because the Advisor and/or other
clients receive such services. The allocation of orders and the commission rates
paid by the Trust will be reviewed periodically by the Board of Trustees.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, as
amended (the "1934 Act"), the Advisor may cause the Trust to pay a broker-dealer
which provides "brokerage and research services" (as defined in the 1934 Act) to
the Advisor, an amount of disclosed commission for effecting a securities
transaction for the Trust in excess of the commission which another
broker-dealer would have charged for effecting that transaction.
For the fiscal years ended November 30, 1996, 1997 and 1998, the Trust paid
no brokerage commissions for the execution of portfolio transactions. The rates
of portfolio turnover for each of the fiscal years ended November 30, 1996, 1997
and 1998 were 22%, 15% and 34%, respectively.
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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. Eastern 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. Portfolio securities for which market quotations are readily
available are valued at current market value. Short-term investments maturing in
60 days or less are valued at amortized cost when the Advisor determines,
pursuant to procedures adopted by the Board of Trustees, that such cost
approximates current market value. All other securities and assets are valued at
their fair value following procedures adopted by the Board of Trustees.
In determining net asset value for the 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 (which will constitute a majority of the securities held by
the Trust) 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.
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THE AUCTION
GENERAL
The Amended and Restated By-Laws of Colonial Municipal Income Trust,
adopted by the Board of Trustees (the "By-Laws"), provide that the Applicable
Rate for each Rate Period of Municipal Preferred after the Initial Rate Period
therefor shall be equal to the rate per annum that the Auction Agent advises has
resulted on the Business Day preceding the first day of such Subsequent Rate
Period (an "Auction Date") from implementation of the auction procedures (the
"Auction Procedures") set forth in the By-Laws and summarized below, in which
persons determine to hold or offer to sell or, based on dividend rates bid by
them, offer to purchase or sell such shares. Each periodic implementation of the
Auction Procedures is referred to herein as an "Auction." The following summary
is qualified by reference to the Auction Procedures set forth in the By-Laws.
As used herein with respect to shares of Municipal Preferred, (i)
"Applicable Rate" means the rate per annum at which dividends are payable on
such shares for any Rate Period thereof, (ii) "Beneficial Owner" means a
customer of a Broker-Dealer who is listed on the records of that Broker-Dealer
(or, if applicable, the Auction Agent) as a holder of such shares, (iii)
"Business Day" means a day on which the New York Stock Exchange is open for
trading and is not a Saturday, Sunday or other day on which banks in New York
City are authorized by law to close, (iv) "Date of Original Issue" means the
date on which the 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
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similar agreements (collectively, the "Broker-Dealer Agreements") with one or
more additional broker-dealers (collectively, the "Broker-Dealers") selected by
the 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 By-Laws. 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 F Municipal Preferred will be held
on Friday , 1999, the Business Day preceding the Dividend Payment
Date for the Initial Rate Period of Municipal Preferred. See "Description of
Municipal Preferred -- Dividends." Thereafter, Auctions will normally be held
every Friday, and each Subsequent Rate Period will normally begin on the
following Monday, unless the then-current Rate Period is a Special Rate Period
or, in certain circumstances, the day that would normally be the Auction Date or
the first day of such Subsequent Rate Period is not a Business Day. The Auction
Date and the first day of the related Rate Period (also a Dividend Payment Date)
must be Business Days but need not be consecutive days. See "Description of
Municipal Preferred -- Dividends" for information concerning the circumstances
under which the first day of a Rate Period or the Auction Date, or both, may be
moved to a date other than such specified days.
Whenever the 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. See also "Description of Municipal
Preferred -- Dividends -- Gross-up Payments" below.
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ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS
Prior to the Submission Deadline (as defined under "Submission of Orders by
Broker-Dealers to Auction Agent" below) on each Auction Date for shares of
Municipal Preferred:
(a) each Beneficial Owner of such shares may submit to its
Broker-Dealer by telephone or otherwise a:
(i) "Hold Order" -- indicating the number of outstanding shares of
Municipal Preferred, if any, that such Beneficial Owner desires to
continue to hold without regard to the Applicable Rate for such shares
for the next succeeding Rate Period;
(ii) "Bid" -- indicating the number of outstanding shares of
Municipal Preferred, if any, that such Beneficial Owner offers to sell
if the Applicable Rate for such shares for the next succeeding Rate
Period shall be less than the rate per annum specified by such
Beneficial Owner in such bid; and/or
(iii) "Sell Order" -- indicating the number of outstanding shares
of Municipal Preferred, if any, that such Beneficial Owner offers to
sell without regard to the Applicable Rate for such shares for the next
succeeding Rate Period; and
(b) Broker-Dealers shall contact customers who are Potential
Beneficial Owners by telephone or otherwise to determine whether such
customers desire to submit Bids, in which they will indicate the number of
shares of Municipal Preferred that they offer to purchase if the Applicable
Rate for such shares for the next succeeding Rate Period is not less than
the rate per annum specified in such Bids.
The communication to a Broker-Dealer of the foregoing information is herein
referred to as an "Order" and collectively as "Orders." A Beneficial Owner or a
Potential Beneficial Owner placing an Order with its Broker-Dealer is herein
referred to as a "Bidder" and collectively as "Bidders." The submission by a
Broker-Dealer of an Order to the Auction Agent shall likewise be referred to
herein as an "Order" and collectively as "Orders," and an Existing Holder or
Potential Holder who places an Order with the Auction Agent or on whose behalf
an Order is placed with the Auction Agent shall likewise be referred to herein
as a "Bidder" and collectively as "Bidders."
A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of Municipal Preferred then held by such
Beneficial Owner. A Bid placed by a Beneficial Owner specifying a rate higher
than the Applicable Rate determined in the Auction shall constitute an
irrevocable offer to sell the shares subject thereto. A Beneficial Owner that
submits a Bid to its Broker-Dealer having a rate higher than the Maximum Rate on
the Auction Date thereof will be treated as having submitted a Sell Order to its
Broker-Dealer. A Beneficial Owner that fails to submit to its Broker-Dealer
prior to the Submission Deadline for shares of Municipal Preferred an Order or
Orders covering all the outstanding shares of Municipal Preferred held by such
Beneficial Owner will be deemed to have submitted a Hold Order to its
Broker-Dealer covering the number of outstanding shares of Municipal Preferred
held by such Beneficial Owner and not subject to Orders submitted to its
Broker-Dealer; provided, however, that if a Beneficial Owner fails to submit to
its Broker-Dealer prior to the Submission Deadline for shares of Municipal
Preferred an Order or Orders covering all of the outstanding shares of Municipal
Preferred held by such Beneficial Owner for an Auction relating to a Special
Rate Period consisting of more than 28 Rate Period Days, such Beneficial Owner
will be deemed to have submitted a Sell Order to its Broker-Dealer covering the
number of outstanding shares of Municipal Preferred held by such Beneficial
Owner and not subject to Orders submitted to its Broker-Dealer. A Sell Order
shall constitute an irrevocable offer to sell the shares of Municipal Preferred
subject thereto at a price per share equal to $25,000. A Beneficial Owner of
shares of Municipal Preferred that offers to become the Beneficial Owner of
additional shares of Municipal Preferred is, for purposes of such offer, a
Potential Beneficial Owner.
A Potential Beneficial Owner of shares of Municipal Preferred may submit to
its Broker-Dealer Bids in which it offers to purchase shares of Municipal
Preferred if the Applicable Rate for the next Rate Period is not less than the
rate specified in such Bid. A Bid placed by a Potential Beneficial Owner
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specifying a rate not higher than the Maximum Rate shall constitute an
irrevocable offer to purchase the number of shares of Municipal Preferred
specified in such Bid if the rate determined in the Auction is equal to or
greater than the rate specified in such Bid.
As described more fully below under "Submission of Orders by Broker-Dealers
to Auction Agent," the Broker-Dealers will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves (unless otherwise permitted by the 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
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than 364 Rate Period Days, and (II) the Reference Rate on such Auction
Date for a Rate Period equal in length to such Special Rate Period, if
such Special Rate Period was 364 Rate Period Days or fewer, or the
Treasury Note Rate on such Auction Date for a Rate Period equal in
length to such Special Rate Period, if such Special Rate Period was more
than 364 Rate Period Days and (y) the Rate Multiple on such Auction
Date; or
(ii) in the case of any Auction Date which is the Auction Date
immediately prior to the first day of any proposed Special Rate Period, the
product of (1) the highest of (x) the Reference Rate on such Auction Date
for a Rate Period equal in length to the then-ending Rate Period, if such
then-ending Rate Period was 364 Rate Period Days or fewer, or the Treasury
Note Rate on such Auction Date for a Rate Period equal in length to the
then-ending Rate Period, if such then-ending Rate Period was more than 364
Rate Period Days, (y) the Reference Rate on such Auction Date for the
Special Rate Period for which the Auction is being held if such Special
Rate Period is 364 Rate Period Days or fewer or the Treasury Note Rate on
such Auction Date for the Special Rate Period for which the Auction is
being held if such Special Rate Period is more than 364 Rate Period Days,
and (z) the Reference Rate on such Auction Date for Minimum Rate Periods
and (2) the Rate Multiple on such Auction Date.
As used herein, "Reference Rate" shall mean (i) the higher of the Taxable
Equivalent of the Short-Term Municipal Bond Rate and the "AA" Composite
Commercial Paper Rate in the case of Minimum Rate Periods and Special Rate
Periods of 28 Rate Period Days or fewer; (ii) the "AA" Composite Commercial
Paper Rate in the case of Special Rate Periods of more than 28 Rate Period Days
but fewer than 183 Rate Period Days; and (iii) the Treasury Bill Rate in the
case of Special Rate Periods of more than 182 Rate Period Days but fewer than
365 Rate Period Days.
As used herein, "Taxable Equivalent of the Short-Term Municipal Bond Rate,"
on any date for any Minimum Rate Period or Special Rate Period of 28 Rate Period
Days or fewer, shall mean 90% of the quotient of (A) the per annum rate
expressed on an interest equivalent basis equal to the Standard & Poor's Kenny
30 day High Grade Index or any successor index (the "Kenny Index") (provided,
however, that any such successor index must be approved by Moody's (if Moody's
is then rating the shares of Municipal Preferred) and Standard & Poor's (if
Standard & Poor's is then rating the shares of Municipal Preferred)), made
available for the Business Day immediately preceding such date but in any event
not later than 8:30 A.M., Eastern time, on such date by Standard & Poor's J.J.
Kenny Evaluation Services or any successor thereto, based upon 30-day yield
evaluations at par of short-term bonds, the interest on which is excludable for
regular Federal income tax purposes under the Code, of "high grade" component
issuers selected by Standard & Poor's J.J. Kenny Evaluation Services or any such
successor from time to time in its discretion, which component issuers shall
include, without limitation, issuers of general obligation bonds but shall
exclude any bonds the interest on which constitutes an item of tax preference
under Section 57(a)(5) of the Code, or successor provisions, for purposes of the
"alternative minimum tax," divided by (B) 1.00 minus the 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., Eastern time, on such date by Standard & Poor's J.J. Kenny Evaluation
Services or any successor, the Taxable Equivalent of the Short-Term Municipal
Bond Rate shall mean the quotient of (A) the per annum rate expressed on an
interest equivalent basis equal to the most recent Kenny Index so made available
for any preceding Business Day, divided by (B) 1.00 minus the 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
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<PAGE> 66
determine the Applicable Rate when all of the outstanding shares of
Municipal Preferred are subject to Submitted Hold Orders, then the interest
equivalent of the seven-day rate, and (B) in the case of any Special Rate
Period of (1) 49 or more but fewer than 70 Rate Period Days, the interest
equivalent of the 60-day rate; (2) 70 or more but fewer than 85 Rate Period
Days, the arithmetic average of the interest equivalent of the 60-day and
90-day rates; (3) 85 or more but fewer than 99 Rate Period Days, the
interest equivalent of the 90-day rate; (4) 99 or more but fewer than 120
Rate Period Days, the arithmetic average of the interest equivalent of the
90-day and 120-day rates; (5) 120 or more but fewer than 141 Rate Period
Days, the interest equivalent of the 120-day rate; (6) 141 or more but
fewer than 162 Rate Period Days, the arithmetic average of the 120-day and
180-day rates; and (7) 162 or more but fewer than 183 Rate Period Days, the
interest equivalent of the 180-day rate, in each case on commercial paper
placed on behalf of issuers whose corporate bonds are rated "AA" by
Standard & Poor's or the equivalent of such rating by Standard & Poor's or
another rating agency, as made available on a discount basis or otherwise
by the Federal Reserve Bank of New York for the Business Day immediately
preceding such date; or
(ii) in the event that the Federal Reserve Bank of New York does not
make available any such rate, then the arithmetic average of such rates, as
quoted on a discount basis or otherwise, by the Commercial Paper Dealers to
the Auction Agent for the close of business on the Business Day next
preceding such date.
If any Commercial Paper Dealer does not quote a rate required to determine the
"AA" Composite Commercial Paper Rate, the "AA" Composite Commercial Paper Rate
shall be determined on the basis of the quotation or quotations furnished by the
remaining Commercial Paper Dealer or Commercial Paper Dealers and any Substitute
Commercial Paper Dealer or Substitute Commercial Paper Dealers selected by the
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.
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As used herein, "Treasury Note Rate," on any date for any Rate Period,
means:
(i) the yield on the most recently auctioned Treasury Note with a
remaining maturity closest to the length of such Rate Period, as quoted in
The Wall Street Journal on such date for the Business Day next preceding
such date; or
(ii) in the event that any such rate is not published in The Wall
Street Journal, then the yield as calculated by reference to the arithmetic
average of the bid price quotations of the most recently auctioned Treasury
Note with a remaining maturity closest to the length of such Rate Period,
as determined by bid price quotations as of the close of business on the
Business Day immediately preceding such date obtained from the U.S.
Government Securities Dealers to the Auction Agent.
For purposes of the foregoing, "Treasury Bill" means a direct obligation of
the U.S. government having a maturity at the time of issuance of 364 days or
less, and "Treasury Note" means a direct obligation of the U.S. government
having a maturity at the time of issuance of five years or less but more than
364 days. If any U.S. Government Securities Dealer does not quote a rate
required to determine the Treasury Bill Rate or the Treasury Note Rate, such
rate shall be determined on the basis of the quotation or quotations furnished
by the remaining U.S. Government Securities Dealer or U.S. Government Securities
Dealers and any Substitute U.S. Government Securities Dealers selected by the
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" will be a percentage, determined as set forth below,
based on the prevailing rating of shares of Municipal Preferred in effect at the
close of business on the Business Day next preceding such Auction Date:
<TABLE>
<CAPTION>
PREVAILING RATING PERCENTAGE
- ----------------- ----------
<S> <C>
"aa3"/AA- or higher......................................... 110%
"a3"/A-..................................................... 125%
"baa3"/BBB-................................................. 150%
"ba3"/BB-................................................... 200%
Below "ba3"/BB-............................................. 250%
</TABLE>
provided, however, that in the event the Trust has notified the Auction Agent of
its intent to allocate income taxable for Federal income tax purposes to shares
of Municipal Preferred prior to the Auction establishing the Applicable Rate for
such shares, the applicable percentage in the foregoing table shall be divided
by the quantity 1 minus the maximum 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.
If the shares of Municipal Preferred are rated by only one rating agency, such
rating will be the prevailing rating.
For purposes of this definition, the "prevailing rating" of shares of
Municipal Preferred shall be (i) "aa3"/AA- or higher if such shares have a
rating of "aa3" or better by Moody's and AA- or better by Standard & Poor's or
the equivalent of such ratings by such agencies or a substitute rating agency or
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<PAGE> 68
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., Eastern time, on each Auction Date, or such other time
on the Auction Date specified by the Auction Agent (the "Submission Deadline"),
each Broker-Dealer will submit to the Auction Agent in writing all Orders
obtained by it for the Auction to be conducted on such Auction Date, designating
itself (unless otherwise permitted by the 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;
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<PAGE> 69
(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
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<PAGE> 70
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
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<PAGE> 71
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., Eastern
time, on each Auction Date. Each Broker-Dealer that submitted an Order for the
account of a customer will then be required to advise such customer of the
Applicable Rate for the next Rate Period and, if such Order was a Bid or a Sell
Order, whether such Bid or Sell Order was accepted or rejected, in whole or in
part, will be required to confirm purchases and sales with each customer
purchasing or selling shares of Municipal Preferred as a result of the Auction
and will be required to advise each customer purchasing or selling shares of
Municipal Preferred as a result of the Auction to give instructions to its Agent
Member of the Securities Depository to pay the purchase price against delivery
of such shares or to deliver such shares against payment therefor, as
appropriate. The Auction Agent will be required to record each transfer of
shares of Municipal Preferred on the registry of Existing Holders to be
maintained by the Auction Agent. See "General" above.
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<PAGE> 72
In accordance with the Securities Depository's normal procedures, on the
Business Day after the Auction Date, the transactions described above will be
executed through the Securities Depository and the accounts of the respective
Agent Members at the Securities Depository will be debited and credited and
shares delivered as necessary to effect the purchases and sales of shares of
Municipal Preferred as determined in the Auction. Purchasers will make payment
through their Agent Members in same-day funds to the Securities Depository
against delivery through their Agent Members; the Securities Depository will
make payment in accordance with its normal procedures, which now provide for
payment against delivery by their Agent Members in same-day funds. The
settlement procedures to be used with respect to Auctions for shares of
Municipal Preferred are set forth in Appendix C hereto.
If any Existing Holder selling shares of Municipal Preferred in an Auction
fails to deliver such shares, the Broker-Dealer of any person that was to have
purchased shares of Municipal Preferred in such Auction may deliver to such
person a number of whole shares of Municipal Preferred that is less than the
number of shares that otherwise was to be purchased by such person. In such
event, the number of shares of Municipal Preferred to be so delivered shall be
determined by such Broker-Dealer. Delivery of such lesser number of shares shall
constitute good delivery.
CONCERNING THE AUCTION AGENT
The Auction Agent is acting as agent for the 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., Eastern time, on the Business Day
preceding such Auction.
The Auction Agent will be the transfer agent, registrar, dividend
disbursing agent and redemption agent for shares of Municipal Preferred. The
registrar for shares of Municipal Preferred will send notices to holders of
shares of Municipal Preferred of any special meetings at which holders of
Municipal Preferred have the right to elect trustees of the 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 45 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
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<PAGE> 73
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 By-Laws. Copies of the Declaration and the form of the
By-Laws are filed as exhibits to the Registration Statement of which the
Prospectus and this Statement of Additional Information are a part and may be
inspected, and copies thereof may be obtained, as described under "Further
Information" in the Prospectus.
GENERAL
The shares of Municipal Preferred will rank on a parity with each other,
with shares of any other series of Municipal Preferred and with shares of any
other series of Preferred Shares as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the 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 By-Laws and applicable law, cumulative cash dividends at
the Applicable Rate thereof, determined as set forth below under "Determination
of Dividend Rate," and no more (except as otherwise provided below under
"Gross-up Payments"), payable on the respective dates determined as set forth
below. Holders of shares of Municipal Preferred shall not be entitled to any
dividend, whether payable in cash, property or shares, in excess of full
cumulative dividends on shares of Municipal Preferred. No interest, or sum of
money in lieu of interest, will be payable in respect of any dividend payment or
payments on shares of Municipal Preferred which may be in arrears, and, except
as otherwise provided herein, no additional sum of money will be payable in
respect of any such arrearage.
Dividends on shares of Municipal Preferred shall accumulate at the
Applicable Rate from the Date of Original Issue and, except as provided below,
shall be payable on Monday, , 1999, and thereafter on each Monday;
provided, however, that (1) if the Monday on which dividends would
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otherwise be payable as set forth above is not a Business Day, then dividends
shall be payable instead on the first Business Day that falls after such Monday
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 Monday, would be
the following Tuesday if it is a Business Day.
DETERMINATION OF DIVIDEND RATE. The dividend rates on shares of Municipal
Preferred offered pursuant to the Prospectus during the period from and after
the Date of Original Issue thereof to and including the last day of the Initial
Rate Period therefor will be equal to the rate per annum set forth with respect
to such shares on the cover page of the Prospectus. For each Subsequent Rate
Period thereafter, the dividend rate on such shares will be equal to the rate
per annum that results from an Auction on the Auction Date next preceding such
Subsequent Rate Period; provided, however, if:
(i) an Auction for any Subsequent Rate Period is not held for any
reason other than as described below, the dividend rate on such shares for
such Subsequent Rate Period will be the Maximum Rate on the Auction Date
therefor;
(ii) any Failure to Deposit shall have occurred with respect to shares
of Municipal Preferred during any Rate Period thereof (other than any
Special Rate Period of more than 364 Rate Period Days or any Rate Period
succeeding any Special Rate Period of more than 364 Rate Period Days during
which a Failure to Deposit occurred that has not been cured), but, prior to
12:00 Noon, Eastern time, on the third Business Day next succeeding the
date on which such Failure to Deposit
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occurred, such Failure to Deposit shall have been cured in accordance with
the next succeeding paragraph and the Trust shall have paid to the Auction
Agent a late charge ("Late Charge") equal to the sum of (1) if such Failure
to Deposit consisted of the failure timely to pay to the Auction Agent the
full amount of dividends with respect to any Dividend Period of such
shares, an amount computed by multiplying (x) 200% of the Reference Rate
for the Rate Period during which such Failure to Deposit occurs on the
Dividend Payment Date for such Dividend Period by (y) a fraction, the
numerator of which shall be the number of days for which such Failure to
Deposit has not been cured in accordance with the next succeeding paragraph
(including the day such Failure to Deposit occurs and excluding the day
such Failure to Deposit is cured) and the denominator of which shall be
360, and applying the rate obtained against the aggregate Liquidation
Preference of the outstanding shares of Municipal Preferred and (2) if such
Failure to Deposit consisted of the failure timely to pay to the Auction
Agent the Redemption Price of the shares of Municipal Preferred, if any,
for which a Notice of Redemption has been mailed by the Trust, an amount
computed by multiplying (x) 200% of the Reference Rate for the Rate Period
during which such Failure to Deposit occurs on the redemption date by (y) a
fraction, the numerator of which shall be the number of days for which such
Failure to Deposit is not cured in accordance with the next succeeding
paragraph (including the day such Failure to Deposit occurs and excluding
the day such Failure to Deposit is cured) and the denominator of which
shall be 360, and applying the rate obtained against the aggregate
Liquidation Preference of the outstanding shares of Municipal Preferred to
be redeemed, no Auction will be held in respect of shares of Municipal
Preferred for the Subsequent Rate Period thereof and the dividend rate for
such Subsequent Rate Period will be the Maximum Rate on the Auction Date
for such Subsequent Rate Period;
(iii) any Failure to Deposit shall have occurred with respect to
shares of Municipal Preferred during any Rate Period thereof (other than
any Special Rate Period of more than 364 Rate Period Days or any Rate
Period succeeding any Special Rate Period of more than 364 Rate Period Days
during which a Failure to Deposit occurred that has not been cured), and,
prior to 12:00 Noon, Eastern time, on the third Business Day next
succeeding the date on which such Failure to Deposit occurred, such Failure
to Deposit shall not have been cured in accordance with the next succeeding
paragraph or the Trust shall not have paid the applicable Late Charge to
the Auction Agent, no Auction will be held in respect of Municipal
Preferred for the first Subsequent Rate Period thereof thereafter (or for
any Rate Period thereafter to and including the Rate Period during which
(1) such Failure to Deposit is cured in accordance with the next succeeding
paragraph and (2) the Trust pays the applicable Late Charge to the Auction
Agent (the condition set forth in this clause (2) to apply only in the
event Moody's is rating such shares at the time the Trust cures such
Failure to Deposit), in each case no later than 12:00 Noon, Eastern time,
on the fourth Business Day prior to the end of such Rate Period), and the
dividend rate for shares of Municipal Preferred for each such Subsequent
Rate Period will be a rate per annum equal to the Maximum Rate on the
Auction Date for such Subsequent Rate Period (but with the prevailing
rating for such shares, for purposes of determining such Maximum Rate,
being deemed to be "Below 'ba3'/BB-"); or
(iv) any Failure to Deposit shall have occurred with respect to shares
of Municipal Preferred during a Special Rate Period thereof of more than
364 Rate Period Days, or during any Rate Period thereof succeeding any
Special Rate Period of more than 364 Rate Period Days during which a
Failure to Deposit occurred that has not been cured, and, prior to 12:00
Noon, Eastern time, on the fourth Business Day preceding the Auction Date
for the Rate Period subsequent to such Rate Period, such Failure to Deposit
shall not have been cured in accordance with the next succeeding paragraph
or, in the event Moody's is then rating such shares, the Trust shall not
have paid the applicable Late Charge to the Auction Agent (such Late
Charge, for purposes of this subparagraph (iv), to be calculated by using,
as the Reference Rate, the Reference Rate applicable to a Rate Period (x)
consisting of more than 182 Rate Period Days but fewer than 365 Rate Period
Days and (y) commencing on the date on which the Rate Period during which
Failure to Deposit occurs commenced), no Auction will be held in respect of
shares of Municipal Preferred for such Subsequent Rate Period (or for any
Rate Period thereafter to and including the Rate Period during
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<PAGE> 76
which (1) such Failure to Deposit is cured in accordance with the next
succeeding paragraph and (2) the Trust pays the applicable Late Charge to
the Auction Agent (the condition set forth in this clause (2) to apply only
in the event Moody's is rating such shares at the time the Trust cures such
Failure to Deposit), in each case no later than 12:00 Noon, Eastern time,
on the fourth Business Day prior to the end of such Rate Period), and the
dividend rate for shares of Municipal Preferred for each such Subsequent
Rate Period shall be a rate per annum equal to the Maximum Rate on the
Auction Date for such Subsequent Rate Period (but with the prevailing
rating for such shares, for purposes of determining such Maximum Rate,
being deemed to be "Below 'ba3'/BB-") (the rate per annum at which
dividends are payable on shares of Municipal Preferred for any Rate Period
being herein referred to as the "Applicable Rate" for such shares).
A Failure to Deposit with respect to shares of Municipal Preferred shall
have been cured (if such Failure to Deposit is not solely due to the willful
failure of the 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,
Eastern time, on the Business Day next preceding each Dividend Payment Date for
shares of Municipal Preferred, an aggregate amount of funds available on the
next Business Day in The City of New York, New York, equal to the dividends to
be paid to all Holders of such shares on such Dividend Payment Date. All moneys
paid to the Auction Agent for the payment of dividends (or for payment of any
Late Charge) shall be held in trust for the payment of such dividends (and any
such Late Charge) by the Auction Agent for the benefit of the Holders specified
above. Any moneys paid to the Auction Agent in accordance with the foregoing but
not applied by the Auction Agent to the payment of dividends (and any such Late
Charge) will, to the extent permitted by law, be repaid to the 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 By-Laws
and applicable law, dividends in an amount equal to the aggregate Gross-up
Payment in accordance with the following:
If, in the case of any Minimum Rate Period or any Special Rate Period of 28
Rate Period Days or fewer, the 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 dissolution, liquidation or
winding up of the affairs of the Trust, the Trust will, prior to the end of the
calendar year in which such dividend was paid, provide notice thereof to the
Auction Agent and direct the 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 during such calendar year at such holder's address as the same appears
or last appeared on the record books of the Trust.
If, in the case of any Special Rate Period of more than 28 Rate Period
Days, the Trust makes a Taxable Allocation to a dividend paid on shares of
Municipal Preferred, the Trust shall, prior to the end of the calendar year in
which such dividend was paid, provide notice thereof to the Auction Agent and
direct
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the Trust's dividend disbursing agent to send such notice with a Gross-up
Payment to each holder of shares that was entitled to such dividend payment
during such calendar year at such holder's address as the same appears or last
appeared on the record books of the Trust.
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
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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 of
shares of Municipal Preferred as a Special Rate Period, but the day following
what would otherwise be the last day of such Special Rate Period is not a Monday
that is a Business Day, 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 on the
first Sunday that is followed by a Monday that is a Business Day preceding what
would otherwise be such last day.
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
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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., Eastern time, on the second Business Day
next preceding such date (or by such later time or date, or both, as may be
agreed to by the Auction Agent), notify the Auction Agent of either (x) its
determination, subject to certain conditions, to exercise such option, in which
case the Trust shall specify the Special Rate Period designated, or (y) its
determination not to exercise such option.
No later than 11:00 A.M., Eastern time, on the second Business Day next
preceding the first day of any proposed Special Rate Period as to which notice
has been given as set forth in the preceding paragraph (or such later time or
date, or both, as may be agreed to by the Auction Agent), the 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., Eastern time, on the second Business Day next preceding the first day of
such proposed Special Rate Period (or by such later time or date, or both, as
may be agreed to by the Auction Agent), the 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.
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VOTING RIGHTS
Holders of shares of Municipal Preferred are entitled to vote on certain
matters as described herein under "Investment Objectives and
Policies -- Fundamental Investment Policies" and in the Prospectus under
"Description of Municipal Preferred -- Voting Rights" and "Certain Provisions in
the Agreement and Declaration of Trust."
In connection with the election of the 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 $90,000,000); 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 the shares of Municipal Preferred
or the holders thereof (provided, however, that a division of a share of
Municipal
B-32
<PAGE> 81
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 By-Laws by the rating agencies in the event the Trust receives
written confirmation from Moody's or Standard & Poor's, or both, as appropriate,
that any such amendment, alteration or repeal would not impair the ratings then
assigned by Moody's and Standard & Poor's to shares of Municipal Preferred.
RATING AGENCY GUIDELINES
The 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 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.
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<PAGE> 82
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 or write put or call options and similar securities and buy or sell
Inverse Floaters, except to the extent set forth in the By-Laws, which include
the restrictions set forth as Appendix D to this Statement of Additional
Information, (2) borrow money, except that the 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 affairs 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 pricing
service (currently the Trust uses both Muller Data Corporation and Standard &
Poor's J.J. Kenny Evaluation Services) referred to in the definition of Market
Value to a pricing service other than Muller Data Corporation or Standard &
Poor's J.J. Kenny Evaluation Services, or (8) enter into reverse repurchase
agreements, unless in each case (except as described above) it has received
written confirmation from Standard & Poor's or Moody's, or both, as appropriate,
that any such action would not impair the rating then assigned by such rating
agency to shares of Municipal Preferred. While the 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.
B-34
<PAGE> 83
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;
(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
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<PAGE> 84
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 Advisor will not alter the
composition of the Trust's portfolio if, in the reasonable belief of the
Advisor, 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 Advisor 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 as of (i) the fifteenth
day of each month (or, if such day is not a Business Day, the next succeeding
Business Day) and (ii) the last Business Day of each month, in each case on or
before the third Business Day after such day. Within ten Business Days after
delivery of such report relating to the last Business Day of each of February,
May, August and November of each year, commencing August, 1999, 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
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<PAGE> 85
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**
- --------------- ---- --- --- ---- ---------
<S> <C> <C> <C> <C> <C>
45 Business Days............................ 190% 195% 210% 250% 220%
25 Business Days............................ 170 175 190 230 220
10 Business Days............................ 155 160 175 215 220
7 Business Days............................. 150 155 170 210 220
3 Business Days............................. 130 135 150 190 220
</TABLE>
- ---------------
* Standard & Poor's rating.
** Standard & Poor's Eligible Assets not rated or rated less than BBB by
Standard & Poor's and not rated at least the equivalent of an "A" rating by
another nationally recognized credit rating agency.
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; and further provided that such Moody's-rated short-term
Municipal Obligations may comprise no more than 50% of short-term Municipal
Obligations that qualify as Standard & Poor's Eligible Assets; (ii) no Standard
& Poor's Discount Factor will be applied to cash, futures, options, Inverse
Floaters and similar instruments or to Receivables for Municipal Obligations
Sold; and (iii) except as set forth in clause (i) above, in the case of any
Municipal Obligation that is not rated by Standard & Poor's but qualifies as a
Standard & Poor's Eligible Asset pursuant to clause (1)(c) of the following
paragraph, such Municipal Obligation will be deemed to have a Standard & Poor's
rating one full rating category lower than the Standard & Poor's rating category
that is the equivalent of the rating category in which such Municipal Obligation
is placed by another nationally recognized credit rating agency. For purposes of
the foregoing, Anticipation Notes rated SP-1+ or, if not rated by Standard &
Poor's, rated MIG-1 or VMIG-1 by Moody's, which do not mature or have a demand
feature at par exercisable in 30 days and which do not have a long-term rating,
will be considered to be short-term Municipal Obligations. "Receivables for
Municipal Obligations Sold," for purposes of calculating Standard & Poor's
Eligible Assets as of any Valuation Date, means the book value of receivables
for Municipal Obligations sold as of or prior to such Valuation Date if such
receivables are due within five business days of such Valuation Date.
The Standard & Poor's guidelines impose certain minimum issue size, issuer,
geographical diversification and other requirements for purposes of determining
Standard & Poor's Eligible Assets. Solely for purposes of this definition, the
term "Municipal Obligation" means any obligation the interest on which is exempt
from regular Federal income taxation and which is issued by any of the fifty
United States, the District of Columbia or any of the territories of the United
States, their subdivisions, counties, cities, towns, villages, school districts
and agencies (including authorities and special districts created by
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<PAGE> 86
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;
(b) be payable in U.S. dollars;
(c) be publicly rated BBB or higher by Standard & Poor's or, except
in the case of Anticipation Notes that are Grant Anticipation Notes or
Bond Anticipation Notes which must be rated by Standard & Poor's to be
included in Standard & Poor's Eligible Assets, if not rated by Standard
& Poor's but rated by another nationally recognized credit rating
agency, be publicly rated A or higher by such agency;
(d) not be private placements (except in the case of Inverse
Floaters);
(e) be part of an issue with an original issue size of at least $20
million or, if of an issue with an original issue size below $20 million
(but in no event lower than $10 million), be issued by an issuer with a
total of at least $50 million of securities outstanding; and
(f) 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 or not rated at least A by another nationally recognized
credit rating agency will be considered Standard & Poor's Eligible Assets
only to the extent the Market Value of such Municipal Obligations does not
exceed 50% of the aggregate Market Value of Standard & Poor's Eligible
Assets; provided, however, that if the Market Value of such Municipal
Obligations exceeds 50% of the aggregate Market Value of Standard & Poor's
Eligible Assets, a portion of such Municipal Obligations (selected by the
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"). 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
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<PAGE> 87
value thereof divided by the applicable Moody's Discount Factor, or (ii) with
respect to a Moody's Eligible Asset that is currently callable as of such
Valuation Date at the option of the issuer thereof, the quotient of (a) the
lesser of the market value or call price thereof, including any call premium,
divided by (b) the applicable Moody's Discount Factor. The Moody's Discount
Factor used to discount a particular Municipal Obligation will be determined by
reference to the "Moody's Exposure Period" (currently, the period commencing on
a given Valuation Date and ending 49 days thereafter) and the Moody's rating on
such Municipal Obligation. Moody's Discount Factors for a range of exposure
periods are set forth below:
<TABLE>
<CAPTION>
MOODY'S DISCOUNT FACTORS RATING CATEGORY
-----------------------------------------------------
EXPOSURE PERIOD AAA* AA* A* BAA* OTHER** (V)MIG-1*** SP-1+**** UNRATED*****
--------------- ---- --- --- ---- ------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
7 weeks........................ 151% 159% 166% 173% 187% 136% 148% 225%
8 weeks or less but greater
than 7 weeks................. 154 161 168 176 190 137 149 231
9 weeks or less but greater
than 8 weeks................. 156 163 170 177 192 138 150 240
</TABLE>
- ---------------
* Moody's rating.
** Municipal Obligations not rated by Moody's but rated BBB by Standard &
Poor's.
*** Municipal Obligations rated MIG-1 or VMIG-1, which do not mature or have a
demand feature at par exercisable in 30 days and which do not have a
long-term rating.
**** Municipal Obligations not rated by Moody's but rated SP-1+ by Standard &
Poor's, which do not mature or have a demand feature at par exercisable in
30 days and which do not have a long-term rating.
***** Municipal Obligations not rated or rated lower than Baa3 by Moody's and
not rated or rated lower than BBB by Standard & Poor's.
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 to
Receivables for Municipal Obligations Sold. "Receivables for Municipal
Obligations Sold," for purposes of calculating Moody's Eligible Assets as of any
Valuation Date, means no more than the aggregate of the following: (i) the book
value of receivables for Municipal Obligations sold as of or prior to such
Valuation Date if such receivables are due within five business days of such
Valuation Date, and if the trades which generated such receivables are (x)
settled through clearing house firms with respect to which the Trust has
received prior written authorization from Moody's or (y) with counterparties
having a Moody's long-term debt rating of at least Baa3; and (ii) the Moody's
Discounted Value of Municipal Obligations sold as of or prior to such Valuation
Date which generated receivables, if such receivables are due within five
business days of such Valuation Date but do not comply with either of conditions
(x) or (y).
The Moody's guidelines impose certain minimum issue size, issuer,
geographical diversification and other requirements for purposes of determining
Moody's Eligible Assets, as set forth in the table below:
<TABLE>
<CAPTION>
MINIMUM MAXIMUM MAXIMUM
ISSUE SIZE UNDERLYING STATE OR TERRITORY
RATING ($ MILLIONS) OBLIGOR (%) CONCENTRATION(%)
------ ------------ ----------- ------------------
<S> <C> <C> <C>
Aaa........................................ 10 100 100
Aa......................................... 10 20 60
A.......................................... 10 10 40
Baa........................................ 10 6 20
Other*..................................... 10 4 12
Unrated**.................................. 10 4 12
</TABLE>
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- ---------------
* Municipal Obligations not rated by Moody's but rated BBB by Standard &
Poor's.
** Municipal Obligations not rated or rated lower than Baa3 by Moody's and not
rated or rated lower than BBB by Standard & Poor's.
For purposes of the foregoing table, the percentages provided, for a given
rating, in the columns entitled "Maximum Underlying Obligor" and "Maximum State
or Territory Concentration" shall apply to the aggregate total of the Municipal
Obligations in the rating category indicated and all rated Municipal Obligations
in lower rating categories, as well as unrated Municipal Obligations that are
Moody's Eligible Assets.
The percentages set forth in the preceding table are based upon Moody's
Eligible Assets calculated excluding cash. Current Moody's guidelines also
require that Municipal Obligations constituting Moody's Eligible Assets (i) pay
interest in cash, (ii) 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 rated
MIG-1, VMIG-1, or P-1, or, if not rated by Moody's, rated A-1+/AA or SP-1+/AA by
Standard & Poor's, will be considered to have a long-term rating of A. In
general, Municipal Obligations which are rated less than Baa3 by Moody's or less
than BBB by Standard & Poor's or not rated by Moody's or Standard & Poor's may
comprise no more than 40% of the aggregate Market Value of Moody's Eligible
Assets.
The 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 By-Laws
and are included as Appendix D to this Statement of Additional Information.
REDEMPTION
OPTIONAL REDEMPTION. Except as described below,
(i) shares of Municipal Preferred are redeemable, at the option of the
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 By-Laws and
applicable law, at a redemption price per share equal to the sum of $25,000
plus an amount equal to accumulated but unpaid dividends thereon (whether
or not earned or declared) to (but not including) the date fixed for
redemption; provided, however, that (1) shares of Municipal Preferred may
not be redeemed in part if after such partial redemption fewer than 500
shares remain outstanding; (2) unless otherwise provided in the By-laws,
shares of Municipal Preferred are redeemable by the 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 By-Laws and applicable
law, on the first day following any Dividend Period thereof included in a
Rate Period of
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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
By-Laws 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
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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 By-Laws
and applicable law for the redemption of all of the required number of shares of
Municipal Preferred and other Preferred Shares which are subject to mandatory
redemption or retirement or the 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 By-Laws under which such redemption is made. If
fewer than all shares of Municipal Preferred held by any holder are to be
redeemed, the notice mailed to such holder shall also specify the number of
shares to be redeemed from such holder. The 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 (on the Business Day next preceding the date
fixed for redemption thereby, in funds available on the next Business Day in The
City of New York, New York) of funds sufficient to redeem the shares of
Municipal Preferred that are the subject of such notice, dividends on such
shares will cease to accumulate and such shares will no longer be deemed
outstanding for any purpose, and all rights of the holders of the shares so
called for redemption will cease and terminate, except the right of the holders
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<PAGE> 91
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 By-Laws 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 of the affairs of the Trust, an amount equal to the
liquidation preference with respect to such shares. The liquidation preference
for shares of Municipal Preferred shall be $25,000 per share, plus an amount
equal to all dividends thereon (whether or not earned or declared) accumulated
but unpaid to (but not including) the date of final distribution in same-day
funds, together with any applicable Gross-up Payments in connection with the
dissolution, liquidation or winding up of the affairs of the 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
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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
Massachusetts business trust or corporation nor the merger or consolidation of
any Massachusetts business trust or corporation into or with the Trust shall be
a dissolution, liquidation or winding up 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 investment company and as such its shareholders
will not have the right to cause the Trust to redeem their shares. Common Shares
trade in the open market at a price that is a function of several factors,
including net asset value and yield. Although the common shares of a closed-end
investment company such as the Trust that invests substantially all of its
assets in investment grade municipal obligations have generally traded at a
premium to net asset value, such shares have occasionally traded at a discount
to net asset value. The Board of Trustees has currently determined that, at
least annually, it will consider action that might be taken to reduce or
eliminate any material discount from net asset value in respect of Common
Shares, which may include the repurchase of such shares in the open market or in
private transactions, the making of a tender offer for such shares at net asset
value, or the conversion of the Trust to an open-end investment company. There
can be no assurance, however, that the Board of Trustees will decide to take any
of these actions, or that share repurchases or tender offers, if undertaken,
will reduce market discount. In addition, see "Description of Municipal
Preferred -- Dividends -- Restrictions on Dividends and Other Payments" for a
discussion of the limitations on the Trust's ability to engage in certain
transactions. The staff of the SEC currently requires that any tender offer made
by a closed-end investment company for its shares must be at a price equal to
the net asset value of such shares on the close of business on the last day of
the tender offer. Any service fees incurred in connection with any tender offer
made by the Trust will be borne by the Trust and will not reduce the stated
consideration to be paid to tendering shareholders.
Subject to its investment limitations, the Trust may borrow to finance the
repurchase of shares or to make a tender offer. Interest on any borrowings to
finance share repurchase transactions or the accumulation of cash by the Trust
in anticipation of share repurchases or tenders will reduce the Trust's net
income. Any share repurchase, tender offer or borrowing that might be approved
by the Board of Trustees would have to comply with the Securities Exchange Act
of 1934, as amended, and the 1940 Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from net
asset value will be made by the Board of Trustees at the time it considers such
issue, it is the Board's present policy, which may be changed by the Board, not
to authorize repurchases of the Trust's Common Shares or a tender offer for such
shares if (1) such transactions, if consummated, would (a) result in the
delisting of the Common Shares from the New York Stock Exchange (the
"Exchange"), or (b) impair the Trust's status as a regulated investment company
under the Code (which would make the Trust a taxable entity, causing the Trust's
income to be taxed at the corporate level in addition to the taxation of
shareholders who receive dividends from the Trust) or as a registered closed-end
investment company under the 1940 Act; (2) the Trust would not be able to
liquidate portfolio securities in an orderly manner and consistent with the
Trust's investment objectives and policies in order to repurchase shares; or (3)
there is, in the Board's judgment, any (a) material legal action or proceeding
instituted or threatened challenging such transactions or otherwise materially
adversely affecting the Trust, (b) general suspension of or limitation
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on prices for trading securities on the Exchange, (c) declaration of a banking
moratorium by Federal or state authorities or any suspension of payment by
United States or New York State banks in which the Trust invests, (d) material
limitation affecting the Trust or the issuers of its portfolio securities by
Federal or state authorities on the extension of credit by lending institutions
or on the exchange of foreign currency, (e) commencement of war, armed
hostilities or other international or national calamity directly or indirectly
involving the United States, or (f) other event or condition which would have a
material adverse effect (including any adverse tax effect) on the Trust or its
shareholders if shares were repurchased. The Board of Trustees may in the future
modify these conditions in light of experience. Before deciding whether to take
any action in response to a discount from net asset value, the Board of Trustees
would consider all relevant factors, including the extent and duration of the
discount, the liquidity of the Trust's portfolio, the impact of any action that
might be taken on the Trust or its shareholders, and market considerations.
Based on these considerations, even if the Trust's Common Shares should trade at
a discount, the Board may determine that, in the interest of the Trust and its
shareholders, no action should be taken.
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MISCELLANEOUS INVESTMENT PRACTICES
SHORT-TERM TRADING
In seeking the Trust's objective, the Advisor will buy or sell portfolio
securities whenever the Advisor believes it appropriate to do so. In deciding
whether to sell a portfolio security, the Advisor does not consider how long the
Trust has owned the security. From time to time the Trust will buy securities
intending to seek short-term trading profits. A change in the securities held by
the Trust is known as "portfolio turnover" and generally involves some expense
to the Trust. This expense may include brokerage commissions or dealer markups
and other transaction costs on both the sale of securities and the reinvestment
of the proceeds in other securities. If sales of portfolio securities cause the
Trust to realize net short-term capital gain, such gain generally will be
taxable as ordinary income. As a result of the Trust's investment policies,
under certain market conditions the Trust's portfolio turnover rate may be
higher than that of other investment companies. Portfolio turnover rate for a
fiscal year is the ratio of the lesser of purchases or sales of portfolio
securities to the monthly average of the value of portfolio
securities -- excluding securities whose maturities at acquisition were one year
or less. The Trust's portfolio turnover rate is not a limiting factor when the
Advisor considers a change in the Trust's portfolio.
LOWER-RATED SECURITIES
The Trust may invest in lower-rated securities (commonly known as "high
yield," high risk securities or "junk bonds"). The lower ratings of certain
securities held by the Trust reflect a greater possibility that adverse changes
in the financial condition of the issuer or in general economic conditions, or
both, or an unanticipated rise in interest rates, may impair the ability of the
issuer to make payments of interest and principal. The inability (or perceived
inability) of issuers to make timely payments of interest and principal would
likely make the values of securities held by the Trust more volatile and could
limit the Trust's ability to sell its securities at prices approximating the
values the Trust had placed on such securities. In the absence of a liquid
trading market for securities held by it, the Trust at times may be unable to
establish the fair value for such securities.
Securities ratings are based largely on the issuer's historical financial
condition and the rating agencies' analysis at the time of rating. Consequently,
the rating assigned to any particular security is not necessarily a reflection
of the issuer's current financial condition, which may be better or worse than
the rating would indicate. In addition, the rating assigned to a security by
Moody's or Standard & Poor's (or by any other nationally recognized securities
rating organization) does not reflect an assessment of the volatility of the
security's market value or the liquidity of an investment in the security. See
Appendix A for a description of security ratings.
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. A decrease in
interest rates will generally result in an increase in the value of the Trust's
assets. Conversely, during periods of rising interest rates, the value of the
Trust's assets will generally decline. The values of lower-rated securities may
often be affected to a greater extent by changes in general economic conditions
and business conditions affecting the issuers of such securities and their
industries. Negative publicity or investor perceptions may also adversely affect
the values of lower-rated securities. Changes by recognized rating services in
their ratings of any fixed-income security and changes in the ability of an
issuer to make payments of interest and principal may also affect the value of
these investments. Changes in the value of portfolio securities generally will
not affect income derived from these securities, but will affect the Trust's net
asset value. The Trust will not necessarily dispose of a security when its
rating is reduced below its rating at the time of purchase. However, the Advisor
will monitor the investment to determine whether its retention will assist in
meeting the Trust's investment objective.
Issuers of lower-rated securities are often highly leveraged, so that their
ability to service their debt obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. Such issuers may not
have more traditional methods of financing available to them and may be
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unable to repay outstanding obligations at maturity by refinancing. The risk of
loss due to default in payment of interest or repayment of principal by such
issuers is significantly greater because such securities frequently are
unsecured and subordinated to the prior payment of senior indebtedness.
At times, a substantial portion of the Trust's assets may be invested in
securities as to which the Trust, by itself or together with other Trusts and
accounts managed by the Advisor and its affiliates, holds all or a major portion
of the securities outstanding. Although the Advisor generally considers such
securities to be liquid because of the availability of an institutional market
for such securities, it is possible that, under adverse market or economic
conditions or in the event of adverse changes in the financial condition of the
issuer, the Trust could find it more difficult to sell these securities when the
Advisor believes it advisable to do so or may be able to sell the securities
only at prices lower than if they were more widely held. Under these
circumstances, it may also be more difficult to determine the fair value of such
securities for purposes of computing the Trust's net asset value. In order to
enforce its rights in the event of a default under such securities, the Trust
may be required to participate in various legal proceedings or take possession
of and manage assets securing the issuer's obligations on such securities. This
could increase the Trust's operating expenses and adversely affect the Trust's
net asset value.
Certain securities held by the Trust may permit the issuer at its option to
"call," or redeem, its securities. If an issuer were to redeem securities held
by the Trust during a time of declining interest rates, the Trust might not be
able to reinvest the proceeds in securities providing the same investment return
as the securities redeemed. The Trust may invest without limit in such bonds.
To the extent the Trust invests in securities in the lower rating
categories, the achievement of the Trust's goals is more dependent on the
Advisor's investment analysis than would be the case if the Trust were investing
in securities in the higher rating categories.
PRIVATE PLACEMENTS
The Trust may invest in securities that are purchased in private placements
and, accordingly, may be subject to restrictions on resale as a matter of
contract or under federal securities laws. Because there may be relatively few
potential purchasers for such investments, especially under adverse market or
economic conditions or in the event of adverse changes in the financial
condition of the issuer, the Trust could find it more difficult to sell such
securities when the Advisor believes it advisable to do so or may be able to
sell such securities only at prices lower than if such securities were more
widely held. At times, it may also be more difficult to determine the fair value
of such securities for purposes of computing the Trust's net asset value.
STEP COUPON BONDS (STEPS)
The Trust may invest in debt securities which do not pay interest for a
stated period of time and then pay interest at a series of different rates for a
series of periods. In addition to the risks associated with the credit rating of
the issuers, these securities are subject to the volatility risk of zero coupon
bonds for the period when no interest is paid.
TENDER OPTION BONDS
A tender option bond is a municipal security (generally held pursuant to a
custodial arrangement) having a relatively long maturity and bearing interest at
a fixed rate substantially higher than prevailing short-term tax-exempt rates
that has been coupled with the agreement of a third party, such as a bank,
broker-dealer or other financial institution, pursuant to which such institution
grants the security holders the option, at periodic intervals, to tender their
securities to the institution and receive the face value thereof. As
consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the municipal security's fixed
coupon rate and the rate, as determined by a remarketing or similar agent at or
near the commencement of such period, that would cause the securities, coupled
with the tender option, to trade at par on the date of such determination. Thus,
after payment of this fee, the security holder effectively holds a demand
obligation that bears interest at the prevailing
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short-term tax-exempt rate. The Advisor will consider on an ongoing basis the
creditworthiness of the issuer of the underlying municipal securities, of any
custodian, and of the third-party provider of the tender option. In certain
instances and for certain tender option bonds, the option may be terminable in
the event of a default in payment of principal or interest on the underlying
municipal securities and for other reasons.
PAY-IN-KIND (PIK) SECURITIES
The Trust may invest in securities which pay interest either in cash or
additional securities at the issuer's option. These securities are generally
high yield securities and in addition to the other risks associated with
investing in high yield securities are subject to the risks that the interest
payments, which consist of additional securities, will also be subject to the
risks of high yield securities.
MONEY MARKET INSTRUMENTS
The Trust may invest in short-term money market instruments as follows:
Government obligations are issued by the U.S. or foreign governments, their
subdivisions, agencies and instrumentalities. Supranational obligations are
issued by supranational entities and are generally designed to promote economic
improvements. Certificates of deposit are issued against deposits in a
commercial bank with a defined return and maturity. Banker's acceptances are
used to finance the import, export or storage of goods and are "accepted" when
guaranteed at maturity by a bank. Commercial paper is promissory notes issued by
businesses to finance short-term needs (including those with floating or
variable interest rates, or including a frequent interval put feature).
Short-term corporate obligations are bonds and notes (with one year or less to
maturity at the time of purchase) issued by businesses to finance long-term
needs.
FORWARD COMMITMENTS
The Trust may enter into contracts to purchase securities for a fixed price
at a future date beyond customary settlement time ("forward commitments") if the
Trust sets aside, on the books and records of its custodian, liquid assets in an
amount sufficient to meet the purchase price, or if the Trust enters into
offsetting contracts for the forward sale of other securities it owns. In the
case of to-be-announced ("TBA") purchase commitments, the unit price and the
estimated principal amount are established when the Trust enters into a
contract, with the actual principal amount being within a specified range of the
estimate. Forward commitments may be considered securities in themselves, and
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date, which risk is in addition to the risk of decline
in the value of the Trust's other assets. Where such purchases are made through
dealers, the Trust relies on the dealer to consummate the sale. The dealer's
failure to do so may result in the loss to the Trust of an advantageous yield or
price. Although the Trust will generally enter into forward commitments with the
intention of acquiring securities for its portfolio or for delivery pursuant to
options contracts it has entered into, the Trust may dispose of a commitment
prior to settlement if the Advisor deems it appropriate to do so. The Trust may
realize short-term profits or losses on the sale of forward commitments.
The Trust may enter into TBA sale commitments to hedge its portfolio
positions or to sell securities it owns under delayed delivery arrangements.
Proceeds of TBA sale commitments are not received until the contractual
settlement date. During the time a TBA sale commitment is outstanding,
equivalent deliverable securities, or an offsetting TBA purchase commitment
deliverable on or before the sale commitment date, are held as "cover" for the
transaction. Unsettled TBA sale commitments are valued at current market value
of the underlying securities. If the TBA sale commitment is closed through the
acquisition of an offsetting purchase commitment, the Trust realizes a gain or
loss on the commitment without regard to any unrealized gain or loss on the
underlying security. If the Trust delivers securities under the commitment, the
Trust realizes a gain or loss from the sale of the securities based upon the
unit price established at the date the commitment was entered into.
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REPURCHASE AGREEMENTS
The Trust may enter into repurchase agreements. A repurchase agreement is a
contract under which the Trust acquires a security for a relatively short period
(usually not more than one week), subject to the obligation of the seller to
repurchase and the Trust to resell such security at a fixed time and price
(representing the Trust's cost plus interest). It is the Trust's present
intention to enter into repurchase agreements only with commercial banks and
registered broker-dealers and only with respect to obligations of the U.S.
government or its agencies or instrumentalities. Repurchase agreements may also
be viewed as loans made by the Trust which are collateralized by the securities
subject to repurchase. The Advisor will monitor such transactions to ensure that
the value of the underlying securities will be at least equal at all times to
the total amount of the repurchase obligation, including the interest factor. If
the seller defaults, the Trust could realize a loss on the sale of the
underlying security to the extent that the proceeds of sale, including accrued
interest, are less than the resale price provided in the agreement, including
interest. In addition, if the seller should be involved in bankruptcy or
insolvency proceedings, the Trust may incur delay and costs in selling the
underlying security or may suffer a loss of principal and interest if the Trust
is treated as an unsecured creditor and required to return the underlying
collateral to the seller's estate.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Trust may transfer uninvested cash balances into a joint
account, along with cash of other Liberty Funds and certain other accounts.
These balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
OPTIONS ON SECURITIES
WRITING COVERED OPTIONS. The Trust may write covered call options and
covered put options on optionable securities held in its portfolio, when in the
opinion of the Advisor such transactions are consistent with the Trust's
investment objective and policies. Call options written by the Trust give the
purchaser the right to buy the underlying securities from the Trust at a stated
exercise price; put options give the purchaser the right to sell the underlying
securities to the Trust at a stated price.
The Trust may write only covered options, which means that, so long as the
Trust is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, the Trust
will hold cash and/or high-grade short-term debt obligations equal to the price
to be paid if the option is exercised. In addition, the Trust will be considered
to have covered a put or call option if and to the extent that it holds an
option that offsets some or all of the risk of the option it has written. The
Trust may write combinations of covered puts and calls on the same underlying
security.
The Trust will receive a premium from writing a put or call option, which
increases the Trust's return on the underlying security in the event the option
expires unexercised or is closed out at a profit. The amount of the premium
reflects, among other things, the relationship between the exercise price and
the current market value of the underlying security, the volatility of the
underlying security, the amount of time remaining until expiration, current
interest rates and the effect of supply and demand in the options market and in
the market for the underlying security. By writing a call option, the Trust
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option but continues to bear
the risk of a decline in the value of the underlying security. By writing a put
option, the Trust assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then-current market
value, resulting in a potential capital loss unless the security subsequently
appreciates in value.
The Trust may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an offsetting option. The Trust realizes a profit or loss from a closing
transaction if the cost of the transaction (option premium plus transaction
costs) is less or more than the premium received from writing the option. If the
Trust writes a call option but does not own the underlying security, and when it
writes a put option, the Trust may be required to deposit cash or securities
with its broker as "margin," or collateral, for its obligation to buy or sell
the underlying security.
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As the value of the underlying security varies, the Trust may have to deposit
additional margin with the broker. Margin requirements are complex and are fixed
by individual brokers, subject to minimum requirements currently imposed by the
Federal Reserve Board and by stock exchanges and other self-regulatory
organizations.
PURCHASING PUT OPTIONS. The Trust may purchase put options to protect its
portfolio holdings in an underlying security against a decline in market value.
Such protection is provided during the life of the put option since the Trust,
as holder of the option, is able to sell the underlying security at the put
exercise price regardless of any decline in the underlying security's market
price. In order for a put option to be profitable, the market price of the
underlying security must decline sufficiently below the exercise price to cover
the premium and transaction costs. By using put options in this manner, the
Trust will reduce any profit it might otherwise have realized from appreciation
of the underlying security by the premium paid for the put option and by
transaction costs.
PURCHASING CALL OPTIONS. The Trust may purchase call options to hedge
against an increase in the price of securities that the Trust wants ultimately
to buy. Such hedge protection is provided during the life of the call option
since the Trust, as holder of the call option, is able to buy the underlying
security at the exercise price regardless of any increase in the underlying
security's market price. In order for a call option to be profitable, the market
price of the underlying security must rise sufficiently above the exercise price
to cover the premium and transaction costs.
RISK FACTORS IN OPTIONS TRANSACTIONS
The successful use of the Trust's options strategies depends on the ability
of the Advisor to forecast interest rate and market movements correctly. For
example, if the Trust were to write a call option based on the Advisor's
expectation that the price of the underlying security would fall, but the price
were to rise instead, the Trust could be required to sell the security upon
exercise at a price below the current market price. Similarly, if the Trust were
to write a put option based on the Advisor's expectation that the price of the
underlying security would rise, but the price were to fall instead, the Trust
could be required to purchase the security upon exercise at a price higher than
the current market price.
When the Trust purchases an option, it runs the risk that it will lose its
entire investment in the option in a relatively short period of time, unless the
Trust exercises the option or enters into a closing sale transaction before the
option's expiration. If the price of the underlying security does not rise (in
the case of a call) or fall (in the case of a put) to an extent sufficient to
cover the option premium and transaction costs, the Trust will lose part or all
of its investment in the option. This contrasts with an investment by the Trust
in the underlying security, since the Trust will not realize a loss if the
security's price does not change.
The effective use of options also depends on the Trust's ability to
terminate option positions at times when the Advisor deems it desirable to do
so. There is no assurance that the Trust will be able to effect closing
transactions at any particular time or at an acceptable price.
If a secondary market in options were to become unavailable, the Trust
could no longer engage in closing transactions. Lack of investor interest might
adversely affect the liquidity of the market for particular options or series of
options. A market may discontinue trading of a particular option or options
generally. In addition, a market could become temporarily unavailable if unusual
events -- such as volume in excess of trading or clearing capability -- were to
interrupt its normal operations.
A market may at times find it necessary to impose restrictions on
particular types of options transactions, such as opening transactions. For
example, if an underlying security ceases to meet qualifications imposed by the
market or the Options Clearing Corporation, new series of options on that
security will no longer be opened to replace expiring series, and opening
transactions in existing series may be prohibited. If an options market were to
become unavailable, the Trust as a holder of an option would be able to realize
profits or limit losses only by exercising the option, and the Trust, as option
writer, would remain obligated under the option until expiration or exercise.
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Disruptions in the markets for the securities underlying options purchased
or sold by the Trust could result in losses on the options. If trading is
interrupted in an underlying security, the trading of options on that security
is normally halted as well. As a result, the Trust as purchaser or writer of an
option will be unable to close out its positions until options trading resumes,
and it may be faced with considerable losses if trading in the security reopens
at a substantially different price. In addition, the Options Clearing
Corporation or other options markets may impose exercise restrictions. If a
prohibition on exercise is imposed at the time when trading in the option has
also been halted, the Trust as purchaser or writer of an option will be locked
into its position until one of the two restrictions has been lifted. If the
Options Clearing Corporation were to determine that the available supply of an
underlying security appears insufficient to permit delivery by the writers of
all outstanding calls in the event of exercise, it may prohibit indefinitely the
exercise of put options. The Trust, as holder of such a put option, could lose
its entire investment if the prohibition remained in effect until the put
option's expiration.
FUTURES CONTRACTS AND RELATED OPTIONS
Subject to applicable law, the Trust may invest without limit in the types
of futures contracts and related options identified in the Prospectus for
hedging and non-hedging purposes, such as to manage the effective duration of
the Trust's portfolio or as a substitute for direct investment. A financial
futures contract sale creates an obligation by the seller to deliver the type of
financial instrument called for in the contract in a specified delivery month
for a stated price. A financial futures contract purchase creates an obligation
by the purchaser to take delivery of the type of financial instrument called for
in the contract in a specified delivery month at a stated price. The
determination is made in accordance with the rules of the exchange on which the
futures contract sale or purchase was made. Futures contracts are traded in the
United States only on commodity exchanges or boards of trade -- known as
"contract markets" -- approved for such trading by the Commodity Futures Trading
Commission (the "CFTC"), and must be executed through a futures commission
merchant or brokerage firm which is a member of the relevant contract market.
Although futures contracts (other than index futures) by their terms call
for actual delivery or acceptance of commodities or securities, in most cases
the contracts are closed out before the settlement date without the making or
taking of delivery. Closing out a futures contract sale is effected by
purchasing a futures contract for the same aggregate amount of the specific type
of financial instrument or commodity with the same delivery date. If the price
of the initial sale of the futures contract exceeds the price of the offsetting
purchase, the seller is paid the difference and realizes a gain. Conversely, if
the price of the offsetting purchase exceeds the price of the initial sale, the
seller realizes a loss. If the Trust is unable to enter into a closing
transaction, the amount of the Trust's potential loss is unlimited. The closing
out of a futures contract purchase is effected by the purchaser's entering into
a futures contract sale. If the offsetting sale price exceeds the purchase
price, the purchaser realizes a gain, and if the purchase price exceeds the
offsetting sale price, the purchaser realizes a loss. In general, 40% of the
gain or loss arising from the closing out of a futures contract traded on an
exchange approved by the CFTC is treated as short-term gain or loss, and 60% is
treated as long-term gain or loss.
Unlike when the Trust purchases or sells a security, no price is paid or
received by the Trust upon the purchase or sale of a futures contract. Upon
entering into a contract, the Trust is required to deposit with its custodian in
a segregated account in the name of the futures broker an amount of liquid
assets. This amount is known as "initial margin." The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds to finance the transactions. Rather, initial margin is similar to a
performance bond or good faith deposit which is returned to the Trust upon
termination of the futures contract, assuming all contractual obligations have
been satisfied. Futures contracts also involve brokerage costs.
Subsequent payments, called "variation margin" or "maintenance margin," to
and from the broker (or the custodian) are made on a daily basis as the price of
the underlying security or commodity fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"marking to the market." For example, when the Trust has purchased a futures
contract on a security and
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the price of the underlying security has risen, that position will have
increased in value and the Trust will receive from the broker a variation margin
payment based on that increase in value. Conversely, when the Trust has
purchased a security futures contract and the price of the underlying security
has declined, the position would be less valuable and the Trust would be
required to make a variation margin payment to the broker.
The Trust may elect to close some or all of its futures positions at any
time prior to their expiration in order to reduce or eliminate a position then
currently held by the Trust. The Trust may close its positions by taking
opposite positions which will operate to terminate the Trust's position in the
futures contracts. Final determinations of variation margin are then made,
additional cash is required to be paid by or released to the Trust, and the
Trust realizes a loss or a gain. Such closing transactions involve additional
commission costs.
The Trust does not intend to purchase or sell futures or related options
for other than hedging purposes if, as a result, the sum of the initial margin
deposits on the Trust's existing futures and related options positions and
premiums paid for outstanding options on futures contracts would exceed 5% of
the Trust's net assets.
OPTIONS ON FUTURES CONTRACTS. The Trust may purchase and write call and
put options on futures contracts and it may buy or sell and enter into closing
transactions with respect to such options to terminate existing positions.
Options on futures contracts give the purchaser the right, in return for the
premium paid, to assume a position in a futures contract at the specified option
exercise price at any time during the period of the option. The Trust may use
options on futures contracts in lieu of writing or buying options directly on
the underlying securities or purchasing and selling the underlying futures
contracts. For example, to hedge against a possible decrease in the value of its
portfolio securities, the Trust may purchase put options or write call options
on futures contracts rather than selling futures contracts. Similarly, the Trust
may purchase call options or write put options on futures contracts as a
substitute for the purchase of futures contracts to hedge against a possible
increase in the price of securities which the Trust expects to purchase. Such
options generally operate in the same manner as options purchased or written
directly on the underlying investments.
As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an offsetting option. There is
no guarantee that such closing transactions can be effected.
The Trust will be required to deposit initial margin and maintenance margin
with respect to put and call options on futures contracts written by it pursuant
to brokers' requirements, similar to those described above in connection with
the discussion of futures contracts.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. Successful
use of futures contracts by the Trust is subject to the Advisor's ability to
predict movements in various factors affecting securities markets, including
interest rates. Compared to the purchase or sale of futures contracts, the
purchase of call or put options on futures contracts involves less potential
risk to the Trust because the maximum amount at risk is the premium paid for the
options (plus transaction costs). However, there may be circumstances when the
purchase of a call or put option on a futures contract would result in a loss to
the Trust when the purchase or sale of a futures contract would not, such as
when there is no movement in the prices of the hedged investments. The writing
of an option on a futures contract involves risks similar to those risks
relating to the sale of futures contracts.
The use of options and futures strategies also involves the risk of
imperfect correlation among movements in the prices of the securities underlying
the futures and options purchased and sold by the Trust, of the options and
futures contracts themselves, and, in the case of hedging transactions, of the
securities which are the subject of a hedge.
There is no assurance that higher than normal trading activity or other
unforeseen events might not, at times, render certain market clearing facilities
inadequate, and thereby result in the institution by exchanges of special
procedures which may interfere with the timely execution of customer orders.
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To reduce or eliminate a position held by the Trust, the Trust may seek to
close out such position. The ability to establish and close out positions will
be subject to the development and maintenance of a liquid secondary market. It
is not certain that this market will develop or continue to exist for a
particular futures contract or option. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain contracts or options, (ii) restrictions
may be imposed by an exchange on opening transactions or closing transactions or
both, (iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of contracts or options, or underlying
securities, (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange, (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current trading volume,
or (vi) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of contracts or options
(or a particular class or series of contracts or options), in which event the
secondary market on that exchange for such contracts or options (or in the class
or series of contracts or options) would cease to exist, although outstanding
contracts or options on the exchange that had been issued by a clearing
corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
U.S. TREASURY SECURITY FUTURES CONTRACTS AND OPTIONS. U.S. Treasury
security futures contracts require the seller to deliver, or the purchaser to
take delivery of, the type of U.S. Treasury security called for in the contract
at a specified date and price. Options on U.S. Treasury security futures
contracts give the purchaser the right, in return for the premium paid, to
assume a position in a U.S. Treasury security futures contract at the specified
option exercise price at any time during the period of the option.
Successful use of U.S. Treasury security futures contracts by the Trust is
subject to the Advisor's ability to predict movements in the direction of
interest rates and other factors affecting markets for debt securities. For
example, if the Trust has sold U.S. Treasury security futures contracts in order
to hedge against the possibility of an increase in interest rates which would
adversely affect securities held in its portfolio, and the prices of the Trust's
securities increase instead as a result of a decline in interest rates, the
Trust would be likely to lose part or all of the benefit of the increased value
of its securities which it has hedged because it will have offsetting losses in
its futures positions. In addition, in such situations, if the Trust has
insufficient cash, it may have to sell securities to meet daily maintenance
margin requirements at a time when it may be disadvantageous to do so.
There is also a risk that price movements in U.S. Treasury security futures
contracts and related options will not correlate closely with price movements in
markets for particular securities. For example, if the Trust has hedged against
a decline in the values of high yield corporate securities held by it by selling
Treasury security futures and the values of Treasury securities subsequently
increase while the values of its high yield corporate securities decrease, the
Trust would incur losses on both the Treasury security futures contracts written
by it and the high yield corporate securities held in its portfolio.
INDEX FUTURES CONTRACTS. An index futures contract is a contract to buy or
sell units of an index at a specified future date at a price agreed upon when
the contract is made. Entering into a contract to buy units of an index is
commonly referred to as buying or purchasing a contract or holding a long
position in the index. Entering into a contract to sell units of an index is
commonly referred to as selling a contract or holding a short position. A unit
is the current value of the index. The Trust may enter into stock index futures
contracts, debt index futures contracts, or other index futures contracts
appropriate to its objective. The Trust may also purchase and sell options on
index futures contracts.
There are several risks in connection with the use by the Trust of index
futures. One risk arises because of the imperfect correlation between movements
in the prices of the index futures and movements in the prices of securities
which are the subject of the hedge. The Advisor will, however, attempt to reduce
this risk by buying or selling, to the extent possible, futures on indices the
movements of which will, in its judgment, have a significant correlation with
movements in the prices of the securities sought to be hedged.
Successful use of index futures by the Trust is also subject to the
Advisor's ability to predict movements in the direction of the market. For
example, it is possible that, where the Trust has sold
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futures to hedge its portfolio against a decline in the market, the index on
which the futures are written may advance and the value of securities held in
the Trust's portfolio may decline. If this occurred, the Trust would lose money
on the futures and also experience a decline in value in its portfolio
securities. It is also possible that, if the Trust has hedged against the
possibility of a decline in the market adversely affecting securities held in
its portfolio and securities prices increase instead, the Trust will lose part
or all of the benefit of the increased value of those securities it has hedged
because it will have offsetting losses in its futures positions. In addition, in
such situations, if the Trust has insufficient cash, it may have to sell
securities to meet daily variation margin requirements at a time when it is
disadvantageous to do so.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the index futures and the portion
of the portfolio being hedged, the prices of index futures may not correlate
perfectly with movements in the underlying index due to certain market
distortions. First, all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the index and
futures markets. Second, margin requirements in the futures market are less
onerous than margin requirements in the securities market, and as a result the
futures market may attract more speculators than the securities market does.
Increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and also because of the imperfect correlation between movements
in the index and movements in the prices of index futures, even a correct
forecast of general market trends by the Advisor may still not result in a
profitable position over a short time period.
OPTIONS ON INDEX FUTURES. Options on index futures are similar to options
on securities except that options on index futures give the purchaser the right,
in return for the premium paid, to assume a position in an index futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the period of
the option. Upon exercise of the option, the delivery of the futures position by
the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account which
represents the amount by which the market price of the index futures contract,
at exercise, exceeds (in the case of a call) or is less than (in the case of a
put) the exercise price of the option on the index future. If an option is
exercised on the last trading day prior to its expiration date, the settlement
will be made entirely in cash equal to the difference between the exercise price
of the option and the closing level of the index on which the future is based on
the expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
OPTIONS ON INDICES
As an alternative to purchasing call and put options on index futures, the
Trust may purchase and sell call and put options on the underlying indices
themselves. Such options would be used in a manner identical to the use of
options on index futures.
INDEX WARRANTS
The Trust may purchase put warrants and call warrants whose values vary
depending on the change in the value of one or more specified securities indices
("index warrants"). Index warrants are generally issued by banks or other
financial institutions and give the holder the right, at any time during the
term of the warrant, to receive upon exercise of the warrant a cash payment from
the issuer based on the value of the underlying index at the time of exercise.
In general, if the value of the underlying index rises above the exercise price
of the index warrant, the holder of a call warrant will be entitled to receive a
cash payment from the issuer upon exercise based on the difference between the
value of the index and the exercise price of the warrant. If the value of the
underlying index falls, the holder of a put warrant will be entitled to receive
a cash payment from the issuer upon exercise based on the difference between the
exercise price of the warrant and the value of the index. The holder of a
warrant would not be entitled to any payments from the issuer at any time when,
in the case of a call warrant, the exercise price is greater than the value
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of the underlying index, or, in the case of a put warrant, the exercise price is
less than the value of the underlying index. If the Trust were not to exercise
an index warrant prior to its expiration, then the Trust would lose the amount
of the purchase price paid by it for the warrant.
The Trust will normally use index warrants in a manner similar to its use
of options on securities indices. The risks of the Trust's use of index warrants
are generally similar to those relating to its use of index options. Unlike most
index options, however, index warrants are issued in limited amounts and are not
obligations of a regulated clearing agency, but are backed only by the credit of
the bank or other institution which issues the warrant. Also, index warrants
generally have longer terms than index options. Although the Trust will normally
invest only in exchange-listed warrants, index warrants are not likely to be as
liquid as certain index options backed by a recognized clearing agency. In
addition, the terms of index warrants may limit the Trust's ability to exercise
the warrants at such time, or in such quantities, as the Trust would otherwise
wish to do.
ZERO COUPON SECURITIES (ZEROS)
The Trust may invest in zero coupon securities, which are securities issued
at a significant discount from face value and pay interest only at maturity
rather than at intervals during the life of the security and in certificates
representing undivided interests in the interest or principal of mortgage-backed
securities (interest only/principal only), which tend to be more volatile than
other types of securities. The Trust will accrue and distribute income from zero
coupon and stripped securities and certificates on a current basis and may have
to sell securities to generate cash for distributions.
INVERSE FLOATERS
Inverse floaters are derivative securities whose interest rates vary
inversely to changes in short-term interest rates and whose values fluctuate
inversely to changes in long-term interest rates. The value of certain inverse
floaters will fluctuate substantially more in response to a given change in
long-term rates than would a traditional debt security. These securities have
investment characteristics similar to leverage, in that interest rate changes
have a magnified effect on the value of inverse floaters.
B-55
<PAGE> 104
TAX MATTERS
FEDERAL INCOME TAX MATTERS
Federal Taxation of the Trust
The ability of the Trust to qualify for taxation as a regulated investment
company under Subchapter M of the Code requires, among other things, that the
Trust distribute to its shareholders with respect to each year at least 90% of
the sum of (1) its net tax-exempt interest income and (2) its taxable net
investment income (including, generally, taxable interest, dividends and certain
other income, less certain expenses, and the excess, if any, of net short-term
capital gain over net long-term capital loss) (the "Distribution Requirement").
In addition to satisfying the Distribution Requirement for each taxable
year, a regulated investment company must derive at least 90% of its gross
income from dividends, interest, certain payments with respect to securities
loans, gains from the sale or other disposition of stock or securities or
foreign currencies (to the extent such currency gains are directly related to
the regulated investment company's principal business of investing in stock or
securities, or options and futures with respect to stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement").
Further, the Trust must satisfy an asset diversification test in order to
qualify as a regulated investment company. Under this test, at the close of each
quarter of the Trust's taxable year, at least 50% of the value of the Trust's
assets must consist of cash and cash items (including receivables), U.S.
Government securities, securities of other regulated investment companies, and
securities of other issuers (as to which the Trust has not invested more than 5%
of the value of the Trust's total assets in securities of such issuer and as to
which the Trust does not hold more than 10% of the outstanding voting securities
of such issuer), and no more than 25% of the value of its total assets may be
invested in the securities of any one issuer (other than U.S. Government
securities and securities of other regulated interment companies), or in two or
more issuers which the Trust controls and which are engaged in the same or
similar trades or businesses or related trades or businesses.
A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in each calendar year an amount at least equal to the
sum of 98% of ordinary taxable income for the calendar year and 98% of capital
gain net income for the one-year period ended on October 31 of such calendar
year (or, at the election of a regulated investment company having a taxable
year ending November 30 or December 31, for its taxable year), plus 100% of any
undistributed income from the preceding year. For the foregoing purposes, a
regulated investment company is treated as having distributed any amount on
which it is subject to income tax for any taxable year ending in such calendar
year.
The Trust generally intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the Trust may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability. In addition, the Trust may elect to pay the excise tax liability
if it determines that the costs of making an excise tax distribution are greater
than the excise tax liability that would be due upon the failure to make such
excise tax distribution.
If the Trust does not qualify for taxation as a regulated investment
company for any taxable year, the Trust's income will be subject to corporate
income taxes imposed at the Trust level, and all distributions from earnings and
profits, including distributions of net exempt-interest income and net capital
gain (i.e., the excess, if any, of net long-term capital gain over net
short-term capital loss), will be taxable to shareholders as ordinary income. In
addition, in order to requalify for taxation as a regulated investment
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<PAGE> 105
company, the Trust may be required to recognize unrealized gains, pay
substantial taxes and interest, and make certain distributions.
If at any time when shares of Municipal Preferred are outstanding the 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. Any such suspension may cause the Trust to pay the 4%
Federal excise tax described above and may prevent the Trust from satisfying the
Distribution Requirement. The Trust may redeem shares of Municipal Preferred in
an effort to comply with the Distribution Requirement and to avoid the excise
tax. See "Description of Municipal Preferred -- Dividends."
Federal Taxation of Shareholders
DIVIDENDS AND OTHER DISTRIBUTIONS. In order for any distributions to
holders of shares of Municipal Preferred to be eligible to be treated as
exempt-interest dividends, the shares of Municipal Preferred must be treated as
equity for Federal income tax purposes. Based in part on certain representations
made by the Trust to Ropes & Gray relating to the lack of any present intention
to redeem or purchase shares of Municipal Preferred at any time in the future,
it is the opinion of Ropes & Gray that the shares of Municipal Preferred will
constitute equity for Federal income tax purposes. This opinion relies in part
on a published ruling of the Internal Revenue Service stating that certain
auction rate preferred stock similar in many material respects to the Municipal
Preferred represents equity. The opinion of Ropes & Gray represents only its
best legal judgment and is not binding on the Internal Revenue Service or the
courts. If the Internal Revenue Service were successfully to assert that
variable rate preferred stock such as the Municipal Preferred should be treated
as debt for Federal income tax purposes, dividends on shares of Municipal
Preferred would be treated as taxable interest for Federal income tax purposes.
In such event, dividends on shares of Municipal Preferred would not be increased
by the 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. Ropes & Gray 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.
Prior proposed legislation that was ultimately not enacted would have
reinstated a deductible tax (the "Environmental Tax"), imposed through tax years
beginning before January 1, 1996, at a rate of 0.12% on a corporation's
alternative minimum taxable income (computed without regard to the alternative
minimum tax net operating loss deduction) in excess of $2 million. If the
Environmental Tax is reinstated, exempt-interest dividends paid by the Trust
that are included in a corporate shareholder's alternative minimum taxable
income may subject such shareholder to the Environmental Tax. It is not possible
for the Trust to predict whether similar legislation might be proposed and
enacted in the future. Corporate shareholders should consult with their own tax
advisors regarding the likelihood of such legislation and its effect on them.
As discussed in the Prospectus, exempt-interest dividends attributable to
interest received on certain private activity bonds and certain industrial
development bonds will not be tax-exempt to any shareholders who are, within the
meaning of Section 147(a) of the Code, "substantial users" of the facilities
financed by such obligations or bonds or who are "related persons" of such
substantial users. In general, a "substantial user" of a facility includes a
"non-exempt person who regularly uses a part of such facility in his trade or
business." "Related persons" are in general defined to include persons among
whom there exists a relationship, either by family or business, which would
result in a disallowance of losses in transactions among them under various
provisions of the Code (or if they are members of the same controlled group of
corporations under the Code), including a partnership and each of its partners
(and their spouses and minor children), an S corporation and each of its
shareholders (and their spouses and minor children) and various combinations of
these relationships. The foregoing is not a complete statement of all of the
provisions of the Code covering the definitions of "substantial user" and
"related person." For additional information, investors should consult their tax
advisors before investing in Municipal Preferred.
B-57
<PAGE> 106
All or a portion of interest on indebtedness incurred or continued by a
shareholder to purchase or carry Trust shares may not be deductible by the
shareholder. The portion of interest that is not deductible is equal to the
total interest paid or accrued on the indebtedness multiplied by the percentage
of the Trust's total distributions (not including distributions of net capital
gain) paid to the shareholder that are exempt-interest dividends. Under rules
used by the Internal Revenue Service for determining when borrowed funds are
considered to have been used for the purpose of purchasing or carrying
particular assets, the purchase of shares of Municipal Preferred may be
considered to have been made with borrowed funds even though such funds are not
directly traceable to the purchase of shares.
Under Federal tax law in effect at the date of this Prospectus, a
shareholder's interest deduction generally will not be disallowed if the average
adjusted basis of the shareholder's tax-exempt obligations (including shares of
Municipal Preferred) does not exceed two percent of the average adjusted basis
of the shareholder's trade or business assets (in the case of most corporations
and some individuals) and portfolio investments (in the case of individuals).
Prior proposed legislation that was ultimately not enacted would have further
limited or repealed this two-percent de minimis exception, which could reduce
the total after-tax yield of the Municipal Preferred to investors to whom the de
minimis exception would otherwise apply. It is not possible for the Trust to
predict whether similar legislation might be proposed and enacted in the future.
Shareholders should consult with their own tax advisors regarding the likelihood
of such legislation and its effect on them.
SALES OR REDEMPTIONS OF SHARES. From time to time the 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.
BACKUP WITHHOLDING. The Trust generally is required to withhold and remit
to the U.S. Treasury 31% of the taxable dividends and other distributions paid
to non-corporate shareholders who fail to furnish the Trust with a correct
taxpayer identification number, who have underreported dividends or interest
income, or who fail to certify to the Trust that they are not subject to such
withholding. An individual's taxpayer identification number is his or her social
security number.
FOREIGN INVESTORS. Non-resident alien individuals, foreign corporations
and certain other foreign entities generally will be subject to a U.S.
withholding tax at a rate of 30% on the Trust's distributions from its ordinary
income and the excess of its net short-term capital gain over its net long-term
capital loss, unless the tax is reduced or eliminated by an applicable tax
treaty. Distributions from the excess of the Trust's net capital gain received
by such shareholders and any gain from the sale or other disposition of shares
of the Trust generally will not be subject to U.S. Federal income taxation,
provided that non-resident alien status has been certified by the shareholder.
Different U.S. tax consequences may result if the shareholder is engaged in a
trade or business in the United States, is present in the United States for a
sufficient period of time during a taxable year to be treated as a U.S.
resident, or fails to provide any required certifications regarding status as a
non-resident alien investor. Foreign shareholders should consult their tax
advisors regarding the U.S. and foreign tax consequences of an investment in the
Trust.
The Internal Revenue Service recently revised its regulations affecting the
application to foreign investors of the back-up withholding and withholding tax
rules described above. The new regulations will
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<PAGE> 107
generally be effective for payments made after December 31, 2000. In some
circumstances, the new rules will increase the certification and filing
requirements imposed on foreign investors in order to qualify for exemption from
the 31% back-up withholding tax and for reduced withholding tax rates under
income tax treaties. Foreign investors in the Trust should consult their tax
advisors with respect to the potential application of these new regulations.
The foregoing is a general, abbreviated summary of the provisions of the
Code and regulations thereunder presently in effect as they directly govern the
taxation of the Trust and owners of shares of Municipal Preferred. These
provisions are subject to change by legislative or administrative action, and
any such change may be retroactive with respect to Trust transactions. Owners of
shares of Municipal Preferred are advised to consult with their own tax advisors
for more detailed information concerning Federal income tax matters.
FOREIGN, STATE AND LOCAL TAX MATTERS
The exemption from Federal income tax for exempt-interest dividends does
not necessarily result in exemption for such dividends under the income or other
tax laws of any foreign, state or local taxing authority. Some states exempt
from state income tax that portion of any exempt-interest dividend that is
derived from interest received by a regulated investment company on its holdings
of securities of that state and its political subdivisions and
instrumentalities. Therefore, the Trust will report annually to its shareholders
the percentage of interest income earned by the Trust during the preceding year
on tax-exempt obligations indicating, on a state-by-state basis, the source of
such income. Holders of shares of Municipal Preferred are advised to consult
with their own tax advisors about foreign, state and local tax matters.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Trust. However, the
Declaration disclaims shareholder liability for acts or obligations of the Trust
and requires that a notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Trust or the Trustees.
The Declaration provides for indemnification out of Trust property for all loss
and expense of any shareholder held personally liable for the obligations of the
Trust. Thus, the risk of a shareholder's incurring financial loss on account of
shareholder liability is limited to circumstances (which are considered remote)
in which the Trust would be unable to meet its obligations and the disclaimer
was inoperative.
CUSTODIAN
The Chase Manhattan Bank, located at 270 Park Avenue, New York, New York
10017-2070, is the Trust's custodian. The custodian is responsible for
safeguarding the Trust's cash and securities, receiving and delivering
securities and collecting the Trust's interest and dividends.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP are the Trust's independent accountants,
providing audit and tax return preparation services and assistance and
consultation in connection with the review of various Securities and Exchange
Commission filings. The address of PricewaterhouseCoopers LLP is 160 Federal
Street, Boston, Massachusetts 02110. The financial statements included in this
SAI have been so included, and the financial highlights included in the
Prospectus have been so included, in reliance upon the report of
PricewaterhouseCoopers LLP given on the authority of said firm as experts in
accounting and auditing.
B-59
<PAGE> 108
GLOSSARY
" 'AA' Composite Commercial Paper Rate" has the meaning set forth on pages
B-17 to B-18 of this Statement of Additional Information.
"Advisor" means Colonial Management Associates, Inc.
"Affected Series" has the meaning set forth on page B-33 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 B-13 of this Statement
of Additional Information.
"Auction" means each periodic implementation of the Auction Procedures.
"Auction Agency Agreement" has the meaning set forth on page B-13 of this
Statement of Additional Information.
"Auction Agent" means the entity appointed as such by a resolution of the
Board of Trustees.
"Auction Date," with respect to any Rate Period, means the Business Day
next preceding the first day of such Rate Period.
"Auction Procedures" means the procedures for conducting Auctions as
described in this Statement of Additional Information, including Appendix B
hereto.
"Available Municipal Preferred" has the meaning set forth on page B-21 of
this Statement of Additional Information.
"Benchmark Rate" has the meaning set forth on page B-22 of this Statement
of Additional Information.
"Beneficial Owner" has the meaning set forth on page B-13 of this Statement
of Additional Information.
"Bid" has the meaning set forth on page B-15 of this Statement of
Additional Information.
"Bidder" and "Bidders" have the respective meanings set forth on page B-15
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.
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<PAGE> 109
"Broker-Dealer Agreement" means an agreement among the Trust, the Auction
Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow
the procedures specified in the By-Laws, the Prospectus and this Statement of
Additional Information.
"Business Day" has the meaning set forth on page B-13 of this Statement of
Additional Information.
"By-Laws" means the Amended and Restated By-Laws of Colonial Municipal
Income Trust on file with the Secretary of the Commonwealth of Massachusetts.
"Cede" means Cede & Co., the nominee of DTC in whose name the shares of
Municipal Preferred initially will be registered.
"CFTC" has the meaning set forth on page B-51 of this Statement of
Additional Information.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" has the meaning set forth on page B-18 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 B-13 of this
Statement of Additional Information.
"Declaration" means the Agreement and Declaration of Trust of Colonial
Municipal Income Trust, as amended, on file with the Secretary of the
Commonwealth of Massachusetts.
"Deposit Securities" means cash and Municipal Obligations rated at least
A-1+ or SP-1+ by Standard & Poor's, except that, for purposes of determining
whether the 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 B-13 of this
Statement of Additional Information.
"Dividend Period" has the meaning set forth on page B-13 of this Statement
of Additional Information.
"DTC" has the meaning set forth on page B-14 of this Statement of
Additional Information.
"Eligible Assets" means Moody's Eligible Assets or Standard & Poor's
Eligible Assets, as the case may be.
"Escrowed Bonds" means Municipal Obligations that (i) have been determined
to be legally defeased in accordance with Standard & Poor's legal defeasance
criteria, (ii) have been determined to be economically defeased in accordance
with Standard & Poor's economic defeasance criteria and assigned a rating of AAA
by Standard & Poor's, (iii) are not rated by Standard & Poor's but have been
determined
B-61
<PAGE> 110
to be legally defeased by Moody's, or (iv) have been determined to be
economically defeased by Moody's and assigned a rating no lower than the rating
that is Moody's equivalent of Standard & Poor's AAA rating.
"Exchange" has the meaning set forth on page B-44 of this Statement of
Additional Information.
"Existing Holder" has the meaning set forth on page B-13 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,
Eastern time, (A) on the Business Day next preceding any Dividend Payment Date
for such shares, in funds available on such Dividend Payment Date in The City of
New York, New York, the full amount of any dividend (whether or not earned or
declared) to be paid on such Dividend Payment Date on any share or (B) on the
Business Day next preceding any redemption date in funds available on such
redemption date for such shares in The City of New York, New York, the
Redemption Price to be paid on such redemption date for any share after notice
of redemption is mailed as set forth in the By-Laws, the Prospectus or this
Statement of Additional Information; provided, however, that the foregoing
clause (B) shall not apply to the 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 B-29 of this Statement
of Additional Information.
"Hold Order" has the meaning set forth on page B-15 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 Rate Period" has the meaning set forth on page B-13 of this
Statement of Additional Information.
"IRS" means the Internal Revenue Service.
"Inverse Floater" shall mean trust certificates or other instruments
evidencing interests in one or more municipal securities that qualify as
Standard & Poor's Eligible Assets (and are not part of a private placement of
municipal securities and satisfy the issuer and size requirements of the
definition of Standard & Poor's Eligible Assets) the interest rates on which are
adjusted at short-term intervals on a basis that is inverse to the simultaneous
readjustment of the interest rates on corresponding floating rate trust
certificates or other instruments issued by the same issuer, provided that the
ratio of the aggregate dollar amount of floating rate instruments to inverse
floating rate instruments issued by the same issuer does not exceed one to one
at their time or original issuance unless the floating rate instrument has only
one reset remaining until maturity.
"Kenny Index" has the meaning set forth on page B-17 of this Statement of
Additional Information.
"Late Charge" has the meaning set forth on page B-27 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 service designated from time to time by the Board of
Trustees. Market Value of any asset shall include any interest accrued thereon.
The pricing service will use current industry standards to value portfolio
securities. The pricing service may employ electronic data processing techniques
or a matrix system, or both, to determine valuations. Securities for which
quotations are not readily available shall be valued at fair value as determined
by the pricing service using methods which include consideration of: yields or
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prices of municipal bonds of comparable quality, type of issue, coupon, maturity
and rating; indications as to value from dealers; and general market conditions.
In the event the pricing service is unable to value a security, the security
shall be valued at the lower of two dealer bids obtained by the Trust from
dealers who are members of the National Association of Securities Dealers, Inc.
and make a market in the security, at least one of which shall be in writing.
Futures contracts and options are valued at closing prices for such instruments
established by the exchange or board of trade on which they are traded, or if
market quotations are not readily available, are valued at fair value on a
consistent basis using methods determined in good faith by the Trustees.
"Maximum Potential Gross-up Payment Liability" has the meaning set forth on
pages B-35 to B-36 of this Statement of Additional Information.
"Maximum Rate" has the meaning set forth on pages B-16 to B-17 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 pages B-38 to B-39
of this Statement of Additional Information.
"Moody's Eligible Assets" has the meaning set forth on page B-38 of this
Statement of Additional Information.
"Moody's Exposure Period" has the meaning set forth on page B-39 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:
<TABLE>
<CAPTION>
FEDERAL VOLATILITY
TAX RATE INCREASE FACTOR
- ----------------- ----------
<S> <C>
5% 295%
10% 317%
15% 341%
20% 369%
25% 400%
30% 436%
35% 477%
40% 525%
</TABLE>
"Municipal Obligations" shall mean "Municipal Obligations" as defined on
page 10 of the prospectus filed as part of the Trust's registration statement on
Form N-2 on file with the Securities and Exchange Commission, as such
registration statement may be amended from time to time.
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<PAGE> 112
"Municipal Preferred" means the Municipal Auction Rate Cumulative Preferred
Shares, without par value, liquidation preference $25,000 per share, of the
Trust.
"Municipal Preferred Basic Maintenance Amount" has the meaning set forth on
page B-35 of this Statement of Additional Information.
"Municipal Preferred Basic Maintenance Cure Date" has the meaning set forth
on page B-35 of this Statement of Additional Information.
"Municipal Preferred Basic Maintenance Report" has the meaning set forth on
page B-36 of this Statement of Additional Information.
"1940 Act" means the Investment Company Act of 1940, as amended.
"1940 Act Cure Date" has the meaning set forth on page B-34 of this
Statement of Additional Information.
"1940 Act Municipal Preferred Asset Coverage" has the meaning set forth on
page B-34 of this Statement of Additional Information.
"Notice of Redemption" has the meaning set forth on page B-42 of this
Statement of Additional Information.
"Notice of Special Rate Period" has the meaning set forth on page B-31 of
this Statement of Additional Information.
"Order" and "Orders" have the respective meanings set forth on page B-15 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 B-13 of this
Statement of Additional Information.
"Potential Holder" has the meaning set forth on page B-13 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.
"Rate Multiple" has the meaning set forth on page B-19 of this Statement of
Additional Information.
"Rate Period" has the meaning set forth on page B-13 of this Statement of
Additional Information.
"Rate Period Days," for any Rate Period or Dividend Period, means the
number of days that would constitute such Rate Period or Dividend Period but for
the application of the second paragraph under "Description of Municipal
Preferred -- Dividends -- General" or the second paragraph under "Description of
Municipal Preferred -- Dividends -- Designation of Special Rate Periods."
"Receivables for Municipal Obligations Sold," for purposes of calculating
Moody's Eligible Assets or Standard & Poor's Eligible Assets, as the case may
be, has the meaning set forth on pages B-39 and B-37 of this Statement of
Additional Information, respectively.
B-64
<PAGE> 113
"Redemption Price" has the meaning set forth on page B-41 of this Statement
of Additional Information.
"Reference Rate" has the meaning set forth on page B-17 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 B-15 of this Statement of
Additional Information.
"Special Rate Period" has the meaning set forth on page B-13 of this
Statement of Additional Information.
"Special Redemption Provisions" has the meaning set forth on page B-40 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 pages
B-36 to B-37 of this Statement of Additional Information.
"Standard & Poor's Eligible Assets" has the meaning set forth on page B-36
of this Statement of Additional Information.
"Standard & Poor's Exposure Period" has the meaning set forth on pages B-36
to B-37 of this Statement of Additional Information.
"Standard & Poor's Volatility Factor" means, as of any Valuation Date, a
multiplicative factor equal to (i) 305% in the case of any Minimum Rate Period
or any Special Rate Period of 28 Rate Period Days or fewer, (ii) 268% in the
case of any Special Rate Period of more than 28 Rate Period Days but fewer than
183 Rate Period Days, and (iii) 204% in the case of any Special Rate Period of
more than 182 Rate Period Days.
"Submission Deadline" means 1:30 P.M., Eastern time, on any Auction Date or
such other time on any Auction Date by which Broker-Dealers are required to
submit Orders to the Auction Agent as specified by the Auction Agent from time
to time.
"Submitted Bid" and "Submitted Bids" have the respective meanings set forth
on page B-21 of this Statement of Additional Information.
"Submitted Hold Order" and "Submitted Hold Orders" have the respective
meanings set forth on page B-21 of this Statement of Additional Information.
"Submitted Order" and "Submitted Orders" have the respective meanings set
forth on page B-21 of this Statement of Additional Information.
"Submitted Sell Order" and "Submitted Sell Orders" have the respective
meanings set forth on page B-21 of this Statement of Additional Information.
"Subsequent Rate Period" has the meaning set forth on page B-13 of this
Statement of Additional Information.
"Substitute Commercial Paper Dealer" has the meaning set forth on page B-18
of this Statement of Additional Information.
"Substitute U.S. Government Securities Dealer" has the meaning set forth on
page B-19 of this Statement of Additional Information.
B-65
<PAGE> 114
"Sufficient Clearing Bids" has the meaning set forth on page B-21 of this
Statement of Additional Information.
"Taxable Allocation" has the meaning set forth on page B-28 of this
Statement of Additional Information.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" has the meaning
set forth on page B-17 of this Statement of Additional Information.
"Taxable Income" has the meaning set forth on page B-22 of this Statement
of Additional Information.
"Taxable Yield Rate" has the meaning set forth on page B-22 of this
Statement of Additional Information.
"Treasury Bill" has the meaning set forth on page B-19 of this Statement of
Additional Information.
"Treasury Bill Rate" has the meaning set forth on page B-18 of this
Statement of Additional Information.
"Treasury Note" has the meaning set forth on page B-19 of this Statement of
Additional Information.
"Treasury Note Rate" has the meaning set forth on page B-19 of this
Statement of Additional Information.
"Trust" means Colonial 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 B-19
of this Statement of Additional Information.
"Valuation Date" has the meaning set forth on page B-35 of this Statement
of Additional Information.
"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 B-21 of this Statement
of Additional Information.
B-66
<PAGE> 115
FINANCIAL STATEMENTS
INVESTMENT PORTFOLIO
NOVEMBER 30, 1998 (IN THOUSANDS)
MUNICIPAL BONDS - 98.1% PAR VALUE
- -------------------------------------------------------------------------------
EDUCATION - 3.1%
EDUCATION - 2.1%
CA Statewide Communities Development Authority,
Crossroads School for Arts & Sciences,
Series 1998,
6.000% 08/01/28 (a) $ 1,200 $ 1,215
IL State Development Finance Authority,
Latin School of Chicago,
Series 1998:
5.600% 08/01/18 250 254
5.650% 08/01/28 500 507
MA State Industrial Finance Agency,
St. John's High School,
Series 1998,
5.350% 06/01/28 300 299
MI Southfield Economic Development Corp.,
Lawrence University,
Series 1998-A,
5.400% 02/01/18 1,000 1,003
VT State Educational & Health Buildings
Finance Agency, Norwich University,
Series 1998,
5.500% 07/01/21 1,000 1,011
--------
4,289
--------
STUDENT LOAN - 1.0%
SD State Student Loan Finance Corp.,
Series 1996-E,
6.550% 08/01/20 2,000 2,198
--------
- -------------------------------------------------------------------------------
HEALTHCARE - 31.7%
HEALTH SERVICES - 0.1%
IL State Health Facilities Authority,
Midwest Physician Group, Ltd.,
Series 1998,
5.500% 11/15/19 325 319
--------
F-1
<PAGE> 116
HOSPITALS - 9.9%
AL Alabama Special Care Facilities Authority,
Montgomery Healthcare,
Series 1989,
11.000% 10/01/19 2,250 2,284
CO State Health Care Facilities Authority,
National Jewish Medical & Research Center,
Series 1998,
5.375% 01/01/23 840 837
GA Baldwin County Hospital Authority,
Oconee Regional Medical Center,
Series 1998,
5.250% 12/01/22 500 489
GA Clayton Hospital Authority,
The Woodlands Foundation, Inc.,
Series 1991-A,
9.750% 05/01/21 (b) 1,500 975
GA Forsyth County Hospital Authority,
Georgia Baptist Heathcare System,
Series 1998,
6.000% 10/01/08 1,000 996
IL Health Facilities Authority,
Thorek Hospital & Medical Center,
5.375% 08/15/28 500 497
LA State Public Facilities Authority,
Pendleton Memorial Methodist Hospital,
Series 1998,
5.250% 06/01/17 500 487
MA State Health & Educational
Facilities Authority, Milford-Whitinsville
Regional Hospital, Series C,
5.250% 07/15/18 500 494
MI Flint Hospital Building Authority,
Hurley Medical Center,
Series 1998-A,
5.375% 07/01/20 625 621
MN St. Paul Housing & Redevelopment Authority,
Healtheast Project, Series A,
5.700% 11/01/15 2,000 2,046
MN Washington County Housing &
Redevelopment Authority,
Healtheast, Inc., Series 1998,
5.250% 11/15/12 1,250 1,229
MO State Housing Development Commission,
Freeman Health Systems,
Series 1998,
5.250% 02/15/18 750 740
F-2
<PAGE> 117
MS State Business Finance Corp.,
Medical Foundation, Inc.,
Series 1998,
5.625% 07/01/23 1,150 1,156
NH State Higher Educational & Health
Facilities Authority,
Littleton Hospital Assoc., Inc.:
Series 1998-A,
5.900% 05/01/28 675 670
6.000% 05/01/28 625 632
OH Belmont County,
East Ohio Regional Hospital,
Series 1998,
5.700% 01/01/13 1,500 1,481
OH Sandusky County,
Memorial Hospital,
Series 1998,
5.150% 01/01/08 270 276
PA Allegheny County Hospital Development,
Ohio Valley General Hospital,
Series 1998-A,
5.450% 01/01/28 1,050 1,050
PA Pottsville Hospital Authority,
Pottsville Hospital & Warner Clinic,
Series 1998,
5.625% 07/01/24 755 759
TX Lufkin Health Facilities Development Corp.,
Memorial Health Systems of East Texas,
Series 1998,
5.700% 02/15/28 750 760
VT State Educational & Health
Buildings Finance Agency,
Springfield Hospital, Series A,
7.750% 01/01/13 1,040 1,172
VT State Educational & Health Buildings
Finance Agency,
Brattleboro Memorial Hospital,
5.375% 03/01/28 1,000 985
--------
20,636
--------
INTERMEDIATE CARE FACILITIES - 1.4%
MA State Health & Educational Facilities Authority,
Corp. for Independent Living,
8.100% 07/01/18 680 761
PA State Economic Development Financing Authority,
Northwestern Human Services, Inc.,
F-3
<PAGE> 118
Series 1998-A,
5.250% 06/01/14 2,150 2,105
--------
2,866
--------
LIFECARE - 3.7%
CO Health Care Facilities Authority,
National Benevolent Association:
Series 1998-A,
5.250% 01/01/27 430 423
Series 1998-B,
5.250% 02/01/18 1,000 984
KY State Economic Development Finance Authority,
Christian Church Homes of Kentucky, Inc.,
Series 1998,
5.500% 11/15/30 750 751
MI State Strategic Fund,
Holland Home,
Series 1998,
5.750% 11/15/18 1,250 1,234
MN Columbia Heights,
Crest View Corp.,
Series 1998,
6.000% 03/01/33 745 746
NH State Higher Educational & Health
Facilities Authority, Rivermead at
Peterborough, Series 1998,
5.750% 07/01/28 500 496
PA Philadelphia Authority for Industrial
Development, Baptist Home of Philadelphia,
Series 1998-A:
5.500% 11/15/18 360 355
5.600% 11/15/28 570 554
TN Metropolitan Government,
Nashville & Davidson County,
Blakeford at Green Hills, Series 1998,
5.650% 07/01/24 575 563
TX Abilene Health Facilities Development Corp.,
Sears Methodist Retirement Obligation Group,
Series 1998-A,
5.900% 11/15/25 750 742
WI State Health & Educational
Facilities Authority,
Attic Angel Obligated Group,
5.750% 11/15/27 875 853
F-4
<PAGE> 119
--------
7,701
--------
NURSING HOMES - 16.6%
CO State Health Facilities Authority,
American Housing Foundation, Inc.,
Series 1990-A,
10.250% 12/01/20 1,500 1,500
CO State Health Facilities Authority,
Volunteers of America Care Facilities, Inc.,
Series 1998-A:
5.450% 07/01/08 250 250
5.750% 07/01/20 700 688
DE State Economic Development Authority,
Georgetown Health Center,
12.000% 04/01/25 2,225 2,398
DE Sussex County, Healthcare Facility,
Delaware Health Corp.,
Series 1994-A,
7.600% 01/01/24 1,000 1,059
IA State Finance Authority,
Care Initiatives Project:
Series 1996,
9.250% 07/01/25 1,000 1,335
Series 1998-B:
5.750% 07/01/18 550 549
5.750% 07/01/28 1,475 1,462
IN Gary Industrial Economic Development,
West Side Health Care Center,
Series 1987-A,
11.500% 10/01/17 2,435 2,516
IN Michigan City Health Facilities,
Metro Health Foundation, Inc. Project,
10.000% 11/01/22 4,500 4,500
KS Halstead Industrial
Kansas Health Care Project,
10.250% 08/01/13 (b) 1,330 452
KY Jefferson County First Mortgage
AHF Kentucky Iowa, Inc. Project,
Series 1990,
10.250% 01/01/20 960 1,001
KY Lexington-Fayette Urban County
Government, First Mortgage, AHF
Kentucky-Iowa, Inc. Project,
Series 1990,
10.250% 01/01/20 960 1,001
F-5
<PAGE> 120
MA Boston, St. Joseph Nursing Care
Center, Inc., Series 1990,
10.000% 01/01/20 (c) 1,915 2,059
MA State Industrial Finance Agency:
American Health Foundation, Inc.,
Series 1989,
10.125% 03/01/19 (b) 475 356
GF/Massachusetts, Inc.,
Series 1994,
8.300% 07/01/23 970 1,089
MI Cheboygan County Economic
Development Corp., Metro Health
Foundation Project,
Series 1993,
10.000% 11/01/22 2,440 2,440
MN Duluth Economic Development Authority,
BSM Properties,
Series 1998-A,
5.875% 12/01/28 250 249
MN Minneapolis, Walker Methodist
Senior Services Group, Series 1998-A,
6.000% 11/15/28 (d) 1,000 998
MO Springfield Industrial Development
Authority,
10.250% 12/01/10 1,125 1,130
NJ Economic Development Authority
Geriatric and Medical Service, Inc.,
Series A,
10.500% 05/01/04 650 689
NM State Hospital Equipment Loan Council,
Memorial Medical Center,
Series 1998,
5.500% 06/01/28 1,000 979
OH Montgomery County,
Grafton Oaks Limited Partners,
Series 1986,
9.750% 12/01/16 1,480 1,406
OK Muskogee County Economic Development
Authority Health Facilities,
Heartway Corp.:
Series A,
9.500% 03/01/19 1,545 1,576
Series B,
(e) 03/01/19 250 63
TN New Tazewell Health Education and
Housing Facilities Board,
New Tazewell, Series 1987,
10.000% 06/01/17 1,585 1,587
F-6
<PAGE> 121
TX Kirbyville Health Facilities Development Corp.,
Heartway III Project:
Series 1997-A,
10.000% 03/20/18 591 593
Series 1997-B,
(e) 03/20/04 100 54
WA Kitsap County Housing Authority,
Martha & Mary Nursing Home,
7.100% 02/20/36 643 764
--------
34,743
--------
HOUSING - 13.5%
ASSISTED LIVING/SENIOR - 4.8%
IL Clarendon Hills Residential Facilities,
Churchill Estate,
Series 1998 A:
6.750% 03/01/24 1,050 1,067
6.750% 03/01/31 1,365 1,387
IL State Development Finance Authority,
Care Institute, Inc.,
8.250% 06/01/25 1,500 1,688
MA Boston Industrial Development
Finance Authority, Springhouse, Inc.,
Series 1988,
5.875% 07/01/20 500 497
MN Roseville, Care Institute, Inc.,
Series 1993,
7.750% 11/01/23 1,610 1,626
PA Montgomery County Industrial
Development Authority, Assisted
Living Facility, Series 1993-A,
8.250% 05/01/23 800 887
TX Bell County Health Facilities
Development Corp., Care Institute, Inc.,
9.000% 11/01/24 1,500 1,719
WI State Health & Educational
Facilities Authority, United
Lutheran Program for Aging, Inc.,
5.700% 03/01/28 750 740
WI State Health & Educational
Facilities Authority, Clement
Manor, Series 1998,
5.750% 08/15/24 450 435
--------
F-7
<PAGE> 122
10,046
--------
MULTI-FAMILY - 7.9%
DE Wilmington, Electra Arms
Senior Association Project,
6.250% 06/01/28 1,000 977
FL State Housing Finance Agency,
Windsong Apartments,
Series 1993-C,
9.250% 01/01/19 830 747
IL Chicago, Michigan Boulevard Garden
Apartment Rehabilitation Project,
Series 1985,
12.000% 01/01/00 185 166
MN Washington County Housing &
Redevelopment Authority,
Cottages of Aspen, Series 1992,
9.250% 06/01/22 1,070 1,181
MN White Bear Lake,
Birch Lake Townhomes Project:
Series 1989-A,
10.250% 07/15/19 1,770 1,797
Series 1989-B,
(e) 07/15/19 (f) 671 201
NC Eastern Carolina Regional Housing
Authority, New River Apartments
Jacksonville, Series 1994,
8.250% 09/01/14 1,850 2,000
Resolution Trust Corp.,
Pass Through Certificates,
Series 1993-A,
9.500% 12/01/16 (g) 4,248 4,381
SC State Housing Finance and Development
Multi-Family Housing Finance Revenue,
Westbridge Apartments, Series A,
9.500% 09/01/20 2,143 2,202
TN Franklin Industrial Board,
Landings Apartment Project,
Series 1996-B,
8.750% 04/01/27 785 803
TX Galveston Health Facilities Center,
Driftwood Apartments,
8.000% 08/01/23 1,000 1,074
VA Alexandria Redevelopment
& Housing Authority, Courthouse
Commons Apartments, Series 1990-A,
10.000% 01/01/21 1,000 1,020
F-8
<PAGE> 123
--------
16,549
--------
SINGLE FAMILY - 0.8%
AK State Housing Finance Corp.,
Series 1996-A,
6.050% 12/01/17 800 857
KY Kentucky Counties Single-Family
Mortgage Revenue, Class A,
9.000% 09/01/16 30 30
PA Allegheny County,
Residential Financial Authority,
Single Family Mortgage, Series 1987-G,
9.500% 12/01/18 660 667
--------
1,554
--------
- -------------------------------------------------------------------------------
OTHER - 13.0%
OTHER - 2.0%
IN Hammond, American Maize
Products Co., Series 1994,
8.000% 12/01/24 2,000 2,338
LA Port New Orleans Industrial Development,
Continental Grain Co., Series 1993,
7.500% 07/01/13 1,000 1,061
MD Baltimore, Park Charles Project,
Series 1986,
8.000% 01/01/10 755 812
--------
4,211
--------
REFUNDED/ESCROWED (H) - 11.0%
CA San Joaquin Hills Transportation
Corridor Agency, Series 1993,
(e) 01/01/25 (i) 10,000 2,705
FL Clearwater Housing Authority,
Hampton Apartments,
Series 1994,
8.250% 05/01/24 2,500 3,081
ID State Health Facilities Authority,
IHC Hospitals, Inc.,
8.700% 02/15/21 2,750 3,385
F-9
<PAGE> 124
IL Health Facilities Authority,
Edgewater Medical Center,
Series A,
9.250% 07/01/24 2,235 2,840
MA State Industrial Finance Agency,
Tunnel Revenue,
Series 1990,
9.000% 10/01/20 920 1,026
MN Mille Lacs Capital Improvement Authority,
Mille Lacs Band of Chippewa,
Series 1992-A,
9.250% 11/01/12 1,015 1,241
NC Lincoln County,
Lincoln County Hospital,
9.000% 05/01/07 470 568
NM City of Clovis,
Retirement Ranches Project:
10.750% 04/01/19 1,920 2,024
10.750% 04/01/19 190 200
PA Delaware County Authority,
Health Facility Mercy Health Corp. Project,
Series 1996:
6.000% 12/15/16 1,400 1,568
6.000% 12/15/26 500 562
TN Shelby County, Health, Education, & Housing
Facilities Board, Open Arms Development Center:
Series 1992-A,
9.750% 08/01/19 505 716
Series 1992-C,
9.750% 08/01/19 515 730
WA State Health Care Facilities Authority,
Grays Harbor Community Hospital,
Series 1993:
7.200% 07/01/03 330 353
8.025% 07/01/20 1,770 1,956
--------
22,955
--------
- -------------------------------------------------------------------------------
OTHER REVENUE - 10.4%
CHEMICALS - 1.1%
LA St. Charles Parish,
Union Carbide Corp.,
Series 1992,
F-10
<PAGE> 125
7.350% 11/01/22 2,000 2,199
--------
INDUSTRIAL - 6.2%
CO Mesa County Industrial Development
Joy Technologies, Inc.,
Series 1992,
8.500% 09/15/06 1,500 1,671
IL State Development Finance Authority,
Armstrong World Industries, Inc. Project,
5.950% 12/01/24 1,000 1,119
IL Will-Kankakee Regional Development Authority,
Flanders Corp./Precisionaire Project,
Series 1997,
6.500% 12/15/17 975 1,031
LA Southern Louisiana Port Commission,
Cargill, Inc. Project,
5.850% 04/01/17 500 536
MA State Industrial Finance Agency,
House of Bianchi, Inc.,
8.750% 06/01/18 280 288
MI State Strategic Fund,
Michigan Sugar Co., Sebewang Project,
Series 1998-A,
6.250% 11/01/15 1,000 996
MN Brooklyn Park, TL Systems Corp.,
Series 1991,
10.000% 09/01/16 770 938
NV Henderson Public Improvement Trust,
Dongsung America Co., Inc.,
Series 1998,
7.000% 11/01/10 500 501
OH Cuyahoga County,
Joy Technologies, Inc.,
Series 1992,
8.750% 09/15/07 550 617
TX Trinity River Authority,
Texas Instruments Project,
Series 1996,
6.200% 03/01/20 750 818
VA Halifax County Industrial Development,
Craddock-Terry, Inc., Series 1989,
10.000% 12/01/19 (b) 677 203
VA Pittsylvania County Industrial
Development, Craddock-Terry, Inc.,
Series 1989,
10.000% 12/01/19 (b) 533 219
VA Prince Edward County Industrial
F-11
<PAGE> 126
Development, Craddock-Terry, Inc.,
Series 1989,
10.000% 12/01/19 (b) 1,610 966
WA Pilchuck Public Development Corp.,
Goodrich (B.F.) Co. Tramco Project,
Series 1993,
6.000% 08/01/23 3,000 3,096
--------
12,999
--------
OIL & GAS - 0.7%
WA Pierce County Economic
Development Corp.,
Occidental Petroleum Co.,
5.800% 09/01/29 1,500 1,517
--------
PAPER PRODUCTS - 1.0%
SC Darlington County,
Industrial Development Authority,
Sonoco Products Co. Project,
6.125% 06/01/25 2,000 2,140
--------
RECREATION - 0.5%
NM Red River Sports,
6.450% 06/01/07 1,000 1,005
--------
RETAIL - 0.9%
NJ State Economic Development Authority,
Glimcher Properties L.P. Project,
6.000% 11/01/28 1,000 1,001
OH Lake County,
North Madison Properties,
Series 1993,
8.819% 09/01/11 710 815
--------
1,816
--------
RESOURCE RECOVERY - 3.7%
DISPOSAL - 2.7%
CT State Development Authority,
Sewer Sludge Disposal Facilities,
Series 1996,
8.250% 12/01/06 1,250 1,417
GA Fulton County Development
F-12
<PAGE> 127
Authority, Very, Inc.,
10.500% 12/01/07 1,120 1,185
MA Boston Industrial Development
Finance Authority, Jet-A-Way, Inc.,
10.500% 01/01/11 1,000 1,114
MA State Industrial Finance Agency:
Massachusetts Environmental Services,
Series 1994-A,
8.750% 11/01/21 (b) 975 780
Peabody Monofill Associates, Inc.,
Series 1995,
9.000% 09/01/05 1,025 1,134
--------
5,630
--------
RESOURCE RECOVERY - 1.0%
MA State Industrial Finance Agency,
Ogden Haverhill Project, Series 1998-A,
5.500% 12/01/13 1,000 1,014
PA Delaware County Industrial
Development Authority, Series A,
6.200% 07/01/19 1,000 1,071
--------
2,085
--------
- -------------------------------------------------------------------------------
TAX-BACKED - 6.7%
LOCAL APPROPRIATED - 0.5%
CA Compton, Civic Center Project,
5.500% 09/01/15 1,000 1,023
--------
LOCAL GENERAL OBLIGATIONS - 1.3%
LA New Orleans,
Series 1991,
(e) 09/01/15 4,000 1,720
TX Irving Independent School District,
Series 1997:
(e) 02/15/15 1,500 679
(e) 02/15/16 1,000 427
--------
2,826
F-13
<PAGE> 128
--------
SPECIAL NON-PROPERTY TAX - 3.4%
IL Metropolitan Pier & Exposition
Authority, Series 1996-A,
(e) 12/15/13 (i) 5,000 2,407
IL Metropolitan Pier & Exposition Authority,
McCormick Project:
(e) 06/15/14 (i) 5,000 2,331
(e) 06/15/15 3,000 1,321
IL State Development Finance Authority,
City of Marion Project,
Series 1991,
9.625% 09/15/21 1,445 1,084
--------
7,143
--------
SPECIAL PROPERTY TAX - 1.5%
CA Poway Community Facilities District,
No. 88-1 Parkway Business Center,
Series 1998,
6.750% 08/15/15 575 629
CA Riverside County Public Financing
Authority Redevelopment Projects, Series A,
5.500% 10/01/22 650 663
CA Yorba Linda Redevelopment Agency,
Series 1998-A,
(e) 09/01/24 1,325 356
FL Lexington Oaks Community Development
District, Series 1998-A,
6.125% 05/01/19 800 805
FL Orlando, Conroy Road Interchange Project,
Series 1998-A:
5.500% 05/01/10 (d) 125 124
5.800% 05/01/26 (d) 500 492
--------
3,069
--------
- -------------------------------------------------------------------------------
TRANSPORTATION - 4.8%
AIR TRANSPORTATION - 3.9%
IN Indianapolis Airport Authority:
Federal Express Corp.,
Series 1994,
F-14
<PAGE> 129
7.100% 01/15/17 2,000 2,227
United Airlines Project, Series A,
6.500% 11/15/31 2,000 2,142
KY Kenton County Airport Board,
Delta Airlines, Inc.,
Series 1992-A,
7.500% 02/01/20 2,500 2,737
TX Alliance Airport Authority,
Federal Express Corp.,
Series 1996,
6.375% 04/01/21 1,000 1,078
--------
8,184
--------
AIRPORT - 0.3%
OH Toledo-Lucas County Port Authority,
Series 1998,
5.500% 05/15/20 585 573
-----------
TOLL FACILITIES - 0.6%
CA San Joaquin Hills Transportation
Corridor Agency, Series A,
(e) 01/15/15 3,000 1,361
-----------
- ------------------------------------------------------------------------------
UTILITY - 11.2%
INDIVIDUAL POWER PRODUCER - 3.9%
FL Martin County Industrial
Development Authority, Indiantown
Cogeneration Project, Series 1994-A,
7.875% 12/15/25 1,000 1,153
NY Port Authority of New York &
New Jersey, KIAC Partners,
Series 1996-IV,
6.750% 10/01/11 2,000 2,242
PA Economic Development Finance
Authority, Colver Project, Series D:
7.125% 12/01/15 500 555
7.150% 12/01/18 3,750 4,174
--------
8,124
--------
F-15
<PAGE> 130
INVESTOR OWNED - 2.9%
AZ Pima County Industrial Development Authority,
Tucson Electric Power Co., Series A,
6.100% 09/01/25 750 757
CT State Development Authority,
Connecticut Light & Power Co.,
Series 1993-B,
5.950% 09/01/28 300 301
IL Bryant Pollution Control Revenue,
Central Illinois Light Co.,
Series 1993,
5.900% 08/01/23 2,000 2,080
MS State Business Finance Corp.,
Systems Energy Resources Project,
Series 1998,
5.875% 04/01/22 1,500 1,494
NM Farmington, San Juan Public
Service Co. Project, Series D,
6.375% 04/01/22 1,250 1,342
--------
5,974
--------
MUNICIPAL ELECTRIC - 2.1%
TX Austin Utility System Revenue,
Series 1994:
(e) 05/15/17 (i) 6,600 2,629
(e) 05/15/18 (i) 5,000 1,884
--------
4,513
--------
WATER & SEWER - 2.3%
LA Public Facility Belmont Water
Authority,
9.000% 03/15/24 (j) 730 657
MS Five Lakes Utility District,
8.250% 07/15/24 500 400
NJ State Economic Development
Authority, Hills Development Co.,
10.500% 09/01/08 2,100 2,155
TX Houston Water & Sewer System,
Series C,
(e) 12/01/12 (i) 3,000 1,555
--------
F-16
<PAGE> 131
4,767
--------
TOTAL MUNICIPAL BONDS (cost of $196,856)(k) 205,015
--------
SHORT-TERM OBLIGATIONS - 1.0%
- ------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTES (l)
CA Irvine Improvement Bond Act of 1915:
Series 1997,
3.250% 09/02/22 300 300
Series 1998,
3.250% 09/02/23 200 200
CA State Health Facilities Financing
Authority, Sutter Health, Series A,
3.250% 03/01/20 700 700
MI Flint Hospital Building Authority,
Hurley Medical Center,
Series 1995-B,
3.400% 07/01/15 200 200
MS Perry County,
Leaf River Forest Project,
3.250% 03/01/02 300 300
NM Farmington,
Arizona Public Service Co.,
Four Corners Project, Series 1994-B,
3.250% 09/01/24 200 200
NY New York City Municipal Water
Finance Authority,
Series 1995-A,
3.750% 06/15/25 200 200
--------
TOTAL SHORT-TERM OBLIGATIONS 2,100
--------
OTHER ASSETS & LIABILITIES, NET - 0.9% 1,816
- ------------------------------------------------------------------------------
NET ASSETS - 100% $208,931
--------
NOTES TO INVESTMENT PORTFOLIO:
- ------------------------------------------------------------------------------
F-17
<PAGE> 132
(a) This is a restricted security which was acquired on August 21, 1998 and
August 31, 1998 at an aggregate cost of $1,200. This security represents
0.6% of the Fund's net assets as of November 30, 1998.
(b) This issuer is in default of certain debt covenants. Income is not being
accrued.
(c) This is a restricted security which was acquired on April 25, 1990 at a cost
of $1,921. This security represents 1.0% of the Fund's net assets at
November 30, 1998.
(d) This security has been purchased on a delayed delivery basis for settlement
at a future date beyond the customary settlement date.
(e) Zero coupon bond.
(f) Accrued interest accumulates in the value of the security and is payable at
redemption. The value of this security represents fair value as determined
under procedures approved by the Trustees.
(g) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At November 30,
1998, the value of this security amounted to $4,381 or 2.1% of net assets.
(h) The Fund has been informed that each issuer has placed direct obligations of
the U.S. Government in an irrevocable trust, solely for the payment of the
interest and principal.
(i) These securities, or a portion thereof, with a total market value of
$12,192, are being used to collateralize the delayed delivery purchases
indicated in note (d) above and open future contracts.
(j) This is a restricted security which was acquired on March 22, 1994 at a cost
of $730. This security represents 0.3% of the Fund's net assets as of
November 30, 1998.
(k) Cost for federal income tax purposes is $196,921.
(l) Variable rate demand notes are considered short-term obligations. Interest
rates change periodically on specified dates. These securities are payable
on demand and are secured by either letters of credit or other credit
support agreements from banks. The rates listed are as of November 30, 1998.
Short futures contracts open at November 30, 1998:
<TABLE>
<CAPTION>
Unrealized
Par value Expiration depreciation
Type covered by contracts month at 11/30/98
<S> <C> <C> <C>
</TABLE>
F-18
<PAGE> 133
<TABLE>
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Treasury Bond $200 March $ 5
</TABLE>
See notes to financial statements.
STATEMENT OF ASSETS & LIABILITIES
NOVEMBER 30, 1998
<TABLE>
<CAPTION>
(in thousands except for per share amount)
<S> <C> <C>
ASSETS
Investments at value (cost $196,856) $205,015
Short-term obligations 2,100
--------
207,115
Receivable for:
Interest $ 4,262
Investments sold 330
Other 12 4,604
------- --------
Total Assets 211,719
LIABILITIES
Payable for:
Investments purchased 1,615
Distributions 1,131
Payable due to custodian bank 18
Variation margin on futures 3
Accrued:
Deferred Trustees fees 2
Other 19
-------
Total Liabilities 2,788
--------
NET ASSETS at value for 27,590
shares of beneficial interest outstanding $208,931
--------
Net asset value per share $ 7.57
--------
COMPOSITION OF NET ASSETS
Capital paid in $244,568
Overdistributed net investment income (96)
Accumulated net realized loss (43,695)
Net unrealized appreciation (depreciation) on:
</TABLE>
F-19
<PAGE> 134
<TABLE>
<S> <C>
Investments 8,159
Open futures contracts (5)
--------
$208,931
--------
</TABLE>
See notes to financial statements.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 1998
<TABLE>
<CAPTION>
(in thousands)
<S> <C> <C>
INVESTMENT INCOME
Interest $ 14,607
EXPENSES
Management fee $ 1,353
Transfer agent 65
Bookkeeping fee 55
Trustees fee 14
Custodian fee 4
Audit fee 32
Legal fee 100
Reports to shareholders 12
Other 65 1,700
------- --------
Net Investment Income 12,907
--------
NET REALIZED & UNREALIZED GAIN (LOSS) ON PORTFOLIO
POSITIONS
Net realized gain 4,942
Net change in unrealized appreciation (depreciation)
during the period on:
Investments 64
Open futures contracts (38)
-------
Net unrealized appreciation 26
--------
Net Gain 4,968
--------
Increase in Net Assets from Operations $ 17,875
--------
</TABLE>
F-20
<PAGE> 135
See notes to financial statements.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
(in thousands) Year ended November 30
--------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS 1998 1997
Operations:
Net investment income $ 12,907 $ 13,806
Net realized gain (loss) 4,942 (7,104)
Net unrealized appreciation 26 7,312
-------- --------
Net Increase from Operations 17,875 14,014
Distributions:
From net investment income (13,417) (13,887)
In excess of net investment
income (124) --
-------- --------
4,334 127
Fund Share Transactions:
Value of distributions reinvested 1,064 613
-------- --------
Total Increase 5,398 740
NET ASSETS
Beginning of period 203,533 202,793
-------- --------
End of period (net of overdistributed and
including undistributed net investment income
of $96 and $510, respectively) $208,931 $203,533
-------- --------
NUMBER OF FUND SHARES
Issued for distributions reinvested 141 82
Outstanding at
Beginning of period 27,449 27,367
-------- --------
</TABLE>
F-21
<PAGE> 136
<TABLE>
<S> <C> <C>
End of period 27,590 27,449
-------- --------
</TABLE>
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1998
NOTE 1. ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
ORGANIZATION: Colonial Municipal Income Trust (the Trust) is a Massachusetts
business trust, registered under the Investment Company Act of 1940, as amended,
as a diversified closed-end, management investment company. The Trust's primary
investment objective is to provide high current income, generally exempt from
federal income taxes, by investing primarily in medium and lower quality
municipal securities. The Trust's secondary objective is to preserve its
capital. The trust authorized an unlimited number of shares.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The following is a summary of
significant accounting policies that are consistently followed by the Trust in
the preparation of its financial statements.
SECURITY VALUATION AND TRANSACTIONS: Debt securities generally are valued by a
pricing service based upon market transactions for normal, institutional-size
trading units of similar securities. When management deems it appropriate, an
over-the-counter or exchange bid quotation is used.
Futures contracts are valued based on the difference between the last sale price
and the opening price of the contract.
Options are valued at the last reported sale price, or in the absence of a sale,
the mean between the last quoted bid and asking price.
Short-term obligations with a maturity of 60 days or less are valued at
amortized cost.
Portfolio positions for which market quotations are not readily available are
valued at fair value under procedures approved by the Trustees.
F-22
<PAGE> 137
Security transactions are accounted for on the date the securities are
purchased, sold or mature.
Cost is determined and gains (losses) are based upon the specific identification
method for both financial statement and federal income tax purposes.
The Trust may trade securities on other than normal settlement terms. This may
increase the risk if the other party to the transaction fails to deliver and
causes the Trust to subsequently invest at less advantageous prices.
FEDERAL INCOME TAXES: Consistent with the Trust's policy to qualify as a
regulated investment company and to distribute all of its taxable and tax-exempt
income, no federal income tax has been accrued.
INTEREST INCOME, DEBT DISCOUNT AND PREMIUM: Interest income is recorded on the
accrual basis. Original issue discount is accreted to interest income over the
life of a security with a corresponding increase in the cost basis; market
discount is not accreted. Premium is amortized against interest income with a
corresponding decrease in the cost basis.
DISTRIBUTIONS TO SHAREHOLDERS: Distributions to shareholders are recorded
on the ex-date.
The amount and character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. Reclassifications are made to the Trust's capital
accounts to reflect income and gains available for distribution (or available
capital loss carryforwards) under income tax regulations.
NOTE 2. FEES AND COMPENSATION PAID TO AFFILIATES
- --------------------------------------------------------------------------------
MANAGEMENT FEE: Colonial Management Associates, Inc. (the Advisor) is the
investment Advisor of the Trust and furnishes accounting and other services
and office facilities for a monthly fee equal to 0.65% annually of the Trust's
average weekly net assets.
BOOKKEEPING FEE: The Advisor provides bookkeeping and pricing services for
$18,000 per year plus 0.0233% of the Trust's average net assets over $50
million.
OTHER: The Trust pays no compensation to its officers, all of whom are employees
F-23
<PAGE> 138
of the Advisor.
The Trust's Trustees may participate in a deferred compensation plan which may
be terminated at any time. Obligations of the plan will be paid solely out of
the Trust's assets.
NOTE 3. PORTFOLIO INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT ACTIVITY: During the year ended November 30, 1998, purchases and
sales of investments, other than short-term obligations, were $69,789,070 and
$68,432,873, respectively.
Unrealized appreciation (depreciation) at November 30, 1998, based on cost of
investments for federal income tax purposes was approximately:
<TABLE>
<S> <C>
Gross unrealized appreciation $13,775,000
Gross unrealized depreciation (5,681,000)
-----------
Net unrealized appreciation $ 8,094,000
-----------
</TABLE>
CAPITAL LOSS CARRYFORWARDS: At November 30, 1998, capital loss carryforwards
available (to the extent provided in regulations) to offset future realized
gains were approximately as follows:
<TABLE>
<CAPTION>
Year of Capital loss
expiration carryforward
---------- ------------
<S> <C>
1999 6,352,000
2000 9,103,000
2001 7,979,000
2002 5,301,000
2003 7,499,000
2004 4,000
2005 7,197,000
-----------
$43,435,000
-----------
</TABLE>
Expired capital loss carryforwards, if any, are recorded as a reduction of
capital paid in.
To the extent loss carryforwards are used to offset any future realized gains,
it is unlikely that such gains would be distributed since they may be taxable to
shareholders as ordinary income.
OTHER: There are certain risks arising from geographic concentration in
F-24
<PAGE> 139
any state. Certain revenue or tax related events in a state may impair the
ability of certain issuers of municipal securities to pay principal and interest
on their obligations.
The Trust may focus its investments in certain industries, subjecting it to
greater risk than a trust that is more diversified.
The Trust may purchase or sell municipal and Treasury bond futures contracts and
purchase and write options on futures. The Trust will invest in these
instruments to hedge against the effects of changes in the value of portfolio
securities due to anticipated changes in interest rates and/or market
conditions, for duration management, or when the transactions are economically
appropriate to the reduction of risk inherent in the management of the Trust and
not for trading purposes. The use of futures contracts and options involves
certain risks which include (1) imperfect correlation between the price movement
of the instruments and the underlying securities, (2) inability to close out a
position due to different trading hours, or the temporary absence of a liquid
market for either the instrument or the underlying securities or (3) an
inaccurate prediction by the Advisor of the future direction of interest rates.
Any of these risks may involve amounts exceeding the variation margin recorded
in the Trust's Statement of Assets and Liabilities at any given time.
FINANCIAL HIGHLIGHTS
Selected per share data, total return, ratios and supplemental data throughout
each period are as follows:
<TABLE>
<CAPTION>
Year ended November 30
----------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Net asset value -
Beginning of period $ 7.410 $ 7.410 $ 7.480
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.469 0.509 0.508
Net realized and
unrealized gain (loss) 0.183 (0.002) (0.068)
------- ------- -------
Total from Investment
Operations 0.652 0.507 0.440
</TABLE>
F-25
<PAGE> 140
<TABLE>
<S> <C> <C> <C>
------- ------- -------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.487) (0.507) (0.510)
In excess of net
investment income (0.005) - -
------- ------- -------
Total Distributions
Declared to Shareholders (0.492) (0.507) (0.510)
------- ------- -------
Net asset value -
End of period $ 7.570 $ 7.410 $ 7.410
------- ------- -------
Market price per share -
End of period $ 8.125 $ 7.560 $ 7.250
------- ------- -------
Total return - based on net asset
value (a) 8.99% 7.07% 6.38%
------- ------- -------
Total return - based on market
value (b) 14.57% 11.67% 15.36%
------- ------- -------
RATIOS TO AVERAGE NET ASSETS
Expenses 0.82% (c) 0.86% (c) 0.91% (c)
Net investment income 6.20% (c) 6.83% (c) 6.87% (c)
Portfolio turnover 34% 15% 22%
Net assets at end
of period (000) $208,931 $203,533 $202,793
</TABLE>
(a) Total return at net asset value assuming all distributions reinvested.
(b) Total return at market value assuming all distributions reinvested and
excluding brokerage commissions.
(c) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
FINANCIAL HIGHLIGHTS - CONT.
<TABLE>
<CAPTION>
Year ended November 30
<S> <C> <C>
</TABLE>
F-26
<PAGE> 141
<TABLE>
<CAPTION>
----------------------
1995 1994
<S> <C> <C>
$ 7.150 $ 7.830
------- -------
0.547 0.609
0.335 (0.707)
------- -------
0.882 (0.098)
------- -------
(0.552) (0.582)
- -
------- -------
(0.552) (0.582)
------- -------
$ 7.480 $ 7.150
------- -------
$ 6.750 $ 6.750
------- -------
12.96% (0.42)%
------- -------
8.04% (10.06)%
------- -------
0.98% (c) 0.90%
7.47% (c) 8.12%
24% 24%
$204,666 $195,444
</TABLE>
-------------------------------------------------------------------
Federal income tax information (unaudited) All of the distributions
will be treated as exempt income for federal income tax purposes.
-------------------------------------------------------------------
F-27
<PAGE> 142
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND THE TRUSTEES OF COLONIAL MUNICIPAL
INCOME TRUST
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of operations and
of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Colonial Municipal Income Trust at
November 30, 1998, the results of its operations, the changes in its net assets
and the financial highlights for the periods indicated, in conformity with
generally accepted accounting principles. These financial statements and the
financial highlights (hereafter referred to as 'financial statements') are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of portfolio positions at November 30, 1998
by correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 13, 1999
F-28
<PAGE> 143
APPENDIX A
RATINGS OF INVESTMENTS
STANDARD & POOR'S RATINGS SERVICES -- A brief description of the applicable
Standard & Poor's Ratings Services ("S&P") rating symbols and their meanings (as
published by S&P) follows:
LONG TERM DEBT
An S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
INVESTMENT GRADE
AAA Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
SPECULATIVE GRADE RATING
Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree of speculation and
'C' the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by major uncertainties or major exposures
to adverse conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
A-1
<PAGE> 144
The 'BB' rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied 'BBB-' rating.
B Debt rated 'B' has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
The 'B' rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied 'BB' or 'BB-' rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to
have the capacity to pay interest and repay principal.
The 'CCC' rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied 'B' or 'B-' rating.
CC The rating 'CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' debt rating.
C The rating 'C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating
may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
CI The rating 'CI' is reserved for income bonds on which no interest is being
paid.
D Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The 'D' rating also
will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from 'AA' to 'CCC' may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
PROVISIONAL RATINGS: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project financed by the debt being rated and indicates that payment of debt
service requirements is largely or entirely dependent upon the successful and
timely completion of the project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise judgment with respect to such likelihood and risk.
NR Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
MUNICIPAL NOTES
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note rating.
Notes maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment:
- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
A-2
<PAGE> 145
NOTE RATING SYMBOLS ARE AS FOLLOWS:
SP-1 Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell, or hold a security
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
COMMERCIAL PAPER
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues
designated "A-l."
A-3 Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated "B" are regarded as having only speculative capacity for timely
payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase, sell, or
hold a security inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished to S&P by the issuer or obtained by S&P from other sources
it considers reliable. S&P does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information or based on other circumstances.
MOODY'S INVESTORS SERVICE, INC. -- A brief description of the applicable
Moody's Investors Service, Inc. ("Moody's") rating symbols and their meanings
(as published by Moody's) follows:
MUNICIPAL BONDS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
A-3
<PAGE> 146
Aa Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations, i.e.
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Bonds for which the security depends upon the completion of some act or the
fulfillment of some condition are rated conditionally. These are bonds secured
by (a) earnings of projects under construction, (b) earnings of projects
unseasoned in operation experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols
Aal, Al, Baal, Bal and Bl.
SHORT-TERM LOANS
MIG 1/VMIG 1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well
established.
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MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is
specific risk.
S.G. This designation denotes speculative quality. Debt instruments
in this category lack margins of protection.
COMMERCIAL PAPER
Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated PRIME-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
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APPENDIX B
AUCTION PROCEDURES
The following procedures will be set forth as Paragraphs 1 through 8 of
Part II of Section 12.1 of the Amended and Restated By-Laws of the Trust. The
terms not defined below are defined in the Glossary or in the Prospectus or this
Statement of Additional Information.
1. ORDERS.
(a) Prior to the Submission Deadline on each Auction Date for shares of a
series of Municipal Preferred:
(i) each Beneficial Owner of shares of such series may submit to its
Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares, if any, of such series held
by such Beneficial Owner which such Beneficial Owners desires to
continue to hold without regard to the Applicable Rate for shares of
such series for the next succeeding Rate Period of such shares;
(B) the number of Outstanding shares, if any, of such series held
by such Beneficial Owner offers to sell if the Applicable Rate for
shares of such series for the next succeeding Rate Period of shares of
such series shall be less than the rate per annum specified by such
Beneficial Owner; and/or
(C) the number of Outstanding shares, if any, of such series held
by such Beneficial Owners which such Beneficial Owner offers to sell
without regard to the Applicable Rate for shares of such series for the
next Rate Period of shares of such series;
and
(ii) one or more Broker-Dealers, using lists of Potential Beneficial
Owners, shall in good faith for the purpose of conducting a competitive
Auction in a commercially reasonable manner, contact Potential Beneficial
Owners (by telephone or otherwise), including Persons that are not
Beneficial Owners, on such lists to determine the number of shares, if any,
of such series which each such Potential Beneficial Owner offers to
purchase if the Applicable Rate for shares of such series for the next
succeeding Rate Period of shares of such series shall not be less than the
rate per annum specified by such Potential Beneficial Owner.
For purposes hereof, the communication by a Beneficial Owner or Potential
Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the Auction Agent,
of information referred to in clause (i)(a), (i)(B), (i)(C), or (ii) of this
subparagraph (a) is hereinafter referred to as an "order" and collectively as
"Orders" and each Beneficial Owner and each Potential Beneficial Owner placing
an Order with a Broker-Dealer, and such Broker-Dealer placing an Order with the
Auction Agent, is hereinafter referred to as a "Bidder" and collectively as
"Bidders"; an Order containing the information referred to in clause (i)(A) of
this subparagraph (a) is hereinafter referred to as a "Hold Order" and
collectively as "Hold Orders"; an Order containing the information referred to
in clause (i)(B) or (ii) of this subparagraph (a) is hereinafter referred to as
a "Bid" and collectively as "Bids"; and an Order containing the information
referred to in clause (i)(C) of this subparagraph (a) is hereinafter referred to
as a "Sell Order" and collectively as "Sell Orders."
(b)(i) A Bid by a Beneficial Owner or an Existing Holder of shares of a
series of Municipal Preferred subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified in such
Bid if the Applicable Rate for shares of such series determined on such
Auction Date shall be less than the rate specified therein;
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(B) such number or a lesser number of Outstanding shares of such
series to be determined as set forth in paragraph 4(a)(iv) herein if the
Applicable Rate for shares of such series determined on such Auction Date
shall be equal to the rate specified therein; or
(C) the number of Outstanding shares of such series specified in such
Bid if the rate specified therein shall be higher than the Maximum Rate for
shares of such series, or such number or a lesser number of Outstanding
shares of such series to be determined as set forth in paragraph 4(b)(iii)
herein if the rate specified therein shall be higher than the Maximum Rate
for shares of such series and Sufficient Clearing Bids for shares of such
series do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder of shares of
a series of Municipal Preferred subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified in such
Sell Order; or
(B) such number or a lesser number of Outstanding shares of such
series as set forth in paragraph 4(b)(iii) herein if Sufficient Clearing
Bids for shares of such series do not exist;
provided, however, that a Broker-Dealer that is an Existing Holder with respect
to shares of a series of Municipal Preferred shall not be liable to any Person
for failing to sell such shares pursuant to a Sell Order described in the
proviso to paragraph 2(c) herein if (1) such shares were transferred by the
Beneficial Owner thereof without compliance by such Beneficial Owner or its
transferee Broker-Dealer (or other transferee person, if permitted by the 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 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;
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(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
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of shares of such series subject to valid Hold Orders referred to in clause
(i) above and valid Bids referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of a series of Municipal
Preferred is submitted to the Auction Agent by or on behalf of any Potential
Holder, each such Bid submitted shall be a separate Bid with the rate and number
of shares therein specified.
(f) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date, shall be irrevocable.
3. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND
APPLICABLE RATE.
(a) Not earlier than the Submission Deadline on each Auction Date for
shares of a series of Municipal Preferred, the Auction Agent shall assemble all
valid Orders submitted or deemed submitted to it by the Broker-Dealers in
respect of shares of such series (each such Order as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to individually as a
"Submitted Holder Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order" and collectively as "Submitted Hold
Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as
"Submitted Orders") and shall determine for such series:
(i) the excess of the number of Outstanding shares of such series over
the number of Outstanding shares of such series subject to Submitted Hold
Orders (such excess being hereinafter referred to as the "Available
Municipal Preferred" of such series);
(ii) from the Submitted Orders for shares of such series whether:
(A) the number of Outstanding shares of such series subject to
Submitted Bids of Potential Holders specifying one or more rates equal
to or lower than the Maximum Rate for shares of such series;
exceeds or is equal to the sum of:
(B) the number of Outstanding shares of such series subject to
Submitted Bids of Existing Holders specifying one or more rates higher
than the Maximum Rate for shares of such series; and
(C) the number of Outstanding shares of such series subject to
Submitted Sell Orders
(in the event such excess or such equality exists (other than because
the number of shares of such series in subclauses (B) and (C) above is
zero because all of the Outstanding shares of such series are subject to
Submitted Hold Orders), such Submitted Bids in subclause (A) above being
hereinafter referred to collectively as "Sufficient Clearing Bids" for
shares of such series); and
(iii) if Sufficient Clearing Bids for shares of such series exist, the
lowest rate specified in such Submitted Bids (the "Winning Bid Rate" for
shares of such series) which if:
(A) (I) each such Submitted Bid of Existing Holders specifying such
lowest rate and (II) all other such Submitted Bids of Existing Holders
specifying lower rates were rejected, thus entitling such Existing
Holders to continue to hold the shares of such series that are subject
to such Submitted Bids; and
(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.
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(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
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of such series shall be accepted or rejected as follows in the following
order of priority and all other Submitted Bids with respect to shares of
such series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is higher than the Winning Bid Rate for shares
of such series shall be accepted, thus requiring each such Existing
Holder to sell the shares of Municipal Preferred subject to such
Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares
of such series shall be rejected, thus entitling each such Existing
Holder to continue to hold the shares of Municipal Preferred subject to
such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares
of such series shall be accepted;
(iv) each Existing Holders' Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate for shares of
such series shall be rejected, thus entitling such Existing Holder to
continue to hold the 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 may be all such Existing Holders that specified a rate
equal to the Winning Bid Rate for shares of such series; and
(v) each Potential Holder's Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate of shares of
such series shall be accepted but only in an amount equal to the number
of shares of such series obtained by multiplying the number of shares in
the excess of the Available Municipal Preferred of such series over the
number of shares of Municipal Preferred subject to Submitted Bids
described in clauses (ii) through (iv) of this subparagraph (a) by a
fraction, the numerator of which shall be the number of Outstanding
shares Municipal Preferred subject to such Submitted Bids made by all
such Potential Holders that specified a rate equal to the Winning Bid
Rate for shares of such series.
(b) If Sufficient Clearing Bids for shares of a series of Municipal
Preferred have not been made (other than because all of the Outstanding
shares of such series are subject to Submitted Hold Orders), subject to the
provisions of subparagraph (d) of this paragraph 4, Submitted Orders for
shares of such series shall be accepted or rejected as follows in the
following orders of priority and all other Submitted Bids for shares of
such series shall be rejected:
(i) Existing Holder's Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Rate for
shares of such series shall be rejected, thus entitling such Existing
Holders to continue to hold the shares of Municipal Preferred subject to
such Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Rate for
shares of such series shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for shares of such
series specifying any rate that is higher than the Maximum Rate for
shares of such series and the Submitted Sell Orders for
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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 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 Benefit Owner, a
Potential Beneficial Owner or its respective Agent Member to deliver shares
of Municipal Preferred of any series or to pay for shares of Municipal
Preferred of any series sold or purchased pursuant to the Auction
Procedures or otherwise.
B-7
<PAGE> 155
5. NOTIFICATION OF ALLOCATIONS. Whenever the Trust intends to include any
net capital gain or other income taxable for Federal income tax purposes in any
dividend on shares of Municipal Preferred, the Trust shall, in the case of a
Minimum Rate Period or a Special Rate Period of 28 Rate Period Days or fewer,
and may, in the case of any other Special Rate Period, notify the Auction Agent
of the amount to be so included not later than the Dividend Payment Date next
preceding the Auction Date on which the Applicable Rate for such dividend is to
be established. Whenever the Auction Agent receives such notice from the Trust,
it will be required in turn to notify each Broker-Dealer, who, on or prior to
such Auction Date, in accordance with its Broker-Dealer Agreement, will be
required to notify its Beneficial Owners and Potential Beneficial Owners of
shares of Municipal Preferred believed by it to be interested in submitting an
Order in the Auction to be held on such Auction Date.
6. AUCTION AGENT. For so long as any shares of Municipal Preferred are
outstanding, the Auction Agent, duly appointed by the Trust to so act, shall be
in each case a commercial bank, trust company or other financial institution
independent of the Trust and its affiliates (which however, may engage or have
engaged in business transactions with the Trust or its affiliates) and at no
time shall the Trust or any of its affiliates act as the Auction Agent in
connection with the Auction Procedures. If the Auction Agent resigns or for any
reason its appointment is terminated during any period that any shares of
Municipal Preferred are outstanding, the Board of Trustees shall use its best
efforts promptly thereafter to appoint another qualified commercial bank, trust
company or financial institution to act as the Auction Agent. The Auction
Agent's registry of Existing Holders of shares of a series of Municipal
Preferred shall be conclusive and binding on the Broker-Dealers. A Broker-Dealer
may inquire of the Auction Agent between 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.
B-8
<PAGE> 156
APPENDIX C
SETTLEMENT PROCEDURES
Capitalized terms used herein have the respective meanings specified in the
forepart of the Prospectus or the Glossary included in the Prospectus, as the
case may be.
(a) On each Auction Date for shares of Municipal Preferred, the Auction
Agent shall notify by telephone the Broker-Dealers that participated in the
Auction held on such Auction Date and submitted an Order to the Auction Agent as
or on behalf of an Existing Holder or Potential Holder of:
(i) the Applicable Rate fixed for the next Rate Period;
(ii) whether Sufficient Clearing Bids existed for the determination of
the Applicable Rate;
(iii) if such Broker-Dealer submitted a Bid or a Sell Order to the
Auction Agent as or on behalf of an Existing Holder, whether such Bid or
Sell Order was accepted or rejected, in whole or in part, and the number of
shares, if any, of Municipal Preferred then outstanding to be sold by such
Existing Holder;
(iv) if such Broker-Dealer submitted a Bid to the Auction Agent as or
on behalf of a Potential Holder, whether such Bid was accepted or rejected,
in whole or in part, and the number of shares, if any, of Municipal
Preferred to be purchased by such Potential Holder;
(v) if the aggregate number of shares of Municipal Preferred to be
sold by all Existing Holders with respect to whom such Broker-Dealer
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;
C-1
<PAGE> 157
(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.
C-2
<PAGE> 158
APPENDIX D
RATING AGENCY FUTURES AND OPTIONS RESTRICTIONS
The following restrictions will be set forth in Paragraph 10(a) of Part I
of Section 12.1 of the Amended and Restated By-Laws (the "By-Laws") of the
Trust. The terms not defined below are defined in the Glossary, the Prospectus,
the Statement of Additional Information or the By-Laws, filed as an exhibit to
the Registration Statement of the Trust. Reference is made to the By-Laws for
the full text of the rating agency restrictions on futures and options
transactions and certain other actions or investments by the Trust.
(a) For so long as any Municipal Preferred are rated by Standard & Poor's
or Moody's, the Trust will not purchase or sell futures contracts, write,
purchase or sell options on futures contracts or write put options (except
covered put options) or call options (except covered call options) on portfolio
securities unless it receives written confirmation from Standard & Poor's or
Moody's, or both, as the case may be, that engaging in such transactions will
not impair the ratings then assigned to the Municipal Preferred by Standard &
Poor's or Moody's, or both, except that the 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
D-1
<PAGE> 159
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, with a
Discounted Value that equals or exceeds the Municipal Preferred Basic
Maintenance Amount, the Discounted Value of cash or securities held for the
payment of Initial Margin or Variation Margin shall be zero and the aggregate
Discounted Value of Standard & Poor's Eligible Assets or Moody's Eligible
Assets, as the case may be, shall be reduced by an amount equal to (I) 30% of
the aggregate settlement value, as marked to market, of any outstanding futures
contracts based on the Municipal Index which are owned by the Trust plus (II)
25% of the aggregate settlement value, as marked to market, of any outstanding
futures contracts based on Treasury Bonds which contracts are owned by the
Trust.
D-2
<PAGE> 160
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 November 30, 1998
(which were previously filed electronically pursuant to
Section 30(b)(2) of the Investment Company Act of 1940 -
Accession Number: 0000950156-99-000076):
The Financial Statements contained in Part B are as follows:
Investment portfolio, November 30, 1998; Statement of assets
and liabilities, November 30, 1998; Statement of operations,
November 30, 1998; Statement of changes in net assets, Years
ended November 30, 1997 & 1998; Notes to Financial
Statements; Financial Highlights; Report of Independent
Accountants
(2) Exhibits
(a)(1) Agreement and Declaration of Trust (1)
(a)(2) Amendment No. 1 to Agreement and Declaration of
Trust (1)
(b) Form of Amended and Restated By-Laws
(c) Not applicable
(d)(1) Portions of the Agreement and Declaration of
Trust as amended, included as Exhibit (a)(1) and
(a)(2), and the Form of Amended and Restated
By-Laws of the Registrant, included as Exhibit
(b) (See Article III, Sections 1, 2, 4 and 5;
Article V; Article VIII, Section 4; and Article
IX, Sections 4 and 7 of the Agreement and
Declaration of Trust, as amended, and Sections
2-3, 4(c), 5, and 9-12 of Part I of Section 12.1
and Sections 1-5 and 7 of Part II of Section
12.1 of the Form of Amended and Restated
By-laws)
(d)(2) Form of specimen certificate for the municipal
auction rate cumulative preferred shares
(e) Dividend Reinvestment Plan (2)
(f) Not applicable
(g) Management Agreement with Colonial Management
<PAGE> 161
Associates, Inc. (1)
(h) Form of Underwriting Agreement with Salomon
Smith Barney Inc.
(i) Not applicable
(j)(1) Global Custody Agreement with The Chase
Manhattan Bank (incorporated herein by reference
to Item 24. Exhibit No. 8 to Post-Effective
Amendment No. 13 to the Registration Statement
of Liberty Funds Trust VI (formerly Colonial
Trust VI), Registration Nos. 33-45117 &
811-6529, filed with the Commission on or about
October 24, 1997)
(j)(2) Amendment No. 5 to Schedule A of Global Custody
Agreement with The Chase Manhattan Bank
(incorporated herein by reference to Item 23.
Exhibit (g)(1)(ii) to Post-Effective Amendment
No. 18 to the Registration Statement of Liberty
Variable Investment Trust, Registration Nos.
33-59216 & 811-7556, filed with the Commission
on or about June 1, 1999)
(k)(1) Form of Auction Agency Agreement
(k)(2) Form of Broker-Dealer Agreement
(k)(3) Registrar, Transfer Agency and Service Agreement
between the Registrant and State Street Bank and
Trust Company (2)
(k)(4)(i) Service Contract with Colonial Management
Associates, Inc. (2)
(k)(4)(ii) Amendment to Service Contract with Colonial
Management Associates, Inc. (2)
(l) Opinion and consent of Ropes & Gray, counsel to
Registrant
(m) Not applicable
(n) Consent of independent accountants
(o) Not applicable
(p) Not applicable
(q) Not applicable
(r) Not applicable
- -------------------------------
A copy of the Power of Attorney for each of Robert J. Birnbaum, Tom Bleasdale,
John V. Carberry, Lora S. Collins, James E. Grinnell, Richard W. Lowry,
Salvatore Macera, William E. Mayer, James L. Moody, Jr., John J. Neuhauser,
Robert L. Sullivan and Anne-Lee Verville is incorporated herein by reference to
Post-Effective Amendment No. 50 to the Registration Statement of Colonial Trust
IV, Registration Nos. 2-62492 and 811-2865, filed with the Commission on or
about November 6, 1998.
(1) Incorporated by reference to the Registration Statement filed with
the Commission via EDGAR on or about April 28, 1999.
(2) Incorporated by reference to the Registration Statement filed with
the Commission via EDGAR on or about July 13, 1999.
Item 25. Marketing Arrangements.
See Sections 5(l), 5(m) and 6(s) of Exhibit (h) of Item 24(2) of
this Registration Statement.
Item 26. Other Expenses of Issuance and Distribution.
<PAGE> 162
The following table sets forth the expenses to be incurred in
connection with the Offer described in this Registration
Statement:
Registration fees $ 25,020
Printing $ 20,000
Accounting fees and expenses $ 7,500
Legal fees and expenses $ 90,000
Miscellaneous $ 15,000
--------
Total $157,520(*)
========
* Estimated
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 June 25, 1999
-------------- ------------------------
Shares of Beneficial Interest 3,492
Municipal Auction Rate Cumulative
Preferred Shares -0-
Item 29. Indemnification.
The Agreement and Declaration of Trust, as amended, filed as
Exhibit (a)(1) and (a)(2) to this Registration Statement
provides for indemnification to each of the Registrant's
Trustees and officers against all liabilities and expenses
incurred in acting as Trustee or officer, except in the case of
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such Trustees
and officers. The Form of Underwriting Agreement filed as
Exhibit (h) to this Registration Statement provides for
indemnification by the Registrant and Colonial Management
Associates, Inc. (the "Advisor") of Salomon Smith Barney Inc.
(the "Underwriter") and its controlling persons and by the
Underwriter of the Registrant, the Advisor and their respective
Trustees, directors, officers and controlling persons against
certain liabilities, including liabilities under the Securities
Act of 1933, as amended, under certain circumstances.
Insofar as indemnification for liability arising under the
Securities Act of 1933, as amended, may be permitted to
Trustees, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer
<PAGE> 163
or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
The Registrant, Colonial Management Associates, Inc. and their
respective Trustees, directors and officers are insured by a
directors and officers/errors and omissions liability policy.
Item 30. Business and Other Connections of Investment Adviser. The
description of the business of Colonial Management Associates,
Inc., the Registrant's Investment Advisor, is set forth under
the caption "The Advisor" in the Prospectus forming part of this
Registration Statement. The following sets forth business and
other connections of each director and officer of Colonial
Management Associates, Inc.
Registrant's investment advisor/administrator, Colonial Management Associates,
Inc. ("Colonial"), is registered as an investment advisor under the Investment
Advisers Act of 1940 ("Advisers Act"). Colonial Advisory Services, Inc.
("CASI"), an affiliate of Colonial, is also registered as an investment advisor
under the 1940 Act. As of the end of the fiscal year, December 31, 1998, CASI
had four institutional, corporate or other accounts under management or
supervision, the total market value of which was approximately $227 million. As
of the end of the fiscal year, December 31, 1998, Colonial was the investment
advisor, sub-advisor and/or administrator to 57 mutual funds, including funds
sub-advised by Colonial, the total market value of which investment companies
was approximately $18,950.90 million.
The following sets forth the business and other connections of each
director and officer of Colonial Management Associates, Inc.:
(1) (2) (3) (4)
Name and principal
business
addresses* Affiliation
of officers and with Period is through 05/31/99. Other
directors of investment business, profession, vocation or
investment adviser adviser employment connection Affiliation
- ------------------ ---------- -------------------------------- -----------
Allard, Laurie V.P.
Archer, Joseph A. V.P.
Ballou, William J. V.P., Liberty Trusts I through IX Asst. Sec.
Asst. Colonial High Income
Sec., Municipal Trust Asst. Sec.
Counsel Colonial InterMarket Income
Trust I Asst. Sec.
Colonial Intermediate High
Income Fund Asst. Sec.
<PAGE> 164
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
AlphaTrade Inc. Asst. Clerk
Liberty Funds Distributor,
Inc. Asst. Clerk
Liberty Financial Advisers,
Inc. Asst. Sec.
Liberty Funds Group LLC Asst. Sec.
Liberty Variable Investment
Trust Asst. Sec.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund,
Inc. Asst. Sec.
Barron, Suzan M. V.P., Liberty Trusts I through IX Asst. Sec.
Asst. Colonial High Income
Sec., Municipal Trust Asst. Sec.
Counsel Colonial InterMarket Income
Trust I Asst. Sec.
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
AlphaTrade Inc. Asst. Clerk
Liberty Funds Distributor,
Inc. Asst. Clerk
Liberty Financial Advisers,
Inc. Asst. Sec.
Liberty Funds Group LLC Asst. Sec.
Liberty Variable Investment
Trust Asst. Sec.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund,
Inc. Asst. Sec.
Barsketis, Ophelia Sr.V.P. Stein Roe & Farnham Incorporated Snr. V.P.
Berliant, Allan V.P.
Boatman, Bonny E. Sr.V.P.; Colonial Advisory Services, Exec. V.P.
IPC Mbr. Inc.
Bunten, Walter V.P.
Campbell, Kimberly V.P.
Carnabucci,
Dominick V.P.
Carome, Kevin Sr.V.P.; Liberty Funds Distributor,
IPC Mbr. Inc. Assistant Clerk
Liberty Funds Group LLC Sr. V.P.
Stein Roe & Farnham
<PAGE> 165
Incorporated General Counsel
Carroll, Sheila A. Sr.V.P.
Citrone, Frank Sr.V.P.
Conlin, Nancy L. Sr. V.P.; Liberty Trusts I through IX Secretary
Sec.; Clerk Colonial High Income
IPC Mbr.; Municipal Trust Secretary
Dir; Gen. Colonial InterMarket Income
Counsel Trust I Secretary
Colonial Intermediate High
Income Fund Secretary
Colonial Investment Grade
Municipal Trust Secretary
Colonial Municipal Income
Trust Secretary
Liberty Funds Distributor,
Inc. Dir.; Clerk
Liberty Funds Services, Inc. Clerk; Dir.
Liberty Funds Group LLC V.P.; Gen.
Counsel and
Secretary
Liberty Variable Investment
Trust Secretary
Colonial Advisory Services,
Inc. Dir.; Clerk
AlphaTrade Inc. Dir.; Clerk
Liberty Financial Advisors,
Inc. Dir.; Sec.
Liberty All-Star Equity Fund Secretary
Liberty All-Star Growth Fund,
Inc. Secretary
Connaughton, V.P. Liberty Trust I through VIII CAO; Controller
J. Kevin Liberty Variable Investment
Trust CAO; Controller
Colonial High Income
Municipal Trust CAO; Controller
Colonial Intermarket Income
Trust I CAO; Controller
Colonial Intermediate High
Income Fund CAO; Controller
Colonial Investment Grade
Municipal Trust CAO; Controller
Colonial Municipal Income
Trust CAO; Controller
Liberty All-Star Equity Fund Controller
Liberty All-Star Growth Fund,
Inc. Controller
Liberty Trust IX Controller
Daniszewski, V.P.
Joseph J.
Dearborn, James V.P.
<PAGE> 166
Desilets, Marian H. V.P. Liberty Funds Distributor,
Inc. V.P.
Liberty Trust I through IX Asst. Sec.
Colonial High Income
Municipal Trust Asst. Sec.
Colonial Intermarket Income
Trust I Asst. Sec.
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
Liberty Variable Investment
Trust Asst. Sec.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund,
Inc. Asst. Sec.
DiSilva-Begley, V.P. Colonial Advisory Services, Compliance
Linda IPC Mbr. Inc. Officer
Eckelman, Marilyn Sr.V.P.
Ericson, Carl C. Sr.V.P. Colonial Intermediate High
IPC Mbr. Income Fund V.P.
Colonial Advisory Services, Pres.; CEO
Inc. and CIO
Evans, C. Frazier Sr.V.P. Liberty Funds Distributor,
Inc. Mng. Director
Feloney, Joseph L. V.P. Colonial Advisory Services,
Asst. Treas. Inc. Asst. Treas.
Liberty Funds Group LLC Asst. Treas.
Finnemore, Sr.V.P. Colonial Advisory Services,
Leslie W. Inc. Sr. V.P.
Franklin, Sr. V.P. AlphaTrade Inc. President
Fred J. IPC Mbr. Liberty Financial Companies, Chief
Inc. Compliance Ofcr
Garrison, William V.P. Stein Roe & Farnham
Incorporated V.P.
Gibson, Stephen E. Dir.; Pres.; Liberty Funds Group LLC Dir.;
CEO; Pres.; CEO;
Chairman of Exec. Cmte.
the Board; Mbr.; Chm.
IPC Mbr. Liberty Funds Distributor,
Inc. Dir.; Chm.
Colonial Advisory Services,
Inc. Dir.; Chm.
Liberty Funds Services, Inc. Dir.; Chm.
AlphaTrade Inc. Dir.
Liberty Trusts I through VIII President
<PAGE> 167
Colonial High Income
Municipal Trust President
Colonial InterMarket Income
Trust I President
Colonial Intermediate High
Income Fund President
Colonial Investment Grade
Municipal Trust President
Colonial Municipal Income
Trust President
Liberty Financial Advisors,
Inc. Director
Stein Roe & Farnham
Incorporated Asst. Chairman
Liberty Variable Investment
Trust President
Grabowski, Neil V.P.
Hanson, Loren Sr. V.P.;
IPC Mbr.
Harasimowicz, V.P.
Stephen
Harris, David V.P. Stein Roe Global Capital Mngmt Principal
Hartford, Brian Sr.V.P.
Haynie, James P. Sr.V.P. Colonial Advisory Services,
Inc. Sr. V.P.
Held, Dorothy V.P.
Hernon, Mary V.P.
Hill, William V.P. Colonial Advisory Services, V.P.
Inc.
Hounsell, Clare V.P. Stein Roe & Farnham
Incorporated V.P.
Iudice, Jr. V.P.; Liberty Funds Group LLC Controller,
Philip J. Controller CAO, Asst.
Asst. Treas.
Treasurer Liberty Funds Distributor, CFO,
Inc. Treasurer
Colonial Advisory Services, Controller;
Inc. Asst. Treas.
AlphaTrade Inc. CFO, Treas.
Liberty Financial Advisors,
Inc. Asst. Treas.
Jacoby, Timothy J. Sr. V.P.; Liberty Funds Group LLC V.P., Treasr.,
CFO; CFO
Treasurer Liberty Trusts I through VIII Treasr.,CFO
Colonial High Income
<PAGE> 168
Municipal Trust Treasr.,CFO
Colonial InterMarket Income
Trust I Treasr.,CFO
Colonial Intermediate High
Income Fund Treasr.,CFO
Colonial Investment Grade
Municipal Trust Treasr.,CFO
Colonial Municipal Income
Trust Treasr.,CFO
Colonial Advisory Services,
Inc. CFO, Treasr.
Liberty Financial Advisors,
Inc. Treasurer
Stein Roe & Farnham
Incorporated Snr. V.P.
Liberty Variable Investment
Trust Treasurer, CFO
Liberty All-Star Equity Fund Treasurer
Liberty All-Star Growth Fund,
Inc. Treasurer
Liberty Trust IX Treasurer
Jansen, Deborah Sr.V.P. Stein Roe & Farnham
Incorporated Sr. V.P.
Jersild, North V.P. Stein Roe & Farnham
Incorporated V.P.
Johnson, Gordon V.P.
Knudsen, Gail E. V.P. Liberty Trusts I through IX Asst. Treas.
Colonial High Income
Municipal Trust Asst. Treas.
Colonial InterMarket Income
Trust I Asst. Treas.
Colonial Intermediate High
Income Fund Asst. Treas.
Colonial Investment Grade
Municipal Trust Asst. Treas.
Colonial Municipal Income
Trust Asst. Treas.
Liberty Variable Investment
Trust Asst. Treas.
Liberty All-Star Equity Fund Asst. Treas.
Liberty All-Star Growth Fund,
Inc. Asst. Treas.
Lapointe, Thomas V.P.
Lasher, Bennett V.P.
Lasman, Gary V.P.
Lennon, John E. Sr.V.P. Colonial Advisory Services,
Inc. V.P.
Lenzi, Sharon V.P.
<PAGE> 169
Lessard, Kristen V.P.
Loring, William
C., Jr. Sr.V.P.
MacKinnon,
Donald S. Sr.V.P.
Marcus, Harold V.P.
Muldoon, Robert V.P.
Newman, Maureen Sr.V.P.
O'Brien, David Sr.V.P.
Ostrander, Laura Sr.V.P. Colonial Advisory Services,
Inc. V.P.
Palombo, Joseph R. Dir.; Colonial Advisory Services,
Exe.V.P.; Inc. Dir.
IPC Mbr.; Colonial High Income
Municipal Trust V.P.
Colonial InterMarket Income
Trust I V.P.
Colonial Intermediate High
Income Fund V.P.
Colonial Investment Grade
Municipal Trust V.P.
Colonial Municipal Income
Trust V.P.
Liberty Trusts I through IX V.P.
Liberty Funds Services, Inc. Director
Liberty Funds Group LLC CAO; Ex. V.P.
Liberty Funds Distributor,
Inc. Director
AlphaTrade Inc. Director
Liberty Financial Advisors,
Inc. Director
Stein Roe & Farnham
Incorporated Exec. V.P.
Liberty Variable Investment
Trust V.P.
Liberty All-Star Equity Fund V.P.
Liberty All-Star Growth Fund,
Inc. V.P.
Peishoff, William V.P.
Peterson, Ann T. V.P. Colonial Advisory Services,
Inc. V.P.
Pielech, Mitchell V.P.
Pope, David V.P.
<PAGE> 170
Rao, Gita Sr.V.P.
Reading, John V.P.; Liberty Funds Services, Inc. Asst. Clerk
Asst. Liberty Funds Group LLC Asst. Sec.
Sec.; Colonial Advisory Services,
Asst. Inc. Asst. Clerk
Clerk and Liberty Funds Distributor,
Counsel Inc. Asst. Clerk
AlphaTrade Inc. Asst. Clerk
Liberty Trusts I through IX Asst. Sec.
Colonial High Income
Municipal Trust Asst. Sec.
Colonial InterMarket Income
Trust I Asst. Sec.
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
Liberty Financial Advisors,
Inc. Asst. Sec.
Liberty Variable Investment
Trust Asst. Sec.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund,
Inc. Asst. Sec.
Rega, Michael V.P. Colonial Advisory Services,
Inc. V.P.
Richards, Scott B. Sr. V.P.
Salopek, Steven V.P. Stein Roe & Farnham
Incorporated V.P.
Schermerhorn, Scott Sr. V.P.
Seibel, Sandra L. V.P. Colonial Advisory Services,
Inc. V.P.
Shields, Yvonne V.P. Stein Roe & Farnham
Incorporated V.P.
Smalley, Greg V.P.
Spanos, Gregory J. Sr. V.P. Colonial Advisory Services,
Inc. Exec. V.P.
Stevens, Richard V.P. Colonial Advisory Services,
Inc. V.P.
Stoeckle, Mark Sr.V.P. Colonial Advisory Services,
Inc. V.P.
Swayze, Gary Sr.V.P.
<PAGE> 171
Thomas, Ronald V.P.
Wallace, John V.P. Colonial Advisory Services,
Asst.Treas. Inc. Asst. Treas.
Liberty Funds Group LLC Asst. Treas.
Ware, Elizabeth M. V.P.
Wiley, Christine V.P.
Wiley, Peter V.P.
- ------------------------------------------------
*The Principal address of all of the officers and directors of the investment
advisor is One Financial Center, Boston, MA 02111.
Item 31. Location of Accounts and Records:
Registrant: Colonial Municipal Income Trust
One Financial Center
Boston, Massachusetts 02111-2621
Investment Advisor: Colonial Management Associates, Inc.
One Financial Center
Boston, Massachusetts 02111-2621
Custodian: The Chase Manhattan Bank
270 Park Avenue
New York, New York 10017-2070
Transfer Agent: State Street Bank & Trust Company
225 Franklin Street
Boston, Massachusetts 02110
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.
<PAGE> 172
(4) Not applicable.
(5)(a) That, for the purpose of determining any liablility
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> 173
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Registration Statement on Form N-2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston and the
Commonwealth of Massachusetts on the 14th day of July, 1999.
COLONIAL MUNICIPAL INCOME TRUST
By: /s/ STEPHEN E. GIBSON
-----------------------------
Stephen E. Gibson
President
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 their
capacities as officers and Trustees of the Registrant.
SIGNATURES TITLE DATE
- ----------- ----- ----
/s/ STEPHEN E. GIBSON President (chief July 14, 1999
- -------------------------- executive officer)
Stephen E. Gibson
/s/ J. KEVIN CONNAUGHTON Controller and Chief July 14, 1999
- -------------------------- Accounting Officer
J. Kevin Connaughton
/s/ TIMOTHY J. JACOBY Treasurer and Chief July 14, 1999
- -------------------------- Financial Officer
Timothy J. Jacoby
<PAGE> 174
/s/ ROBERT J. BIRNBAUM*
- --------------------------- Trustee
Robert J. Birnbaum
/s/ TOM BLEASDALE*
- --------------------------- Trustee
Tom Bleasdale
/s/ JOHN V. CARBERRY*
- --------------------------- Trustee
John V. Carberry
/s/ LORA S. COLLINS*
- --------------------------- Trustee
Lora S. Collins
/s/ JAMES E. GRINNELL*
- --------------------------- Trustee
James E. Grinnell
/s/ RICHARD W. LOWRY*
- --------------------------- Trustee
Richard W. Lowry
/s/ SALVATORE MACERA*
- --------------------------- Trustee
Salvatore Macera
/s/ WILLIAM E. MAYER*
- --------------------------- Trustee
William E. Mayer
<PAGE> 175
/s/ JAMES L. MOODY, JR. *
- ----------------------- Trustee *WILLIAM J. BALLOU
James L. Moody, Jr. -------------------
William J. Ballou
Attorney-in-fact
July 14, 1999
/s/ JOHN J. NEUHAUSER*
- ----------------------- Trustee
John J. Neuhauser
/s/ THOMAS E. STITZEL*
- ----------------------- Trustee
Thomas E. Stitzel
/s/ ROBERT L. SULLIVAN*
- ----------------------- Trustee
Robert L. Sullivan
/s/ ANNE-LEE VERVILLE*
- ----------------------- Trustee
Anne-Lee Verville
<PAGE> 176
INDEX OF EXHIBITS
(b) Form of Amended and Restated By-Laws
(d)(2) Form of Specimen Share Certificate
(h) Form of Underwriting Agreement
(k)(1) Form of Auction Agency Agreement
(k)(2) Form of Broker-Dealer Agreement
(l) Opinion and Consent of Ropes & Gray
(n) Consent of independent accountants
<PAGE> 1
Exhibit (b)
AMENDED AND RESTATED BY-LAWS
OF
COLONIAL MUNICIPAL INCOME TRUST
Article 1.
Agreement and Declaration of Trust and Principal Office
1.1. Agreement and Declaration of Trust. These By-Laws shall be subject
to the Agreement and Declaration of Trust, as from time to time in effect (the
"Declaration of Trust"), of Colonial Municipal Income Trust, a Massachusetts
business Trust established by the Declaration of Trust (the "Trust.")
1.2. Principal Office of the Trust. The principal office of the Trust
shall be located in Boston, Massachusetts.
Article 2.
Shareholders
2.1. Shareholders Meetings. The annual meeting of the shareholders of
the Trust shall be held between April 1 and April 30 in each year, beginning in
1988, on a date and at a time within that period set by the Trustees. A special
meeting of the shareholders of the Trust may be called at any time by the
Trustees, by the president or, if the Trustees and the president shall fail to
call any meeting of shareholders for a period of 30 days after written
application of one or more shareholder who hold at least 10% of all outstanding
shares of the Trust, the such shareholder may call such meeting. Each call of a
meeting shall state the place, date, hour and purposes of the meeting.
2.2. Place of Meetings. All meetings of the shareholders shall be held
at the principal office of the Trust, or, to the extent permitted by the
Declaration of Trust, at such other place within the United States as shall be
designated by the Trustees or the president of the Trust.
2.3. Notice of Meetings. A written notice of each meeting of
shareholders, stating the place, date and hour and the purposes of the meeting,
shall be given at least seven days before the meeting to each shareholder
entitled to vote thereat by leaving such notice with him or at his residence or
usual place of business or by mailing it, postage prepaid, and addressed to such
shareholder at his address as it appears in the records of the Trust. Such
notice shall be given by the secretary or an assistant secretary or by an
officer designated by the Trustees. No notice of any meeting of shareholders
need be given to a shareholder if a written waiver of notice, executed before or
after the meeting by such shareholder or his attorney thereunto duly authorized,
is filed with the records of the meeting.
<PAGE> 2
2.4. Ballots. No ballots shall be required for any election unless
requested by a shareholder present or represented at the meeting and entitled to
vote in the election.
Proxies. Shareholders entitled to vote may vote either in person or by proxy in
writing dated not more than six months before the meeting named therein, which
proxies shall be filed with the secretary or other person responsible to record
the proceedings of the meeting before being voted. Unless otherwise specifically
limited by their terms, such proxies shall entitle the holders thereof to vote
at any adjournment of such meeting but shall not be valid after the final
adjournment of such meeting. The placing of a shareholder's name on a proxy
pursuant to telephonic or electronically transmitted instructions obtained
pursuant to procedures reasonably designed to verify that such instruction have
been authorized by such shareholder shall constitute execution of such proxy by
or on behalf of such shareholder.
Article 3.
Trustees
3.1. Committees and Advisory Board. The Trustees may appoint from their
number an executive committee and other committees. Except as the Trustees may
otherwise determine, any such committee may make rules for conduct of its
business. The Trustees may appoint an advisory board to consist of not less than
two nor more than five members. The members of the advisory board shall be
compensated in such manner as the Trustees may determine and shall confer with
and advise the Trustees regarding the investments and other affairs of the
Trust. Each member of the advisory board shall hold office until the first
meeting of the Trustees following the next meeting of the shareholders and until
his successor is elected and qualified, or until he sooner dies, resigns, is
removed, or becomes disqualified, or until the advisory board is sooner
abolished by the Trustees.
In addition, the Trustees may appoint a Dividend Committee of not less
than three persons, which shall be comprised of at least one Trustee of the
Trust.
No special compensation shall be payable to members of the Dividend
Committee. Each member of the Dividend Committee will hold office until the
successors are elected and qualified or until the member dies, resigns, is
removed, becomes disqualified or until the Committee is abolished by the
Trustees.
3.2. Regular Meetings. Regular meetings of the Trustees may be held
without call or notice at such places and at such times as the Trustees may from
time to time determine, provided that notice of the first regular meeting
following any such determination shall be given to absent Trustees.
3.3. Special Meetings. Special meeting of the Trustees may be held at
any time at any place designated in the call of the meeting, when called by the
president or the treasurer or by
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<PAGE> 3
two or more Trustees, sufficient notice thereof being given to each Trustee by
the secretary or an assistant secretary or by the officer or one of the Trustees
calling the meeting.
3.4. Notice. It shall be sufficient notice to a Trustee to send notice
by mail at least forty-eight hours or by telegram at least twenty-four hours
before the meeting addressed to the Trustee at his or her usual or last known
business or residence address or to give notice to him or her in person or by
telephone at least twenty-four hours before the meeting. Notice of a meeting
need not be given to any Trustee if a written waiver of notice, executed by him
or her before or after the meeting, is filed with the records of the meeting, or
to any Trustee who attends the meeting without protesting prior thereto or at
its commencement the lack of notice to him or her. Neither notice of a meeting
nor a waiver of a notice need specify the purposes of the meeting.
3.5. Quorum. At any meeting of the Trustees one-third of the Trustees
then in office shall constitute a quorum; provided, however, a quorum shall not
be less than two. Any meeting may be adjourned from time to time by a majority
of the votes cast upon the question, whether or not a quorum is present, and the
meeting may be held as adjourned without further notice.
Article 4.
Officers and Agents
4.1. Enumeration; Qualification. The officers of the Trust shall be a
president, a treasurer, a secretary and such other officers, if any, as the
Trustees from time to time may in their discretion elect or appoint. The Trust
may also have such agents, if any, as the Trustees from time to time may in
their discretion appoint. Any officer may be but none need be a Trustee of
shareholder. Any two or more offices may be held by the same person.
4.2. Powers. Subject to the other provisions of these By-Laws, each
officer shall have, in addition to the duties and powers herein and in the
Declaration of Trust set forth, such duties and powers as are commonly incident
to his or her office as if the Trust were organized as a Massachusetts business
corporation and such other duties and powers as the Trustees may from time to
time designate, including without limitation the power to make purchases and
sales of portfolio securities of the Trust pursuant to recommendations of the
Trust's investment adviser in accordance with the policies and objective of the
Trust set forth in its prospectus and with such general or specific instructions
as the Trustees may from time to time have issued.
4.3. Election. The president, the treasurer and the secretary shall be
elected annually by the Trustees at their first meeting following the annual
meeting of the shareholders. Other elected officer are elected by the Trustees.
Assistant officers are appointed by the elected officers.
4.4. Tenure. The president, the treasurer and the secretary shall hold
office until their respective successors are chosen and qualified, or in each
case until he or she sooner dies,
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<PAGE> 4
resigns, is removed or becomes disqualified. Each other officer shall hold
office at the pleasure of the Trustees. Each agent shall retain his or her
authority at the pleasure of the Trustees.
4.5. President and Vice Presidents. The president shall be the chief
executive officer of the Trust. The president shall preside at all meetings of
the shareholders and of the Trustees at which he or she is present, except as
otherwise voted by the Trustees. Any vice president shall have such duties and
powers as shall be designated from time to time by the Trustees.
4.6. Treasurer and Controller. The treasurer shall be the chief
financial officer of the Trust and subject to any arrangement made by the
Trustees with a bank or trust company or other organization as custodian or
transfer or shareholder services agent, shall be in charge of its valuable
papers and shall have such duties and powers as shall be designated from time to
time by the Trustees or by the president. Any assistant treasurer shall have
such duties and powers as shall be designated from time to time by the Trustees.
The Controller shall be the chief accounting officer of the Trust and
shall be in charge of its books of account and accounting records. The
Controller shall be responsible for preparation of financial statements of the
Trust and shall have such other duties and powers as may be designated from time
to time by the Trustees or the President.
4.7. Secretary and Assistant Secretaries. The secretary shall record
all proceedings of the shareholders and the Trustees in books to be kept
therefor, which books shall be kept at the principal office of the Trust. In the
absence of the secretary from any meeting of shareholders or Trustees, an
assistant secretary, or if there be none or he or she is absent, a temporary
clerk chosen at the meeting shall record the proceedings thereof in the
aforesaid books.
Article 5.
Resignations and Removals
Any Trustee, officer or advisory board member may resign at any time by
delivering his or her resignation in writing to the president, the treasurer or
the secretary or to a meeting of the Trustees. The Trustees may remove any
office elected by them with or without cause by the vote of a majority of the
Trustee then in office. Except to the extent provided in a written agreement
with the Trust, no Trustee, officer, or advisory board member resigning, and no
officer or advisory board member shall have any right to any compensation for
any period following his or her resignation or removal, or any right to damages
on account of such removal.
Article 6.
Vacancies
A vacancy in any office may be filled at any time. Each successor shall
hold office for the unexpired term, and in the case of the president, the
treasurer and the secretary, until his or
-4-
<PAGE> 5
her successor is chosen and qualified, or in each case until he or she sooner
dies, resigns, is removed or becomes disqualified.
Article 7.
Shares of Beneficial Interest
7.1. Share Certificates. Except as provided in Section 12.1, each
shareholder shall be entitled to a certificate stating the number of shares
owned by him or her, in such form as shall be prescribed from time to time by
the Trustees. Such certificate shall be signed by the president or a vice
president and by the treasurer or an assistant treasurer. Such signatures may be
facsimiles if the certificate is signed by a transfer agent or by a registrar,
other than a Trustee, officer or employee of the Trust. In case any officer who
has signed or whose facsimile signature has been placed on such certificate
shall have ceased to be such officer before such certificate is issued, it may
be issued by the Trustee with the same effect as if he or she were such officer
at the time of its issue.
In lieu of issuing certificates for shares, the Trustees or the
transfer agent may either issue receipts therefor or may keep accounts upon the
books of the Trust for the record holders of such shares, who shall in either
case be deemed, for all purposes hereunder, to be the holder of certificates for
such shares as if they had accepted such certificates and shall be held to have
expressly assented and agreed to the terms hereof.
7.2. Loss of Certificates. In the case of the alleged loss or
destruction or the mutilation of a share certificate, a duplicate certificate
may be issued in place thereof, upon such terms as the Trustees may prescribe.
7.3. Discontinuance of Issuance of Certificates. The Trustees may at
any time discontinue the issuance of share certificates and may, by written
notice to each shareholder, require the surrender of share certificates of the
Trust for cancellation. Such surrender and cancellation shall not affect the
ownership of shares in the Trust.
Article 8.
Record Date and Closing Transfer Books
The Trustees may fix in advance a time, which shall not be more than 60
days before the date of any meeting of shareholders or the date for the payment
of any dividend or making of any other distribution to shareholders, as the
record date for determining the shareholders having the right to notice and to
vote at such meeting and any adjournment thereof or the right to receive such
dividend or distribution, and in such case only shareholder of record on such
record date shall have such right, notwithstanding any transfer of shares on the
books of the Trust after the record date; or without fixing such record date the
Trustees may for any such purposes close the transfer books for all or any part
of such period.
-5-
<PAGE> 6
Article 9.
Seal
The seal of the Trust shall, subject to alteration by the Trustees,
consist of a flat-faced circular die with the word "Massachusetts" together with
the name of the Trust and the year of its organization, cut or engraved thereon;
but, unless otherwise required by the Trustees, the seal shall not be necessary
to be placed on, and its absence shall not impair the validity of, any document,
instrument or other paper executed and delivered by or on behalf of the Trust.
Article 10.
Execution of Papers
Except as the Trustees may generally or in particular cases authorize
the execution thereof in some other manner, all deeds, leases, transfers,
contracts, bonds, notes, checks, drafts and other obligations made, accepted or
endorsed by the Trust shall be signed, and all transfers of securities standing
in the name of the Trust shall be executed, by the president or by one of the
vice presidents or by the treasurer or by whomsoever else shall be designated
for that purpose by the vote of the Trustees and need not bear the seal of the
Trust.
Article 11.
Fiscal Year
Except as from time to time otherwise provided by the Trustees, the
fiscal year of the Trust shall end on November 30.
Article 12.
Shares of Beneficial Interest
The Trust has an unlimited number of common shares, without par value,
which may be issued from time to time by the Trustees of the Trust. The Trust
also has a class of 3,600 preferred shares, without par value, which may be
issued by the Trustees from time to time in one or more series and with such
designations, preferences and other rights, qualifications, limitations and
restrictions as are determined by the Board of Trustees or a duly authorized
committee thereof and set forth in this Article 12.
12.1. Statement Creating One Series of Municipal Auction Rate
Cumulative Preferred Shares.
There is one series of Municipal Auction Rate Cumulative Preferred
Shares.
-6-
<PAGE> 7
PART I
DESIGNATION
SERIES F: A series of 3,600 preferred shares, without par value,
liquidation preference $25,000 per share plus accumulated but unpaid dividends,
if any, thereon (whether or not earned or declared), is hereby designated
"Municipal Auction Rate Cumulative Preferred Shares, Series F" and is referred
to below as "Series F Municipal Preferred." Each share of Series F Municipal
Preferred shall be issued on ________, 1999; have an Applicable Rate for its
Initial Rate Period equal to __% per annum; have an initial Dividend Payment
Date of Monday, July __, 1999; and have such other preferences, limitations and
relative voting and other rights, in addition to those required by applicable
law or set forth in the Trust's Declaration of Trust, as are set forth in Part I
and Part II of this Section 12.1. Series F Municipal Preferred shall constitute
a separate series of Municipal Preferred of the Trust. The Board of Trustees of
the Trust may, in their discretion, increase the number of shares of Municipal
Preferred authorized under these Bylaws to authorize the issuance of another
series of Municipal Preferred so long as such issuance is permitted by paragraph
5 of this Part I of this Section 12.1.
1. Definitions. Unless the context or use indicates another or
different meaning or intent, in Part I and Part II of this Section 12.1 the
following terms have the following meanings, whether used in the singular or
plural:
"'AA' Composite Commercial Paper Rate," on any date for any Rate Period
of shares of a series of Municipal Preferred, shall mean (i) (A) in the case of
any Minimum Rate Period or any Special Rate Period of fewer than 49 Rate Period
Days, the interest equivalent of the 30-day rate; provided, however, that if
such Rate Period is a Minimum Rate Period and the "AA" Composite Commercial
Paper Rate is being used to determine the Applicable Rate for shares of such
series when all of the Outstanding shares of such series are subject to
Submitted Hold Orders, then the interest equivalent of the seven-day rate, and
(B) in the case of any Special Rate Period of (1) 49 or more but fewer than 70
Rate Period Days, the interest equivalent of the 60-day rate; (2) 70 or more but
fewer than 85 Rate Period Days, the arithmetic average of the interest
equivalent of the 60-day and 90-day rates; (3) 85 or more but fewer than 99 Rate
Period Days, the interest equivalent of the 90-day rate; (4) 99 or more but
fewer than 120 Rate Period Days, the arithmetic average of the interest
equivalent of the 90-day and 120-day rates; (5) 120 or more but fewer than 141
Rate Period Days, the interest equivalent of the 120-day rate; (6) 141 or more
but fewer than 162 Rate Period Days, the arithmetic average of the 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 rate "AA" by S&P or the
equivalent of such rating by S&P 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
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
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<PAGE> 8
not quote a rate required to determine the "AA" Composite Commercial Paper Rate,
the "AA" Composite Commercial Paper Rate shall be determined on the basis of the
quotation or quotations furnished by the remaining Commercial Paper Dealer or
Commercial Paper Dealers and any Substitute Commercial Paper Dealer or
Substitute Commercial Paper Dealers selected by the Trust to provide such rate
or rates not being supplied by any Commercial Paper Dealer or Commercial Paper
Dealers, as the case may be, or, if the Trust does not select any such
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers, by
the remaining Commercial Paper Dealer or Commercial Paper Dealers. For purposes
of this definition, the "interest equivalent" of a rate stated on a discount
basis (a "discount rate") for commercial paper of a given days' maturity shall
be equal to the quotient (rounded upwards to the next higher one-thousandth
(.001) of 1% of (A) the discount rate divided by (B) the difference between (x)
1.00 and (y) a fraction the numerator of which shall be the product of the
discount rate times the number of days in which such commercial paper matures
and the denominator of which shall be 360.
"Accountant's Confirmation" shall have the meaning specified in
paragraph 7(c) of this Part I of Section 12.1.
"Affiliate" shall mean, for purposes of the definition of
"Outstanding," any Person known to the Auction Agent to be controlled by, in
control of or under common control with the Trust; provided, however, that no
Broker-Dealer controlled by, in control of or under common control with the
Trust shall be deemed to be an Affiliate nor shall any corporation or any Person
controlled by, in control of or under common control with such corporation, one
of the trustees, directors or executive officers of which is a trustee of the
Trust be deemed to be an Affiliate solely because such trustee, director or
executive officer is also a trustee of the Trust.
"Agent Member" shall mean a member of or participant in the Securities
Depository that will act on behalf of a Bidder.
"Anticipation Notes" shall mean Tax Anticipation Notes (TANs), Revenue
Anticipation Notes (RANs), Tax and Revenue Anticipation Notes (TRANs), Grant
Anticipation Notes (GANs) that are rated by S&P and Bond Anticipation Notes
(BANs).
"Applicable Rate" shall have the meaning specified in paragraph 2(e)(i)
of this Part I of this Section 12.1.
"Auction" shall mean each periodic implementation of the Auction
Procedures.
"Auction Agency Agreement" shall mean the agreement between the Trust
and the Auction Agent which provides, among other things, that the Auction Agent
will follow the Auction Procedures for purposes of determining the Applicable
Rate for shares of a series of Municipal Preferred so long as the Applicable
Rate for shares of such series is to be based on the results of an Auction.
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<PAGE> 9
"Auction Agent" shall mean the entity appointed as such by a resolution
of the Board of Trustees in accordance with paragraph 6 of Part II of this
Section 12.1.
"Auction Date," with respect to any Rate Period, shall mean the
Business Day next preceding the first day of such Rate Period.
"Auction Procedures" shall mean the procedures for conducting Auctions
set forth in Part II of this Section 12.1.
"Available Municipal Preferred" shall have the meaning specified in
paragraph 3(a) of Part II of this Section 12.1.
"Benchmark Rate" shall have the meaning specified in paragraph 3(c) of
Part II of this Section 12.1.
"Beneficial Owner" with respect to shares of a series of Municipal
Preferred, means a customer of a Broker-Dealer who is listed on the records of
that Broker-Dealer (or, if applicable, the Auction Agent) as a holder of shares
of such series.
"Bid" and "Bids" shall have the respective meanings specified in
paragraph 1(a) of Part II of this Section 12.1.
"Bidder" and "Bidders" shall have the respective meanings specified in
paragraph 1(a) of Part II of this Section 12.1; provided, however, that neither
the Trust nor any affiliate thereof shall be permitted to be a Bidder in an
Auction, except that any Broker-Dealer that is an affiliate of the Trust may be
a Bidder in an Auction, but only if the Orders placed by such Broker-Dealer are
not for its own account.
"Board of Trustees" shall mean the Board of Trustees of the Trust or
any duly authorized committee thereof.
"Broker-Dealer" shall mean any broker-dealer, commercial bank or other
entity permitted by law to perform the functions required of a Broker-Dealer in
Part II of this Section 12.1, that is a member of, or a participant in, the
Securities Depository or is an affiliate of such member or participant, has been
selected by the Trust and has entered into a Broker-Dealer Agreement that
remains effective.
"Broker-Dealer Agreement" shall mean an agreement among the Trust, the
Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to
follow the procedures specified in Part II of this Section 12.1.
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<PAGE> 10
"Business Day" shall mean a day on which the New York Stock Exchange is
open for trading, and which is neither a Saturday, Sunday nor any other day on
which banks in The City of New York, New York are authorized by law to close.
"By-laws" means these Amended and Restated By-laws of the Trust.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Commercial Paper Dealers" means Lehman Commercial Paper Incorporated,
Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith and such other
commercial paper dealer or dealers as the Trust may from time to time appoint,
or, in lieu of any thereof, their respective affiliates or successors.
"Common Shares" means the common shares of beneficial interest, without
par value, of the Trust.
"Cure Date" shall have the meaning specified in of paragraph 11(b) of
this Part I of this Section 12.1.
"Date of Original Issue" with respect to shares of a series of
Municipal Preferred, shall mean the date on which the Trust originally issued
such shares.
"Declaration" shall mean the Agreement and Declaration of Trust dated
January 22, 1987 of the Trust, as amended by Amendment No. 1 dated August 4,
1989 to the Agreement and Declaration of Trust of the Trust, both on file with
the Secretary of State of The Commonwealth of Massachusetts and as hereafter
restated or amended from time to time.
"Deposit Securities" shall mean cash and Municipal Obligations rated at
least A-1+ or SP-1+ by S&P, except that, for purposes of subparagraph (a)(v) of
paragraph 11 of Part I of this Section 12.1, such Municipal Obligations shall be
considered "Deposit Securities" only if they are also rated P-1, MIG-1 or VMIG-1
by Moody's.
"Discounted Value," as of any Valuation Date, shall mean, (i) with
respect to an S&P Eligible Asset, the quotient of the Market Value thereof
divided by the applicable S&P Discount Factor and (ii) (a) with respect to a
Moody's Eligible Asset that is not currently callable as of such Valuation Date
at the option of the issuer thereof, the quotient of the Market Value thereof
divided by the applicable Moody's Discount Factor, or (b) with respect to a
Moody's Eligible Asset that is currently callable as of such Valuation Date at
the option of the issuer thereof, the 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.
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<PAGE> 11
"Dividend Payment Date," with respect to shares of a series of
Municipal Preferred, shall mean any date on which dividends are payable on
shares of such series pursuant to the provisions of paragraph 2(d) of Part I of
this Section 12.1.
"Dividend Period," with respect to shares of a series of Municipal
Preferred, shall mean the period from and including the Date of Original Issue
of shares of such series to but excluding the initial Dividend Payment Date for
shares of such series and any period thereafter from and including one Dividend
Payment Date for shares of such series to but excluding the next succeeding
Dividend Payment Date for shares of such series.
"Escrowed Bonds" means Municipal Obligations that (i) have been
determined to be legally defeased in accordance with S&P's legal defeasance
criteria, (ii) have been determined to be economically defeased in accordance
with S&P's economic defeasance criteria and assigned a rating of AAA by S&P,
(iii) are not rated by S&P but have been determined to be legally defeased by
Moody's, or (iv) have been determined to be economically defeased by Moody's and
assigned a rating no lower than the rating that is Moody's equivalent of S&P's
AAA rating.
"Existing Holder," with respect to shares of a series of Municipal
Preferred, shall mean a Broker-Dealer (or any such other Person as may be
permitted by the Trust) that is listed on the records of the Auction Agent as a
holder of shares of such series.
"Failure to Deposit," with respect to shares of a series of Municipal
Preferred, shall mean a failure by the Trust to pay to the Auction Agent, not
later than 12:00 noon, New York City time, (A) on the Business Day next
preceding any Dividend Payment Date for shares of such series, in funds
available on such Dividend Payment Date in The City of New York, New York, the
full amount of any dividend (whether or not earned or declared) to be paid on
such Dividend Payment Date on any share of such series or (B) on the Business
Day next preceding any redemption date in funds available on such redemption
date for shares of such series in The City of New York, New York, the Redemption
Price to be paid on such redemption date for any shares of such series after
notice of redemption is mailed pursuant to paragraph 11(c) of Part I of this
Section 12.1; provided, however, that the foregoing clause (B) shall not apply
to the Trust's failure to pay the Redemption Price in respect of shares of
Municipal Preferred when the related Notice of Redemption provides that
redemption of such shares is subject to one or more conditions precedent and any
such condition precedent shall not have been satisfied at the time or times and
in the manner specified in such Notice of Redemption.
"Federal Tax Rate Increase" shall have the meaning specified in the
definition of "Moody's Volatility Factor."
"Gross-up Payment" in respect of any dividend means payment to a Holder
of shares of a series of Municipal Preferred of an amount which, giving effect
to the Taxable Allocations made with respect to such dividend, would cause such
Holder's after-tax returns (taking into account both the Taxable Allocations and
the Gross-up Payment) to be equal to the after-tax
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<PAGE> 12
return the Holder would have received if no such Taxable Allocations had
occurred. Such Gross-up Payment shall be calculated: (i) without consideration
being given to the time value of money; (ii) assuming that no Holder of shares
of Municipal Preferred is subject to the Federal alternative minimum tax with
respect to dividends received from the Trust; and (iii) assuming that each
Holder of shares of Municipal Preferred is taxable at the maximum marginal
regular Federal individual income tax rate applicable to ordinary income or net
capital gain, as applicable, or the maximum marginal regular Federal corporate
income tax rate applicable to ordinary income or net capital gain, as
applicable, whichever is greater, in effect at the time such Gross-up Payment is
made.
"Holder," with respect to shares of a series of Municipal Preferred,
shall mean the Registered Holder of such shares as the same appears on the
record books of the Trust.
"Hold Order" and "Hold Orders" shall have the respective meanings
specified in paragraph 1(a) of Part II of this Section 12.1.
"Independent Accountant" shall mean a nationally recognized accountant,
or firm of accountants, that is, with respect to the Trust, an independent
public accountant or firm of independent public accountants under the Securities
Act of 1933, as amended from time to time.
"Initial Margin" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a futures
contract.
"Initial Rate Period," with respect to shares of a series of Municipal
Preferred, shall mean the period from and including the Date of Original Issue
for such series to but excluding the initial Dividend Payment Date for such
series.
"Interest Equivalent" shall mean a yield on a 360-day basis of a
discount basis security which is equal to the yield on an equivalent
interest-bearing security.
"Inverse Floater" shall mean trust certificates or other instruments
evidencing interests in one or more municipal securities that qualify as S&P
Eligible Assets (and satisfy the issuer and size requirements of the definition
of S&P Eligible Assets) the interest rates on which are adjusted at short-term
intervals on a basis that is inverse to the simultaneous readjustment of the
interest rates on corresponding floating rate trust certificates or other
instruments issued by the same issuer, provided that the ratio of the aggregate
dollar amount of floating rate instruments to inverse floating rate instruments
issued by the same issuer does not exceed one to one at their time or original
issuance unless the floating rate instrument has only one reset remaining until
maturity.
"Kenny Index" shall have the meaning set forth under the definition of
"Taxable Equivalent of the Short-Term Municipal Bond Rate."
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<PAGE> 13
"Late Charge" shall have the meaning specified in paragraph 2(e)(i)(B)
of Part I of this Section 12.1.
"Liquidation Preference," with respect to a given number of shares of
Municipal Preferred, means $25,000 times that number.
"Market Value" of any asset of the Trust means the market value thereof
determined by the pricing service designated from time to time by the Board of
Trustees. Market Value of any asset shall include any interest accrued thereon.
The pricing service will use current industry standards to value portfolio
securities. The pricing service may employ electronic data processing techniques
or a matrix system, or both, to determine valuations. Securities for which
quotations are not readily available shall be valued at fair value as determined
by the pricing service using methods which include consideration of: yields or
prices of municipal bonds of comparable quality, type of issue, coupon, maturity
and rating; indications as to value from dealers; and general market conditions.
In the event the pricing service is unable to value a security, the security
shall be valued at the lower of two dealer bids obtained by the Trust from
dealers who are nationally recognized members of the National Association of
Securities Dealers, Inc. who are independent of the investment advisor to the
Trust and make a market in the security, at least one of which shall be in
writing. Futures contracts and options are valued at closing prices for such
instruments established by the exchange or board of trade on which they are
traded, or if market quotations are not readily available, are valued at fair
value on a consistent basis using methods determined in good faith by the
Trustees.
"Maximum Potential Gross-up Payment Liability," as of any Valuation
Date, shall mean the aggregate amount of Gross-up Payments that would be due if
the Trust were to make Taxable Allocations, with respect to any taxable year,
estimated based upon dividends paid and the amount of undistributed realized net
capital gains and other taxable income earned by the Trust, as of the end of the
calendar month immediately preceding such Valuation Date, and assuming such
Gross-up Payments are fully taxable.
"Maximum Rate," for shares of a series of Municipal Preferred on any
Auction Date for shares of such series, shall mean:
(i) in the case of any Auction Date which is not the Auction Date
immediately prior to the first day of any proposed Special Rate Period
designated by the Trust pursuant to paragraph 4 of Part I of this
Section 12.1, the product of (A) the Reference Rate on such Auction Date
for the next Rate Period of shares of such series and (B) the Rate
Multiple on such Auction Date, unless shares of such series have or had
a Special Rate Period (other than a Special Rate Period of 28 Rate
Period Days or fewer) and an Auction at which Sufficient Clearing Bids
existed has not yet occurred for a Minimum Rate Period of shares of such
series after such Special Rate Period, in which case the higher of:
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<PAGE> 14
(A) the dividend rate on shares of such series for the
then-ending Rate Period; and
(B) the product of (1) the higher of (x) the Reference
Rate on such Auction Date for a Rate Period equal in length to
the then-ending Rate Period of shares of such series, if such
then-ending Rate Period was 364 Rate Period Days or fewer, or the
Treasury Note Rate on such Auction Date for a Rate Period equal
in length to the then-ending Rate Period of shares of such
series, if such then-ending Rate Period was more than 364 Rate
Period Days, and (y) the Reference Rate on such Auction Date for
a Rate Period equal in length to such Special Rate Period of
shares of such series, if such Special Rate Period was 364 Rate
Period Days or fewer, or the Treasury Note Rate on such Auction
Date for a Rate Period equal in length to such Special Rate
Period, if such Special Rate Period was more than 364 Rate Period
Days and (2) the Rate Multiple on such Auction Date; or
(ii) in the case of any Auction Date which is the Auction Date
immediately prior to the first day of any proposed Special Rate Period
designated by the Trust pursuant to paragraph 4 of Part I of this
Section 12.1, the product of (A) the highest of (1) the Reference Rate
on such Auction Date for a Rate Period equal in length to the
then-ending Rate Period of shares of such series, if such then-ending
Rate Period was 364 Rate Period Dates or fewer, or the Treasury Note
Rate on such Auction Date for a Rate Period equal in length to the
then-ending Rate Period of shares of such series, if such then-ending
Rate Period was more than 364 Rate Period Days, (2) the Reference Rate
on such Auction Date for the Special Rate Period for which the Auction
is being held if such Special Rate Period is 364 Rate Period Days or
fewer or the Treasury Note Rate on such Auction Date for the Special
Rate Period for which the Auction is being held if such Special Rate
Period is more than 364 Rate Period Days, and (3) the Reference Rate on
such Auction Date for Minimum Rate Periods and (B) the Rate Multiple on
such Auction Date.
"Minimum Rate Period" shall mean any Rate Period consisting of 7 Rate
Period Days.
"Moody's" shall mean Moody's Investors Service, Inc., a Delaware
corporation, and its successors.
"Moody's Discount Factor" shall mean, for purposes of determining the
Discounted Value of any Moody's Eligible Asset, the percentage determined by
reference to the rating on such asset and the shortest Exposure Period set forth
opposite such rating that is the same length as or is longer than the Moody's
Exposure Period, in accordance with the table set forth below:
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<PAGE> 15
Rating Category
<TABLE>
<CAPTION>
Exposure Period Aaa* Aa* A* Baa* Other** (V)MIG-1*** SP-1+**** Unrated*****
- --------------- ---- --- -- ---- ------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
7 weeks.............. 151% 159% 166% 173% 187% 136% 148% 225%
8 weeks or less but
greater than seven
weeks................ 154 161 168 176 190 137 149 231
9 weeks or less but
greater than eight
weeks................ 156 163 170 177 192 138 150 240
</TABLE>
* Moody's rating.
** Municipal Obligations not rated by Moody's but rated BBB by S&P.
*** Municipal Obligations rated MIG-1 or VMIG-1, which do not mature or
have a demand feature at par exercisable in 30 days and which do not
have a long-term rating.
**** Municipal Obligations not rated by Moody's but rated SP-1+ by S&P,
which do not mature or have a demand feature at par exercisable in 30
days and which do not have a long-term rating.
***** Municipal Obligations rated less than Baa3 by Moody's or less than
BBB by S&P or not rated by Moody's or S&P.
Notwithstanding the foregoing, (i) the Moody's Discount Factor for
short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated at least MIG-1, VMIG-1 or P-1 by Moody's and mature or
have a demand feature at par exercisable in 30 days or less or 125% so long as
such Municipal Obligations are rated at least A-1+/AA or SP-1+/AA by S&P and
mature or have a demand feature at par exercisable in 30 days or less and (ii)
no Moody's Discount Factor will be applied to cash or to Receivables for
Municipal Obligations Sold or futures, options and similar instruments (to the
extent such securities are Moody's Eligible Assets); provided, however, that for
purposes of determining the Moody's Discount Factor applicable to a Municipal
Obligation, any Municipal Obligation (excluding any short-term Municipal
Obligation) not rated by Moody's but rated by S&P shall be deemed to have a
Moody's rating which is one full rating category lower than its S&P rating.
"Moody's Eligible Asset" shall mean cash, Receivables for Municipal
Obligations Sold, futures, options and similar instruments (other than Inverse
Floaters and index warrants) or a Municipal Obligation that (i) pays interest in
cash, (ii) does not have its Moody's rating, if applicable, suspended by
Moody's, (iii) is part of an issue of Municipal Obligations of at least
$10,000,000, and (iv) is not subject to a covered call or a covered put option
written by the Trust. Municipal Obligations issued by any one issuer and not
rated by Moody's or rated lower than Baa3 by Moody's and not rated by S&P or
rated lower than BBB by S&P ("Unrated Moody's Municipal Obligations") may
comprise no more than 4% of total Moody's Eligible Assets; such Unrated Moody's
Municipal Obligations, if any, together with any Municipal Obligations issued by
the same issuer and rated BBB by S&P may comprise no more than 4% of total
Moody's
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<PAGE> 16
Eligible Assets; such BBB-rated Municipal Obligations and Unrated Moody's
Municipal Obligations, if any, together with any Municipal Obligations issued by
the same issuer and rated Baa by Moody's or A by S&P may comprise no more than
6% of total Moody's Eligible Assets; such BBB, Baa and A-rated Municipal
Obligations and Unrated Moody's Municipal Obligations, if any, together with any
Municipal Obligations issued by the same issuer and rated A by Moody's or AA by
S&P, may comprise no more than 10% of total Moody's Eligible Assets; and such
BBB, Baa, A and AA-rated Municipal Obligations and Unrated Moody's Municipal
Obligations, if any, together with any Municipal Obligations issued by the same
issuer and rated Aa by Moody's or AAA by S&P, may comprise no more than 20% of
total Moody's Eligible Assets. For purposes of the foregoing sentence, any
Municipal Obligation backed by the guaranty, letter of credit or insurance
issued by a third party shall be deemed to be issued by such third party if the
issuance of such third-party credit is the sole determinant of the rating on
such Municipal Obligations. Municipal Obligations issued by issuers located
within a single state or territory and not rated by Moody's or rated lower than
Baa3 by Moody's and not rated by S&P or rated lower than BBB by S&P may comprise
no more than 12% of total Moody's Eligible Assets; such Unrated Moody's
Municipal Obligations, if any, together with any Municipal Obligations issued by
issuers located within the same state or territory and rated BBB by S&P may
comprise no more than 12% of total Moody's Eligible Assets; such BBB-rated
Municipal Obligations and Unrated Moody's Municipal Obligations, if any,
together with any Municipal Obligations issued by issuers located within the
same state or territory and rated Baa by Moody's or A by S&P, may comprise no
more than 20% of total Moody's Eligible Assets; such BBB, Baa and A-rated
Municipal Obligations and Unrated Moody's Municipal Obligations, if any,
together with any Municipal Obligations issued by issuers located within the
same state or territory and rated A by Moody's or AA by S&P, may comprise no
more than 40% of total Moody's Eligible Assets; and such BBB, Baa, A and
AA-rated Municipal Obligations and Unrated Moody's Municipal Obligations, if
any, together with any Municipal Obligations issued by issuers located within
the same state or territory and rated Aa by Moody's or AAA by S&P, may comprise
no more than 60% of total Moody's Eligible Assets. Municipal Obligations which
are not rated by Moody's or S&P may comprise no more than 40% of the aggregate
Market Value of Moody's Eligible Assets; provided, however, that if the Market
Value of such Municipal Obligations exceeds 40% of the aggregate Market Value of
Moody's Eligible Assets, a portion of such Municipal Obligations (selected by
the Trust) shall not be considered Moody's Eligible Assets, so that the Market
Value of such Municipal Obligations (excluding such portion) does not exceed 40%
of the aggregate Market Value of Moody's Eligible Assets; provided, however,
that no such unrated Municipal Obligation shall be considered a Moody's Eligible
Asset if such Municipal Obligation shall be in "default", which term shall mean
for purposes of this definition, either (a) the nonpayment by the issuer of
interest or principal when due or (b) the notification of the Trust by the
trustee under the underlying indenture or other governing instrument for such
Municipal Obligation that the issuer will fail to pay when due principal or
interest on such Municipal Obligation. For purposes of applying the foregoing
requirements, a Municipal Obligation shall be deemed to be rated BBB by S&P if
rated BBB-, BBB or BBB+ by S&P, Moody's Eligible Assets shall be calculated
without including cash, and Municipal Obligations rated MIG-1, VMIG-1 or P-1 or,
if not rated by Moody's, rated A-1+/Aa or SP-1+/AA by S&P, shall be
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<PAGE> 17
considered to have a long-term rating of A. When the Trust sells a Municipal
Obligation and agrees to repurchase such Municipal Obligation at a future day,
such Municipal Obligation shall be valued at its Discounted Value for purposes
of determining Moody's Eligible Assets, and the amount of the repurchase price
of such Municipal Obligation shall be included as a liability for purposes of
calculating the Municipal Preferred Basic Maintenance Amount. When the Trust
purchases a Moody's Eligible Asset and agrees to sell it at a future date, such
Eligible Asset shall be valued at the amount of cash to be received by the Trust
upon such future date, provided that the counterparty to the transaction has a
long-term debt rating of at least A2 and a short-term debt rating of at least
P-1 from Moody's and the transaction has a term of no more than 30 days;
otherwise such Eligible Asset shall be valued at the Discounted Value of such
Eligible Asset. For purposes of determining the aggregate Discounted Value of
Moody's Eligible Assets, such aggregate amount shall be reduced with respect to
any futures contracts as set forth in paragraph 10(a) of this Part I.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset to the extent it is (i) subject to any material lien, mortgage,
pledge, security interest or security agreement of any kind (collectively,
"Liens"), except for (a) Liens which are being contested in good faith by
appropriate proceedings and which Moody's has indicated to the Trust will not
affect the status of such asset as a Moody's Eligible Asset, (b) Liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (c) Liens to secure payment for services rendered or cash advanced to
the Trust by Colonial Management Associates, Inc., The Chase Manhattan Bank or
the Auction Agent and (d) Liens by virtue of any repurchase agreement or futures
contract; or (ii) deposited irrevocably for the payment of any liabilities for
purposes of determine the Municipal Preferred Basic Maintenance Amount.
"Moody's Exposure Period" shall mean the period commencing on a given
Valuation Date and ending 49 days thereafter.
"Moody's Volatility Factor" shall mean, as of any Valuation Date, (i) in
the case of any Minimum Rate Period, any Special Rate period of 28 Rate Period
Days or fewer, or any Special Rate Period of 57 Rate Period Days or more, a
multiplicative factor equal to 275%, except as otherwise provided in the last
sentence of this definition; (ii) in the case of any Special Rate Period of more
than 28 but fewer than 36 Rate Period Days, a multiplicative factor equal to
203%; (iii) in the case of any Special Rate Period of more than 35 but fewer
than 43 Rate Period Days, a multiplicative factor equal to 217%; (iv) in the
case of any Special Rate Period of more than 42 but fewer than 50 Rate Period
Days, a multiplicative factor equal to 226%; and (v) in the case of any Special
Rate Period of more than 49 but fewer than 57 Rate Period Days, a multiplicative
factor equal to 235%. If, as a result of the enactment of changes to the Code,
the greater of the maximum marginal Federal individual income tax rate
applicable to ordinary income and the maximum marginal Federal corporate income
tax rate applicable to ordinary income will increase, such increase being
rounded up to the next five percentage points (the "Federal Tax Rate Increase"),
until the effective date of such increase, the Moody's Volatility Factor in the
case of any Rate Period described in (i) above in this definition instead shall
be determined by reference to the following table:
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<PAGE> 18
<TABLE>
<CAPTION>
Federal Volatility
Tax Rate Increase Factor
----------------- ----------
<S> <C>
5% 295%
10% 317%
15% 341%
20% 369%
25% 400%
30% 436%
35% 477%
40% 525%
</TABLE>
"Municipal Obligations" shall mean "Municipal Obligations" as defined in
the Trust's registration statement on Form N-2 as filed with the Securities and
Exchange Commission on July __, 1999 (the "Registration Statement").
"Municipal Preferred" shall mean Municipal Auction Rate Cumulative
Preferred Shares, without par value, liquidation preference $25,000 per share,
of the Trust.
"Municipal Preferred Basic Maintenance Amount," as of any Valuation
Date, shall mean the dollar amount equal to the sum of (i) (A) the product of
the number of shares of Municipal Preferred outstanding on such date multiplied
by $25,000 (plus the product of the number of shares of any other series of
Preferred Shares outstanding on such date multiplied by the liquidation
preference of such shares), plus any redemption premium applicable to shares of
Municipal Preferred (or other Preferred Shares) then subject to redemption; (B)
the aggregate amount of dividends that will have accumulated at the respective
Applicable Rates (whether or not earned or declared) to (but not including) the
first respective Dividend Payment Dates for shares of Municipal Preferred
outstanding that follow such Valuation Date (plus the aggregate amount of
dividends, whether or not earned or declared, that will have accumulated in
respect of other outstanding Preferred Shares to, but not including, the first
respective dividend payment dates for such other shares that follow such
Valuation Date); (C) the aggregate amount of dividends that would accumulate on
shares of each series of Municipal Preferred outstanding from such first
respective Dividend Payment Date therefor through the 49th day after such
Valuation Date, at the Maximum Rate (calculated as if such Valuation Date were
the Auction Date for the Rate Period commencing on such Dividend Payment Date)
for a Minimum Rate Period of shares of such series to commence on such Dividend
Payment Date, assuming, solely for purposes of the foregoing, that if on such
Valuation Date the Trust shall have delivered a Notice of Special Rate Period to
the Auction Agent pursuant to paragraph 4(d)(i) of this Part I with respect to
shares of such series, such Maximum Rate shall be the higher of (a) the Maximum
Rate for the Special Rate Period of shares of such series to commence on such
Dividend Payment Date and (b) the Maximum Rate for a Minimum Rate Period of
shares of such series to commence on such Dividend Payment Date, multiplied by
the Volatility Factor applicable to a Minimum Rate Period, or, in the event the
Trust shall have delivered a Notice of
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<PAGE> 19
Special Rate Period to the Auction Agent pursuant to paragraph 4(d)(i) of this
Part I with respect to shares of such series designating a Special Rate Period
consisting of 49 Rate Period Days or more, the Volatility Factor applicable to a
Special Rate Period of that length (plus the aggregate amount of dividends that
would accumulate at the maximum dividend rate or rates on any other Preferred
Shares outstanding from such respective dividend payment dates through 49th day
after such Valuation Date, as established by or pursuant to the respective
statements establishing and fixing the rights and preferences of such other
Preferred Shares) (except that (1) if such Valuation Date occurs at a time when
a Failure to Deposit (or, in the case of Preferred Shares other than Municipal
Preferred, a failure similar to a Failure to Deposit) has occurred that has not
been cured, the dividend for purposes of calculation would accumulate at the
current dividend rate then applicable to the shares in respect of which such
failure has occurred and (2) for those days during the period described in this
subparagraph (C) in respect of which the Applicable Rate in effect immediately
prior to such Dividend Payment Date will remain in effect (or, in the case of
the Preferred Shares other than Municipal Preferred, in respect of which the
dividend rate or rates in effect immediately prior to such respective dividend
payment dates will remain in effect), the dividend for purposes of calculation
would accumulate at such Applicable Rate (or other rate or rates, as the case
may be) in respect of those days); (D) the amount of anticipated expenses of the
Trust for the 90 days subsequent to such Valuation Date; (E) the amount of the
Trust's Maximum Potential Gross-up Payment Liability in respect of shares of
Municipal Preferred (and similar amounts payable in respect of other Preferred
Shares pursuant to provisions similar to those contained in paragraph 3 of Part
I of this Section 12.1) as of such Valuation Date; and (F) any current
liabilities as of such Valuation Date to the extent not reflected in any of
(i)(A) through (i)(E) (including, without limitation, any payables for Municipal
Obligations purchased as of such Valuation Date and any liabilities incurred for
the purpose of clearing securities transactions) less (ii) the value (i.e., for
purposes of current Moody's guidelines, the face value of cash, short-term
Municipal Obligations rated MIG-1, VMIG-1 or P-1, and short-term securities that
are the direct obligation of the U.S. government, provided in each case that
such securities mature on or prior to the date upon which any of (i)(A) through
(i)(F) become payable, otherwise the Moody's Discounted Value or for purposes of
current S&P guides, the face value of cash, short-term municipal securities
rated "A-1+" or "SP-1+" and mature or have a demand feature exercisable in 30
days or less, and short-term securities that are the direct obligation of the
U.S. government, provided in each case that such securities mature on or prior
to the date upon which any of (i)(A) through (i)(F) become payable, otherwise
S&P's Discounted Value) of any of the Trust's assets irrevocably deposited by
the Trust for the payment of any of (i)(A) through (i)(F).
"Municipal Preferred Basic Maintenance Cure Date," with respect to the
failure by the Trust to satisfy the Municipal Preferred Basic Maintenance Amount
(as required by paragraph 7(a) of Part I of this Section 12.1) as a given
Valuation Date, shall mean the second Business Day following such Valuation
Date.
"Municipal Preferred Basic Maintenance Report" shall mean a report
signed by the President, Treasurer, Controller, Secretary or any Senior Vice
President or Vice President of the Trust which sets forth, as of the related
Valuation Date, the assets of the Trust, the Market Value
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<PAGE> 20
and the Discounted Value thereof (seriatim and in aggregate), and the Municipal
Preferred Basic Maintenance Amount.
"1940 Act" shall mean the Investment Company Act of 1940, as amended
from time to time.
"1940 Act Cure Date," with respect to the failure by the Trust to
maintain the 1940 Act Municipal Preferred Asset Coverage (as required by
paragraph 7 of this Part I of Section 12.1) as of the last Business Day of each
month, shall mean the last Business Day of the following month.
"1940 Act Municipal Preferred Asset Coverage" shall mean asset coverage,
as defined in Section 18(h) of the 1940 Act, of at least 200% with respect to
all outstanding senior securities of the Trust which are shares of beneficial
interest, including all outstanding shares of Municipal Preferred (or such other
asset coverage as may in the future be specified in or under the 1940 Act as the
minimum asset coverage for senior securities which are shares or stock of a
closed-end investment company as a condition of declaring dividends on its
common shares or stock).
"Notice of Redemption" shall mean any notice with respect to the
redemption of shares of Municipal Preferred pursuant to paragraph 11(c) of this
Part I of Section 12.1.
"Notice of Special Rate Period" shall mean any notice with respect to a
Special Rate Period of shares of Municipal Preferred pursuant to paragraph
4(d)(i) of this Part I of Section 12.1.
"Order" and "Orders" shall have the respective meanings specified in
paragraph 1(a) of Part II of this Section 12.1.
"Outstanding" shall mean, as of any Auction Date with respect to shares
of any series of Municipal Preferred, the number of shares of such series
theretofore issued by the Trust except, without duplication, (i) any shares of
such series theretofore canceled or delivered to the Auction Agent for
cancellation or redeemed by the Trust, (ii) any shares of such series as to
which the Trust or any Affiliate thereof shall be an Existing Holder and (iii)
any shares of such series represented by any certificate in lieu of which a new
certificate has been executed and delivered by the Trust.
"Persons" shall mean and include an individual, a partnership, a
corporation, a trust, an unincorporated association, a joint venture or other
entity or a government or any agency or political subdivision thereof.
"Potential Beneficial Owner," with respect to shares of a series of
Municipal Preferred, shall mean a customer of a Broker-Dealer that is not a
Beneficial Owner of shares of such series but that wishes to purchase shares of
such series, or that is a Beneficial Owner of shares of such series that wishes
to purchase additional shares of such series.
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<PAGE> 21
"Potential Holder," with respect to shares of a series of Municipal
Preferred, shall mean a Broker-Dealer (or any such other person as may be
permitted by the Trust) that is not an Existing Holder of shares of such series
or that is an Existing Holder of shares of such series that wishes to become the
Existing Holder of additional shares of such series.
"Preferred Shares" shall mean the preferred shares, without par value,
of the Trust, and includes the shares of Municipal Preferred.
"Quarterly Valuation Date" shall mean the last Business Day of each
February, May, August, and November of each year, commencing on August, 1999
with respect to Series F Municipal Preferred.
"Rate Multiple," for shares of a series of Municipal Preferred on any
Auction Date for shares of such series, shall mean the percentage, determined as
set forth below, based on the prevailing rating of shares of such series in
effect at the close of business on the Business Day next preceding such Auction
Date:
<TABLE>
<CAPTION>
Prevailing Rating Percentage
----------------- ----------
<S> <C>
"aa3"/AA- or higher........................................ 110%
"a3"/A-.................................................... 125%
"baa3"/BBB-................................................ 150%
"ba3"/BB-.................................................. 200%
Below "ba3"/BB-............................................ 250%
</TABLE>
provided, however, that in the event the Trust has notified the Auction Agent of
its intent to allocate income taxable for Federal income tax purposes to shares
of such series prior to the Auction establishing the Applicable Rate for shares
of such series, the applicable percentage in the foregoing table shall be
divided by the quantity 1 minus the 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.
For purposes of this definition, the "prevailing rating" of shares of a
series of Municipal Preferred shall be (i) "aa3"/AA- or higher if such shares
have a rating of "aa3" or better by Moody's and AA- or better by S&P or the
equivalent of such ratings by such agencies or a substitute rating agency or
substitute rating agencies selected as provided below, (ii) if not "aa3"/AA- or
higher, then "a3"/A- if such shares have a rating of "a3" or better by Moody's
and A- or better by S&P or the equivalent of such ratings by such agencies or a
substitute rating agency or substitute rating agencies selected as provided
below, (iii) if not "aa3"/AA- or higher or "a3"/A-, then "baa3"/BBB- if such
shares have a rating of "baa3" or better by Moody's and BBB- or better by S&P or
the equivalent of such ratings by such agencies or a substitute rating agency or
substitute rating agencies selected as provided below, (iv) if not "aa3"/AA- or
higher, "a3"/A- or "baa3"/BBB-, then "ba3"/BB- if such shares have a rating of
"ba3" or better by Moody's and BB- or better by S&P or the equivalent of such
ratings by such agencies or a
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<PAGE> 22
substitute rating agency or substitute rating agencies selected as provided
below, and (v) if not "aa3"/AA- or higher, "a3"/A-, "baa3"/BBB-, or "ba3"/BB-,
then Below "ba3"/BB-; provided, however, that if such shares are rated by only
one rating agency, the prevailing rating will be determined without reference to
the rating of any other rating agency. The Trust shall take all reasonable
action necessary to enable either S&P or Moody's to provide a rating for shares
of Municipal Preferred. If neither S&P nor Moody's shall make such a rating
available, Salomon Smith Barney, Inc. or its successor shall select at least one
nationally recognized statistical rating organization (as that term is used in
the rules and regulations of the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended from time to time) to act as a
substitute rating agency in respect of shares of such series of Municipal
Preferred, and the Trust shall take all reasonable action to enable such rating
agency to provide a rating for such shares.
"Rate Period," with respect to shares of a series of Municipal
Preferred, shall mean the Initial Rate Period of shares of such series and any
Subsequent Rate Period, including any Special Rate Period, of shares of such
series.
"Rate Period Days," for any Rate Period or Dividend Period, means the
number of days that would constitute such Rate Period or Dividend Period but for
the application of paragraph 2(d) of Part I of this Section 12.1 or paragraph
4(b) of Part I of this Section 12.1.
"Receivables for Municipal Obligations Sold" shall mean (A) for purposes
of calculating Moody's Eligible Assets as of any Valuation Date, no more than
the aggregate of the following: (i) the book value of receivables for Municipal
Obligations sold as of or prior to such Valuation Date if such receivables are
due within five business days of such Valuation Date, and if the trades which
generated such receivables are (x) settled through clearing house firms with
respect to which the Trust has received prior written authorization from Moody's
or (y) with counterparties having a Moody's long-term debt rating of at least
Baa3; and (ii) the Moody's Discounted Value of Municipal Obligations sold as of
or prior to such Valuation Date which generated receivables, if such receivables
are due within five business days of such Valuation Date but do not comply with
either of the conditions specified in (i) above, and (B) for purposes of
calculating S&P Eligible Assets as of any Valuation Date, the book value of
receivables for Municipal Obligations sold as of or prior to such Valuation Date
if such receivables are due within five business days of such Valuation Date.
"Redemption Price" shall mean the applicable redemption price specified
in paragraph 11(a) or (b) of Part I of this Section 12.1.
"Reference Rate" shall mean (i) the higher of the Taxable Equivalent of
the Short-Term Municipal Bond Rate and the "AA" Composite Commercial Paper Rate
in the case of Minimum Rate Periods and Special Rate Periods of 28 Rate Period
Days or fewer; (ii) the "AA" Composite Commercial Paper Rate in the case of
Special Rate Periods of more than 28 Rate Period Days but 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.
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<PAGE> 23
"Registration Statement" has the meaning specified in the definition of
"Municipal Obligations."
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., and its successors.
"S&P Discount Factor" shall mean, for purposes of determining the
Discounted Value of any S&P Eligible Asset, the percentage determined by
reference to the rating on such asset and the shortest S&P Exposure Period set
forth opposite such rating that is the same length as or is longer than the S&P
Exposure Period, in accordance with the table set forth below:
<TABLE>
<CAPTION>
Rating Category
-----------------------------------
Exposure Period AAA* AA* A* BBB* Unrated**
- --------------- ---- --- -- ---- ---------
<S> <C> <C> <C> <C> <C>
45 Business Days.................................... 190% 195% 210% 250% 220%
25 Business Days.................................... 170 175 190 230 220
10 Business Days.................................... 155 160 175 215 220
7 Business Days................................... 150 155 170 210 220
3 Business Days................................... 130 135 150 190 220
</TABLE>
- --------------
* S&P rating.
** S&P Eligible Assets not rated by S&P or rated less than BBB by S&P and not
rated at least the equivalent of an "A" rating by another nationally
recognized credit rating agency.
Notwithstanding the foregoing, (i) the S&P Discount Factor for short-term
Municipal Obligations will be 115%, so long as such Municipal Obligations are
rated A-1+ or SP-1+ by S&P and mature or have a demand feature exercisable
within 30 days or less, 120% if such Municipal Obligations are rated A-1 or
SP-1- by S&P and mature or have a demand feature exercisable within 30 days or
less, or 125% if such Municipal Obligations are not rated by S&P but are rated
VMIG-1, P-1 or MIG-1 by Moody's; provided, however, that any such Moody's-rated
short-term Municipal Obligations which have demand features exercisable within
30 days or less must be backed by a letter of credit, liquidity facility or
guarantee from a bank or other financial institution with a short-term rating of
at least A-1+ from S&P; and further provided that such Moody's-rated short-term
Municipal Obligations may comprise no more than 50% of short-term Municipal
Obligations that qualify as S&P Eligible Assets; (ii) no S&P Discount Factor
will be applied to cash, futures, options, Inverse Floaters and similar
instruments or to Receivables for Municipal Obligations Sold; and (iii) except
as set forth in clause (i) above, in the case of any Municipal Obligation that
is not rated by S&P but qualifies as an S&P Eligible Asset pursuant to clause
(iii) of that definition, such Municipal Obligation will be deemed to have an
S&P rating one full rating category lower than the S&P rating category that is
the equivalent of the rating category in which such Municipal Obligation is
placed by such other nationally recognized credit rating agency. For purposes of
the foregoing, Anticipation Notes rated SP-1+ or, if not rated by S&P, rated
MIG-1 or VMIG-1 by Moody's, which do not mature or have a demand feature at par
exercisable in 30 days and
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<PAGE> 24
which do not have a long-term rating, shall be considered to be short-term
Municipal Obligations.
"S&P Eligible Asset" shall mean cash (excluding any cash irrevocably
deposited by the Trust for the payment of any liabilities within the meaning of
Municipal Preferred Basic Maintenance Amount), Receivables for Municipal
Obligations Sold, futures, options, Inverse Floaters and similar instruments or
a Municipal Obligation owned by the Trust that (i) is interest bearing and pays
interest at least semi-annually; (ii) is payable with respect to principal and
interest in U.S. Dollars; (iii) is publicly rated BBB or higher by S&P or,
except in the case of Anticipation Notes that are Grant Anticipation Notes or
Bond Anticipation Notes which must be rated by S&P to be included in S&P
Eligible Assets, if not rated by S&P but rated by another nationally recognized
credit rating agency, is rated at least A by such agency; (iv) is not part of a
private placement of Municipal Obligations (except in the case of Inverse
Floaters); (v) is part of an issue of Municipal Obligations with an original
issue size of at least $20 million or, if of an issue with an original issue
size below $20 million (but in no event below $10 million), is issued by an
issuer with a total of at least $50 million of securities outstanding; and (vi)
is not subject to a covered call or covered put option written by the Trust.
Solely for purposes of this definition, the term "Municipal Obligation" means
any obligation the interest on which is exempt from regular Federal income
taxation and which is issued by any of the fifty United States, the District of
Columbia or any of the territories of the United States, their subdivisions,
counties, cities, towns, villages, school districts and agencies (including
authorities and special districts created by the states), and federally
sponsored agencies such as local housing authorities.
Notwithstanding the foregoing limitations:
(1) Municipal Obligations (excluding Escrowed Bonds) of any one
issuer or guarantor (excluding bond insurers) shall be considered S&P
Eligible Assets only to the extent the Market Value of such Municipal
Obligations does not exceed 10% of the aggregate Market Value of S&P
Eligible Assets, provided that 2% is added to the applicable S&P
Discount Factor for every 1% by which the Market Value of such Municipal
Obligations exceeds 5% of the aggregate Market Value of S&P Eligible
Assets, and provided that Municipal Obligations (excluding Escrowed
Bonds) not rated by S&P or rated less than BBB by S&P and not rated at
least A by another nationally recognized credit rating agency of any one
issuer or guarantor (excluding bond insurers) shall constitute S&P
Eligible Assets only to the extent the Market Value of such Municipal
Obligations does not exceed 5% of the aggregate Market Value of S&P
Eligible Assets;
(2) Municipal Obligations not rated at least BBB or not rated by
S&P or not rated at least A by another nationally recognized credit
rating agency shall be considered S&P Eligible Assets only to the extent
the Market Value of such Municipal Obligations does not exceed 50% of
the aggregate Market Value of S&P Eligible Assets; provided, however,
that if the Market Value of such Municipal Obligations exceeds 50% of
the aggregate Market Value of S&P Eligible Assets, a portion of such
Municipal Obligations
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<PAGE> 25
(selected by the Trust) shall not be considered S&P Eligible Assets, so
that the Market Value of such Municipal Obligations (excluding such
portion) does not exceed 50% of the aggregate Market Value of S&P
Eligible Assets;
(3) Long-term Municipal Obligations (excluding Escrowed Bonds)
issued by issuers in any one state or territory shall be considered S&P
Eligible Assets only to the extent that the Market Value of such
Municipal Obligations does not exceed 25% of the aggregate Market Value
of S&P Eligible Assets; and
(4) Municipal Obligations which are not interest bearing or do
not pay interest at least semi-annually shall be considered S&P Eligible
Assets if rated AAA by S&P.
For purposes of determining the aggregate Discounted Value of S&P's
Eligible Assets, such aggregate amount shall be reduced with respect to any
futures contracts as set forth in paragraph 10(a) of this Part I.
"S&P Exposure Period" shall mean the period commencing on a given
Valuation Date and ending three business days thereafter.
"S&P Volatility Factor" shall mean, as of any Valuation Date, a
multiplicative factor equal to (i) 305% in the case of any Minimum Rate Period
or any Special Rate Period of 28 Rate Period Days or fewer; (ii) 268% in the
case of any Special Rate Period of more than 28 Rate Period Days but fewer than
183 Rate Period Days; and (iii) 204% in the case of any Special Rate Period of
more than 182 Rate Period Days.
"Securities Depository" shall mean The Depository Trust Company and its
successors and assigns or any other securities depository selected by the Trust
which agrees to follow the procedures required to be followed by such securities
depository in connection with shares of Municipal Preferred.
"Sell Order" and "Sell Orders" shall have the respective meanings
specified in paragraph 1(a) of Part II of this Section 12.1.
"Special Rate Period," with respect to shares of a series of Municipal
Preferred, shall have the meaning specified in paragraph 4(a) of Part I of this
Section 12.1.
"Special Redemption Provisions" shall have the meaning specified in
paragraph 11(a)(i) of Part I of this Section 12.1.
"Submission Deadline" shall mean 1:30 P.M., New York City time, on any
Auction Date or such other time on any Auction Date by which Broker-Dealers are
required to submit Orders to the Auction Agent as specified by the Auction Agent
from time to time.
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<PAGE> 26
"Submitted Bid" and "Submitted Bids" shall have the respective meanings
specified in paragraph 3(a) of Part II of this Section 12.1.
"Submitted Hold Order" and "Submitted Hold Orders" shall have the
respective meanings specified in paragraph 3(a) of Part II of this Section 12.1.
"Submitted Order" and "Submitted Orders" shall have the respective
meanings specified in paragraph 3(a) of Part II of this Section 12.1.
"Submitted Sell Order" and "Submitted Sell Orders" shall have the
respective meanings specified in paragraph 3(a) of Part II of this Section 12.1.
"Subsequent Rate Period," with respect to shares of a series of
Municipal Preferred, shall mean the period from and including the first day
following the Initial Rate Period of shares of such series to but excluding the
next Dividend Payment Date for shares of such series and any period thereafter
from and including one Dividend Payment Date for shares of such series to but
excluding the next succeeding Dividend Payment Date for shares of such series;
provided, however, that if any Subsequent Rate Period is also a Special Rate
Period, such term shall mean the period commencing on the first day of such
Special Rate Period and ending on the last day of the last Dividend Period
thereof.
"Substitute Commercial Paper Dealer" shall mean CS First Boston or
Morgan Stanley & Co. Incorporated or their respective affiliates or successors,
if such entity is a commercial paper dealer; provided, however, that none of
such entities shall be a Commercial Paper Dealer.
"Substitute U.S. Government Securities Dealer" shall mean CS First
Boston and Merrill Lynch, Pierce, Fenner & Smith Incorporated or their
respective affiliates or successors, if such entity is a U.S. Government
securities dealer; provided, however, that none of such entities shall be a U.S.
Government Securities Dealer.
"Sufficient Clearing Bids" shall have the meaning specified in paragraph
3(a) of Part II of this Section 12.1.
"Taxable Allocation" shall have the meaning specified in paragraph 3 of
Part I of this Section 12.1.
"Taxable Equivalent of the Short-Term Municipal Bond Rate," on any date
for any Minimum Rate Period or Special Rate Period of 28 Rate Period Days or
fewer, shall mean 90% of the quotient of (A) the per annum rate expressed on an
interest equivalent basis equal to the S&P Kenny 30 day High Grade Index or any
successor index (the "Kenny Index") (provided, however, that any such successor
index must be approved by Moody's (if Moody's is then rating the shares of
Municipal Preferred) and S&P (if S&P is then rating the shares of Municipal
Preferred)), made available for the Business Day immediately preceding such date
but in any
-26-
<PAGE> 27
event not later than 8:30 A.M., New York City time, on such date by S&P J.J.
Kenny Evaluation Services or any successor thereto, based upon 30-day yield
evaluations at par of short-term bonds the interest on which is excludable for
regular Federal Income tax purposes under the Code, of "high grade" component
issuers selected by S&P J.J. Kenny Evaluation Services or any such successor
from time to time in its discretion, which component issuers shall include,
without limitation, issuers of general obligation bonds, but shall exclude any
bonds the interest on which constitutes an item of tax preference under Section
57(a)(5) of the Code, or successor provisions, for purposes of the "alternative
minimum tax," divided by (B) 1.00 minus the 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 S&P J.J. Kenny Evaluation Services or any successor, the Taxable
Equivalent of the Short-Term Municipal Bond Rate shall mean the quotient of (A)
the per annum rate expressed on an interest equivalent basis equal to the most
recent Kenny Index so made available for any preceding Business Day, divided by
(B) 1.00 minus the 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.
"Taxable Income" shall have the meaning specified in paragraph 3(c) of
Part II of this Section 12.1.
"Treasury Bill" shall mean a direct obligation of the U.S. Government
having a maturity at the time of issuance of 364 days or less.
"Treasury Bill Rate," on any date for any Rate Period, shall mean (i)
the bond equivalent yield, calculated in accordance with prevailing industry
convention, of the rate on the most recently auctioned Treasury Bill with a
remaining maturity closest to the length of such Rate Period, as quoted in The
Wall Street Journal on such date for the Business Day next preceding such date;
or (ii) in the event that any such rate is not published in The Wall Street
Journal, then the bond equivalent yield, calculated in accordance with
prevailing industry convention, as calculated by reference to the arithmetic
average of the bid price quotations of the most recently auctioned Treasury Bill
with a remaining maturity closest to the length of such Rate Period, as
determined by bid price quotations as of the close of business on the Business
Day immediately preceding such date obtained from the U.S. Government Securities
Dealers to the Auction Agent.
"Treasury Note" shall mean a direct obligation of the U.S. Government
having a maturity at the time of issuance of five years or less but more than
364 days.
"Treasury Note Rate," on any date for any Rate Period, shall mean (i)
the yield on the most recently auctioned Treasury Note with a remaining maturity
closest to the length of such Rate Period, as quoted in The Wall Street Journal
on such date for the Business Day next preceding such date; or (ii) in the event
that any such rate is not published in The Wall Street
-27-
<PAGE> 28
Journal, then the yield as calculated by reference to the arithmetic average of
the bid price quotations of the most recently auctioned Treasury Note with a
remaining maturity closest to the length of such Rate Period, as determined by
bid price quotations as of the close of business on the Business Day immediately
preceding such date obtained from the U.S. Government Securities Dealers to the
Auction Agent. If any U.S. Government Securities Dealer does not quote a rate
required to determine the Treasury Bill Rate of the Treasury Note Rate, the
Treasury Bill Rate or the Treasury Note Rate shall be determined on the basis of
the quotation or quotations furnished by the remaining U.S. Government
Securities Dealer or U.S. Government Securities Dealers and any Substitute U.S.
Government Securities Dealers selected by the Trust to provide such rate or
rates not being supplied by any U.S. Government Securities Dealer or U.S.
Government Securities Dealers, as the case may be, or, if the Trust does not
select any such Substitute U.S. Government Securities Dealer or Substitute U.S.
Government Securities Dealers, by the remaining U.S. Government Securities
Dealer or U.S. Government Securities Dealers.
"U.S. Government Securities Dealer" shall mean Lehman Government
Securities Incorporated, Goldman, Sachs & Co., Salomon Smith Barney Inc. and
Morgan Guaranty Trust Company of New York or their respective affiliates or
successors, if such entity is a U.S. government securities dealer.
"Valuation Date" shall mean, for purposes of determining whether the
Trust is maintaining the Municipal Preferred Basic Maintenance Amount, each
Business Day.
"Variation Margin" means, in connection with an outstanding futures
contract owned or sold by the Trust, the amount of cash or securities paid to or
received from a broker (subsequent to the Initial Margin payment) from time to
time as the price of such futures contract fluctuates.
"Volatility Factor" shall mean, as of any Valuation Date, the greater of
the Moody's Volatility Factor and the S&P Volatility Factor.
"Voting Period" shall have the meaning specified in paragraph 5(b) of
this Part I of Section 12.1.
"Winning Bid Rate" shall have the meaning specified in paragraph 3(a) of
Part II of this Section 12.1.
2. Dividends.
(a) Ranking. The shares of a series of Municipal Preferred shall rank on
a parity with each other, with shares of any other series of Municipal Preferred
and with shares of any other series of Preferred Shares as to the payment of
dividends by the Trust.
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<PAGE> 29
(b) Cumulative Cash Dividends. The Holders of shares of Municipal
Preferred of any series shall be entitled to receive, when, as and if declared
by the Board of Trustees, out of funds legally available therefor in accordance
with the Declaration, these By-laws and applicable law, cumulative cash
dividends at the Applicable Rate for shares of such series, determined as set
forth in subparagraph (e) of this paragraph 2, and no more (except to the extent
set forth in paragraph 3 of this Part I), payable on the Dividend Payment Dates
with respect to shares of such series determined pursuant to subparagraph (d) of
this paragraph 2. Holders of shares of Municipal Preferred shall not be entitled
to any dividend, whether payable in cash, property or shares, in excess of full
cumulative dividends, as herein provided, on shares of Municipal Preferred. No
interest, or sum of money in lieu of interest, shall be payable in respect of
any dividend payment or payments on shares of Municipal Preferred which may be
in arrears, and, except to the extent set forth in subparagraph (e)(i) of this
paragraph 2, no additional sum of money shall be payable in respect of any such
arrearage.
(c) Dividends Cumulative From Date of Original Issue. Dividends on
shares of Municipal Preferred of any series shall accumulate at the Applicable
Rate for shares of such series from the Date of Original Issue thereof.
(d) Dividend Payment Dates and Adjustments Thereof. The Dividend Payment
Dates with respect to shares of a series of Municipal Preferred shall be Monday,
________, 1999 and each Monday thereafter with respect to shares of Series F
Municipal Preferred; provided, however, that
(i)(A) if the Monday on which dividends would otherwise be
payable is not a Business Day, then such dividends shall be payable on
such shares on the first Business Day that falls after such Monday; and
(ii) notwithstanding the foregoing provisions of this paragraph
2(d), the Trust in its discretion may establish the Dividend Payment
Dates in respect of any Special Rate Period of shares of a series of
Municipal Preferred consisting of more than 28 Rate Period Days;
provided, however, that such dates shall be set forth in the Notice of
Special Rate Period relating to such Special Rate Period, as delivered
to the Auction Agent, which Notice of Special Rate Period shall be filed
with the Secretary of the Trust; and further provided that (1) any such
Dividend Payment Date shall be a Business Day and (2) the last Dividend
Payment Date in respect of such Special Rate Period shall be the
Business Day immediately following the last day thereof, as such last
day is determined in accordance with subparagraph (b) of paragraph 4 of
this Part I.
(e) Dividend Rates and Calculation of Dividends.
(i) Dividend Rates. The dividend rate on shares of Municipal
Preferred of any series during the period from and after the Date of
Original Issue of shares of such series to and including the last day of
the Initial Rate Period of shares of such series shall be
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equal to the rate per annum set forth with respect to shares of such
series under "Designation" in this Part I. For each Subsequent Rate
Period of shares of such series thereafter, the dividend rate on shares
of such series shall be equal to the rate per annum that results from an
Auction for shares of such series on the Auction Date next preceding
such Subsequent Rate Period; provided, however, that if:
(A) an Auction for any such Subsequent Rate Period is not
held for any reason other than as described below, the dividend
rate on shares of such series for such Subsequent Rate Period
will be the Maximum Rate for shares of such series on the Auction
Date therefor;
(B) any Failure to Deposit shall have occurred with
respect to shares of such series during any Rate Period thereof
(other than any Special Rate Period consisting of more than 364
Rate Period Days or any Rate Period succeeding any Special Rate
Period consisting of more than 364 Rate Period Days during which
a Failure to Deposit occurred that has not been cured), but,
prior to 12:00 Noon, New York City time, on the third Business
Day next succeeding the date on which such Failure to Deposit
occurred, such Failure to Deposit shall have been cured in
accordance with subparagraph (f) of this paragraph 2 and the
Trust shall have paid to the Auction Agent a late charge ("Late
Charge") equal to the sum of (1) if such Failure to Deposit
consisted of the failure timely to pay to the Auction Agent the
full amount of dividends with respect to any Dividend Period of
the shares of such series, an amount computed by multiplying (x)
200% of the Reference Rate for the Rate Period during which such
Failure to Deposit occurs on the Dividend Payment Date for such
Dividend Period by (y) a fraction, the numerator of which shall
be the number of days for which such Failure to Deposit has not
been cured in accordance with subparagraph (f) of this paragraph
2 (including the day such Failure to Deposit occurs and excluding
the day such Failure to Deposit is cured) and the denominator of
which shall be 360, and applying the rate obtained against the
aggregate Liquidation Preference of the outstanding shares of
such series and (2) if such Failure to Deposit consisted of the
failure timely to pay to the Auction Agent the Redemption Price
of the shares, if any, of such series for which Notice of
Redemption has been mailed by the Trust pursuant to paragraph
11(c) of this Part I, an amount computed by multiplying (x) 200%
of the Reference Rate for the Rate Period during which such
Failure to Deposit occurs on the redemption date by (y) a
fraction, the numerator of which shall be the number of days for
which such Failure to Deposit is not cured in accordance with
subparagraph (f) of this paragraph 2 (including the day such
Failure to Deposit occurs and excluding the day such Failure to
Deposit is cured) and the denominator of which shall be 360, and
applying the rate obtained against the aggregate Liquidation
Preference of the outstanding shares of such series to be
redeemed, no Auction will be held in respect of shares of such
series for the Subsequent Rate Period thereof and the dividend
rate for shares of such series for such Subsequent Rate Period
will be the
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Maximum Rate for shares of such series on the Auction Date for
such Subsequent Rate Period;
(C) any Failure to Deposit shall have occurred with
respect to shares of such series during any Rate Period thereof
(other than any Special Rate Period consisting of more than 364
Rate Period Days or any Rate Period succeeding any Special Rate
Period consisting of more than 364 Rate Period Days during which
a Failure to Deposit occurred that has not been cured), and,
prior to 12:00 Noon, New York City time, on the third Business
Day next succeeding the date on which such Failure to Deposit
occurred, such Failure to Deposit shall not have been cured in
accordance with subparagraph (f) of this paragraph 2 or the Trust
shall not have paid the applicable Late Charge to the Auction
Agent, no Auction will be held in respect of shares of such
series for the first Subsequent Rate Period thereof thereafter
(or for any Rate Period thereof thereafter to and including the
Rate Period during which (1) such Failure to Deposit is cured in
accordance with subparagraph (f) of this paragraph 2 and (2) the
Trust pays the applicable Late Charge to the Auction Agent (the
condition set forth in this clause (2) to apply only in the event
Moody's is rating such shares at the time the Trust cures such
Failure to Deposit), in each case no later than 12:00 Noon, New
York City time, on the fourth Business Day prior to the end of
such Rate Period), and the dividend rate for shares of such
series for each such Subsequent Rate Period shall be a rate per
annum equal to the Maximum Rate for shares of such series on the
Auction Date for such Subsequent Rate Period (but with the
prevailing rating for shares of such series, for purposes of
determining such Maximum Rate, being deemed to be "Below
'ba3'/BB-"); or
(D) any Failure to Deposit shall have occurred with
respect to shares of such series during a Special Rate Period
thereof consisting of more than 364 Rate Period Days, or during
any Rate Period thereof succeeding any Special Rate Period
consisting of more than 364 Rate Period Days during which a
Failure to Deposit occurred that has not been cured, and, prior
to 12:00 Noon, New York City time, on the fourth Business Day
preceding the Auction Date for the Rate Period subsequent to such
Rate Period, such Failure to Deposit shall not have been cured in
accordance with subparagraph (f) of this paragraph 2 or, in the
event Moody's is then rating such shares, the Trust shall not
have paid the applicable Late Charge to the Auction Agent (such
Late Charge, for purposes of this subparagraph (D), to be
calculated by using, as the Reference Rate, the Reference Rate
applicable to a Rate Period (x) consisting of more than 182 Rate
Period Days but fewer than 365 Rate Period Days and (y)
commencing on the date on which the Rate Period during which
Failure to Deposit occurs commenced), no Auction will be held in
respect of shares of such series for such Subsequent Rate Period
(or for any Rate Period thereof thereafter to and including the
Rate Period during which (1) such Failure to Deposit is cured in
accordance with subparagraph (f) of
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this paragraph 2 and (2) the Trust pays the applicable Late
Charge to the Auction Agent (the condition set forth in this
clause (2) to apply only in the event Moody's is rating such
shares at the time the Trust cures such Failure to Deposit), in
each case no later than 12:00 Noon, New York City time, on the
fourth Business Day prior to the end of such Rate Period), and
the dividend rate for shares of such series for each such
Subsequent Rate Period shall be a rate per annum equal to the
Maximum Rate for shares of such series on the Auction Date for
such Subsequent Rate Period (but with the prevailing rating for
shares of such series, for purposes of determining such Maximum
Rate, being deemed to be "Below 'ba3'/BB-") (the rate per annum
of which dividends are payable on shares of a series of Municipal
Preferred for any Rate Period thereof being herein referred to as
the "Applicable Rate" for shares of such series).
(ii) Calculation of Dividends. The amount of dividends per share
payable on shares of a series of Municipal Preferred on any date on
which dividends shall be payable on shares of such series shall be
computed by multiplying the Applicable Rate for shares of such series in
effect for such Dividend Period or Dividend Periods or part thereof for
which dividends have not been paid by a fraction, the numerator of which
shall be the number of days in such Dividend Period or Dividend Periods
or part thereof and the denominator of which shall be 365 if such
Dividend Period consists of 7 Rate Period Days and 360 for all other
Dividend Periods, and applying the rate obtained against $25,000.
(f) Curing a Failure to Deposit. A Failure to Deposit with respect to
shares of a series of Municipal Preferred shall have been cured (if such Failure
to Deposit is not solely due to the willful failure of the Trust to make the
required payments to the Auction Agent) with respect to any Rate Period of
shares of such series if, within the respective time periods described in
subparagraph (e)(i) of this paragraph 2, the Trust shall have paid to the
Auction Agent (A) all accumulated and unpaid dividends on shares of such series
and (B) without duplication, the Redemption Price for shares, if any, of such
series for which Notice of Redemption has been mailed by the Trust pursuant to
paragraph 11(c) of Part I of this Section 12.1 of the By-laws; provided,
however, that the foregoing clause (B) shall not apply to the Trust's failure to
pay the Redemption Price in respect of shares of Municipal Preferred when the
related Redemption Notice provides that redemption of such shares is subject to
one or more conditions precedent and any such condition precedent shall not have
been satisfied at the time or times and in the manner specified in such Notice
of Redemption.
(g) Dividend Payments by Trust to Auction Agent. The Trust shall pay to
the Auction Agent, not later than 12:00 Noon, New York City time, on the
Business Day next preceding each Dividend Payment Date for shares of a series of
Municipal Preferred, an aggregate amount of funds available on the next Business
Day in The City of New York, New York, equal to the dividends to be paid to all
Holders of shares of such series on such Dividend Payment Date.
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(h) Auction Agent as Trustee of Dividend Payments by Trust. All moneys
paid to the Auction Agent for the payment of dividends (or for the payment of
any Late Charge) shall be held in trust for the payment of such dividends (and
any such Late Charge) by the Auction Agent for the benefit of the Holders
specified in subparagraph (i) of this paragraph 2. Any moneys paid to the
Auction Agent in accordance with the foregoing but not applied by the Auction
Agent to the payment of dividends (and any such Late Charge) will, to the extent
permitted by law, be repaid to the Trust at the end of 90 days from the date on
which such moneys were so to have been applied.
(i) Dividends Paid to Holders. Each dividend on shares of Municipal
Preferred shall be paid on the Dividend Payment Date therefor to the Holders
thereof as their names appear on the record books of the Trust on the Business
Day next preceding such Dividend Payment Date.
(j) Dividends Credited Against Earliest Accumulated But Unpaid
Dividends. Any dividend payment made on shares of Municipal Preferred shall
first be credited against the earliest accumulated but unpaid dividends due with
respect to such shares. Dividends in arrears for any past Dividend Period may be
declared and paid at any time, without reference to any regular Dividend Payment
Date, to the Holders as their names appear on the record books of the Trust on
such date, not exceeding 15 days preceding the payment date thereof, as may be
fixed by the Board of Trustees.
(k) Dividends Designated as Exempt-Interest Dividends. Dividends on
shares of Municipal Preferred shall be designated as exempt-interest dividends
up to the amount of tax-exempt income of the Trust, to the extent permitted by,
and for purposes of, Section 852 of the Code.
3. Gross-up Payments.
Holders of shares of Municipal Preferred shall be entitled to receive,
when, as and if declared by the Board of Trustees, out of funds legally
available therefor in accordance with the Declaration, these By-laws and
applicable law, dividends in an amount equal to the aggregate Gross-up Payments
as follows:
(a) Minimum Rate Periods and Special Rate Periods of 28 Rate Period Days
or Fewer. If, in the case of any Minimum Rate Period or any Special Rate Period
of 28 Rate Period Days or fewer, the Trust allocates any net capital gain or
other income taxable for Federal income tax purposes to a dividend paid on
shares of Municipal Preferred without having given advance notice thereof to the
Auction Agent as provided in paragraph 5 of Part II of this Section of the
By-laws (such allocation being referred to herein as a "Taxable Allocation")
solely by reason of the fact that such allocation is made retroactively as a
result of the redemption of all or a portion of the outstanding shares of
Municipal Preferred or the liquidation of the Trust, the Trust shall, prior to
the end of the calendar year in which such dividend was paid, provide notice
thereof to the Auction Agent and direct the Trust's dividend disbursing agent to
send such notice with a
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Gross-up Payment to each Holder of such shares that was entitled to such
dividend payment during such calendar year at such Holder's address as the same
appears or last appeared on the record books of the Trust.
(b) Special Rate Periods of More Than 28 Rate Period Days. If, in the
case of any Special Rate Period of more than 28 Rate Period Days, the Trust
makes a Taxable Allocation to a dividend paid on shares of Municipal Preferred,
the Trust shall, prior to the end of the calendar year in which such dividend
was paid, provide notice thereof to the Auction Agent and direct the Trust's
dividend disbursing agent to send such notice with a Gross-up Payment to each
Holder of shares that was entitled to such dividend payment during such calendar
year at such Holder's address as the same appears or last appeared on the record
books of the Trust.
(c) No Gross-up Payments In the Event of a Reallocation. The Trust shall
not be required to make Gross-up Payments with respect to any net capital gain
or other taxable income determined by the Internal Revenue Service to be
allocable in a manner different from that allocated by the Trust.
4. Designation of Special Rate Periods.
(a) Length of and Preconditions for Special Rate Period. The Trust, at
its option, may designate any succeeding Subsequent Rate Period of shares of a
series of Municipal Preferred as a Special Rate Period consisting of a specified
number of Rate Period Days evenly divisible by seven and not more than 1,820,
subject to adjustment as provided in subparagraph (b) of this paragraph 4. A
designation of a Special Rate Period shall be effective only if (A) notice
thereof shall have been given in accordance with subparagraphs (c) and (d)(i) of
this paragraph 4, (B) an Auction for shares of such series shall have been held
on the Auction Date immediately preceding the first day of such proposed Special
Rate Period and Sufficient Clearing Bids for shares of such series shall have
existed in such Auction, and (C) if any Notice of Redemption shall have been
mailed by the Trust pursuant to paragraph 11(c) of this Part I with respect to
any shares of such series, the Redemption Price with respect to such shares
shall have been deposited with the Auction Agent. In the event the Trust wishes
to designate any succeeding Subsequent Rate Period for shares of a series of
Municipal Preferred as a Special Rate Period consisting of more than 28 Rate
Period Days, the Trust shall notify S&P (if S&P is then rating such series) and
Moody's (if Moody's is then rating such series) in advance of the commencement
of such Subsequent Rate Period that the Trust wishes to designate such
Subsequent Rate Period as a Special Rate Period and shall provide S&P (if S&P is
then rating such series) and Moody's (if Moody's is then rating such series)
with such documents as either may request.
(b) Adjustment of Length of Special Rate Period. In the event the Trust
wishes to designate a Subsequent Rate Period as a Special Rate Period, but the
day following what would otherwise be the last day of such Special Rate Period
is not (a) a Monday that is a Business Day in the case of a series of Municipal
Preferred designated as "Series F Municipal Preferred" in this Part I, then the
Trust shall designate such Subsequent Rate Period as a Special Rate Period
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consisting of the period commencing on the first day following the end of the
immediately preceding Rate Period and ending on the first Sunday that is
followed by a Monday that is a Business Day preceding what would otherwise be
such last day, in the case of Series F Municipal Preferred.
(c) Notice of Proposed Special Rate Period. If the Trust proposes to
designate any succeeding Subsequent Rate Period of shares of a series of
Municipal Preferred as a Special Rate Period pursuant to subparagraph (a) of
this paragraph 4, not less than 20 (or such lesser number of days as may be
agreed to from time to time by the Auction Agent) nor more than 30 days prior to
the date the Trust proposes to designate as the first day of such Special Rate
Period (which shall be such day that would otherwise be the first day of a
Minimum Rate Period), notice shall be (i) published or caused to be published by
the Trust in a newspaper of general circulation to the financial community in
The City of New York, New York, which carries financial news, and (ii) mailed by
the Trust by first-class mail, postage prepaid, to the Holders of shares of such
series. Each such notice shall state (A) that the Trust may exercise its option
to designate a succeeding Subsequent Rate Period of shares of such series as a
Special Rate Period, specifying the first day thereof and (B) that the Trust
will, by 11:00 A.M., New York City time, on the second Business Day next
preceding such date (or by such later time or date, or both, as may be agreed to
by the Auction Agent) notify the Auction Agent of either (x) its determination,
subject to certain conditions, to exercise such option, in which case the Trust
shall specify the Special Rate Period designated, or (y) its determination not
to exercise such option.
(d) Notice of Special Rate Period. No later than 11:00 A.M., New York
City time, on the second Business Day next preceding the first day of any
proposed Special Rate Period of shares of a series of Municipal Preferred as to
which notice has been given as set forth in subparagraph (c) of this paragraph 4
(or such later time or date, or both, as may be agreed to by the Auction Agent),
the Trust shall deliver to the Auction Agent either:
(i) a notice ("Notice of Special Rate Period") stating (A) that
the Trust has determined to designate the next succeeding Rate Period of
shares of such series as a Special Rate Period, specifying the same and
the first day thereof, (B) the Auction Date immediately prior to the
first day of such Special Rate Period, (C) that such Special Rate Period
shall not commence if (1) an Auction for shares of such series shall not
be held on such Auction Date for any reason or (2) an Auction for shares
of such series shall be held on such Auction Date but Sufficient
Clearing Bids for shares of such series shall not exist in such Auction,
(D) the scheduled Dividend Payment Dates for shares of such series
during such Special Rate Period and (E) the Special Redemption
Provisions, if any, applicable to shares of such series in respect of
such Special Rate Period; such notice to be accompanied by a Municipal
Preferred Basic Maintenance Report showing that, as of the third
Business Day next preceding such proposed Special Rate Period, Moody's
Eligible Assets (if Moody's is then rating such series) and S&P Eligible
Assets (if S&P is then rating such series) each have an aggregate
Discounted Value at least equal to the Municipal Preferred Basic
Maintenance Amount as of such Business Day (assuming for
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purposes of the foregoing calculation that (a) the Maximum Rate is the
Maximum Rate on such Business Day as if such Business Day were the
Auction Date for the proposed Special Rate Period, and (b) the Moody's
Discount Factors applicable to Moody's Eligible Assets are determined by
reference to the first Exposure Period longer than the Exposure Period
then applicable to the Trust, as described in the definition of Moody's
Discount Factor herein); or
(ii) a notice stating that the Trust has determined not to
exercise its option to designate a Special Rate Period of shares of such
series and that the next succeeding Rate Period of shares of such series
shall be a Minimum Rate Period.
(e) Failure to Deliver Notice of Special Rate Period. If the Trust fails
to deliver either of the notices described in subparagraphs (d)(i) or (d)(ii) of
this paragraph 4 (and, in the case of the notice described in subparagraph
(d)(i) of this paragraph 4, a Municipal Preferred Basic Maintenance Report to
the effect set forth in such subparagraph (if either Moody's or S&P is then
rating the series in question)) with respect to any designation of any proposed
Special Rate Period to the Auction Agent by 11:00 A.M., New York City time, on
the second Business Day next preceding the first day of such proposed Special
Rate Period (or by such later time or date, or both, as may be agreed to by the
Auction Agent), the Trust shall be deemed to have delivered a notice to the
Auction Agent with respect to such Special Rate Period to the effect set forth
in subparagraph (d)(ii) of this paragraph 4. In the event the Trust delivers to
the Auction Agent a notice described in subparagraph (d)(i) of this paragraph 4,
it shall file a copy of such notice with the Secretary of the Trust, and the
contents of such notice shall be binding on the Trust. In the event the Trust
delivers to the Auction Agent a notice described in subparagraph (d)(ii) of this
paragraph 4, the Trust will provide Moody's (if Moody's is then rating the
series in question) and S&P (if S&P is then rating the series in question) a
copy of such notice.
5. Voting Rights.
(a) One Vote Per Share of Municipal Preferred. Except as otherwise
provided in the Declaration, this paragraph 5 or as otherwise required by law,
(i) each Holder of shares of Municipal Preferred shall be entitled to one vote
for each share of Municipal Preferred held by such Holder on each matter
submitted to a vote of shareholders of the Trust, and (ii) the holders of
outstanding Preferred Shares, including each share of Municipal Preferred, and
of Common Shares shall vote together as a single class; provided, however, that,
at any meeting of the shareholders of the Trust held for the election of
trustees, the holders of outstanding Preferred Shares, including Municipal
Preferred, represented in person or by proxy at said meeting, shall be entitled,
as a class, to the exclusion of the holders of all other securities and classes
of shares of beneficial interest of the Trust, to elect two trustees of the
Trust, each Preferred Share, including each share of Municipal Preferred,
entitling the holder thereof to one vote. Subject to subparagraph (b) of this
paragraph 5, the holders of outstanding Common Shares and Preferred Shares,
including Municipal Preferred, voting together as a single class, shall elect
the balance of the trustees.
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(b) Voting For Additional Trustees.
(i) Voting Period. During any period in which any one or more of
the conditions described in subparagraphs (A) or (B) of this
subparagraph (b)(i) shall exist (such period being referred to herein as
a "Voting Period"), the number of trustees constituting the Board of
Trustees shall be automatically increased by the smallest number that,
when added to the two trustees elected exclusively by the holders of
Preferred Shares, including shares of Municipal Preferred, would
constitute a majority of the Board of Trustees as so increased by such
smallest number; and the holders of Preferred Shares, including
Municipal Preferred, shall be entitled, voting as a class on a
one-vote-per-share basis (to the exclusion of the holders of all other
securities and classes of shares of beneficial interest of the Trust),
to elect such smallest number of additional trustees, together with the
two trustees that such holders are in any event entitled to elect. A
Voting Period shall commence:
(A) if at the close of business on any dividend payment
date accumulated dividends (whether or not earned or declared) on
any outstanding Preferred Share, including Municipal Preferred,
equal to at least two full years' dividends shall be due and
unpaid and sufficient cash or specified securities shall not have
been deposited with the Auction Agent for the payment of such
accumulated dividends; or
(B) if at any time holders of Preferred Shares are
entitled under the 1940 Act to elect a majority of the trustees
of the Trust.
Upon the termination of a Voting Period, the voting rights described in this
subparagraph (b)(i) shall cease, subject always, however, to the revesting of
such voting rights in the Holders upon the further occurrence of any of the
events described in this subparagraph (b)(i).
(ii) Notice of Special Meeting. As soon as practicable after the
accrual of any right of the holders of Preferred Shares to elect
additional trustees as described in subparagraph (b)(i) of this
paragraph 5, the Trust shall notify the Auction Agent and the Auction
Agent shall call a special meeting of such holders, by mailing a notice
of such special meeting to such holders, such meeting to be held not
less than 10 nor more than 20 days after the date of mailing of such
notice. If the Trust fails to send such notice to the Auction Agent or
if the Auction Agent does not call such a special meeting, it may be
called by any such holder on like notice. The record date for
determining the holders entitled to notice of and to vote at such
special meeting shall be the close of business on the fifth Business Day
preceding the day on which such notice is mailed. At any such special
meeting and at each meeting of holders of Preferred Shares held during a
Voting Period at which trustees are to be elected, such holders, voting
together as a class (to the exclusion of the holders of all other
securities and classes of shares of beneficial interest
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of the Trust), shall be entitled to elected the number of trustees
prescribed in subparagraph (b)(i) of this paragraph 5 on a
one-vote-per-share basis.
(iii) Terms of Office of Existing Trustees. The terms of office
of all persons who are trustees of the Trust at the time of a special
meeting of Holders and holders of other Preferred Shares to elect
trustees shall continue, notwithstanding the election at such meeting by
the Holders and such other holders of the number of trustees that they
are entitled to elect, and the persons so elected by the Holders and
such other holders, together with the two incumbent trustees elected by
the Holders and such other holders of Preferred Shares and the remaining
incumbent trustees elected by the Holders of the Common Shares and
Preferred Shares, shall constitute the duly elected trustees of the
Trust.
(iv) Terms of Office of Certain Trustees to Terminate Upon
Termination of Voting Period. Simultaneously with the termination of a
Voting Period, the term of office of the additional trustees elected by
the Holders and holders of other Preferred Shares pursuant to
subparagraph (b)(i) of this paragraph 5 shall terminate, the remaining
trustees shall constitute the trustees of the Trust and the voting
rights of the Holders and such other holders to elect additional
trustees pursuant to subparagraph (b)(i) of this paragraph 5 shall
cease, subject to the provisions of the last sentence of subparagraph
(b)(i) of this paragraph 5.
(c) Holders of Municipal Preferred To Vote on Certain Other Matters.
(i) Increases in Capitalization. So long as any shares of
Municipal Preferred are outstanding, the Trust shall not, without the
affirmative vote or consent of the Holders of at least a majority of the
shares of Municipal Preferred outstanding at the time, in person or by
proxy, either in writing or at a meeting, voting as a separate class:
(a) authorize, create or issue any class or series of shares ranking
prior to or on a parity with shares of Municipal Preferred with respect
to the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Trust, or
authorize, create or issue additional shares of any series of Municipal
Preferred (except that, notwithstanding the foregoing, but subject to
the provisions of paragraph 10(c) of this Part I, the Board of Trustees,
without the vote or consent of the Holders of Municipal Preferred, may
from time to time authorize and create, and the Trust may from time to
time issue, additional shares of any series of Municipal Preferred or
classes or series of Preferred Shares ranking on a parity with shares of
Municipal Preferred with respect to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up of
the affairs of the Trust; provided, however, that if Moody's or S&P is
not then rating the shares of Municipal Preferred, the aggregate
liquidation preference of all Preferred Shares of the Trust outstanding
after any such issuance, exclusive of accumulated and unpaid dividends,
may not exceed $90,000,000) or (b) amend, alter or repeal the provisions
of the Declaration or the By-Laws, including this Section 12.1,
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whether by merger, consolidation or otherwise, so as to materially
affect any preference, right or power of such shares of Municipal
Preferred to the Holders thereof; provided, however, that (i) none of
the actions permitted by the exception to (a) above will be deemed to
affect such preferences, rights or powers, (ii) a division of a share of
Municipal Preferred will be deemed to affect such preferences, rights or
powers only if the terms of such division adversely affect the Holders
of shares of Municipal Preferred and (iii) the authorization, creation
and issuance of classes or series of shares ranking junior to shares of
Municipal Preferred with respect to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up of
the affairs of the Trust, will be deemed to affect such preferences,
rights or powers only if Moody's or S&P is then rating shares of
Municipal Preferred and such issuance would, at the time thereof, cause
the Trust not to satisfy the 1940 Act Municipal Preferred Asset Coverage
or the Municipal Preferred Basic Maintenance Amount. So long as any
shares of Municipal Preferred are outstanding, the Trust shall not,
without the affirmative vote or consent of the Holders of at least 66
2/3% of the shares of Municipal Preferred outstanding at the time, in
person or by proxy, either in writing or at a meeting, voting as 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 above would adversely affect the rights of one ore 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 or consent of
the Holders of at least a majority of the shares of each such Affected
Series outstanding at the time, in person or by proxy, either in writing
or at a meeting (each such Affected Series voting at a separate class).
(ii) 1940 Act Matters. Unless a higher percentage is provided for
in the Declaration or these By-laws, (A) the affirmative vote of the
Holders of at least a majority of the Preferred Shares, including
Municipal Preferred, outstanding at the time, voting as a separate
class, shall be required to approve any conversion of the Trust from a
closed-end to an open-end investment company and (B) the affirmative
vote of the Holders of a "majority of the outstanding Preferred Shares,"
including Municipal Preferred, voting as a separate class, shall be
required to approve any plan of reorganization (as such term is used in
the 1940 Act) adversely affecting such shares. The affirmative vote of
the Holders of a "majority of the outstanding Preferred Shares,"
including Municipal Preferred, voting as a separate class, shall be
required to approve any action not described in the first sentence of
this paragraph 5(c)(ii) requiring a vote of security holders of the
Trust under Section 13(a) of the 1940 Act. For purposes of the
foregoing, "majority of the outstanding Preferred Shares" means (i) 67%
or more of such shares present at a meeting, if the Holders of more than
50% of such shares are present or represented by proxy, or (ii) more
than 50% of such shares, whichever is less. In the event a vote of
Holders of Municipal Preferred is required pursuant to the provisions of
Section 13(a) of the 1940 Act, the Trust shall, not later than ten
business Days prior to the date on which such vote is to be taken,
notify Moody's (if Moody's is then rating the shares of Municipal
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Preferred) and S&P (if S&P is then rating the shares of Municipal
Preferred) that such vote is to be taken and the nature of the action
with respect to which such vote is to be taken. The Trust shall, not
later than ten Business Days after the date on which such vote is taken,
notify Moody's (if Moody's is then rating the shares of Municipal
Preferred) of the results of such vote.
(d) Board May Take Certain Actions Without Shareholder Approval. The
Board of Trustees, without the vote or consent of the shareholders of the Trust,
may from time to time amend, alter or repeal any or all of the definitions of
the terms listed below, or any provision of this Section 12.1 of the By-laws
viewed by Moody's or S&P as a predicate for any such definition, and any such
amendment, alteration or repeal will not be deemed to affect the preferences,
rights or powers of shares of Municipal Preferred or the Holders thereof;
provided, however, that the Board of Trustees receives written confirmation from
Moody's (such confirmation being required to be obtained only in the event
Moody's is rating the shares of Municipal Preferred and in no event being
required to be obtained in the case of the definitions of (x) Deposit
Securities, Discounted Value, Receivables for Municipal Obligations Sold and
Other Issues as such terms apply to S&P Eligible Asset and (y) S&P Discount
Factor, S&P Eligible Asset, S&P Exposure Period, S&P Volatility Factor) and S&P
(such confirmation being required to be obtained only in the event S&P is rating
the shares of Municipal Preferred and in no event being required to be obtained
in the case of the definitions of (x) Discounted Value, Receivables for
Municipal Obligations Sold and Other Issues as such terms apply to Moody's
Eligible Asset, and (y) Moody's Discount Factor, Moody's Eligible Asset, Moody's
Exposure Period and Moody's Volatility Factor) that any such amendment,
alteration or repeal would not impair the ratings then assigned by Moody's or
S&P, as the case may be, to shares of Municipal Preferred:
<TABLE>
<S> <C>
Deposit Securities Moody's Exposure Period
Discounted Value Moody's Volatility Factor
Escrowed Bonds 1940 Act Cure Date
Market Value 1940 Act Municipal Preferred Asset
Maximum Potential Gross-up Coverage
Payment Liability Other Issues
Municipal Preferred Basic Quarterly Valuation Date
Maintenance Amount Receivables for Municipal
Municipal Preferred Basic Obligations Sold
Maintenance Cure Date S&P Discount Factor
Municipal Preferred Basic S&P Eligible Asset
Maintenance Report S&P Exposure Period
Moody's Discount Factor S&P Volatility Factor
Moody's Eligible Asset Valuation Date
Volatility Factor
</TABLE>
(e) Voting Rights Set Forth Herein Are Sole Voting Rights. Unless
otherwise required by law, these By-laws or by the Declaration, the Holders of
shares of Municipal Preferred shall
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not have any relative rights or preferences or other special rights other than
those specifically set forth herein.
(f) No Preemptive Rights or Cumulative Voting. The Holders of shares of
Municipal Preferred shall have no preemptive rights or rights to cumulative
voting.
(g) Voting for Trustees Sole Remedy for Trust's Failure to Pay
Dividends. In the event that the Trust fails to pay any dividends on the shares
of Municipal Preferred, the exclusive remedy of the Holders shall be the right
to vote for Trustees pursuant to the provisions of this paragraph 5.
(h) Holders Entitled to Vote. For purposes of determining any rights of
the Holders to vote on any matter, whether such right is created by this Section
12.1, by the other provisions of these By-laws or the Declaration, by statute or
otherwise, no Holder shall be entitled to vote any share of Municipal Preferred
and no share of Municipal Preferred shall be deemed to be "outstanding" for the
purpose of voting or determining the number of shares required to constitute a
quorum if, prior to or concurrently with the time of determination of shares
entitled to vote or shares deemed outstanding for quorum purposes, as the case
may be, the requisite Notice of Redemption with respect to such shares shall
have been mailed as provided in paragraph 11(c) of this Part I and the
Redemption Price for the redemption of such shares shall have been deposited in
trust with the Auction Agent for that purpose. No shares of Municipal Preferred
held by the Trust or any affiliate of the Trust (except for shares held by a
Broker-Dealer that is an affiliate of the Trust for the account of its
customers) shall have any voting rights or be deemed to be outstanding for
voting or other purposes.
6. 1940 Act Municipal Preferred Asset Coverage.
The Trust shall maintain, as of the last Business Day of each month in
which any share of Municipal Preferred is outstanding, the 1940 Act Municipal
Preferred Asset Coverage.
7. Municipal Preferred Basic Maintenance Amount.
(a) So long as shares of Municipal Preferred are outstanding, the Trust
shall maintain, on each Valuation Date, and shall verify to its satisfaction
that it is maintaining on such Valuation Date, (i) S&P Eligible Assets having an
aggregate Discounted Value equal to or greater than the Municipal Preferred
Basic Maintenance Amount (if S&P is then rating the shares of Municipal
Preferred) and (ii) Moody's Eligible Assets having an aggregate Discounted Value
equal to or greater than the Municipal Preferred Basic Maintenance Amount (if
Moody's is then rating the shares of Municipal Preferred).
(b) On or before 5:00 P.M., New York City time, on the third Business
Day after a Valuation Date on which the Trust fails to satisfy the Municipal
Preferred Basic Maintenance Amount, and on the third Business Day after the
Municipal Preferred Basic Maintenance Cure
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Date with respect to such Valuation Date, the Trust shall complete and deliver
to S&P (if S&P is then rating the shares of Municipal Preferred), Moody's (if
Moody's is then rating the shares of Municipal Preferred) and the Auction Agent
(if either S&P or Moody's is then rating the shares of Municipal Preferred) a
Municipal Preferred Basic Maintenance Report as of the date of such failure or
such Municipal Preferred Basic Maintenance Cure Date, as the case may be, which
will be deemed to have been delivered to the Auction Agent if the Auction Agent
receives a copy of telecopy, telex or other electronic transcription thereof and
on the same day the Trust mails to the Auction Agent for delivery on the next
Business Day the full Municipal Preferred Basic Maintenance Report.
The Trust shall also deliver a Municipal Preferred Basic Maintenance
Report to (i) the Auction Agent (if either Moody's or S&P is then rating the
shares of Municipal Preferred) as of (A) the fifteenth day of each month (or, if
such day is not a Business Day, the next succeeding Business Day) and (B) the
last Business Day of each month, (ii) Moody's (if Moody's is then rating the
shares of Municipal Preferred) and S&P (if S&P is then rating the shares of
Municipal Preferred) as of any Quarterly Valuation Date, in each case on or
before the third Business Day after such day, and (iii) S&P, if and when
requested for any Valuation Date, on or before the third Business Day after such
request. A failure by the Trust to deliver a Municipal Preferred Basic
Maintenance Report pursuant to the preceding sentence shall be deemed to be
delivery of a Municipal Preferred Basic Maintenance Report indicating the
Discounted Value for all assets of the Trust is less than the Municipal
Preferred Basic Maintenance Amount, as of the relevant Valuation Date.
(c) Within ten Business Days after the date of delivery of a Municipal
Preferred Basic Maintenance Report in accordance with subparagraph (b) of this
paragraph 7 relating to a Quarterly Valuation Date, the Trust shall cause the
Independent Accountant to confirm in writing to S&P (if S&P is then rating the
shares of Municipal Preferred), Moody's (if Moody's is then rating the shares of
Municipal Preferred) and the Auction Agent (if either S&P or Moody's is then
rating the shares of Municipal Preferred) (i) the mathematical accuracy of the
calculations reflected in such Report (and in any other Municipal Preferred
Basic Maintenance Report, randomly selected by the Independent Accountant, that
was delivered by the Trust during the quarter ending on such Quarterly Valuation
Date) and (ii) that, in such Report (and in such randomly selected Report), the
Trust determined in accordance with this paragraph whether the Trust had, at
such Quarterly Valuation Date (and at the Valuation Date addressed in such
randomly-selected Report), S&P Eligible Assets (if S&P is then rating the shares
of Municipal Preferred) of an aggregate Discounted Value at least equal to the
Municipal Preferred Basic Maintenance Amount and Moody's Eligible Assets (if
Moody's is then rating the shares of Municipal Preferred) of an aggregate
Discounted Value at least equal to the Municipal Preferred Basic Maintenance
Amount (such confirmation being herein called the "Accountant's Confirmation").
(d) Within ten Business Days after the date of delivery of a Municipal
Preferred Basic Maintenance Report in accordance with subparagraph (b) of this
paragraph 7 relating to any
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Valuation Date on which the Trust failed to satisfy the Municipal Preferred
Basic Maintenance Amount, and relating to the Municipal Preferred Basic
Maintenance Cure Date with respect to such failure to satisfy the Municipal
Preferred Basic Maintenance Amount, the Trust shall cause the Independent
Accountant to provide to S&P (if S&P is then rating the shares of Municipal
Preferred), Moody's (if Moody's is then rating the shares of Municipal
Preferred) and the Auction Agent (if either S&P or Moody's is then rating the
shares of Municipal Preferred) an Accountant's Confirmation as to such Municipal
Preferred Basic Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to subparagraph
(c) or (d) of this paragraph 7 shows that an error was made in the Municipal
Preferred Basic Maintenance Report for a particular Valuation Date for which
such Accountant's Confirmation was required to be delivered, or shows that a
lower aggregate Discounted Value for the aggregate of all S&P Eligible Assets
(if S&P is then rating the shares of Municipal Preferred) or Moody's Eligible
Assets (if Moody's is then rating the shares of Municipal Preferred), as the
case may be, of the Trust was determined by the Independent Accountant, the
calculation or determination made by such Independent Accountant shall be final
and conclusive and shall be binding on the Trust, and the Trust shall
accordingly amend and deliver the Municipal Preferred Basic Maintenance Report
to S&P (if S&P is then rating the shares of Municipal Preferred), Moody's (if
Moody's is then rating the shares of Municipal Preferred) and the Auction Agent
(if either S&P or Moody's is then rating the shares of Municipal Preferred)
promptly following receipt by the Trust of such Accountant's Confirmation.
(f) On or before 5:00 p.m., New York City time, on the first Business
Day after the Date of Original Issue of any shares of Municipal Preferred, the
Trust shall complete and deliver to S&P (if S&P is then rating the shares of
Municipal Preferred) and Moody's (if Moody's is then rating the shares of
Municipal Preferred) a Municipal Preferred Basic Maintenance Report as of the
close of business on such Date of Original Issue. Within five Business Days of
such Date of Original Issue, the Trust shall cause the Independent Accountant to
confirm in writing to S&P (if S&P is then rating the shares of Municipal
Preferred) (i) the mathematical accuracy of the calculations reflected in such
Report and (ii) that the Discounted Value of S&P Eligible Assets reflected
thereon equals or exceeds the Municipal Preferred Basic Maintenance Amount
reflected thereon.
(g) On or before 5:00 p.m., New York City time, on the third Business
Day after either (i) the Trust shall have redeemed Common Shares or (ii) the
ratio of the Discounted Value of S&P Eligible Assets or the Discounted Value of
Moody's Eligible Assets to the Municipal Preferred Basic Maintenance Amount is
less than or equal to 105%, the Trust shall complete and deliver to S&P (if S&P
is then rating the shares of Municipal Preferred) or Moody's (if Moody's is then
rating the shares of Municipal Preferred), as the case may be, a Municipal
Preferred Basic Maintenance Report as of the date of either such event.
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<PAGE> 44
8. [Reserved].
9. Restrictions on Dividends and Other Distributions.
(a) Dividends on Preferred Shares Other Than Municipal Preferred. Except
as set forth in the next sentence, no dividends shall be declared or paid or set
apart for payment on the shares of any class or series of shares of beneficial
interest of the Trust ranking, as to the payment of dividends, on a parity with
shares of Municipal Preferred for any period unless full cumulative dividends
have been or contemporaneously are declared and paid on the shares of each
series of Municipal Preferred through its most recent Dividend Payment Date.
When dividends are not paid in full upon the shares of each series of Municipal
Preferred through its most recent Dividend Payment Date or upon the shares of
any other class or series of shares of beneficial interest of the Trust ranking
on a parity as to the payment of dividends with shares of Municipal Preferred
through their most recent respective dividend payment dates, all dividends
declared upon shares of Municipal Preferred and any other such class or series
of shares of beneficial interest ranking on a parity as to the payment of
dividends with shares of Municipal Preferred shall be declared pro rata so that
the amount of dividends declared per share on shares of Municipal Preferred and
such other class or series of shares of beneficial interest shall in all cases
bear to each other the same ratio that accumulated dividends per share on the
shares of Municipal Preferred and such other class or series of shares of
beneficial interest bear to each other (for purposes of this sentence, the
amount of dividends declared per share of Municipal Preferred shall be based on
the Applicable Rate for such shares for the Dividend Periods during which
dividends were not paid in full).
(b) Dividends and Other Distributions With Respect to Common Shares
Under the 1940 Act. The Board of Trustees shall not declare any dividend (except
a dividend payable in Common Shares), or declare any other distribution, upon
the Common Shares, or purchase Common Shares, unless in every such case the
Preferred Shares have, at the time of any such declaration or purchase, an asset
coverage (as defined in and determined pursuant to the 1940 Act) of at least
200% (or such other asset coverage as may in the future be specified in or under
the 1940 Act as the minimum asset coverage for senior securities which are
shares or stock of a closed-end investment company as a condition of declaring
dividends on its common shares or stock) after deducting the amount of such
dividend, distribution or purchase price, as the case may be.
(c) Other Restrictions on Dividends and Other Distributions. For so long
as any share of Municipal Preferred is outstanding, and except as set forth in
subparagraph (a) of this paragraph 9 and paragraph 12(c) of this Part I, (A) the
Trust shall not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or in
options, warrants or rights to subscribe for or purchase, Common Shares or other
shares, if any, ranking junior to the shares of Municipal Preferred as to the
payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up) in respect of the Common Shares or any other shares
of the Trust ranking junior to or on a parity with the shares of
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<PAGE> 45
Municipal Preferred as to the payment of dividends or the distribution of assets
upon dissolution, liquidation or winding up, or call for redemption, redeem,
purchase or otherwise acquire for consideration any Common Shares or any other
such junior shares (except by conversion into or exchange for shares of the
Trust ranking junior to the shares of Municipal Preferred as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up), or any such parity shares (except by conversion into or exchange
for shares of the Trust ranking junior to or on a parity with Municipal
Preferred as to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up), unless (i) full cumulative dividends on
shares of each series of Municipal Preferred through its most recently ended
Dividend Period shall have been paid or shall have been declared and sufficient
funds for the payment thereof deposited with the Auction Agent and (ii) the
Trust has redeemed the full number of shares of Municipal Preferred required to
be redeemed by any provision for mandatory redemption pertaining thereto, and
(B) the Trust shall not declare, pay or set apart for payment any dividend or
other distribution (other than a dividend or distribution paid in shares of, or
in options, warrants or rights to subscribe for or purchase, Common Shares or
other shares, if any, ranking junior to shares of Municipal Preferred as to the
payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up) in respect of Common Shares or any other shares of
the Trust ranking junior to shares of Municipal Preferred as to the payment of
dividends or the distribution of assets upon dissolution, liquidation or winding
up, or call for redemption, redeem, purchase or otherwise acquire for
consideration any Common Shares or any other such junior shares (except by
conversion into or exchange for shares of the Trust ranking junior to shares of
Municipal Preferred as to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up), unless immediately after
such transaction the Discounted Value of Moody's Eligible Assets (if Moody's is
then rating the shares of Municipal Preferred) and S&P Eligible Assets (if S&P
is then rating the shares of Municipal Preferred) would each at least equal the
Municipal Preferred Basic Maintenance Amount.
10. Rating Agency Restrictions.
For so long as any shares of Municipal Preferred are outstanding and
Moody's or S&P, or both, are rating such shares, the Trust will not, unless it
has received written confirmation from Moody's or S&P, or both, as appropriate,
that any such action would not impair the ratings then assigned by such rating
agency to such shares, engage in any one or more of the following transactions:
(a) purchase or sell futures contracts, write, purchase or sell options
on futures contracts or write put options (except covered put options) or call
options (except covered call options) on portfolio securities except that the
Trust may purchase or sell futures contracts based on the Bond Buyer Municipal
Bond Index (the "Municipal Index") or United States Treasury Bonds or Notes
("Treasury Bonds") and write, purchase or sell put and call options on such
contracts (collectively, "Hedging Transactions"), subject to the following
limitations:
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(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 S&P Eligible Assets or Moody's Eligible Assets, as the case
may be, with an aggregate Discounted Value equal to or greater than the
Municipal Preferred Basic Maintenance Amount on two consecutive Valuation
Dates and (B) the Trust is required to pay Variation Margin on the second
such Valuation Date;
(iv) the Trust will engage in a Closing Transaction to close out any
outstanding futures contract or option thereon in the month prior to the
delivery month under the terms of such futures contract or option thereon
unless the Trust holds the securities deliverable under such terms; and
(v) when the Trust writes a futures contract or option thereon, it
will either maintain an amount of cash, cash equivalents or high grade
(rated A or better by S&P or Moody's, as the case may be), fixed-income
securities in a segregated account with the Trust's custodian, so that the
amount so segregated plus the amount of Initial Margin and Variation Margin
held in the account of or on behalf of the Trust's broker with respect to
such futures contract or option equals the Market Value of the futures
contract or option, or, in the event the Trust writes a futures contract or
option thereon
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<PAGE> 47
which requires delivery of an underlying security, it shall hold such
underlying security in its portfolio.
For purposes of determining whether the Trust has S&P Eligible Assets or
Moody's Eligible Assets, as the case may be, with a Discounted Value that equals
or exceeds the Municipal Preferred Basic Maintenance Amount, the Discounted
Value of cash or securities held for the payment of Initial Margin or Variation
Margin shall be zero and the aggregate Discounted Value of S&P Eligible Assets
or Moody's Eligible Assets, as the case may be, shall be reduced by an amount
equal to (I) 30% of the aggregate settlement value, as marked to market, of any
outstanding futures contracts based on the Municipal Index which are owned by
the Trust plus (II) 25% of the aggregate settlement value, as marked to market,
of any outstanding futures contracts based on Treasury Bonds which contracts are
owned by the Trust.
(b) borrow money, except that the Trust may, without obtaining the
written confirmation described above, borrow money for the purpose of clearing
securities transactions if (i) the Municipal Preferred Basic Maintenance Amount
would continue to be satisfied after giving effect to such borrowing (which
shall mean, for purposes of the calculation of the Municipal Preferred Basic
Maintenance Amount, adding the amount of the liability for such borrowing to the
calculation of the Municipal Preferred Basic Maintenance Amount under
subparagraph (F) under the definition of that term in Part I of this Section
12.1) and (ii) such borrowing (A) is privately arranged with a bank or other
person and is evidenced by a promissory note or other evidence of indebtedness
that is not intended to be publicly distributed or (B) is for "temporary
purposes," is evidenced by a promissory note or other evidence of indebtedness
and is an amount not exceeding 5 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;
(c) issue additional shares of any series of Municipal Preferred or any
class or series of shares ranking prior to or on a parity with shares of
Municipal Preferred with respect to the payment of dividends or the distribution
of assets upon dissolution, liquidation or winding up of the Trust, or reissue
any shares of Municipal Preferred previously purchased or redeemed by the Trust;
(d) engage in any short sales of securities;
(e) lend securities;
(f) merge or consolidate into or with any corporation;
(g) change the pricing service (currently both Muller Data Corporation
and Standard & Poor's J.J. Kenny Evaluation Services are used by the Trust)
referred to in the definition of
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<PAGE> 48
Market Value to a pricing service other than Muller Data Corporation or Standard
& Poor's J.J. Kenny Evaluation Services; or
(h) enter into reverse repurchase agreements.
11. Redemption.
(a) Optional Redemption.
(i) Subject to the provisions of subparagraph (v) of this
subparagraph (a), shares of Municipal Preferred of any series may be
redeemed, at the option of the Trust, as a whole or from time to time in
part, on the second Business Day preceding any Dividend Payment Date for
shares of such series, out of funds legally available therefor, at a
redemption price per share equal to the sum of $25,000 plus an amount
equal to accumulated but unpaid dividends thereon (whether or not earned
or declared) to (but not including) the date fixed for redemption;
provided, however, that (1) shares of a series of Municipal Preferred
may not be redeemed in part if after such partial redemption fewer than
500 shares of such series remain outstanding; (2) unless otherwise
provided herein, shares of a series of Municipal Preferred are
redeemable by the Trust during the Initial Rate Period thereof only on
the second Business Day next preceding the last Dividend Payment Date
for such Initial Rate Period; and (3) subject to subparagraph (ii) of
this paragraph, (a) the Notice of Special Rate Period relating to a
Special Rate Period of shares of a series of Municipal Preferred, as
delivered to the Auction Agent and filed with the Secretary of the
Trust, may provide that shares of such series shall not be redeemable
during the whole or any part of such Special Rate Period (except as
provided in subparagraph (iv) of this subparagraph (a)) or shall be
redeemable during the whole or any part of such Special Rate Period only
upon payment of such redemption premium or premiums as shall be
specified therein ("Special Redemption Provisions").
(ii) A Notice of Special Rate Period relating to shares of a
series of Municipal Preferred for a Special Rate Period thereof may
contain Special Redemption Provisions only if the Trust's Board of
Trustees, after consultation with the Broker-Dealer or Broker-Dealers
for such Special Rate Period of shares of such series, determines that
such Special Redemption Provisions are in the best interest of the
Trust.
(iii) If fewer than all of the outstanding shares of a series of
Municipal Preferred are to be redeemed pursuant to subparagraph (i) of
this subparagraph (a), the number of shares of such series to be
redeemed shall be determined by the Board of Trustees, and such shares
shall be redeemed pro rata from the Holders of shares of such series in
proportion to the number of shares of such series held by such Holders.
(iv) Subject to the provisions of subparagraph (v) of this
subparagraph (a), shares of any series of Municipal Preferred may be
redeemed, at the option of the Trust, as a
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whole but not in part, out of funds legally available therefor, on the
first day following any Dividend Period thereof included in a Rate
Period consisting of more than 364 Rate Period Days if, on the date of
determination of the Applicable Rate for shares of such series for such
Rate Period, such Applicable Rate equaled or exceeded on such date of
determination the Treasury Note Rate for such Rate Period, at a
redemption price per share equal to the sum of $25,000 plus an amount
equal to accumulated but unpaid dividends thereon (whether or not earned
or declared) to (but not including) to the date fixed for redemption.
(v) The Trust may not on any date mail a Notice of Redemption
pursuant to subparagraph (c) of this paragraph 11 in respect of a
redemption contemplated to be effected pursuant to this subparagraph (a)
unless on such date (a) the Trust has available Deposit Securities with
maturity or tender dates not later than the day preceding the applicable
redemption date and having a value not less than the amount (including
any applicable premium) due to Holders of shares of Municipal Preferred
by reason of the redemption of such shares on such redemption date and
(b) the Discounted Value of Moody's Eligible Assets (if Moody's is then
rating the shares of Municipal Preferred) and the Discounted Value of
S&P Eligible Assets (if S&P is then rating the shares of Municipal
Preferred) each at least equal the Municipal Preferred Basic Maintenance
Amount, and would at least equal the Municipal Preferred Basic
Maintenance Amount immediately subsequent to such redemption if such
redemption were to occur on such date. For purposes of determining in
clause (b) of the preceding sentence whether the Discounted Value of
Moody's Eligible Assets at least equals the Municipal Preferred Basic
Maintenance Amount, the Moody's Discount Factors applicable to Moody's
Eligible Assets shall be determined by reference to the first Exposure
Period longer than the Exposure Period then applicable to the Trust, as
described in the definition of Moody's Discount Factor herein.
(b) Mandatory Redemption. The Trust shall redeem, at a redemption price
equal to $25,000 per share plus accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date fixed by the
Board of Trustees for redemption, certain of the shares of Municipal Preferred,
if the Trust fails to have either Moody's Eligible Assets with a Discounted
Value, or S&P Eligible Assets with a Discounted Value, greater than or equal to
the Municipal Preferred Basic Maintenance Amount or fails to maintain the 1940
Act Municipal Preferred Asset Coverage, in accordance with the requirements of
the rating agency or agencies then rating the shares of Municipal Preferred, and
such failure is not cured on or before the Municipal Preferred Basic Maintenance
Cure Date or the 1940 Act Cure Date, as the case may be (the "Cure Date"). The
number of shares of Municipal Preferred to be redeemed shall be equal to the
lesser of (i) the minimum number of shares of Municipal Preferred, together with
all other Preferred Shares subject to redemption or retirement, the redemption
of which, if deemed to have occurred immediately prior to the opening of
business on the Cure Date, would have resulted in the Trust's having both
Moody's Eligible Assets with a Discounted Value, and S&P Eligible Assets with a
Discounted Value, greater than or equal to the Municipal Preferred Basic
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Maintenance Amount or maintaining the 1940 Act Municipal Preferred Asset
Coverage, as the case may be, on such Cure Date (provided, however, that if
there is no such minimum number of shares of Municipal Preferred and other
Preferred Shares the redemption or retirement of which would have had such
result, all shares of Municipal Preferred and Preferred Shares then outstanding
shall be redeemed), and (ii) the maximum number of shares of Municipal
Preferred, together with all other Preferred Shares subject to redemption or
retirement, that can be redeemed out of funds expected to be legally available
therefor in accordance with the Declaration, these By-laws and applicable law.
In determining the shares of Municipal Preferred required to be redeemed in
accordance with the foregoing, the Trust shall allocate the number required to
be redeemed to satisfy the Municipal Preferred Basic Maintenance Amount or the
1940 Act Municipal Preferred Asset Coverage, as the case may be, pro rata among
shares of Municipal Preferred and other Preferred Shares (and, then pro rata
among each series of Municipal Preferred) subject to redemption or retirement.
The Trust shall effect such redemption on the date fixed by the Trust therefor,
which date shall not be earlier than 20 days nor later than 40 days after such
Cure Date, except that if the Trust does not have funds legally available for
the redemption of all of the required number of shares of Municipal Preferred
and other Preferred Shares which are subject to redemption or retirement or the
Trust otherwise is unable to effect such redemption on or prior to 40 days after
such Cure Date, the Trust shall redeem those shares of Municipal Preferred and
other Preferred Shares which it was unable to redeem on the earliest practicable
date on which it is able to effect such redemption. If fewer than all of the
outstanding shares of a series of Municipal Preferred are to be redeemed
pursuant to this subparagraph (b), the number of shares of such series to be
redeemed shall be redeemed pro rata from the Holders of shares of such series in
proportion to the number of shares of such series held by such Holders.
(c) Notice of Redemption. If the Trust shall determine or be required to
redeem shares of a series of Municipal Preferred pursuant to subparagraph (a) or
(b) of this paragraph 11, it shall mail a Notice of Redemption with respect to
such redemption by first class mail, postage prepaid, to each Holder of the
shares of such series to be redeemed, at such Holder's address as the same
appears on the record books of the Trust on the record date established by the
Board of Trustees. Such Notice of Redemption shall be so mailed not less than 20
nor more than 45 days prior to the date fixed for redemption. Each such Notice
of Redemption shall state: (i) the redemption date; (ii) the number of shares of
Municipal Preferred to be redeemed and the series thereof; (iii) the CUSIP
number for shares of such series; (iv) the Redemption Price; (v) the place or
places where the certificate(s) for such shares (properly endorsed or assigned
for transfer, if the Board of Trustees shall so require and the Notice of
Redemption shall so state) are to be surrendered for payment of the Redemption
Price; (vi) that dividends on the shares to be redeemed will cease to accumulate
on such redemption date; and (vii) the provisions of this paragraph 11 under
which such redemption is made. If fewer than all shares of a series of Municipal
Preferred held by any Holder are to be redeemed, the Notice of Redemption mailed
to such Holder shall also specify the number of shares of such series to be
redeemed from such Holder. The Trust may provide in any Notice of Redemption
relating to an optional redemption contemplated to be effected pursuant to
subparagraph (a) of this paragraph 11 that such redemption is subject to one or
more conditions precedent and that the Trust shall not be required such
redemption unless each such
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condition shall have been satisfied at the time or times and in the manner
specified in such Notice of Redemption.
(d) No Redemption Under Certain Circumstances. Notwithstanding the
provisions of subparagraphs (a) or (b) of this paragraph 11, if any dividends on
shares of a series of Municipal Preferred (whether or not earned or declared)
are in arrears, no shares of such series shall be redeemed unless all
outstanding shares of such series are simultaneously redeemed, and the Trust
shall not purchase or otherwise acquire any shares of such series; provided,
however, that the foregoing shall not prevent the purchase or acquisition of all
outstanding shares of such series pursuant to the successful completion of an
otherwise lawful purchase or exchange offer made on the same terms to, and
accepted by, Holders of all outstanding shares of such series.
(e) Absence of Funds Available for Redemption. To the extent that any
redemption for which Notice of Redemption has been mailed is not made by reason
of the absence of legally available funds therefor in accordance with the
Declaration, these By-laws and applicable law, such redemption shall be made as
soon as practicable to the extent such funds become available. Failure to redeem
shares of Municipal Preferred shall be deemed to 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 in trust with the Auction
Agent the Redemption Price with respect to any shares of which such Notice of
Redemption has been mailed; provided, however, that the foregoing shall not
apply in the case of the Trust's failure to deposit in trust with the Auction
Agent the Redemption Price with respect to any shares where (1) the Notice of
Redemption relating to such redemption provided that such redemption was subject
to one or more conditions precedent and (2) any such condition precedent shall
not have been satisfied at the time or times and in the manner specified in such
Notice of Redemption. Notwithstanding the fact that the Trust may not have
redeemed shares of Municipal Preferred for which a Notice of Redemption has been
mailed, dividends may be declared and paid on shares of Municipal Preferred and
shall include those shares of Municipal Preferred for which a Notice of
Redemption has been mailed.
(f) Auction Agent as Trustee of Redemption Payments by Trust. All moneys
paid to the Auction Agent for payment of the Redemption Price of shares of
Municipal Preferred called for redemption shall be held in trust by the Auction
Agent for the benefit of Holders of shares so to be redeemed.
(g) Shares for Which Notice of Redemption Has Been Given Are No Longer
Outstanding. Provided a Notice of Redemption has been mailed pursuant to
subparagraph (c) of this paragraph 11, upon the deposit with the Auction Agent
(on the Business Day next preceding the date fixed for redemption thereby, in
funds available on the next Business Day in The City of New York, New York) of
funds sufficient to redeem the shares of Municipal Preferred that are the
subject of such notice, dividends on such shares shall cease to accumulate and
such shares shall no longer be deemed to be outstanding for any purpose, and all
rights of the Holders of the shares so called for redemption shall cease and
terminate, except the right of such Holders to receive the Redemption Price, but
without any interest or other additional amount, except as
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provided in paragraphs 2(e)(i) and 3 of this Part I. Upon surrender in
accordance with the Notice of Redemption of the certificates for any shares so
redeemed (property endorsed or assigned for transfer, if the Board of Trustees
shall so require and the Notice of Redemption shall so state), the Redemption
Price shall be paid by the Auction Agent to the Holders of shares of Municipal
Preferred subject to redemption. In the case that fewer than all of the shares
represented by any such certificate are redeemed, a new certificate shall be
issued, representing the unredeemed shares, without cost to the Holder thereof.
The Trust shall be entitled to receive from the Auction Agent, promptly after
the date fixed for redemption, any cash deposited with the Auction Agent in
excess of (i) the aggregate Redemption Price of the shares of Municipal
Preferred called for redemption on such date and (ii) all other amounts to which
Holders of shares of Municipal Preferred called for redemption may be entitled.
Any funds so deposited that are unclaimed at the end of 90 days from such
redemption date shall, to the extent permitted by law, be repaid to the Trust,
after which time the Holders of shares of Municipal Preferred so called for
redemption may look only to the Trust for payment of the Redemption Price and
all other amounts to which they may be entitled. The Trust shall be entitled to
receive, from time to time after the date fixed for redemption, any interest on
the funds so deposited.
(h) Compliance With Applicable Law. In effecting any redemption pursuant
to this paragraph 11, the Trust shall use its best efforts to comply with all
applicable conditions precedent to effecting such redemption under the 1940 Act
and any applicable Massachusetts law, but shall effect no redemption except in
accordance with the 1940 Act and any applicable Massachusetts law.
(i) Only Whole Shares of Municipal Preferred May Be Redeemed. In the
case of any redemption pursuant to this paragraph 11, only whole shares of
Municipal Preferred shall be redeemed, and in the event that any provision of
the Declaration or these By-laws would require redemption of a fractional
shares, the Auction Agent shall be authorized to round up so that only whole
shares are redeemed.
12. Liquidation Rights.
(a) Ranking. The shares of a series of Municipal Preferred shall rank on
a parity with each other, with shares of any other series of Municipal Preferred
and with shares of any other series of Preferred Shares as to the distribution
of assets upon dissolution, liquidation or winding up of the affairs of the
Trust.
(b) Distributions Upon Liquidation. Upon the dissolution, liquidation or
winding up of the affairs of the Trust, whether voluntary or involuntary, the
Holders of shares of Municipal Preferred then outstanding shall be entitled to
receive and to be paid out of the assets of the Trust available for distribution
to its shareholders, before any payment or distribution shall be made on the
Common Shares or on any other class of shares of the Trust ranking junior to the
Municipal Preferred upon dissolution, liquidation or winding up, an amount equal
to the Liquidation Preference with respect to such shares plus an amount equal
to all dividends thereon (whether or
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not earned or declared) accumulated but unpaid to (but not including) the date
of final distributions in same-day funds, together with any payments required to
be made pursuant to paragraph 3 of this Part I in connection with the
liquidation of the Trust. After the payment to the Holders of the shares of
Municipal Preferred of the full preferential amounts provided for in this
subparagraph (b), the holders of Municipal Preferred as such shall have no right
or claim to any of the remaining assets of the Trust.
(c) Pro Rata Distributions. In the event the assets of the Trust
available for distribution to the Holders of shares of Municipal Preferred upon
any dissolution, liquidation, or winding up of the affairs of the Trust, whether
voluntary or involuntary, shall be insufficient to pay in full all amounts to
which such Holders are entitled pursuant to subparagraph (b) of this paragraph
12, no such distribution shall be made on account of any shares of any other
class or series of Preferred Shares ranking on a parity with the shares of
Municipal Preferred with respect to the distribution of assets upon such
dissolution, liquidation or winding up unless proportionate distributive amounts
shall be paid on account of the shares of Municipal Preferred, ratably, in
proportion to the full distributable amounts for which holders of all such
parity shares are respectively entitled upon such dissolution, liquidation or
winding up.
(d) Rights of Junior Shares. Subject to the rights of the holders of
shares of any series or class or classes of shares ranking on a parity with the
shares of Municipal Preferred with respect to the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Trust, after
payment shall have been made in full to the Holders of the shares of Municipal
Preferred as provided in subparagraph (b) of this paragraph 12, but not prior
thereto, any other series or class or classes of shares ranking junior to the
shares of Municipal Preferred with respect to the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Trust shall,
subject to the respective terms and provisions (if any) applying thereto, be
entitled to receive any and all assets remaining to be paid or distributed, and
the Holders of the shares of Municipal Preferred shall not be entitled to share
therein.
(e) Certain Events Not Constituting Liquidation. Neither the sale of all
or substantially all of the property or business of the Trust, nor the merger or
consolidation of the Trust into or with any Massachusetts business trust or
corporation nor the merger or consolidation of any Massachusetts business trust
or corporation into or with the Trust shall be a dissolution, liquidation or
winding up, whether voluntary or involuntary, for the purposes of this paragraph
12.
13. Miscellaneous.
(a) Amendment of this Section 12.1 to Add Additional Series. Subject to
the provisions of subparagraph (c) of paragraph 10 of this Part I, the Board of
Trustees may, by resolution duly adopted, without shareholder approval (except
as otherwise provided by this Section 12.1 or required by applicable law), amend
Section 12.1 to (1) reflect any amendment hereto which the Board of Trustees is
entitled to adopt pursuant to the terms of this Section 12.1 without
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shareholder approval or (2) add additional series of Municipal Preferred or
additional shares of a series of Municipal Preferred (and terms relating
thereto) to the series and shares of Municipal Preferred theretofore described
thereon. Each such additional series and all such additional shares shall be
governed by the terms of this Section 12.1.
(b) [Reserved]
(c) No Fractional Shares. No fractional shares of Municipal Preferred
shall be issued.
(d) Status of Shares of Municipal Preferred Redeemed, Exchanged or
Otherwise Acquired by the Trust. Shares of Municipal Preferred which are
redeemed, exchanged or otherwise acquired by the Trust shall return to the
status of authorized and unissued Preferred Shares without designation as to
series.
(e) Board May Resolve Ambiguities. To the extent permitted by applicable
law, the Board of Trustees may interpret or adjust the provisions of this
Section 12.1 to resolve any inconsistency or ambiguity or to remedy any formal
defect, and may amend this Section 12.1 with respect to any series of Municipal
Preferred prior to this issuance of shares of such series.
(f) Headings Not Determinative. The headings contained in this Section
12.1 are for convenience of reference only and shall not affect the meaning or
interpretation of this Section 12.1.
(g) Notices. All notices or communications, unless otherwise specified
in the By-Laws of the Trust or this Section 12.1, shall be sufficiently given if
in writing and delivered in person or mailed by first-class mail, postage
prepaid.
PART II
1. Orders.
(a) Prior to the Submission Deadline on each Auction Date for shares of
a series of Municipal Preferred:
(i) each Beneficial Owner of shares of such series may submit to
its Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares, if any, of such
series held by such Beneficial Owner which such Beneficial Owners
desires to continue to hold without regard to the Applicable Rate
for shares of such series for the next succeeding Rate Period of
such shares;
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(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;
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(B) such number or a lesser number of Outstanding shares
of such series to be determined as set forth in paragraph
4(a)(iv) of this Part II if the Applicable Rate for shares of
such series determined on such Auction Date shall be equal to the
rate specified therein; or
(C) the number of Outstanding shares of such series
specified in such Bid if the rate specified therein shall be
higher than the Maximum Rate for shares of such series, or such
number or a lesser number of Outstanding shares of such series to
be determined as set forth in paragraph 4(b)(iii) of this Part II
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) of this Part
II if Sufficient Clearing Bids for shares of such series do not
exist;
provided, however, that a Broker-Dealer that is an Existing Holder with
respect to shares of a series of Municipal Preferred shall not be liable
to any Person for failing to sell such shares pursuant to a Sell Order
described in the proviso to paragraph 2(c) of this Part II if (1) such
shares were transferred by the Beneficial Owner thereof without
compliance by such Beneficial Owner or its transferee Broker-Dealer (or
other transferee person, if permitted by the Trust) with the provisions
of paragraph 7 of this Part II or (2) such Broker-Dealer has informed
the Auction Agent pursuant to the terms of its Broker-Dealer Agreement
that, according to such Broker-Dealer's records, such Broker-Dealer
believes it is not the Existing Holder of such shares.
(iii) A Bid by a Potential Beneficial Holder or a Potential
Holder of shares of a series of Municipal Preferred subject to an
Auction on any Auction Date shall constitute an irrevocable offer to
purchase:
(A) the number of Outstanding shares of such series
specified in such Bid if the Applicable Rate for shares of such
series determined on such Auction Date shall be higher than the
rate specified therein; or
(B) such number or a lesser number of Outstanding shares
of such series as set forth in paragraph 4(a)(v) of this Part II
if the Applicable Rate for shares of
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such series determined on such Auction Date shall be equal to the
rate specified therein.
(c) No Order for any number of shares of Municipal Preferred other than
whole shares shall be valid.
2. Submission of Orders by Broker-Dealers to Auction Agent.
(a) Each Broker-Dealer shall submit in writing to the Auction Agent
prior to the Submission Deadline on each Auction Date all Orders for shares of
Municipal Preferred of a series subject to an Auction on such Auction Date
obtained by such Broker-Dealer, designating itself (unless otherwise permitted
by the Trust) as an Existing Holder in respect of shares subject to Orders
submitted or deemed submitted to it by Beneficial Owners and as a Potential
Holder in respect of shares subject to Orders submitted to it by Potential
Beneficial Owners, and shall specify with respect to each Order for such shares:
(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
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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
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(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
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(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.
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(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 subparagraph (a) of paragraph 3 of this Part II,
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:
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<PAGE> 62
(i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is higher than the Winning Bid Rate for shares
of such series shall be accepted, thus requiring each such Existing
Holder to sell the shares of Municipal Preferred subject to such
Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares
of such series shall be rejected, thus entitling each such Existing
Holder to continue to hold the shares of Municipal Preferred subject to
such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares
of such series shall be accepted;
(iv) each Existing Holders' Submitted Bid for shares of such
series specifying a rate that is equal to the Winning Bid Rate for
shares of such series shall be rejected, thus entitling such Existing
Holder to continue to hold the share of Municipal Preferred subject to
such Submitted Bid, unless the number of Outstanding shares of Municipal
Preferred subject to all such Submitted Bids shall be greater than the
number of shares of Municipal Preferred ("remaining shares") in the
excess of the Available Municipal Preferred of such series over the
number of shares of Municipal Preferred subject to Submitted Bids
described in clauses (ii) and (iii) of this subparagraph (a), in which
event such Submitted Bid of such Existing Holder shall be rejected in
part, and such Existing Holder shall be entitled to continue to hold
shares of Municipal Preferred subject to such Submitted Bid, but only in
an amount equal to the number of shares of Municipal Preferred of such
series obtained by multiplying the number of remaining shares by a
fraction, the numerator of which shall be the number of Outstanding
shares of Municipal Preferred held by such Existing Holder subject to
such Submitted Bid and the denominator of which shall be the aggregate
number of Outstanding shares of Municipal Preferred subject to such
Submitted Bids made by all such Existing Holders that specified a rate
equal to the Winning Bid Rate for shares of such series; and
(v) each Potential Holder's Submitted Bid for shares of such
series specifying a rate that is equal to the Winning Bid Rate of shares
of such series shall be accepted but only in an amount equal to the
number of shares of such series obtained by multiplying the number of
shares in the excess of the Available Municipal Preferred of such series
over the number of shares of Municipal Preferred subject to Submitted
Bids described in clauses (ii) through (iv) of this subparagraph (a) by
a fraction, the numerator of which shall be the number of Outstanding
shares of Municipal Preferred subject to such Submitted Bids and the
denominator of which shall be the aggregate number of Outstanding shares
of Municipal Preferred subject to such Submitted Bids made by all such
Potential Holders that specified a rate equal to the Winning Bid Rate
for shares of such series.
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<PAGE> 63
(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) Each Existing Holder's Submitted Bid for shares of such
series specifying any rate that is higher than the Maximum Rate for
shares of such series and the Submitted Sell Orders for shares of such
series of each Existing Holder shall be accepted, thus entitling each
Existing Holder that submitted or on whose behalf was submitted any such
Submitted Bid or Submitted Sell Order to sell the shares of such series
subject to such Submitted Bid or Submitted Sell Order, but in both cases
only in an amount equal to the number of shares of such series obtained
by multiplying the number of shares of such series subject to Submitted
Bids described in clause (ii) of this subparagraph (b) by a fraction,
the numerator of which shall be the number of Outstanding shares of such
series held by such Existing Holder subject to such Submitted Bid or
Submitted Sell Order and the denominator of which shall be the aggregate
number of Outstanding shares of such series subject to all such
Submitted Bids and Submitted Sell Orders.
(c) If all of the Outstanding shares of a series of Municipal Preferred
are subject to Submitted Hold Orders, all Submitted Bids for shares of such
series shall be rejected.
(d) If, as a result of the procedures described in clause (iv) or (v) of
subparagraph (a) or clause (iii) of subparagraph (b) of this paragraph 4, any
Existing Holder would be entitled or required to sell, or any Potential Holder
would be entitled or required to purchase, a fraction of a share of a series of
Municipal Preferred on any Auction Date, the Auction Agent shall, in such manner
as it shall determine in its sole discretion, round up or down the number of
shares of Municipal Preferred of such series to be purchased or sold by any
Existing Holder or Potential Holder on such Auction Date as a result of such
procedures so that the number of shares so purchased or sold by each Existing
Holder or Potential Holder on such Auction Date shall be whole shares of
Municipal Preferred.
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<PAGE> 64
(e) If, as a result of the procedures described in clause (v) of
paragraph (a) of this paragraph 4, any Potential Holder would be entitled or
required to purchase less than a whole share of series of Municipal Preferred on
any Auction Date, the Auction Agent shall, in such manner as it shall determine
in its sole discretion, allocate shares of Municipal Preferred of such series
for purchase among Potential Holders so that only whole shares of Municipal
Preferred of such series are purchased on such Auction Date as a result of such
procedures by any Potential Holder, even if such allocation results in one or
more Potential Holders not purchasing shares of Municipal Preferred of such
series on such Auction Date.
(f) Based on the results of each Auction for shares of a series of
Municipal Preferred, the Auction Agent shall determine the aggregate number of
shares of such series to be purchased and the aggregate number of shares of such
series to be sold by Potential Holders and Existing Holders and, with respect to
each Potential Holder and Existing Holder, to the extent that such aggregate
number of shares to be purchased and such aggregate number of shares to be sold
differ, determine to which other Potential Holder(s) or Existing Holder(s) they
shall deliver, or from which other Potential Holder(s) or Existing Holder(s)
they shall receive, as the case may be, shares of Municipal Preferred of such
series. Notwithstanding any provision of the Auction Procedures or the
Settlement Procedures to the contrary, in the event an Existing Holder or
Beneficial Owner of shares of a series of Municipal Preferred with respect to
whom a Broker-Dealer submitted a Bid to the Auction Agent for such shares that
was accepted in whole or in part, or submitted or is deemed to have submitted a
Sell Order for such shares that was accepted in whole or in part, fails to
instruct its Agent Member to deliver such shares against payment therefor,
partial deliveries of shares of Municipal Preferred that have been made in
respect of Potential Holders' or Potential Beneficial Owners' Submitted Bids for
shares of such series that have been accepted in whole or in part shall
constitute good delivery to such Potential Holders and Potential Beneficial
Owners.
(g) Neither the Trust nor the Auction Agent nor any affiliate of either
shall have any responsibility or liability with respect to the failure of an
Existing Holder, a Potential Holder, a Benefit Owner, a Potential Beneficial
Owner or its respective Agent Member to deliver shares of Municipal Preferred of
any series or to pay for shares of Municipal Preferred of any series sold or
purchased pursuant to the Auction Procedures or otherwise.
5. Notification of Allocations. Whenever the Trust intends to include
any net capital gain or other income taxable for Federal income tax purposes in
any dividend on shares of Municipal Preferred, the Trust shall, in the case of a
Minimum Rate Period or a Special Rate Period of 28 Rate Period Days or fewer,
and may, in the case of any other Special Rate Period, notify the Auction Agent
of the amount to be so included not later than the Dividend Payment Date next
preceding the Auction Date on which the Applicable Rate for such dividend is to
be established. Whenever the Auction Agent receives such notice from the Trust,
it will be required in turn to notify each Broker-Dealer, who, on or prior to
such Auction Date, in accordance with its Broker-Dealer Agreement, will be
required to notify its Beneficial Owners and Potential
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<PAGE> 65
Beneficial Owners of shares of Municipal Preferred believed by it to be
interested in submitting an Order in the Auction to be held on such Auction
Date.
6. Auction Agent. For so long as any shares of Municipal Preferred are
outstanding, the Auction Agent, duly appointed by the Trust to so act, shall be
in each case a commercial bank, trust company or other financial institution
independent of the Trust and its affiliates (which however, may engage or have
engaged in business transactions with the Trust or its affiliates) and at no
time shall the Trust or any of its affiliates act as the Auction Agent in
connection with the Auction Procedures. If the Auction Agent resigns or for any
reason its appointment is terminated during any period that any shares of
Municipal Preferred are outstanding, the Board of Trustees shall use its best
efforts promptly thereafter to appoint another qualified commercial bank, trust
company or financial institution to act as the Auction Agent. The Auction
Agent's registry of Existing Holders of shares of a series of Municipal
Preferred shall be conclusive and binding on the Broker-Dealers. A Broker-Dealer
may inquire of the Auction Agent between 3:00 p.m. on the Business Day preceding
an Auction for shares of a series of Municipal Preferred and 9:30 a.m. on the
Auction Date for such Auction to ascertain the number of shares of a series in
respect of which the Auction Agent has determined such Broker-Dealer to be an
Existing Holder. If such Broker-Dealer believes it is the Existing Holder of
fewer shares of such series than specified by the Auction Agent in response to
such Broker-Dealer's inquiry, such Broker-Dealer may so inform the Auction Agent
of that belief. Such Broker-Dealer shall not, in its capacity as Existing Holder
of shares of such series, submit Orders in such Auction in respect of shares of
such series covering in the aggregate more than the number of shares of such
series specified by the Auction Agent in response to such Broker-Dealer's
inquiry.
7. Transfer of Shares of Municipal Preferred. Unless otherwise permitted
by the Trust, a Beneficial Owner or an Existing Holder may sell, transfer or
otherwise dispose of shares of Municipal Preferred only in whole shares and only
pursuant to a Bid or Sell Order placed with the Auction Agent in accordance with
the procedures described in this Part II 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.
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<PAGE> 66
Article 13.
Amendments
Except as otherwise expressly stated herein, these By-Laws may be
amended or repealed, in whole or in part, by a majority of the Trustees then in
office at any meeting of the Trustees, or by one or more writings signed by such
a majority.
<PAGE> 1
Exhibit (d)(2)
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED
SHARE(S) OF BENEFICIAL INTEREST, SERIES F
Number
U NO PAR VALUE
$25,000 Liquidation Preference per Share
THIS CERTIFICATE IS TRANSFERABLE
IN BOSTON OR IN NEW YORK CITY CUSIP 195799 20 0
SEE REVERSE FOR
CERTAIN DEFINITIONS
COLONIAL MUNICIPAL INCOME TRUST
SHARE CERTIFICATE
S P E C I M E N
THIS
CERTIFIES
THAT Cede & Co.
IS THE
OWNER OF *Three Thousand Six Hundred* (3,600)
FULLY PAID AND NON-ASSESSABLE MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
OF BENEFICIAL INTEREST, SERIES F, NO PAR VALUE, $25,000 LIQUIDATION
PREFERENCE PER SHARE, OF
Colonial Municipal Income Trust, the said shares being issued, received and held
under and subject to the terms and provisions of the Agreement and Declaration
of Trust dated as of January 22, 1987, establishing Colonial Municipal Income
Trust, and all amendments thereto, copies of which are on file with the
Secretary of the Commonwealth of Massachusetts, and to the terms and provisions
of the Amended and Restated By-Laws of Colonial Municipal Income Trust, copies
of which are on file with the Secretary of the Trust. The said owner by
accepting this certificate agrees to and is bound by all of the said terms and
provisions. The shares represented hereby are only transferable in writing by
the owner thereof in person or by attorney upon surrender of this certificate to
the Trustees properly endorsed for transfer. This certificate is executed on
behalf of the Trustees of the Trust as Trustees and not individually and the
obligations hereof are not binding upon any of the Trustees, officers or
shareholders of the Trust individually but are binding only upon the assets and
property of the Trust. This certificate is not valid until countersigned and
registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Trust and the
facsimile signatures of its duly authorized officers.
Dated:
Countersigned and Registered:
<PAGE> 2
BANKERS TRUST COMPANY
(Boston, Massachusetts) Transfer Agent
and Registrar
BY
Authorized Signature. TREASURER PRESIDENT
EXPLANATION OF ABBREVIATIONS
The following abbreviations when used in the form of ownership on the
face of this certificate shall be construed as though they were written out in
full according to applicable laws or regulations.
Abbreviations in addition to those appearing below, may be used.
Abbreviation Equivalent Abbreviation Equivalent
- ------------ ---------- ------------ ----------
JT TEN As joint tenants, TEN IN COM As tenants in common
with right of TEN BY ENT As tenants by the
survivorship and entireties
not as tenants UNIF TRANSFERS Uniform Transfers to
in common MIN ACT Minors
Abbreviation Equivalent Abbreviation Equivalent
- ------------ ----------- ------------ -----------
ADM Administrator(s) FDN Foundation
Administratrix PL Public Law
AGMT Agreement TR (As) trustees(s),
for, of
CUST Custodian for UA Under Agreement
EST Estate, Of estate of UW Under will of, Of
will of,
EX Executor(s), Executrix Under last will &
FBO For the benefit of Testament
Additional abbreviations may also be used though not in the above list.
---------------------------------------------------------------------------
TRANSFER FORM
FOR VALUE RECEIVED, _________________________________ hereby sell,
assign and transfer unto (I/We)
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -------------------------------------------
- -------------------------------------------
- ------------------------------------------------------------------
Please print or typewrite name and address (including postal zip
code of assignee)
___________________________________________________________________Shares
represented by this Certificate and do hereby irrevocably constitute and appoint
_____________________________________________________________________Attorney,
to transfer said shares on the books of the Trust with full
<PAGE> 3
power of substitution in the premises.
Dated:
SIGNATURE GUARANTEED BY Signature(s)_________________________________
(The signature to this assignment must
correspond with the name as
written upon the face of this
Certificate in every
particular, without alteration or
enlargement or any change
whatsoever. If more than one owner,
all must sign.)
- -------------------------------------------------------------------------
(Signature must be guaranteed by a commercial bank or trust company or
member firm of any national stock exchange.)
IMPORTANT NOTICE:
When you sign your name to the Transfer Form without filling in the name of
your "Assignee" this certificate becomes fully negotiable, similar to a check
endorsed in blank. Therefore, to safeguard a signed certificate, it is
recommended that you fill in the name of the new owner in the "Assignee" space.
Alternatively, instead of using this Transfer Form, you may sign a separate
"stock power" form and then mail the unsigned certificate and the signed "stock
power" in separate envelopes. For added protection, use registered mail for a
certificate.
<PAGE> 1
Municipal Auction Rate Cumulative Preferred Shares
COLONIAL MUNICIPAL INCOME TRUST
3,600 Shares, Series F
Liquidation Preference $25,000 Per Share
UNDERWRITING AGREEMENT
July __, 1999
SALOMON SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Colonial Municipal Income Trust, a Massachusetts business trust (the
"Trust"), proposes, upon the terms and conditions set forth herein, to issue and
sell an aggregate of 3,600 shares of its Municipal Auction Rate Cumulative
Preferred Shares, Series F (the "Municipal Preferred"), each with a liquidation
preference of $25,000 per share (the shares of Municipal Preferred to be sold
hereby are referred to herein, collectively, as the "Shares"). The Shares will
be authorized by, and subject to the terms and conditions of, the By-Laws of the
Trust in the form filed as an exhibit to the Registration Statement referred to
in Section 1 of this agreement. The Trust and its investment adviser, Colonial
Management Associates, Inc., (the "Advisor"), wish to confirm as follows their
agreement with Salomon Smith Barney Inc. (the "Underwriter") in connection with
the purchase of the Shares by the Underwriter.
Collectively, (i) the Management Agreement, dated as of March 27,
1995, between the Trust and the Advisor (the "Management Agreement"), (ii) the
Custodian Agreement, dated as of August 17, 1997, between the Trust and The
Chase Manhattan Bank, as amended, (iii) the Auction Agent Agreement, to be dated
as of ____, between the Trust and Bankers Trust Company and (iv) the
Broker-Dealer Agreement, to be dated as of ____, between the Trust and Salomon
Smith Barney Inc. are hereinafter referred to as the "Trust Agreements". This
Underwriting Agreement is hereinafter referred to as the "Agreement".
1. Registration Statement and Prospectus. The Trust has prepared in
conformity with the provisions of the Securities Act of 1933, as amended (the
"1933 Act"), the Investment Company Act of 1940, as amended (the "1940 Act"),
and the rules and regulations of the Securities and Exchange Commission (the
"Commission") promulgated under the 1933 Act (the "1933 Act Rules and
Regulations") and the 1940 Act (the "1940 Act Rules and Regulations" and,
together with the 1933 Act Rules and Regulations, the "Rules and Regulations") a
registration
<PAGE> 2
2
statement on Form N-2, as amended (File No. 333-77261 and 811-4992), under the
1933 Act and the 1940 Act (the "registration statement"), including a prospectus
relating to the Shares, and has filed the registration statement and prospectus
in accordance with the 1933 Act and 1940 Act. The Trust also has filed a
notification of registration of the Trust as an investment company under the
1940 Act on Form N-8A (the "1940 Act Notification"). The term "Registration
Statement" as used in this Agreement means the registration statement (including
all financial schedules and exhibits), as amended at the time it becomes
effective under the 1933 Act or, if the registration statement became effective
under the 1933 Act prior to the execution of this Agreement, as amended or
supplemented at the time it became effective, prior to the execution of this
Agreement. If it is contemplated, at the time this Agreement is executed, that a
post-effective amendment to the registration statement will be filed under the
1933 Act and must be declared effective before the offering of the Shares may
commence, the term "Registration Statement" as used in this Agreement means the
registration statement as amended by said post-effective amendment. If the Trust
has filed an abbreviated registration statement to register an additional amount
of Shares pursuant to Rule 462(b) under the 1933 Act (the "Rule 462 Registration
Statement"), then any reference herein to the term "Registration Statement"
shall include such Rule 462 Registration Statement. The term "Prospectus" as
used in this Agreement means the prospectus and statement of additional
information in the forms included in the Registration Statement or, if the
prospectus and statement of additional information included in the Registration
Statement omit information in reliance on Rule 430A under the 1933 Act Rules and
Regulations and such information is included in a prospectus and statement of
additional information filed with the Commission pursuant to Rule 497 under the
1933 Act, the term "Prospectus" as used in this Agreement means the prospectus
and statement of additional information in the forms included in the
Registration Statement as supplemented by the addition of the information
contained in the prospectus filed with the Commission pursuant to Rule 497. The
term "Prepricing Prospectus" as used in this Agreement means the prospectus and
statement of additional information subject to completion in the forms included
in the registration statement at the time of filing of amendment no.1 to the
registration statement with the Commission on July 13, 1999, and as such
prospectus and statement of additional information shall have been amended from
time to time prior to the date of the Prospectus, together with any other
prospectus and statement of additional information relating to the Trust other
than the Prospectus approved in writing by or directly or indirectly prepared by
the Trust or the Adviser; it being understood that the definition of Prepricing
Prospectus above shall not include any Prepricing Prospectus prepared by the
Underwriter unless approved in writing by the Trust or Advisor. The terms
"Registration Statement", "Prospectus" and "Prepricing Prospectus" shall also
include any financial statements incorporated by reference therein.
The Trust has furnished the Underwriter with copies of such
registration statement, each amendment to such registration statement filed with
the Commission and each Prepricing Prospectus.
2. Agreements to Sell and Purchase. The Trust hereby agrees, subject
to all the terms and conditions set forth herein, to issue and sell to the
Underwriter and, upon the basis of the representations, warranties and
agreements of the Trust and the Advisor herein contained and subject to all the
terms and conditions set forth herein, the Underwriter agrees to purchase from
<PAGE> 3
3
the Trust, at a purchase price of $_______ per Share, the number of shares of
Municipal Preferred set forth opposite the name of the Underwriter in Schedule I
hereto.
3. Terms of Public Offering. The Trust and the Advisor have been
advised by the Underwriter that the Underwriter proposes to make a public
offering of the Shares as soon after the Registration Statement and this
Agreement have become effective as in the Underwriter's judgment is advisable
and initially to offer the Shares upon the terms set forth in the Prospectus.
4. Delivery of the Shares and Payment Therefor. Delivery to the
Underwriter of and payment for the Shares shall be made at the office of Simpson
Thacher & Bartlett, 425 Lexington Avenue, New York, NY 10017, at 9:30 A.M., New
York City time, on July __, 1999 (the "Closing Date"). The place of closing for
the Shares and the Closing Date may be varied by agreement between the
Underwriter and the Trust.
Certificates for the Shares shall be registered in such names and in
such denominations as the Underwriter shall request prior to 9:30 A.M., New York
City time, on the second business day preceding the Closing Date. Such
certificates shall be made available to the Underwriter in New York City for
inspection not later than 9:30 A.M., New York City time, on the business day
next preceding the Closing Date. The certificates evidencing the Shares shall be
delivered to the Underwriter on the Closing Date, through the facilities of The
Depository Trust Company, against payment of the purchase price therefor in
immediately available funds.
5. Agreements of the Trust and the Advisor. The Trust and the
Advisor, jointly and severally, agree with the Underwriter as follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective under the 1933 Act before the offering of the Shares
may commence, the Trust will endeavor to cause the Registration Statement or
such post-effective amendment to become effective under the 1933 Act as soon as
possible and will advise the Underwriter promptly and, if requested by the
Underwriter, will confirm such advice in writing when the Registration Statement
or such post-effective amendment has become effective.
(b) The Trust will advise the Underwriter promptly and, if requested
by the Underwriter, will confirm such advice in writing: (i) of any request made
by the Commission for amendment of or a supplement to the Registration
Statement, any Prepricing Prospectus or the Prospectus (or any amendment or
supplement to any of the foregoing) or for additional information, (ii) of the
issuance by the Commission, the National Association of Securities Dealers, Inc.
(the "NASD"), any state securities commission, any national securities exchange,
any arbitrator, any court or any other governmental, regulatory, self-regulatory
or administrative agency or any official of any order suspending the
effectiveness of the Registration Statement, prohibiting or suspending the use
of the Prospectus or any Prepricing Prospectus, or any sales material, of any
notice pursuant to Section 8(e) of the 1940 Act, of the suspension of
qualification of the Shares for offering or sale in any jurisdiction, or the
initiation of any proceeding for any such purposes, (iii) of receipt by the
Trust, the Advisor, any affiliate of the Trust or the Advisor or any
representative or attorney of the Trust or the Advisor of any other
<PAGE> 4
4
material communication from the Commission, the NASD, any state securities
commission, any national securities exchange, any arbitrator, any court or any
other governmental, regulatory, self-regulatory or administrative agency or any
official relating to the Trust (if such communication relating to the Trust is
received by such person within three years after the date of this Agreement),
the Registration Statement, the 1940 Act Notification, the Prospectus, any
Prepricing Prospectus, any sales material (or any amendment or supplement to any
of the foregoing) or this Agreement or any of the Trust Agreements and (iv)
within the period of time referred to in paragraph (f) below, of any material
adverse change in the condition (financial or other), business, prospects,
properties, net assets or results of operations of the Trust or the Advisor or
of the happening of any other event which makes any statement of a material fact
made in the Registration Statement or the Prospectus or any sales material (or
any amendment or supplement to any of the foregoing) untrue or which requires
the making of any additions to or changes in the Registration Statement or the
Prospectus, or any Prepricing Prospectus or any sales materials (as herein
defined) (or any amendment or supplement to any of the foregoing) in order to
state a material fact required by the 1933 Act, the 1940 Act or the Rules and
Regulations to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading or of the necessity to amend or supplement the Registration
Statement, the Prospectus, or any Prepricing Prospectus or any sales material
(as herein defined) (or any amendment or supplement to any of the foregoing) to
comply with the 1933 Act, the 1940 Act, the Rules and Regulations or any other
law or order of any court or regulatory body. If at any time the Commission, the
NASD, any state securities commission, any national securities exchange, any
arbitrator, any court or any other governmental, regulatory, self-regulatory or
administrative agency or any official shall issue any order suspending the
effectiveness of the Registration Statement, prohibiting or suspending the use
of the Prospectus or any sales material (as herein defined) (or any amendment or
supplement to any of the foregoing) or suspending the qualification of the
Shares for offering or sale in any jurisdiction, the Trust will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible time.
(c) The Trust will furnish to the Underwriter, without charge, three
signed copies of the Registration Statement as originally filed with the
Commission and of each amendment thereto, including financial statements and all
exhibits thereto, and will also furnish to the Underwriter, without charge, such
number of conformed copies of the Registration Statement as originally filed and
of each amendment thereto, but without exhibits, as the Underwriter may request.
(d) The Trust will not (i) file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectus, or any sales
material (as herein defined), of which the Underwriter shall not previously have
been advised or to which the Underwriter shall reasonably object after being so
advised or (ii) so long as, in the opinion of counsel for the Underwriter, a
Prospectus is required by the 1933 Act to be delivered in connection with sales
by the Underwriter or any dealer, file any information, documents or reports
pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"),
without delivering a copy of such information, documents or reports to the
Underwriter prior to or concurrently with such filing.
<PAGE> 5
5
(e) Prior to the execution and delivery of this Agreement, the Trust
has delivered to the Underwriter, without charge, in such quantities as the
Underwriter has requested, copies of each form of the Prepricing Prospectus. The
Trust consents to the use, in accordance with the provisions of the 1933 Act and
with the state securities or blue sky laws of the jurisdictions in which the
Shares are offered by the Underwriter and by dealers, prior to the date of the
Prospectus, of each Prepricing Prospectus so furnished by the Trust.
(f) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as in the opinion of
counsel for the Underwriter a prospectus is required by the 1933 Act to be
delivered in connection with sales by the Underwriter or any dealer, the Trust
will expeditiously deliver to the Underwriter and each dealer, without charge,
as many copies of the Prospectus (and of any amendment or supplement thereto) as
the Underwriter may reasonably request. The Trust consents to the use of the
Prospectus (and of any amendment or supplement thereto) in accordance with the
provisions of the 1933 Act and with the state securities or blue sky laws of the
jurisdictions in which the Shares are offered by the Underwriter and by all
dealers to whom Shares may be sold, both in connection with the offering and
sale of the Shares and for such period of time thereafter as the Prospectus is
required by the 1933 Act to be delivered in connection with sales by the
Underwriter or any dealer. If during such period of time any event shall occur
that in the judgment of the Trust or in the opinion of counsel for the
Underwriter is required to be set forth in the Registration Statement or the
Prospectus (as then amended or supplemented) or should be set forth therein in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary to supplement or
amend the Registration Statement or the Prospectus to comply with the 1933 Act,
the 1940 Act, the Rules and Regulations or any other federal law, rule or
regulation, or any state securities or blue sky disclosure laws, rules or
regulations, the Trust will forthwith prepare and, subject to the provisions of
paragraph (d) above, promptly file with the Commission an appropriate supplement
or amendment thereto, and will expeditiously furnish to the Underwriter and
dealers, without charge, a reasonable number of copies thereof. In the event
that the Trust and the Underwriter agree that the Registration Statement or the
Prospectus should be amended or supplemented, the Trust, if requested by the
Underwriter, will promptly issue a press release announcing or disclosing the
matters to be covered by the proposed amendment or supplement.
(g) The Trust will make generally available to its security holders
an earnings statement, which need not be audited, covering a twelve-month period
ending not later than 15 months after the effective date of the Registration
Statement as soon as practicable after the end of such period, which earnings
statement shall satisfy the provisions of Section 11(a) of the 1933 Act and Rule
158 of the 1933 Act Rules and Regulations.
(h) During the period of five years hereafter, the Trust will
furnish to the Underwriter (i) as soon as available, a copy of each report of
the Trust mailed to stockholders or filed with the Commission or furnished to
the New York Stock Exchange (the "NYSE") other than reports on Form N-SAR, and
(ii) from time to time such other information concerning the Trust as the
Underwriter may reasonably request.
<PAGE> 6
6
(i) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than by notice given by
the Underwriter terminating this Agreement pursuant to Section 12 hereof) or if
this Agreement shall be terminated by the Underwriter because of any failure or
refusal on the part of the Trust or the Advisor to comply with the terms or
fulfill any of the conditions of this Agreement, the Trust and the Advisor,
jointly and severally, agree to reimburse the Underwriter for all out-of-pocket
expenses (including reasonable fees and expenses of counsel for the Underwriter)
incurred by the Underwriter in connection herewith.
(j) The Trust will apply the net proceeds from the sale of the
Shares substantially in accordance with the description set forth in the
Prospectus and in such a manner as to comply with the investment objectives,
policies and restrictions of the Trust as described in the Prospectus.
(k) The Trust will timely file the requisite copies of the
Prospectus with the Commission pursuant to Rule 497(c) or Rule 497(h) of the
1933 Act Rules and Regulations, whichever is applicable or, if applicable, will
timely file the certification permitted by Rule 497(j) of the 1933 Act Rules and
Regulations and will advise the Underwriter of the time and manner of such
filing.
(l) Except as provided in this Agreement, the Trust will not sell,
contract to sell, or otherwise dispose of any senior securities (as defined in
the 1940 Act) of the Trust, or grant any options or warrants to purchase senior
securities of the Trust, for a period of 120 days after the date of the
Prospectus, without the prior written consent of the Underwriter.
(m) Except as stated in this Agreement and in the Prepricing
Prospectus and Prospectus, neither the Trust nor the Advisor has taken, nor will
it take, directly or indirectly, any action designed to or that might reasonably
be expected to cause or result in stabilization or manipulation of the price of
any securities issued by the Trust to facilitate the sale or resale of the
Shares.
(n) The Trust will use its best efforts to cause the Municipal
Preferred, prior to the Closing Date, to be assigned a rating of 'aaa' by
Moody's Investors Service, Inc. ("Moody's") and AAA by Standard & Poor's Ratings
Services ("S&P" and, together with Moody's, the "Rating Agencies").
(o) The Trust and the Advisor will use their best efforts to perform
all of the agreements required of them and discharge all conditions to closing
as set forth in this Agreement.
6. Representations and Warranties of the Trust and the Advisor. The
Trust and the Advisor, jointly and severally, represent and warrant to the
Underwriter that:
(a) Each Prepricing Prospectus included as part of the registration
statement as originally filed or as part of any amendment or supplement thereto,
or filed pursuant to Rule 497 of the 1933 Act Rules and Regulations, complied
when so filed in all material respects with the
<PAGE> 7
7
provisions of the 1933 Act, the 1940 Act and the Rules and Regulations. The
Commission has not issued any order preventing or suspending the use of any
Prepricing Prospectus.
(b) The registration statement in the form in which it became or
becomes effective and also in such form as it may be when any post-effective
amendment thereto shall become effective and the Prospectus and any supplement
or amendment thereto when filed with the Commission under Rule 497 of the 1933
Act Rules and Regulations and the 1940 Act Notification when originally filed
with the Commission and any amendment or supplement thereto when filed with the
Commission, complied or will comply in all material respects with the provisions
of the 1933 Act, the 1940 Act and the Rules and Regulations and did not or will
not at any such times contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, except that this representation and warranty
does not apply to statements in or omissions from the registration statement or
the Prospectus made in reliance upon and in conformity with information relating
to the Underwriter furnished to the Trust in writing by or on behalf of the
Underwriter expressly for use therein.
(c) All the outstanding Common Shares (as defined in the Prospectus)
of the Trust have been duly authorized and validly issued, are fully paid and
nonassessable and are free of any preemptive or similar rights; the Shares have
been duly authorized and, when issued and delivered to the Underwriter against
payment therefor in accordance with the terms hereof, will be validly issued,
fully paid and nonassessable and free of any preemptive or similar rights and
will conform to the description thereof in the Registration Statement and the
Prospectus (and any amendment or supplement to either of them); and the
capitalization of the Trust conforms to the description thereof in the
Registration Statement and the Prospectus (and any amendment or supplement to
either of them).
(d) The Trust is a business trust duly organized and validly
existing in good standing under the laws of the Commonwealth of Massachusetts
with full business trust power and authority to own, lease and operate its
properties and to conduct its business as described in the Registration
Statement and the Prospectus (and any amendment or supplement to either of
them), and is duly registered and qualified to conduct its business and is in
good standing in each jurisdiction or place where the nature of its properties
or the conduct of its business requires such registration or qualification,
except where the failure so to register or qualify does not have a material
adverse effect on the condition (financial or other), business, prospects,
properties, net assets or results of operations of the Trust; and the Trust has
no subsidiaries.
(e) There are no legal or governmental proceedings pending or, to
the knowledge of the Trust, threatened, against the Trust, or to which the Trust
or any of its properties is subject, that are required to be described in the
Registration Statement or the Prospectus (and any amendment or supplement to
either of them) but are not described as required, and there are no agreements,
contracts, indentures, leases or other instruments that are required to be
described in the Registration Statement or the Prospectus (and any amendment or
supplement to either of them) or to be filed as an exhibit to the Registration
Statement that are not described or filed as required by the 1933 Act, the 1940
Act or the Rules and Regulations.
<PAGE> 8
8
(f) The Trust is not in violation of its Declaration of Trust (the
"Declaration") or its amended and restated bylaws (the "Bylaws") or other
organizational documents (together with the Declaration and Bylaws, the
"Organizational Documents"), or of any law, ordinance, administrative or
governmental rule or regulation applicable to the Trust or of any decree of the
Commission, the NASD, any state securities commission, any national securities
exchange, any arbitrator, any court or governmental agency, body or official
having jurisdiction over the Trust, or in default in any material respect in the
performance of any obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness or in any material
agreement, indenture, lease or other instrument to which the Trust is a party or
by which it or any of its properties may be bound.
(g) Neither the issuance and sale of the Shares, the execution,
delivery or performance of this Agreement or any of the Trust Agreements by the
Trust, nor the consummation by the Trust of the transactions contemplated hereby
or thereby (A) requires any consent, approval, authorization or other order of
or registration or filing with, the Commission, the NASD, any state securities
commission, any national securities exchange, any arbitrator, any court,
regulatory body, administrative agency or other governmental body, agency or
official (except such as may have been obtained prior to the date hereof and
such as may be required for compliance with the state securities or blue sky
laws of various jurisdictions which have been or will be effected in accordance
with this Agreement) or conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the Organizational Documents of the
Trust or (B) conflicts or will conflict with or constitutes or will constitute a
breach of, or a default under, any agreement, indenture, lease or other
instrument to which the Trust is a party or by which it or any of its properties
may be bound, or violates or will violate any statute, law, regulation or
judgment, injunction, order or decree applicable to the Trust or any of its
properties, or will result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Trust pursuant to the terms of
any agreement or instrument to which it is a party or by which it may be bound
or to which any of its property or assets is subject. The Trust is not subject
to any order of any court or of any arbitrator, governmental authority or
administrative agency.
(h) The accountants, PricewaterhouseCoopers LLP, who have certified
or shall certify the financial statements included or incorporated by reference
in the Registration Statement and the Prospectus (or any amendment or supplement
to either of them) are independent public accountants as required by the 1933
Act, the 1940 Act and the Rules and Regulations.
(i) The financial statements, together with related schedules and
notes, included or incorporated by reference in the Registration Statement and
the Prospectus (and any amendment or supplement to either of them), present
fairly the financial position, results of operations and changes in financial
position of the Trust on the basis stated or incorporated by reference in the
Registration Statement at the respective dates or for the respective periods to
which they apply; such statements and related schedules and notes have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
therein; and the other financial and statistical information and data included
in the Registration Statement and the Prospectus (and any amendment or
<PAGE> 9
9
supplement to either of them) are accurately presented and prepared on a basis
consistent with such financial statements and the books and records of the
Trust.
(j) The execution and delivery of, and the performance by the Trust
of its obligations under, this Agreement and the Trust Agreements have been duly
and validly authorized by the Trust, and this Agreement and the Trust Agreements
have been duly executed and delivered by the Trust and assuming due
authorization, execution and delivery by the other parties thereto, constitute
the valid and legally binding agreements of the Trust, enforceable against the
Trust in accordance with their terms (subject to the qualification that the
enforceability of the Trust's obligations thereunder may be limited by
bankruptcy, insolvency, reorganization, moratorium, and similar laws of general
applicability relating to or affecting creditors' rights, and to general
principles of equity regardless of whether enforceability is considered in a
proceeding in equity or at law), except as rights to indemnity and contribution
hereunder and thereunder may be limited by federal or state securities laws.
(k) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement to either of them), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement to either of them),
the Trust has not incurred any liability or obligation, direct or contingent, or
entered into any transaction, not in the ordinary course of business, that is
material to the Trust, and there has not been any change in the capitalization,
or material increase in the short-term debt or long-term debt, of the Trust, or
any material adverse change, or any development involving or which may
reasonably be expected to involve, a prospective material adverse change, in the
condition (financial or other), business, prospects, properties, net assets or
results of operations of the Trust, whether or not arising in the ordinary
course of business (a "Material Adverse Effect").
(l) The Trust has not distributed and, prior to the later to occur
of (i) the Closing Date and (ii) completion of the distribution of the Shares,
will not distribute any offering material in connection with the offering and
sale of the Shares other than the Registration Statement, the Prepricing
Prospectus, the Prospectus or other materials, if any, permitted by the 1933
Act, the 1940 Act or the Rules and Regulations.
(m) (i) The Trust has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits") as are
necessary to own its properties and to conduct its business in the manner
described in the Prospectus (and any amendment or supplement thereto), subject
to such qualifications as may be set forth in the Prospectus; (ii) the Trust has
fulfilled and performed all its material obligations with respect to such
permits and no event has occurred which allows, or after notice or lapse of time
would allow, revocation or termination thereof or results in any other material
impairment of the rights of the Trust under any such permit, subject in each
case to such qualification as may be set forth in the Prospectus (and any
amendment or supplement thereto); and (iii) except as described in the
Prospectus (and any amendment or supplement thereto), none of such permits
contains any restriction that is materially burdensome to the Trust, except
where the failure of (i), (ii) or (iii) to be accurate would not, individually
or in the aggregate, have a Material Adverse Effect on the Trust.
<PAGE> 10
10
(n) The Trust maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization and with the
applicable requirements of the 1940 Act, the 1940 Act Rules and Regulations and
the Internal Revenue Code of 1986, as amended (the "Code"); (ii) transactions
are recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets and to maintain compliance with the books and records
requirements under the 1940 Act and the 1940 Act Rules and Regulations; (iii)
access to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(o) The Trust has filed all tax returns required to be filed, which
returns are complete and correct in all material respects, and the Trust is not
in material default in the payment of any taxes which were payable pursuant to
said returns or any assessments with respect thereto.
(p) No holder of any security of the Trust has any right to require
registration of shares of beneficial interest, shares of Municipal Preferred or
any other security of the Trust because of the filing of the registration
statement or consummation of the transactions contemplated by this Agreement.
(q) The conduct by the Trust of its business (as described in the
Prospectus) does not require it to be the owner, possessor or licensee of any
patents, patent licenses, trademarks, service marks or trade names which it does
not own, possess or license.
(r) The Trust is registered under the 1940 Act as a closed-end
non-diversified management investment company and the 1940 Act Notification has
been duly filed with the Commission and, at the time of filing thereof and any
amendment or supplement thereto, conformed in all material respects with all
applicable provisions of the 1940 Act and the Rules and Regulations. The Trust
is, and at all times through the completion of the transactions contemplated
hereby, will be, in compliance in all material respects with the terms and
conditions of the 1933 Act and the 1940 Act. No person is serving or acting as
an officer, director or investment Advisor of the Trust except in accordance
with the provisions of the 1940 Act and the 1940 Act Rules and Regulations and
the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and the
rules and regulations of the Commission promulgated under the Advisers Act (the
"Advisers Act Rules and Regulations").
(s) Except as stated in this Agreement and in the Prospectus (and
any amendment or supplement thereto), the Trust has not taken, nor will it take,
directly or indirectly, any action designed to or which might reasonably be
expected to cause or result in stabilization or manipulation of the price of any
securities issued by the Trust to facilitate the sale or resale of the Shares,
and the Trust is not aware of any such action taken or to be taken by any
affiliates of the Trust.
<PAGE> 11
11
(t) The Trust has filed in a timely manner each document or report
required to be filed by it pursuant to the 1934 Act and the rules and
regulations of the Commission promulgated thereunder (the "1934 Act Rules and
Regulations"); each such document or report at the time it was filed conformed
to the requirements of the 1934 Act and the 1934 Act Rules and Regulations; and
none of such documents or reports contained an untrue statement of any material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
(u) All advertising, sales literature or other promotional material
(including "prospectus wrappers," "broker kits," "road show slides" and "road
show scripts") authorized in writing by or prepared by the Trust or the Advisor
for use in connection with the offering and sale of the Shares (collectively
"sales material") complied and comply in all material respects with the
applicable requirements of the 1933 Act, the 1940 Act, the Rules and Regulations
and the rules and interpretations of the NASD and no such sales material
contained or contains an untrue statement of a material fact or omitted or omits
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(v) Each of the Trust Agreements and the Trust's and the Advisor's
obligations under this Agreement and each of the Trust Agreements comply in all
material respects with all applicable provisions of the 1940 Act, the 1940 Act
Rules and Regulations, the Advisors Act and the Advisers Act Rules and
Regulations.
(w) The Trust currently complies with all requirements under the
Code to qualify as a regulated investment company under Subchapter M of the
Code.
(x) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement to either of them), no director of
the Trust is an "interested person" (as defined in the 1940 Act) of the Trust or
an "affiliated person" (as defined in the 1940 Act) of the Underwriter.
(y) The Trust's Common Shares are duly listed on the New York Stock
Exchange.
(z) The Trust has implemented a comprehensive, detailed program to
analyze and address the risk that its computer hardware and software may be
unable to recognize and properly execute date-sensitive functions involving
certain dates prior to and any dates after December 31, 1999 (the "Year 2000
Problem") and has determined that its computer hardware and software are and
will be able to process all date information prior to and after December 31,
1999 without any errors, aborts, delays or other interruptions in operations
associated with the Year 2000 Problem; and the Trust believes, after reasonable
inquiry, that each supplier, vendor, customer or financial service organization
used by the Trust has remedied or will remedy on a timely basis the Year 2000
Problem, except to the extent that a failure to remedy by any such supplier,
vendor, customer or financial service organization would not have a material
adverse effect on the Trust. The Trust is in compliance with the Commission's
staff legal bulletin No. 5 dated January 12, 1998 related to Year 2000
compliance, as amended to date.
<PAGE> 12
12
7. Representations and Warranties of the Advisor. The Advisor
represents and warrants to the Underwriter as follows:
(a) The Advisor is a corporation duly incorporated and validly
existing in good standing under the laws of the Commonwealth of Massachusetts,
with full corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Registration Statement and the
Prospectus (and any amendment or supplement to either of them), and is duly
registered and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
so to register or to qualify does not have a material adverse effect on the
condition (financial or other), business, prospects, properties, net assets or
results of operations of the Advisor or on the ability of the Advisor to perform
its obligations under this Agreement and the Management Agreement.
(b) The Advisor is duly registered with the Commission as an
investment Advisor under the Advisers Act and is not prohibited by the Advisers
Act, the Advisers Act Rules and Regulations, the 1940 Act or the 1940 Act Rules
and Regulations from acting under the Management Agreement for the Trust as
contemplated by the Prospectus (or any amendment or supplement thereto). There
does not exist any proceeding or any facts or circumstances the existence of
which could lead to any proceeding which might adversely affect the registration
of the Advisor with the Commission.
(c) There are no legal or governmental proceedings pending or, to
the knowledge of the Advisor, threatened against the Advisor, or to which the
Advisor or any of its properties is subject, that are required to be described
in the Registration Statement or the Prospectus (or any amendment or supplement
to either of them) but are not described as required or that may reasonably be
expected to involve a prospective material adverse change, in the condition
(financial or other), business, prospects, properties, net assets or results of
operations of the Advisor or on the ability of the Advisor to perform its
obligations under this Agreement and the Management Agreement.
(d) Neither the execution, delivery or performance of this Agreement
or the performance of the Management Agreement by the Advisor, nor the
consummation by the Advisor of the transactions contemplated hereby or thereby
(A) requires the Advisor to obtain any consent, approval, authorization or other
order of or registration or filing with, the Commission, the NASD, any state
securities commission, any national securities exchange, any arbitrator, any
court, regulatory body, administrative agency or other governmental body, agency
or official or conflicts or will conflict with or constitutes or will constitute
a breach of or a default under, the certificate of incorporation or by-laws, or
other organizational documents, of the Advisor or (B) conflicts or will conflict
with or constitutes or will constitute a breach of or a default under, any
agreement, indenture, lease or other instrument to which the Advisor is a party
or by which it or any of its properties may be bound, or violates or will
violate any statute, law, regulation or filing or judgment, injunction, order or
decree applicable to the Advisor or any of its properties or will result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Advisor pursuant to the terms of any agreement or instrument to
which it is a party or by which it may be bound or to which any of the property
or assets of the
<PAGE> 13
Advisor is subject. The Advisor is not subject to any order of any court or
of any arbitrator, governmental authority or administrative agency.
(e) The execution and delivery of, and the performance by the
Advisor of its obligations under, this Agreement and the Management Agreement
have been duly and validly authorized by the Advisor, and this Agreement and the
Management Agreement have been duly executed and delivered by the Advisor and
each constitutes the valid and legally binding agreement of the Advisor,
enforceable against the Advisor in accordance with its terms (subject to the
qualification that the enforceability of the Advisor's obligations thereunder
may be limited by bankruptcy, insolvency, reorganization, moratorium and similar
laws of general applicability relating to or affecting creditors' rights, and to
general principles of equity regardless of whether enforceability is considered
in a proceeding in equity or at law), except as rights to indemnity and
contribution hereunder may be limited by federal or state securities laws.
(f) The description of the Advisor in the Registration Statement and
the Prospectus (and any amendment or supplement thereto) complied and comply in
all material respects with the provisions of the 1933 Act, the 1940 Act, the
Advisers Act, the Rules and Regulations and the Advisers Act Rules and
Regulations and did not and will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
(g) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement to either of them), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement to either of them),
the Advisor has not incurred any liability or obligation, direct or contingent,
or entered into any transaction, not in the ordinary course of business, that is
material to the Advisor or the Trust and that is required to be disclosed in the
Registration Statement or the Prospectus and there has not been any material
adverse change, or any development involving or which may reasonably be expected
to involve, a prospective material adverse change, in the condition (financial
or other), business, prospects, properties, net assets or results of operations
of the Advisor, whether or not arising in the ordinary course of business, or
which, in each case, could have a material adverse effect on the ability of the
Advisor to perform its obligations under this Agreement and the Management
Agreement.
(h) (i) The Advisor has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits") as are
necessary to own its properties and to conduct its business in the manner
described in the Prospectus (and any amendment thereto); (ii) the Advisor has
fulfilled and performed all its material obligations with respect to such
permits and no event has occurred which allows, or after notice or lapse of time
would allow, revocation or termination thereof or results in any other material
impairment of the rights of the Advisor under any such permit; and (iii) except
as described in the Prospectus (and any amendment or supplement thereto), none
of such permits contains any restriction that is materially burdensome to the
Advisor, except where the failure of (i), (ii), or (iii) to be accurate would
not, individually or in the aggregate, have a Material Adverse Effect on the
Advisor.
<PAGE> 14
14
8. Indemnification and Contribution. (a) The Trust and the Advisor,
jointly and severally, agree to indemnify and hold harmless each of the
Underwriter and each person, if any, who controls the Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act from and
against any and all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation), joint or several, arising out of or based
upon any untrue statement or alleged untrue statement of a material fact
contained in any Prepricing Prospectus or in the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or arising out of or based
upon any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities or expenses arise
out of or are based upon any untrue statement or omission or alleged untrue
statement or omission which has been made therein or omitted therefrom in
reliance upon and in conformity with the information relating to the Underwriter
furnished in writing to the Trust by or on behalf of the Underwriter expressly
for use in connection therewith; provided, however, that the indemnification
contained in this paragraph (a) with respect to any Prepricing Prospectus shall
not inure to the benefit of the Underwriter (or to the benefit of any person
controlling the Underwriter) on account of any such loss, claim, damage,
liability or expense arising from the sale of the Shares by the Underwriter to
any person if a copy of the Prospectus shall not have been delivered or sent to
such person within the time required by the 1933 Act and the 1933 Act Rules and
Regulations, and the untrue statement or alleged untrue statement or omission or
alleged omission of a material fact contained in such Prepricing Prospectus was
corrected in the Prospectus, provided that the Trust has delivered the
Prospectus to the Underwriter in requisite quantity on a timely basis to permit
such delivery or sending. The foregoing indemnity agreement shall be in addition
to any liability which the Trust or the Advisor may otherwise have.
(b) Any party that proposes to assert the right to be indemnified
under this Section 8 will, promptly after receipt of notice of commencement of
any action against such party in respect of which a claim is to be made against
an indemnifying party or parties under this Section 8, notify each such
indemnifying party of the commencement of such action, enclosing a copy of all
papers served, but the omission to so notify such indemnifying party (i) will
not relieve it from any liability that it may have to any indemnified party
under the foregoing provision of this Section 8 unless, and only to the extent
that, such omission results in the forfeiture of substantive rights or defenses
by the indemnifying party and (ii) will not, in any event, relieve such
indemnifying party from any other obligation (other than pursuant to the
foregoing provision of this Section 8) it may have under this Agreement. If any
action, suit or proceeding shall be brought against the Underwriter or any
person controlling the Underwriter in respect of which indemnity may be sought
against the Trust or the Advisor, the Underwriter or such controlling person
shall promptly notify the Trust or the Advisor, and the Trust or the Advisor
may, at its option and upon notice to the Underwriter assume the defense
thereof, including the employment of counsel and payment of all fees and
expenses. The Underwriter or any such controlling person shall have the right to
employ separate counsel in any such action, suit or proceeding and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of the Underwriter or such controlling person unless (i)
the Trust or the Advisor has agreed in writing to pay such fees and expenses,
(ii) the Trust and the Advisor have failed to assume the defense and employ
counsel, or (iii) the named parties to any such
<PAGE> 15
15
action, suit or proceeding (including any impleaded parties) include both the
Underwriter or such controlling person and the Trust or the Advisor and the
Underwriter or such controlling person shall have been advised by its counsel
that representation of such indemnified party and the Trust or the Advisor by
the same counsel would be inappropriate under applicable standards of
professional conduct (whether or not such representation by the same counsel has
been proposed) due to actual or potential differing interests between them (in
which case the Trust and the Advisor shall not have the right to assume the
defense of such action, suit or proceeding on behalf of the Underwriter or such
controlling person). It is understood, however, that the Trust and the Advisor
shall, in connection with any one such action, suit or proceeding or separate
but substantially similar or related actions, suits or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of only one separate firm of
attorneys (in addition to any local counsel) at any time for the Underwriter and
controlling persons not having actual or potential differing interests with you
or among themselves, which firm shall be designated in writing by the
Underwriter, and that all such fees and expenses shall be reimbursed as they are
incurred. The Trust and the Advisor shall not be liable for any settlement of
any such action, suit or proceeding effected without its written consent (which
shall not be unreasonably withheld), but if settled with such written consent,
or if there be a final judgment for the plaintiff in any such action, suit or
proceeding, the Trust and the Advisor agree to indemnify and hold harmless the
Underwriter, to the extent provided in the preceding paragraph, and any such
controlling person from and against any loss, claim, damage, liability or
reasonable expense by reason of such settlement or judgment.
(c) The Underwriter agrees to indemnify and hold harmless the Trust
and the Advisor, their directors, trustees and officers who sign the
Registration Statement, and any person who controls the Trust or the Advisor
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act,
to the same extent as the foregoing indemnity from the Trust and the Advisor to
the Underwriter, but only with respect to information relating to the
Underwriter furnished in writing by or on behalf of the Underwriter expressly
for use in the Registration Statement, the Prospectus or any Prepricing
Prospectus, or any amendment or supplement thereto. If any action, suit or
proceeding shall be brought against the Trust or the Advisor, any of their
directors, any such officer, or any such controlling person based on the
Registration Statement, the Prospectus or any Prepricing Prospectus, or any
amendment or supplement thereto, and in respect of which indemnity may be sought
against the Underwriter pursuant to this paragraph (c), the Underwriter shall
have the rights and duties given to the Trust and the Advisor by paragraph (b)
above (except that if the Trust or the Advisor shall have assumed the defense
thereof the Underwriter shall not be required to do so, but may employ separate
counsel therein and participate in the defense thereof, but the fees and
expenses of such counsel shall be at the Underwriter's expense), and the Trust
and the Advisor, their directors, trustees and any such officer, and any such
controlling person shall have the rights and duties given to the Underwriter by
paragraph (b) above. The foregoing indemnity agreement shall be in addition to
any liability which the Underwriter may otherwise have.
(d) If the indemnification provided for in this Section 8 is
unavailable to an indemnified party under paragraphs (a) or (c) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
<PAGE> 16
16
as a result of such losses, claims, damages, liabilities or reasonable expenses
(i) in such proportion as is appropriate to reflect the relative benefits
received by the Trust and the Advisor on the one hand (treated jointly for this
purpose as one person) and the Underwriter on the other hand from the offering
of the Shares, or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Trust and the Advisor on the one hand (treated jointly for this
purpose as one person) and the Underwriter on the other in connection with the
statements or omissions that resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations
with respect to the offering of the Shares. The relative benefits received by
the Trust and the Advisor on the one hand (treated jointly for this purpose as
one person) and the Underwriter on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Trust bear to the total underwriting discounts and
commissions received by the Underwriter, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault of the Trust and the
Advisor on the one hand (treated jointly for this purpose as one person) and the
Underwriter on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Trust and the Advisor on the one hand (treated jointly for this
purpose as one person) or by the Underwriter on the other hand and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. Any party entitled to contribution will,
promptly after receipt of notice of commencement of any action against such
party in respect of which a claim for contribution may be made under this
Section 8(d), notify such party or parties from whom contribution may be sought,
but the omission so to notify (i) will not relieve the party or parties from
whom contribution may be sought from any other obligation it or they may have
under this Section 8(d), unless such omission results in the forfeiture of
substantive rights or defenses by the party or parties from whom contribution is
being sought and (ii) will not, in any event, relieve the party or parties from
whom contribution may be sought from any other obligation (other than pursuant
to this Section 8(d)) it or they may have under this Agreement. Except for a
settlement entered into pursuant to the last sentence of Section 8(b) hereof, no
party will be liable for contribution with respect to any action or claim
settled without its written consent (which consent shall not be unreasonably
withheld).
(e) The Trust, the Advisor and the Underwriter agree that it would
not be just and equitable if contribution pursuant to this Section 8 were
determined by a pro rata allocation or by any other method of allocation that
does not take account of the equitable considerations referred to in paragraph
(d) above. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities and expenses referred to in paragraph (d)
above shall be deemed to include, subject to the limitations set forth above,
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating any claim or defending any such action, suit or
proceeding. Notwithstanding the provisions of this Section 8, the Underwriter
shall not be required to contribute any amount in excess of the amount by which
the total price of the Shares underwritten by it and distributed to the public
exceeds the amount of any damages which the Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of
<PAGE> 17
17
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation.
(f) No indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any indemnified party is or could
have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such action, suit or proceeding.
(g) Notwithstanding any other provisions in this Section 8, no party
shall be entitled to the benefit of any provision under this Agreement which
protects or purports to protect such person against any liability to the Trust
or its security holders to which such person would otherwise be subject by
reason of such person's willful misfeasance, bad faith, or gross negligence, in
the performance of such person's duties hereunder, or by reason of such person's
reckless disregard of such person's obligations and duties hereunder.
(h) Any losses, claims, damages, liabilities or expenses for which
an indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Trust and the Advisor set forth in this
Agreement shall remain operative and in full force and effect, regardless of (i)
any investigation made by or on behalf of the Underwriter or any person
controlling the Underwriter, the Trust, the Advisor, their directors or
officers, or any person controlling the Trust or the Advisor, (ii) acceptance of
any Shares and payment therefor hereunder, and (iii) any termination of this
Agreement. A successor to the Underwriter or any person controlling the
Underwriter, or to the Trust, the Advisor, their directors or officers, or any
person controlling the Trust or the Advisor, shall be entitled to the benefits
of the indemnity, contribution, and reimbursement agreements contained in this
Section 8.
9. Conditions of Underwriter's Obligations. The obligation of the
Underwriter to purchase the Shares hereunder are subject to the following
conditions:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
registration statement or such post-effective amendment shall have become
effective not later than 5:30 P.M., New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by the
Underwriter, and all filings, if any, required by Rules 497 and 430A under the
1933 Act and the 1933 Act Rules and Regulations shall have been timely made; no
stop order suspending the effectiveness of the Registration Statement or order
pursuant to Section 8(e) of the 1940 Act shall have been issued and no
proceeding for those purposes shall have been instituted or, to the knowledge of
the Trust, the Advisor or the Underwriter, threatened by the Commission, and any
request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been complied
with to the Underwriter's reasonable satisfaction.
(b) Subsequent to the effective date of this Agreement, there shall
not have occurred (i) any change or any development involving a prospective
change in or affecting the condition (financial or other), business, prospects,
properties, net assets, or results of operations of the Trust or the Advisor not
contemplated by the Prospectus, which in the Underwriter's reasonable opinion
would materially and adversely affect the market for the Shares, or (ii) any
<PAGE> 18
18
event or development relating to or involving the Trust or the Advisor or any
officer or director of the Trust or the Advisor which makes any statement made
in the Prospectus untrue or which, in the reasonable opinion of the Trust and
its counsel or the Underwriter and its counsel, requires the making of any
addition to or change in the Prospectus in order to state a material fact
required by the 1933 Act, the 1940 Act or the Rules and Regulations or any other
law to be stated therein or necessary in order to make the statements therein
not misleading, if amending or supplementing the Prospectus to reflect such
event or development would, in the Underwriter's opinion, materially adversely
affect the market for the Shares.
(c) The Trust shall have furnished to the Underwriter a report
showing compliance with the asset coverage requirements of the 1940 Act and a
Basic Maintenance Report (as defined in the By-laws), each dated the Closing
Date and in form and substance satisfactory to you. Each such report may use
portfolio holdings and valuations as of the close of business of any day not
more than six business days preceding the Closing Date, provided, however, that
the Trust represents in such report that its total net assets as of the Closing
Date have not declined by 5% or more from such valuation date.
(d) You shall have received on the Closing Date, an opinion of Ropes
& Gray, counsel for the Trust, dated the Closing Date and addressed to you, as
Underwriter, in form and substance satisfactory to you and to the effect set
forth in Exhibit A hereto.
(e) The Underwriter shall have received on the Closing Date an
opinion of the General Counsel for the Advisor, dated the Closing Date and
addressed to the Underwriter, in form and substance satisfactory to you and to
the effect set forth in Exhibit B hereto.
(f) The Underwriter shall have received on the Closing Date an
opinion of Simpson Thacher & Bartlett, counsel for the Underwriter, dated the
Closing Date and addressed to the Underwriter, with respect to such matters as
the Underwriter may reasonably request.
(g) The Underwriter shall have received letters addressed to the
Underwriter and dated the date hereof and the Closing Date from
PricewaterhouseCoopers LLP, independent certified public accountants,
substantially in the forms heretofore approved by the Underwriter.
(h) (i) No order suspending the effectiveness of the Registration
Statement or prohibiting or suspending the use of the Prospectus (or any
amendment or supplement thereto) or any Prepricing Prospectus or any sales
material shall have been issued and no proceedings for such purpose or for the
purpose of commencing an enforcement action against the Trust, the Advisor or,
with respect to the transactions contemplated by the Prospectus (or any
amendment or supplement thereto) and this Agreement, the Underwriter, may be
pending before or, to the knowledge of the Trust, the Advisor or the Underwriter
or in the reasonable view of counsel to the Underwriter, shall be threatened or
contemplated by the Commission at or prior to the Closing Date and that any
request for additional information on the part of the Commission (to be included
in the Registration Statement, the Prospectus or otherwise) be complied with to
the satisfaction of the Underwriter; (ii) there shall not have been any change
in the shares of beneficial interest of the Trust nor any material increase in
the short-term or long-term debt of the Trust (other than in the ordinary course
of business) from that set forth or contemplated in the
<PAGE> 19
19
Registration Statement or the Prospectus (or any amendment or supplement
thereto); (iii) there shall not have been, subsequent to the respective dates as
of which information is given in the Registration Statement and the Prospectus
(or any amendment or supplement thereto), except as may otherwise be stated in
the Registration Statement and Prospectus (or any amendment or supplement
thereto), any material adverse change in the condition (financial or other),
business, prospects, properties, net assets or results of operations of the
Trust or the Advisor; (iv) the Trust shall not have any liabilities or
obligations, direct or contingent (whether or not in the ordinary course of
business), that are material to the Trust, other than those reflected in the
Registration Statement or the Prospectus (or any amendment or supplement to
either of them); and (v) all the representations and warranties of the Trust and
the Advisor contained in this Agreement shall be true and correct on and as of
the date hereof and on and as of the Closing Date as if made on and as of the
Closing Date, and the Underwriter shall have received a certificate of the Trust
and the Advisor, dated the Closing Date and signed by the chief executive
officer and the chief financial officer of each of the Trust and the Advisor (or
such other officers as are acceptable to the Underwriter), to the effect set
forth in this Section 9(h) and in Section 9(i) hereof.
(i) Neither the Trust nor the Advisor shall have failed at or prior
to the Closing Date to have performed or complied in all material respects with
any of its agreements herein contained and required to be performed or complied
with by it hereunder at or prior to the Closing Date.
(j) The Trust shall have delivered and the Underwriter shall have
received evidence satisfactory to the Underwriter that the shares of Municipal
Preferred are rated 'aaa' by Moody's and AAA by S&P as of the Closing Date, and
there shall not have been given any notice of any intended or potential
downgrading, or of any review for a potential downgrading, in the rating
accorded to the shares of of Municipal Preferred by any Rating Agency.
(k) The Trust and the Advisor shall have furnished or caused to be
furnished to the Underwriter such further certificates and documents as the
Underwriter shall have reasonably requested.
All such opinions, certificates, letters and other documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory in form and substance to the Underwriter and the Underwriter's
counsel.
Any certificate or document signed by any officer of the Trust or
the Advisor and delivered to the Underwriter, or to counsel for the Underwriter,
shall be deemed a representation and warranty by the Trust or the Advisor to the
Underwriter as to the statements made therein.
10. Expenses. The Trust agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by it of
its obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the 1940 Act
Notification, the Prospectus and each amendment or supplement to any of them
(including, without limitation, the filing fees prescribed by the 1933 Act, the
1940 Act and the Rules and Regulations); (ii) the printing (or reproduction) and
delivery (including postage, air
<PAGE> 20
20
freight charges and charges for counting and packaging) of such copies of the
Registration Statement, each Prepricing Prospectus, the Prospectus, any sales
material and all amendments or supplements to any of them as may be reasonably
requested for use in connection with the offering and sale of the Shares; (iii)
the preparation, printing, authentication, issuance and delivery of certificates
for the Shares, including any stamp taxes in connection with the original
issuance and sale of the Shares; (iv) the reproduction and delivery of this
Agreement, any dealer agreements, the preliminary blue sky memorandum, if any,
and all other agreements or documents reproduced and delivered in connection
with the offering of the Shares; (v) the registration of the Shares under the
1934 Act; (vi) the reasonable fees, expenses and disbursements of counsel for
the Underwriter relating to the preparation, reproduction, and delivery of any
preliminary blue sky memorandum; (vii) fees paid to the Rating Agencies; (viii)
the transportation and other expenses incurred by or on behalf of Trust
representatives in connection with presentations to prospective purchasers of
the Shares; and (ix) the fees and expenses of the Trust's accountants and the
fees and expenses of counsel (including local and special counsel) for the
Trust; provided that (a) the Trust, the Advisor and the Underwriter shall pay
its own costs and expenses in attending any information meeting relating to the
Trust, (b) the Underwriter shall pay the costs and expenses of any sales
material prepared by it in connection with the public offering of the Shares,
(c) the Underwriter shall pay the costs and expenses of any "tombstone"
advertisements, and (d) except as provided in this Section and in Section 5
hereof, the Underwriter shall pay its own costs and expenses, including the fees
and expenses of their counsel.
11. Effective Date of Agreement. This Agreement shall become
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the registration statement or a post-effective amendment thereto to be
declared effective before the offering of the Shares may commence, when
notification of the effectiveness of the registration statement or such
post-effective amendment has been released by the Commission. Until such time as
this Agreement shall have become effective, it may be terminated by the Trust,
by notifying the Underwriter, or by the Underwriter, by notifying the Trust. Any
notice under this Section 11 may be given by telegram, telecopy or telephone but
shall be subsequently confirmed by letter.
12. Termination of Agreement. This Agreement shall be subject to
termination in the Underwriter's absolute discretion, without liability on the
part of the Underwriter to the Trust or the Advisor, by notice to the Trust, if
prior to the Closing Date (i) trading in securities generally on the New York
Stock Exchange shall have been suspended or materially limited, (ii) a general
moratorium on commercial banking activities in New York shall have been declared
by either federal or state authorities, or (iii) there shall have occurred any
outbreak or escalation of hostilities or other international or domestic
calamity, crisis or change in political, financial or economic conditions, the
effect of which on the financial markets of the United States is to make it, in
the Underwriter's judgment, impracticable or inadvisable to commence or continue
the offering of the Shares at the offering price to the public set forth on the
cover page of the Prospectus or to enforce contracts for the resale of the
Shares by the Underwriter. Notice of such termination may be given to the Trust
by telegram, telecopy or telephone and shall be subsequently confirmed by
letter.
<PAGE> 21
21
13. Information Furnished by the Underwriter. The statements set
forth in the last paragraph on the cover page and the statements in the first
and third sentences of the third paragraph and in the fifth paragraph under the
caption "Underwriting" in any Prepricing Prospectus and in the Prospectus,
constitute the only information furnished by or on behalf of the Underwriter as
such information is referred to in Sections 6(b) and 8 hereof.
14. Miscellaneous. Except as otherwise provided in Sections 5, 11
and 12 hereof, notice given pursuant to any provision of this Agreement shall be
in writing and shall be delivered (i) if to the Trust or the Advisor, at the
office of the Trust at One Financial Center, Boston, MA 02111, Attention:
Secretary; or (ii) if to the Underwriter, to Salomon Smith Barney Inc., 388
Greenwich Street, New York, New York 10013, Attention: Manager, Investment
Banking Division.
15. Disclaimer. A copy of the document establishing the Trust is
filed with the Secretary of the Commonwealth of Massachusetts. This Agreement is
executed by officers not as individuals and is not binding upon any of the
Trustees, officers, or shareholders of the Trust individually but only upon the
assets of the Trust.
This Agreement has been and is made solely for the benefit of the
Underwriter, the Trust, the Advisor, their directors and officers, and the other
controlling persons referred to in Section 8 hereof and their respective
successors and assigns, to the extent provided herein, and no other person shall
acquire or have any right under or by virtue of this Agreement. Neither the term
"successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from the Underwriter of any of the Shares in his
status as such purchaser.
16. Applicable Law; Counterparts. This Agreement shall be governed
by and construed in accordance with the laws of the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
[End of Text]
<PAGE> 22
Please confirm that the foregoing correctly sets forth the agreement
among the Trust, the Advisor and the Underwriter.
Very truly yours,
COLONIAL MUNICIPAL INCOME
TRUST
By:____________________________________
COLONIAL MANAGEMENT
ASSOCIATES, INC.
By:____________________________________
Confirmed as of the date first
above mentioned.
SALOMON SMITH BARNEY INC.
By:______________________
Managing Director
<PAGE> 23
SCHEDULE I
COLONIAL MUNICIPAL INCOME TRUST
<TABLE>
<CAPTION>
Number of
Shares of
Municipal
Underwriter Preferred
----------- ---------
<S> <C>
Salomon Smith Barney Inc..................... 3,600
-----
-----
Total........................................ 3,600
-----
</TABLE>
<PAGE> 24
EXHIBIT A
FORM OF OPINION OF ROPES & GRAY
The Underwriter shall have received on the Closing Date an opinion of
Ropes & Gray, counsel for the Trust, dated the Closing Date and addressed to
the Underwriter, in form and substance satisfactory to the Underwriter and to
the effect that:
a. The Trust is a business trust duly organized and validly existing in
good standing under the laws of the Commonwealth of Massachusetts
with full power and authority to own, lease and operate its
properties and to conduct its business as described in the
Registration Statement and the Prospectus and to issue and sell the
Shares as contemplated by the Underwriting Agreement;
b. The Shares have been duly authorized and, when issued and delivered
to the Underwriter against payment therefor in accordance with the
terms of the Underwriting Agreement, will be validly issued, fully
paid and nonassessable and free of any preemptive or similar rights
and will conform to the description thereof in the Registration
Statement and the Prospectus; the Certificate evidencing the Shares
complies with all requirements of Massachusetts law; and the
relative rights, interests, powers and preferences of the Shares,
and the obligation of the Trust to redeem such Shares upon the terms
and conditions set forth in the By-Laws, are legal, valid, binding
and enforceable under Massachusetts law;
c. The Shares conform in all material respects with the statements
concerning them contained in the Prospectus, and the authorized and
outstanding shares of beneficial interest of the Trust are as set
forth in the Prospectus;
d. The Registration Statement is effective under the 1933 Act and the
1940 Act; any required filing of the Prospectus pursuant to Rule 497
of the 1933 Act Rules and Regulations has been made within the time
periods required by Rule 497(b) or (h), as the case may be; to the
best knowledge of such counsel, no stop order suspending its
effectiveness or order pursuant to Section 8(e) of the 1940 Act
relating to the Trust has been issued and no proceeding for any
such purpose is pending or threatened by the Commission;
e. The Registration Statement and the Prospectus comply as to form in
all material respects with the provisions of the 1933 Act, the 1940
Act and the Rules and Regulations (except that no opinion need be
expressed as to the financial statements or other financial data
contained therein);
f. The statements made in the Prospectus (including the bStatement of
Additional Information) under the captions "The Auction" and
"Description of Municipal Preferred", insofar as they purport to
summarize the provisions of the Bylaws or other documents or
agreements specifically referred to therein, constitute accurate
summaries of the terms of any such documents;
<PAGE> 25
2
g. The statements made in the Prospectus (including the Statement of
Additional Information) under the captions "Tax Matters", insofar as
they constitute matters of law or legal conclusions, have been
reviewed by such counsel and constitute accurate statements of any
such matters of law or legal conclusions in all material respects,
and fairly present the information called for with respect thereto
by Form N-2 under the 1940 Act;
h. To such counsel's knowledge (but without a search of the dockets of
any court, administrative body or filing office in any
jurisdiction), there are no legal or governmental proceedings
pending or threatened against the Trust, or to which the Trust or
any of its properties is subject, that are required to be described
in the Registration Statement or the Prospectus but are not
described as required;
i. To the best of such counsel's knowledge after reasonable inquiry,
there are no agreements, contracts, indentures, leases or other
instruments that are required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement that are not described or filed as required
by the 1933 Act, the 1940 Act or the Rules and Regulations;
j. Neither the issuance and sale of the Shares, the execution, delivery
or performance of the Underwriting Agreement or any of the Trust
Agreements by the Trust, nor the consummation by the Trust of the
transactions contemplated thereby (A) requires any consent,
approval, authorization or other order of or registration or filing
by the Trust with, the Commission, the NASD, any national
securities exchange, any arbitrator, any court, regulatory body,
administrative agency or other governmental body, agency or
official (except such as may have been obtained prior to the date
hereof and such as may be required for compliance with state
securities and blue sky laws) or conflicts or will conflict with or
constitutes or will constitute a breach of, or a default under, the
Declaration, the By-Laws or other organizational documents of the
Trust or (B) (i) conflicts or will conflict with or constitutes or
will constitute a breach of, or a default under, any agreement,
indenture, lease or other instrument to which the Trust is a party
or by which it or any of its properties may be bound and that is
identified, in an officer's certificate of the Trust, as material
to the business, financial condition, operations, properties or
prospects of the Trust (the "Agreements and Instruments"), (ii)
violates or will violate any statute, law or regulation (assuming
compliance with state securities and blue sky laws), (iii) violates
or will violate any judgment, injunction, order or decree that is
applicable to the Trust or any of its properties and that is known
to such counsel, or (iv) will result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of
the Trust pursuant to the terms of the Agreements and Instruments;
k. The Underwriting Agreement and the Trust Agreements have been duly
authorized, executed and delivered by the Trust and each complies
with all applicable provisions of the 1940 Act; assuming due
authorization, execution and delivery by the other parties
<PAGE> 26
3
thereto, each Trust Agreement constitutes the valid and binding
obligation of the Trust enforceable in accordance with its terms,
except as rights to indemnity and contribution in the Underwriting
Agreements and Trust Agreements may be limited by Federal or state
securities laws, subject as to enforcement to bankruptcy,
insolvency, reorganization and other laws of general applicability
relating to or affecting creditors' rights and to general equity
principles;
l. The Trust is duly registered under the 1940 Act as a closed-end
non-diversified management investment company;
m. The provisions of the Declaration and By-Laws of the Trust and the
investment policies and restrictions described in the Prospectus
(including the Statement of Additional Information) under the
captions "Investment Objectives and Policies" and "Miscellaneous
Investment Practices" comply with the requirements of the 1940 Act
and the 1940 Act Rules and Regulations; and
Such counsel shall also have furnished to the Underwriter a
statement, addressed to the Underwriter, dated the Closing Date, to the
effect that such counsel has acted for the Trust in connection with the
preparation of the Registration Statement, and based on the foregoing,
while such counsel has not themselves independently verified the accuracy
or completeness of or otherwise verified and is not passing upon and
assumes no responsibility for the Registration Statement or the Prospectus
(other than as set forth in (f), (g) and (m) above) in the course of their
review of the Registration Statement and Prospectus and discussion of the
contents of the Registration Statement and Prospectus with certain
officers and employees of the Trust and its independent accountants, no
facts have come to the attention of such counsel which would lead them to
believe that the Registration Statement (excluding the financial
statements, including the notes and schedules thereto, or other financial
data contained or referred to therein, as to which such counsel need
express no belief), as of its effective date, contained any untrue
statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the statements
therein not misleading or that the Prospectus (except for the financial
statements, including the notes and schedules thereto, or other financial
data contained or referred to therein, as to which such counsel need
express no belief) contains any untrue statement of a material fact or
omits to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
Such counsel may also state that they do not express any opinion
concerning any law other than the law of the Commonwealth of Massachusetts
and the federal law of the United States.
<PAGE> 27
EXHIBIT B
FORM OF OPINION OF GENERAL COUNSEL OF ADVISER
The Underwriter shall have received on the Closing Date an opinion of the
General Counsel of the Advisor, addressed to the Underwriter and dated the
Closing Date, in form and substance satisfactory to the Underwriter and to the
effect that:
a. The Adviser is a corporation duly incorporated and validly existing
and in good standing under the laws of The Commonwealth of
Massachusetts, with full corporate power and authority to own, lease
and operate its properties and to conduct its business as described
in the Registration Statement and the Prospectus;
b. The Underwriting Agreement and the Management Agreement have been
duly authorized, executed and delivered by the Advisor and each
complies with all applicable provisions of the Advisers Act and the
Management Agreement constitutes the valid and binding obligation of
the Advisor enforceable in accordance with its terms, subject as to
enforcement to bankruptcy, insolvency, reorganization and other laws
of general applicability relating to or affecting creditors' rights
and to general equity principles;
c. The Adviser is duly registered with the Commission as an investment
adviser under the Advisers Act and is not prohibited by the Advisers
Act, the Advisers Act Rules and Regulations, the 1940 Act or the
1940 Act Rules and Regulations from acting under the Management
Agreement for the Trust as contemplated by the Prospectus;
d. To the best of such counsel's knowledge after reasonable inquiry,
there are no legal or governmental proceedings pending or threatened
against the Adviser, or to which the Adviser or any of its
properties is subject, that are required to be described in the
Registration Statement or the Prospectus but are not described as
required;
e. To the best of such counsel's knowledge after reasonable inquiry,
the Adviser is not in violation of its corporate charter or by-laws,
nor is the Adviser in default under any material agreement,
indenture or instrument or in breach or violation of any judgment,
decree, order, rule or regulation of any court or governmental or
self-regulatory agency or body;
f. Neither the execution, delivery or performance of the Underwriting
Agreement nor the consummation by the Adviser of the transactions
contemplated hereby or thereby (A) requires the Adviser to obtain
any consent, approval, authorization or other order of or
registration or filing with, the Commission, the NASD, any national
securities exchange, any arbitrator, any court, regulatory body,
administrative agency or other governmental body, agency or official
(except such as may have been obtained prior to the date hereof and
such as may be required for compliance with state securities or blue
sky laws) or conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the certificate of
incorporation or by-laws, or other organizational
<PAGE> 28
2
documents, of the Adviser or (B) (i) conflicts or will conflict with
or constitutes or will constitute a breach of, or a default under,
any material agreement, indenture, lease or other instrument to
which the Trust is a party or by which it or any of its properties
may be bound (the "Agreements and Instruments") or any other
Agreements and Instruments known to such counsel after due inquiry,
(ii) violates or will violate any statute, law or regulation
(assuming compliance with state securities and blue sky laws), (iii)
violates or will violate any judgment, injunction, order or decree
that is applicable to the Advisor or any of its properties and that
is known to such counsel, or (iv) will result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of the Advisor pursuant to the terms of the Agreements and
Instruments; and
g. The description of the Adviser in the Registration Statement and the
Prospectus does not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
<PAGE> 1
Exhibit (K)(1)
COLONIAL AUCTION AGENCY AGREEMENT
Basic Terms for Acting as Auction Agent
July __, 1999
These basic terms ("Basic Terms") set forth the general terms and
conditions pursuant to which a bank or trust company identified in a Request and
Acceptance Letter will act as auction agent (an "Auction Agent") for Municipal
Auction Rate Cumulative Preferred Shares ("Municipal Preferred") issued by an
investment company registered under the Investment Company Act of 1940, as
amended, as further identified by such Request and Acceptance Letter (a
"Trust"), for which Colonial Management Associates, Inc. is the investment
adviser.
- --------------------------------------------------------------------------------
The Trust proposes to issue shares of Municipal Preferred pursuant
to its Agreement, Declaration of Trust and Bylaws. The Trust desires that the
Auction Agent perform certain duties in connection with the Municipal Preferred
upon the terms and subject to the conditions of the Agreement.
1. Definitions and Rules of Construction.
1.1 Terms Defined By Reference to Bylaws.
Capitalized terms not defined herein shall have the respective
meanings specified in the Bylaws.
1.2 Terms Defined Herein.
As used herein and in the Settlement Procedures, the following terms
shall have the following meanings, unless the context otherwise requires:
(a) "Agent Member" of any Person shall mean the member of, or
participant in, the Securities Depository that will act on behalf of a
Bidder.
(b) "Agreement" shall mean the Basic Terms, together with the
Request and Acceptance Letter relating to one or more series of Municipal
Preferred.
(c) "Auction" shall have the meaning specified in Section 2.1
hereof.
(d) "Auction Procedures" shall mean the auction procedures
constituting Part II of Section 12.1 of the Bylaws of any Trust as of the
adoption thereof.
(e) "Authorized Officer" of the Auction Agent shall mean each Senior
Vice President, Vice President, Assistant Vice President and Associate
<PAGE> 2
2
of the Auction Agent assigned to its Corporate Trust and Agency Group and
every other officer or employee of the Auction Agent designated as an
"Authorized Officer" for purposes hereof in a communication to the Trust.
(f) "Broker-Dealer Agreement" shall mean each agreement among the
Trust, the Auction Agent and a Broker-Dealer substantially in the form
attached hereto as Exhibit A.
(g) "By-Laws," with respect to any Trust, shall mean the By-Laws, as
amended and restated, of such Trust, a copy of which will be attached to
the Request and Acceptance Letter of such Trust.
(h) "Declaration" means the Agreement and Declaration of Trust of
any Trust, as the same may be amended, supplemented or modified.
(i) "Municipal Preferred" shall mean the preferred shares, no par
value, of any Trust designated as its "Municipal Auction Rate Cumulative
Preferred Shares" and bearing such further designation as to series as the
Board of Trustees of such Trust or any committee thereof shall specify, as
set forth in the Request Letter.
(j) "Request and Acceptance Letter" shall mean the letter from the
Trust to the Auction Agent pursuant to which the Trust appoints the
Auction Agent and the Auction Agent accepts its appointment as auction
agent for the Municipal Preferred.
(k) "Settlement Procedures" shall mean the Settlement Procedures
attached hereto as Exhibit B.
(l) "Trust Officer" shall mean the Chairman of the Board of
Trustees, each Vice Chairman of the Board of Trustees (whether or not
designated by a number or word or words added before or after the title
"Vice Chairman"), the President, each Vice President (whether or not
designated by a number or word or words added before or after the title
"Vice President"), the Secretary, the Treasurer, each Assistant Vice
President and each Associate of the Trust and every other officer or
employee of the Trust designated as a "Trust Officer" for purposes hereof
in a notice to the Auction Agent.
1.3 Rules of Construction.
Unless the context or use indicates another or different meaning or
intent, the following rules shall apply to the construction of the Agreement:
(a) Words importing the singular number shall include the plural
number and vice versa.
<PAGE> 3
3
(b) The captions and headings herein are solely for convenience of
reference and shall not constitute a part of the Agreement nor shall they
affect its meaning, construction or effect.
(c) The words "hereof", "herein", "hereto" and other words of
similar import refer to the Agreement as a whole.
(d) All references herein to a particular time of day shall be to
New York City time.
2. The Auction.
2.1 Purpose; Incorporation by Reference of
Auction Procedures and Settlement Procedures.
(a) The Bylaws for each series of Municipal Preferred will provide
that the Applicable Rate for such series for each Subsequent Rate Period
thereof shall, except under certain conditions, be the rate per annum that
a bank or trust company appointed by the Trust advises results from
implementation of the Auction Procedures for such series. The Board of
Directors or Board of Trustees, as the case may be, of the Trust has
adopted a resolution appointing the Auction Agent as auction agent for
purposes of the Auction Procedures for each series of Municipal Preferred.
The Auction Agent accepts such appointment and agrees to follow the
procedures set forth in this Section 2 and the Auction Procedures for the
purpose of determining the Applicable Rate for each series of Municipal
Preferred for each Subsequent Rate Period thereof for which the Applicable
Rate is to be determined by an Auction. Each periodic implementation of
such procedures is hereinafter referred to as an "Auction."
(b) All of the provisions contained in the Auction Procedures and
the Settlement Procedures are incorporated herein by reference in their
entirety and shall be deemed to be a part hereof to the same extent as if
such provisions were fully set forth herein.
2.2 Preparation for Each Auction; Maintenance
of Registry of Beneficial Owners.
(a) Not later than seven days prior to the first Auction Date for
the first series of Municipal Preferred subject to an Auction, the Trust
shall provide the Auction Agent with a list of the Broker-Dealers. Not
later than seven days prior to any Auction Date for any series of
Municipal Preferred for which any change in such list of Broker-Dealers is
to be effective, the Trust will notify the Auction Agent in writing of
such change and, if any such change involves the addition of a
Broker-Dealer to such list, shall cause to be delivered to the Auction
Agent for execution by the Auction Agent a Broker-Dealer Agreement signed
by such Broker-Dealer;
<PAGE> 4
4
provided, however, that if the Trust proposes to designate any Special
Rate Period of any series of Municipal Preferred pursuant to Section 4 of
Part I of Section 12.1 of the Bylaws, not later than 11:00 A.M., New York
City time, on the Business Day next preceding the Auction next preceding
the first day of such Rate Period or by such later time or date, or both,
as may be agreed to by the Auction Agent, the Trust shall provide the
Auction Agent with a list of the Broker-Dealers for such series and a
manually signed copy of each Broker-Dealer Agreement or a new Schedule A
to a Broker-Dealer Agreement (which Schedule A shall replace and supersede
any previous Schedule A to such Broker-Dealer Agreement) with each
Broker-Dealer for such series. The Auction Agent and the Trust shall have
entered into a Broker-Dealer Agreement with each Broker-Dealer prior to
the participation of any such Broker-Dealer in any Auction.
(b) In the event that any Auction Date for any series of Municipal
Preferred shall be changed after the Auction Agent shall have given the
notice referred to in clause (vi) of paragraph (a) of the Settlement
Procedures, or after the notice referred to in Section 2.5(a) hereof, if
applicable, the Auction Agent, by such means as the Auction Agent deems
practicable, shall give notice of such change to the Broker-Dealers for
such series not later than the earlier of 9:15 A.M., New York City time,
on the new Auction Date or 9:15 A.M., New York City time, on the old
Auction Date.
(c) (i) The Auction Agent shall maintain a registry of the
beneficial owners of the shares of Municipal Preferred of each series who
shall constitute Existing Holders of shares of Municipal Preferred of such
series for purposes of Auctions and shall indicate thereon the identity of
the respective Broker-Dealer of each Existing Holder, if any, on whose
behalf such Broker-Dealer submitted the most recent Order in any Auction
which resulted in such Existing Holder continuing to hold or purchasing
shares of Municipal Preferred of such series. The Auction Agent shall keep
such registry current and accurate. The Trust shall provide or cause to be
provided to the Auction Agent at or prior to the Date of Original Issue of
the shares of Municipal Preferred of each series a list of the initial
Existing Holders of the shares of each such series of Municipal Preferred,
the number of shares purchased by each such Existing Holder and the
respective Broker-Dealer of each such Existing Holder or the affiliate
thereof through which each such Existing Holder purchased such shares. The
Auction Agent shall advise the Trust in writing whenever the number of
Existing Holders is 500 or more. The Auction Agent may rely upon, as
conclusive evidence of the identities of the Existing Holders of shares of
Municipal Preferred of any series (A) such list, (B) the results of
Auctions, (C) notices from any Broker-Dealer as described in the first
sentence of Section 2.2(c)(iii) hereof and (D) the results of any
procedures approved by the Trust that have been devised for the purpose of
determining the identities of Existing Holders in situations where shares
of Municipal Preferred may have been transferred without compliance with
any restriction on the transfer thereof set forth in the Auction
Procedures.
<PAGE> 5
5
(ii) In the event of any partial redemption of any series of
Municipal Preferred, the Auction Agent shall, at least two Business Days
prior to the next Auction for such series, request each Broker-Dealer to
provide the Auction Agent with a list of Persons who such Broker-Dealer
believes should remain Existing Holders after such redemption based upon
inquiries of those Persons such Broker-Dealer believes are Beneficial
Owners as a result of the most recent Auction and with respect to each
such Person, the number of shares of Municipal Preferred of such series
such Broker-Dealer believes are owned by such Person after such
redemption. In the absence of receiving any such information from any
Broker-Dealer, the Auction Agent may continue to treat the Persons listed
in its registry of Existing Holders as the beneficial owner of the number
of shares of Municipal Preferred of such series shown in such registry.
(iii) The Auction Agent shall be required to register a
transfer of shares of Municipal Preferred of any series from an Existing
Holder of such shares of Municipal Preferred only if such transfer is to
another Existing Holder, or other Person if permitted by the Trust, and
only if such transfer is made (A) pursuant to an Auction, (B) the Auction
Agent has been notified in writing (I) in a notice substantially in the
form of Exhibit C to the Broker-Dealer Agreements by a Broker-Dealer of
such transfer or (II) in a notice substantially in the form of Exhibit D
to the Broker-Dealer Agreements by the Broker-Dealer of any Existing
Holder, or other Person if permitted by the Trust, that purchased or sold
such shares of Municipal Preferred in an Auction of the failure of such
shares of Municipal Preferred to be transferred as a result of such
Auction or (C) pursuant to procedures approved by the Trust that have been
devised for the purpose of determining the identities of Existing Holders
in situations where shares of Municipal Preferred may have been
transferred without compliance with any restriction on the transfer
thereof set forth in the Auction Procedures. The Auction Agent is not
required to accept any such notice for an Auction unless it is received by
the Auction Agent by 3:00 P.M., New York City time, on the Business Day
preceding such Auction.
(d) The Auction Agent may request the Broker-Dealers, as set forth
in the Broker-Dealer Agreements, to provide the Auction Agent with a list
of Persons who such Broker-Dealer believes should be Existing Holders
based upon inquiries of those Persons such Broker-Dealer believes are
Beneficial Owners as a result of the most recent Auction and with respect
to each such Person, the number of shares of such series of Municipal
Preferred such Broker-Dealer believes to be owned by such Person. The
Auction Agent shall keep confidential such registry of Existing Holders
and shall not disclose the identities of the Existing Holders of such
shares of Municipal Preferred to any Person other than the Trust and the
Broker-Dealer that provided such information.
<PAGE> 6
6
2.3 Information Concerning Rates.
(a) The Rate Multiple on the date of the Agreement is set forth in
the Request and Acceptance Letter. If there is any change in the credit
rating of Municipal Preferred by either of the rating agencies (or
substitute or successor rating agencies) referred to in the definition of
"Rate Multiple" resulting in any change in the Rate Multiple for Municipal
Preferred after the date of the Request and Acceptance Letter, the Trust
shall notify the Auction Agent in writing of such change in the Rate
Multiple prior to 12:00 Noon, New York City time, on the Business Day
prior to the next Auction Date for any series of Municipal Preferred
succeeding such change. If the Trust designates all or a portion of any
dividend on shares of any series of Municipal Preferred to consist of net
capital gains or other income taxable for Federal income tax purposes, it
will indicate, in its notice in the form of Exhibit I hereto to the
Auction Agent pursuant to Section 2.6 hereof, the Rate Multiple for such
series to be in effect for the Auction Date on which the dividend rate for
such dividend is to be fixed. In determining the Maximum Rate for any
series of Municipal Preferred on any Auction Date as set forth in Section
2.3(b)(i) hereof, the Auction Agent shall be entitled to rely on the last
Rate Multiple for Municipal Preferred of which it has most recently
received notice from the Trust (or, in the absence of such notice, the
percentage set forth in the Request and Acceptance Letter), except that if
the Trust shall have notified the Auction Agent of a Rate Multiple to be
in effect for an Auction Date in accordance with the preceding sentence,
the Rate Multiple in effect for the next succeeding Auction Date of any
series of Municipal Preferred shall be, unless the Trust notifies the
Auction Agent of a change in the Rate Multiple for such succeeding Auction
Date pursuant to this Section 2.3(a), the Rate Multiple that was in effect
on the first preceding Auction Date for Municipal Preferred with respect
to which the dividend, the rate for which was fixed on such Auction Date,
did not include any net capital gains or other income taxable for Federal
income tax purposes.
(b) (i) On each Auction Date for any series of Municipal
Preferred, the Auction Agent shall determine the Maximum Rate for such
series. The Maximum Rate for any series of Municipal Preferred on any
Auction Date shall be:
(A) in the case of any Auction Date which is not the Auction
Date immediately prior to the first day of any proposed Special Rate
Period designated by the Trust pursuant to Section 4 of Part I of Section
12.1 of the Bylaws, the product of (1) the Reference Rate on such Auction
Date for the next Rate Period of such series and (2) the Rate Multiple on
such Auction Date, unless such series has or had a Special Rate Period
(other than a Special Rate Period of 28 Rate Period Days or fewer) and an
Auction at which Sufficient Clearing Bids existed has not yet occurred for
a Minimum Rate Period of such series after such Special Rate Period, in
which case the higher of:
<PAGE> 7
7
(1) the dividend rate on shares of such series for the
then-ending Rate Period; and
(2) the product of (x) the higher of (I) the Reference
Rate on such Auction Date for a Rate Period equal in length to
the then-ending Rate Period of such series, if such then
ending Rate Period was 364 Rate Period Days or fewer, or the
Treasury Note Rate on such Auction Date for a Rate Period
equal in length to the then-ending Rate Period of such series,
if such then ending Rate Period was more than 364 Rate Period
Days, and (II) the Reference Rate on such Auction Date for a
Rate Period equal in length to such Special Rate Period of
such series, if such Special Rate Period was 364 Rate Period
Days or fewer, or the Treasury Note Rate on such Auction Date
for a Rate Period equal in length to such Special Rate Period,
if such Special Rate Period was more than 364 Rate Period Days
and (y) the Rate Multiple on such Auction Date; or
(B) in the case of any Auction Date which is the Auction Date
immediately prior to the first day of any proposed Special Rate Period
designated by the Trust pursuant to Section 4 of Part I of Section 12.1 of
the Bylaws, the product of (1) the highest of (x) the Reference Rate on
such Auction Date for a Rate-Period equal in length to the then-ending
Rate Period of such series, if such then-ending Rate Period was 364 Rate
Period Days or fewer, or the Treasury Note Rate on such Auction Date for a
Rate Period equal in length to the then-ending Rate Period of such Rate
Period, if such then-ending Rate Period was more than 364 Rate Period
Days, (y) the Reference Rate on such Auction Date for the Special Rate
Period for which the Auction is being held if such Special Rate Period is
364 Rate Period Days or fewer or the Treasury Note Rate on such Auction
Date for the Special Rate Period for which the Auction is being held if
such Special Rate Period is more than 364 Rate Period Days, and (z) the
Reference Rate on such Auction Date for Minimum Rate Periods and (2) the
Rate Multiple on such Auction Date.
Not later than 9:30 A.M. on each Auction Date the Auction Agent shall notify the
Trust and the Broker-Dealers of the Maximum Rate so determined and the "AA"
Composite Commercial Paper Rate(s), the Taxable Equivalent of the Short-Term
Municipal Bond Rate(s), Treasury Note Rate(s) and Treasury Bill Rate(s), as the
case may be, used to make such determination.
(ii) From and after a Failure to Deposit by the Trust during
any Rate Period of any series of Municipal Preferred, until such failure
is cured and a Late Charge (as defined in paragraph (a) of Section 2.7),
is paid, in accordance with subparagraph (e)(i) of Section 2 of Part I of
Section 12.1 of the Bylaws, on the first day of each Rate Period of such
series the Auction Agent shall determine the Treasury Note Rate for such
Rate Period of more than 364 Rate Period Days and the Reference Rate for
Rate Periods of 364 Rate Period Days or fewer. Not later
<PAGE> 8
8
than 9:30 A.M. on each such first day, the Auction Agent shall notify the
Trust of the applicable Reference Rate and Treasury Note Rate.
(iii) If any "AA" Composite Commercial Paper Rate, Taxable
Equivalent of the Short-Term Municipal Bond Rate, Treasury Note Rate or
Treasury Bill Rate, as the case may be, is not quoted on an interest or
bond equivalent, as the case may be, basis, the Auction Agent shall
convert the quoted rate to the interest or bond equivalent thereof as set
forth in the definition of such rate in the Bylaws if the rate obtained by
the Auction Agent is quoted on a discount basis, or if such rate is quoted
on a basis other than an interest or bond equivalent or discount basis the
Auction Agent shall convert the quoted rate to an interest or bond
equivalent rate after consultation with the Trust as to the method of such
conversion.
(iv) If any "AA" Composite Commercial Paper Rate is to be
based on rates supplied by Commercial Paper Dealers and one or more of the
Commercial Paper Dealers shall not provide a quotation for the
determination of such "AA" Composite Commercial Paper Rate, the Auction
Agent shall immediately notify the Trust so that the Trust can determine
whether to select a Substitute Commercial Paper Dealer or Substitute
Commercial Paper Dealers to provide the quotation or quotations not being
supplied by any Commercial Paper Dealer or Commercial Paper Dealers. The
Trust shall promptly advise the Auction Agent of any such selection.
(v) If any Treasury Note Rate or Treasury Bill Rate is to be
based on rates supplied by U.S. Government Securities Dealers and one or
more of the U.S. Government Securities Dealers shall not provide a
quotation for the determination of such Treasury Rate, the Auction Agent
shall immediately notify the Trust so that the Trust can determine whether
to select a Substitute U.S. Government Securities Dealer or Substitute
U.S. Government Securities Dealers to provide the quotation or quotations
not being supplied by any U.S. Government Securities Dealer or U.S.
Government Securities Dealers. The Trust shall promptly advise the Auction
Agent of any such selection.
(c) The maximum marginal tax rate referred to in the definition of
"Rate Multiple" in the Bylaws is referred to in this Agreement as the
"Highest Marginal Rate." The Highest Marginal Rate on the date of the
Agreement is set forth in the Request and Acceptance Letter. If there is
any change in the Highest Marginal Rate, the Trust shall notify the
Auction Agent in writing of such change prior to 12:00 Noon, New York City
time, on the Business Day prior to the next Auction Date for Municipal
Preferred succeeding such change. In determining the Maximum Rate for any
series of Municipal Preferred on any Auction Date, the Auction Agent shall
be entitled to rely on the Highest Marginal Rate of which it has most
recently received notice from the Trust (or, in the absence of such
notice, the percentage set forth in the Request and Acceptance Letter).
<PAGE> 9
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2.4 Auction Schedule.
The Auction Agent shall conduct Auctions in accordance with the
schedule set forth below. Such schedule may be changed by the Auction Agent with
the consent of the Trust, which consent shall not be unreasonably withheld. The
Auction Agent shall give written notice of any such change to each
Broker-Dealer. Such notice shall be given prior to the close of business on the
Business Day next preceding the first Auction Date on which any such change
shall be effective.
Time Event
By 9:30 A.M. Auction Agent advises the Trust and Broker-
Dealers of the applicable Maximum Rate and
the Reference Rate(s) and Treasury Note
Rate(s), as the case may be, used in
determining such Maximum Rate as set forth
in Section 2.3(b)(i) hereof.
9:30 A.M. - 1:30 P.M. Auction Agent assembles information
communicated to it by Broker-Dealers as
provided in Section 2(a) of the Auction
Procedures. Submission Deadline is 1:30
P.M.
Not earlier than 1:30 P.M. Auction Agent makes determinations pursuant
to Section 3(a) of the Auction Procedures.
By approximately 3:00 P.M. Auction Agent advises Trust of results of
Auction as provided in Section 3(b) of the
Auction Procedures.
Submitted Bids and Submitted Sell Orders are accepted and rejected and shares of
Municipal Preferred are allocated as provided in Section 4 of the Auction
Procedures. The Auction Agent gives notice of the Auction results as set forth
in paragraph (a) of the Settlement Procedures.
The Auction Agent shall follow the notification procedures set forth in
paragraph (a) of the Settlement Procedures.
2.5 Designation of Special Rate Period.
(a) The Bylaws will provide that, subject to the Trust's option to
designate a Special Rate Period as referred to in paragraph (b) of this
Section 2.5, (i) each Rate Period of any series of Municipal Preferred
will be a Minimum Rate
<PAGE> 10
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Period (a duration of seven days, subject to certain exceptions) and (ii)
each Rate Period following a Rate Period of any series of Municipal
Preferred that is other than a Minimum Rate Period will be a Minimum Rate
Period. Not less than 10 nor more than 20 days prior to the last day of
any such Rate Period that is not a Minimum Rate Period, (i) the Trust
shall deliver to the Auction Agent a notice of the Auction Date of the
next succeeding Auction for such series in the form of Exhibit C hereto
and (ii) the Auction Agent shall deliver such notice by first-class mail,
postage prepaid, to each Existing Holder of shares of such series at the
address set forth for such Existing Holder in the records of the Auction
Agent and to the Broker-Dealers for such series as promptly as practicable
after its receipt of such notice from the Trust.
(b) Pursuant to the Bylaws, the Trust may, at its option, designate
a Special Rate Period for any series of Municipal Preferred in the manner
described in Section 4 of Part I of Section 12.1 of the Bylaws.
(i) If the Board of Trustees proposes to designate any
succeeding Subsequent Rate Period of any series of Municipal Preferred as
a Special Rate Period, (A) the Trust shall deliver to the Auction Agent a
notice of such proposed Special Rate Period in the form of Exhibit D
hereto not less than 20 (or such lesser number of days as may be agreed to
from time to time by the Auction Agent) nor more than 30 days prior to the
first day of such proposed Special Rate Period and (B) the Auction Agent
on behalf of the Trust shall deliver such notice by first-class mail,
postage prepaid, to each Existing Holder of shares of such series of
Municipal Preferred at the address set forth for such Existing Holder in
the records of the Auction Agent and to the Broker-Dealers for such series
as promptly as practicable after its receipt of such notice from the
Trust.
(ii) If the Board of Trustees determines to designate such
succeeding Subsequent Rate Period as a Special Rate Period, (A) the Trust
shall deliver to the Auction Agent a notice of such determination in the
form of Exhibit E hereto not later than 11:00 A.M., New York City time, on
the second Business Day next preceding the first day of such proposed
Special Rate Period (or such later time or date, or both, as may be agreed
to by the Auction Agent) and (B) the Auction Agent shall deliver such
notice to the Broker-Dealers for such series not later than 3:00 P.M., New
York City time, on such second Business Day (or, if the Auction Agent has
agreed to a later time or date, as promptly as practicable thereafter).
(iii) If the Trust shall deliver to the Auction Agent a notice
not later than 11:00 A.M., New York City time, on the second Business Day
next preceding the first day of such proposed Special Rate Period (or such
later time or date, or both, as may be agreed to by the Auction Agent)
stating that the Trust has determined not to exercise its option to
designate such succeeding Subsequent Rate Period as a Special Rate Period,
in the form of Exhibit F hereto, or shall fail to timely deliver either
such notice or a notice in the form of Exhibit E hereto, the
<PAGE> 11
11
Auction Agent shall deliver a notice in the form of Exhibit F hereto to
the Broker-Dealers for such series not later than 3:00 P.M., New York City
time, on such second Business Day (or, if the Auction Agent has agreed to
a later time or date, as promptly as practicable thereafter).
Such change in the length of any Rate Period shall not occur if (1) an Auction
for shares of such series shall not be held on such Auction Date for any reason
or (2) an Auction for shares of such series shall be held on such Auction Date
but Sufficient Clearing Bids for shares of such series shall not exist in such
Auction.
2.6 Allocation of Taxable Income.
The Trust shall, in the case of a Minimum Rate Period or a Special
Rate Period of 28 Rate Period Days or fewer, and may, in the case of any other
Special Rate Period, designate all or a portion of any dividend on shares of any
series of Municipal Preferred to consist of net capital gains or other income
taxable for Federal income tax purposes by delivering to the Auction Agent a
notice in the form of Exhibit I hereto of such designation not later than the
Dividend Payment Date for such series next preceding the Auction Date on which
the dividend rate for such dividend is to be fixed. The Auction Agent will
deliver such notice to the Broker-Dealers for such series on the Business Day
following its receipt of such notice from the Trust. Within two Business Days
after any Auction Date involving the allocation of income taxable for Federal
income tax purposes, the Auction Agent shall notify each Broker-Dealer for the
related series as to the dollar amount per share of such taxable income and
income exempt from Federal income taxation included in the related dividend.
2.7 Failure to Deposit.
(a) If:
(i) any Failure to Deposit shall have occurred with respect to
shares of Municipal Preferred during any Rate Period thereof (other than
any Special Rate Period of more than 364 Rate Period Days or any Rate
Period succeeding any Special Rate Period of more than 364 Rate Period
Days during which a Failure to Deposit occurred that has not been cured),
but, prior to 12:00 Noon, New York City time, on the third Business Day
next succeeding the date on which such Failure to Deposit occurred, such
Failure to Deposit shall have been cured in accordance with Section 2.7(c)
hereof and the Trust shall have paid to the Auction Agent a late charge (a
"Late Charge") equal to the sum of (1) if such Failure to Deposit
consisted of the failure timely to pay to the Auction Agent the full
amount of dividends with respect to any Dividend Period on such shares, an
amount computed by multiplying (x) 200% of the Reference Rate for the Rate
Period during which such Failure to Deposit occurs on the Dividend Payment
Date for such Dividend Period by (y) a fraction, the numerator of which
shall be the number of days for which such Failure to Deposit has not been
cured in accordance with
<PAGE> 12
12
Section 2.7(c) hereof (including the day such Failure to Deposit occurs
and excluding the day such Failure to Deposit is cured) and the
denominator of which shall be 360, and applying the rate obtained against
the aggregate liquidation preference of the outstanding shares of
Municipal Preferred and (2) if such Failure to Deposit consisted of the
failure timely to pay to the Auction Agent the Redemption Price of the
shares of Municipal Preferred, if any, for which Notice of Redemption has
been given by the Trust, an amount computed by multiplying (x) 200% of the
Reference Rate for the Rate Period during which such Failure to Deposit
occurs on the redemption date by (y) a fraction, the numerator of which
shall be the number of days for which such Failure to Deposit is not cured
in accordance with Section 2.7(c) hereof (including the day such Failure
to Deposit occurs and excluding the day such Failure to Deposit is cured)
and the denominator of which shall be 360, and applying the rate obtained
against the aggregate liquidation preference of the outstanding shares of
Municipal Preferred to be redeemed,
then the Auction Agent shall deliver a notice in the form of Exhibit G hereto by
first-class mail, postage prepaid, to the Broker-Dealers for such series not
later than one Business Day after its receipt of the payment from the Trust
curing such Failure to Deposit and such Late Charge.
(b) If:
(i) any Failure to Deposit shall have occurred with respect to
shares of Municipal Preferred during any Rate Period thereof (other than
any Special Rate Period of more than 364 Rate Period Days or any Rate
Period succeeding any Special Rate Period of more than 364 Rate Period
Days during which a Failure to Deposit occurred but has not been cured),
and, prior to 12:00 Noon, New York City time, on the third Business Day
next succeeding the date on which such Failure to Deposit occurred, such
Failure to Deposit shall not have been cured in accordance with Section
2.7(c) hereof or the Trust shall not have paid the applicable Late Charge
to the Auction Agent; or
(ii) any Failure to Deposit shall have occurred with respect
to shares of Municipal Preferred during a Special Rate Period thereof of
more than 364 Rate Period Days, or during any Rate Period thereof
succeeding any Special Rate Period of more than 364 Rate Period Days
during which a Failure to Deposit occurred that has not been cured, and,
prior to 12:00 Noon, New York City time, on the fourth Business Day
preceding the Auction Date for the Rate Period subsequent to such Rate
Period, such Failure to Deposit shall not have been cured in accordance
with Section 2.7(c) hereof or the Trust shall not have paid the applicable
Late Charge to the Auction Agent in accordance with Section 2(e)(i)(D) of
Section 12.1 of the Bylaws (such Late Charge, for purposes of this clause
(b)(ii) of this Section 2.7, to be calculated by using, as the Reference
Rate, the Reference Rate applicable to a Rate Period (x) consisting of
more than 182 Rate Period Days and
<PAGE> 13
13
(y) commencing on the date on which the Rate Period during which Failure
to Deposit occurs commenced);
then the Auction Agent shall deliver a notice in the form of Exhibit H hereto to
the Broker-Dealers for such series not later than one Business Day after the
receipt of the payment from the Trust curing such Failure to Deposit and such
Late Charge.
(c) A Failure to Deposit with respect to shares of Municipal
Preferred shall have been cured (if such Failure to Deposit is not solely
due to the willful failure to the Trust to make the required payment to
the Auction Agent) with respect to any Rate Period if, within the
respective time periods described immediately above, the Trust shall have
paid to the Auction Agent (i) all accumulated and unpaid dividends on the
shares of Municipal Preferred and (ii) without duplication, the Redemption
Price for the shares of Municipal Preferred, if any, for which Notice of
Redemption has been mailed; provided, however, that the foregoing clause
(ii) shall not apply to the Trust's failure to pay the Redemption Price in
respect of shares of Municipal Preferred when the related Notice of
Redemption provides that redemption of such shares is subject to one or
more conditions precedent and each such condition precedent shall not have
been satisfied at the time or times and in the manner specified in such
Notice of Redemption.
2.8 Broker-Dealers.
(a) Not later than 12:00 Noon, New York City time, on each Auction
Date for any series of Municipal Preferred, the Trust shall pay to the
Auction Agent an amount in cash equal to the aggregate fees payable to the
Broker-Dealers for such series pursuant to Section 2.8 of the
Broker-Dealer Agreements for such series. The Auction Agent shall apply
such moneys as set forth in Section 2.8 of each such Broker-Dealer
Agreement.
(b) The Trust shall obtain the consent of the Auction Agent prior to
selecting any Person to act as a Broker-Dealer, which consent shall not be
unreasonably withheld.
(c) The Auction Agent shall terminate any Broker-Dealer Agreement as
set forth therein if so directed by the Trust, provided that at least one
Broker-Dealer Agreement would be in effect for each series of Municipal
Preferred after such termination.
(d) Subject to the Auction Agent's having consented to the selection
of the relevant Broker-Dealer pursuant to Section 2.8(b) hereof, the
Auction Agent shall from time to time enter into such Broker-Dealer
Agreements with one or more Broker-Dealers as the Trust shall request, and
shall enter into such schedules to any such Broker-Dealer Agreements as
the Trust shall request, which schedules, among
<PAGE> 14
14
other things, shall set forth the series of Municipal Preferred to which
such Broker-Dealer Agreement relates.
2.9 Ownership of Shares of Municipal Preferred.
The Trust shall notify the Auction Agent if the Trust or any
affiliate of the Trust acquires any shares of Municipal Preferred of any series.
Neither the Trust nor any affiliate of the Trust shall submit any Order in any
Auction for Municipal Preferred, except as set forth in the next sentence. Any
Broker-Dealer that is an affiliate of the Trust may submit Orders in Auctions,
but only if such Orders are not for its own account. For purposes of this
Section 2.9, a Broker-Dealer shall not be deemed to be an affiliate of the Trust
solely because one or more of the directors or executive officers of such
Broker-Dealer or of any Person controlled by, in control of or under common
control with such Broker-Dealer is also a director of the Trust. The Auction
Agent shall have no duty or liability with respect to enforcement of this
Section 2.9.
2.10 Access to and Maintenance of Auction Records.
The Auction Agent shall, upon the receipt of prior written notice
from the Trust, afford to the Trust access at reasonable times during normal
business hours to all books, records, documents and other information concerning
the conduct and results of Auctions. The Auction Agent shall maintain records
relating to any Auction for a period of six years after such Auction, and such
records shall, in reasonable detail, accurately and fairly reflect the actions
taken by the Auction Agent hereunder.
3. The Auction Agent as Dividend and
Redemption Price Disbursing Agent.
The Auction Agent, as dividend and redemption price disbursing
agent, shall pay to the Holders of shares of Municipal Preferred of any series
(i) on each Dividend Payment Date for such series, dividends on the shares of
Municipal Preferred of such series, (ii) on any date fixed for redemption of
shares of Municipal Preferred of any series, the Redemption Price of any shares
of such series called for redemption and (iii) any Late Charge related to any
payment of dividends or Redemption Price, in each case after receipt of the
necessary Trusts from the Trust with which to pay such dividends, Redemption
Price or Late Charge. The amount of dividends for any Rate Period for any series
of Municipal Preferred to be paid by the Auction Agent to the Holders of such
shares of such series will be determined by the Trust as set forth in Section 2
of Part I of Section 12.1 of the Bylaws with respect to such series. The
Redemption Price of any shares to be paid by the Auction Agent to the Holders
will be determined by the Trust as set forth in Section 11 of Part I of Section
12.1 of the Bylaws with respect to such series. The Trust shall notify the
Auction Agent in writing of a decision to redeem shares of any series of
Municipal Preferred at least five days prior to the date a Notice of Redemption
is required to be mailed to the Holders of the shares to be redeemed by
paragraph (c) of Section 11 of Part I of Section 12.1 of the
<PAGE> 15
15
Bylaws. Such notice by the Trust to the Auction Agent shall contain
the information required by paragraph (c) of Section 11 of Part I of Section
12.1 of the Bylaws to be stated in the Notice of Redemption required to be
mailed by the Trust to such Holders.
4. The Auction Agent as Transfer Agent and Registrar.
4.1 Issue of Stock or Shares Certificates.
Upon the Date of Original Issue of each series of Municipal
Preferred, one or more certificates representing all of the shares of such
series issued on such date shall be issued by the Trust and, at the request of
the Trust, registered in the name of Cede & Co. and countersigned by the Auction
Agent.
4.2 Registration of Transfer of Shares.
Shares of each series of Municipal Preferred shall be registered
solely in the name of the Securities Depository or its nominee.
4.3 Removal of Legend on Restricted Shares.
All requests for removal of legends on shares of Municipal Preferred
of any series indicating restrictions on transfer shall be accompanied by an
opinion of counsel stating that such legends may be removed and such shares
freely transferred, such opinion to be delivered under cover of a letter from a
Trust Officer authorizing the Auction Agent to remove the legend on the basis of
said opinion.
4.4 Lost Stock or Share Certificates.
The Auction Agent shall issue and register replacement certificates
for certificates represented to have been lost, stolen or destroyed upon the
fulfillment of such requirements as shall be deemed appropriate by the Trust and
the Auction Agent, subject at all times to provisions of law, the Bylaws of the
Trust governing such matters and resolutions adopted by the Trust with respect
to lost securities. The Auction Agent may issue new certificates in exchange for
and upon the cancellation of mutilated certificates. Any request by the Trust to
the Auction Agent to issue a replacement or new certificate pursuant to this
Section 4.4 shall be deemed to be a representation and warranty by the Trust to
the Auction Agent that such issuance will comply with such provisions of law and
the Bylaws and resolutions of the Trust.
<PAGE> 16
16
4.5 Disposition of Cancelled Certificates;
Record Retention.
The Auction Agent shall retain all stock or share certificates which
have been cancelled in transfer or exchange and all accompanying documentation
in accordance with applicable rules and regulations of the Securities and
Exchange Commission for two calendar years. Upon the expiration of this two-year
period, the Auction Agent shall deliver to the Trust the cancelled certificates
and accompanying documentation. The Trust shall also undertake to furnish to the
Securities and Exchange Commission and to the Board of Governors of the Federal
Reserve System, upon demand, at either the principal office or at any regional
office, complete, correct and current hard copies of any and all such records.
Thereafter such records shall not be destroyed by the Trust without the
concurrence of the Auction Agent.
4.6 Stock or Record Books.
For so long as the Auction Agent is acting as the transfer agent for
any series of Municipal Preferred pursuant to the Agreement, it shall maintain a
stock or record book containing a list of the Holders of the shares of Municipal
Preferred of each such series. In case of any request or demand for the
inspection of the stock or record books of the Trust or any other books in the
possession of the Auction Agent, the Auction Agent will notify the Trust and
secure instructions as to permitting or refusing such inspection. The Auction
Agent reserves the right, however, to exhibit the stock or record books or other
books to any Person in case it is advised by its counsel that its failure to do
so would be unlawful.
4.7 Return of Funds.
Any funds deposited with the Auction Agent hereunder by the Trust
for any reason, including but not limited to redemption of shares of Municipal
Preferred of any series, that remain unpaid after ninety days shall be repaid to
the Trust upon the written request of the Trust, together with interest, if any,
earned thereon.
5. Representations and Warranties of the Trust.
The Trust represents and warrants to the Auction Agent that:
(a) the Trust is a duly organized and existing business trust in
good standing under the laws of the State of its incorporation or
organization and has full corporate power or all requisite power to
execute and deliver the Agreement and to authorize, create and issue the
shares of Municipal Preferred of each series, and the shares of Municipal
Preferred of each series when issued, will be duly authorized, validly
issued, fully paid and nonassessable;
(b) the Agreement has been duly and validly authorized, executed and
delivered by the Trust and constitutes the legal, valid and binding
obligation of the Trust;
<PAGE> 17
17
(c) the form of the certificate evidencing the shares of Municipal
Preferred of each series complies or will comply with all applicable laws
of the State of its incorporation or organization;
(d) when issued, the shares of Municipal Preferred of each series
will have been duly registered under the Securities Act of 1933, as
amended, and no further action by or before any governmental body or
authority of the United States or of any state thereof is required in
connection with the execution and delivery of the Agreement or will have
been required in connection with the issuance of the shares of Municipal
Preferred of each series;
(e) the execution and delivery of the Agreement and the issuance and
delivery of the shares of Municipal Preferred of each series do not and
will not conflict with, violate or result in a breach of the terms,
conditions or provisions of, or constitute a default under, the Agreement
and Declaration of Trust (as amended to date) or the Bylaws of the Trust,
any law or regulation, any order or decree of any court or public
authority having jurisdiction, or any mortgage, indenture, contract,
agreement or undertaking to which the Trust is a party or by which it is
bound the effect of which conflict, violation, default or breach would be
material to the Trust or the Trust and its subsidiaries taken as a whole;
and
(f) no taxes are payable upon or in respect of the execution of the
Agreement or the issuance of the shares of Municipal Preferred of any
series.
6. The Auction Agent.
6.1 Duties and Responsibilities.
(a) The Auction Agent is acting solely as agent for the Trust
hereunder and owes no fiduciary duties to any Person, other than the
Trust, by reason of the Agreement.
(b) The Auction Agent undertakes to perform such duties and only
such duties as are specifically set forth in the Agreement, and no implied
covenants or obligations shall be read into the Agreement against the
Auction Agent.
(c) In the absence of bad faith or negligence on its part, the
Auction Agent shall not be liable for any action taken, suffered, or
omitted or for any error of judgment made by it in the performance of its
duties under the Agreement. The Auction Agent shall not be liable for any
error of judgment made in good faith unless the Auction Agent shall have
been negligent in ascertaining the pertinent facts.
<PAGE> 18
18
6.2 Rights of the Auction Agent.
(a) The Auction Agent may rely and shall be protected in acting or
refraining from acting upon any communication authorized hereby and upon
any written instruction, notice, request, direction, consent, report,
certificate, share certificate or other instrument, paper or document
believed in good faith by it to be genuine. The Auction Agent shall not be
liable for acting upon any telephone communication authorized hereby which
the Auction Agent believes in good faith to have been given by the Trust
or by a Broker-Dealer. The Auction Agent may record telephone
communications with the Trust or with the Broker-Dealers or both.
(b) The Auction Agent may consult with counsel of its choice and the
advice of such counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in reliance thereon.
(c) The Auction Agent shall not be required to advance, expend or
risk its own funds or otherwise incur or become exposed to financial
liability in the performance of its duties hereunder.
(d) The Auction Agent may perform its duties and exercise its rights
hereunder either directly or by or through agents or attorneys and shall
not be responsible for any misconduct or negligence on the part of any
agent or attorney appointed by it with due care hereunder.
6.3 Auction Agent's Disclaimer.
The Auction Agent makes no representation as to the validity or
adequacy of the Agreement, the Broker-Dealer Agreements or the shares of
Municipal Preferred of any series except that the Auction Agent hereby
represents that the Agreement has been duly authorized, executed and delivered
by the Auction Agent and constitutes a legal and binding obligation of the
Auction Agent.
6.4 Compensation, Expenses and Indemnification.
(a) The Trust shall pay the Auction Agent from time to time
reasonable compensation for all services rendered by it under the
Agreement and the Broker-Dealer Agreements.
(b) The Trust shall reimburse the Auction Agent upon its request for
all reasonable out-of-pocket expenses, disbursements and advances incurred
or made by the Auction Agent in accordance with any provision of the
Agreement and the Broker-Dealer Agreements (including the reasonable
compensation and the
<PAGE> 19
19
expenses and disbursements of its agents and counsel), except any expense
or disbursement attributable to its negligence or bad faith.
(c) The Trust shall indemnify the Auction Agent for and hold it
harmless against any loss, liability or expense incurred without
negligence or bad faith on its part, arising out of or in connection with
its agency under the Agreement and the Broker-Dealer Agreements, including
the costs and expenses of defending itself against any such claim or
liability in connection with its exercise or performance of any of its
duties hereunder and thereunder.
7. Miscellaneous.
7.1 Term of Agreement.
(a) The term of the Agreement is unlimited unless it shall be
terminated as provided in this Section 7.1. The Trust may terminate the
Agreement at any time by so notifying the Auction Agent, provided that the
Trust has entered into an agreement in substantially the form of the
Agreement with a successor Auction Agent. The Auction Agent may terminate
the Agreement upon written notice to the Trust on the date specified in
such notice, which date shall be no earlier than 45 days after the date of
delivery of such notice.
(b) Except as otherwise provided in this paragraph (b), the
respective rights and duties of the Trust and the Auction Agent under the
Agreement with respect to any series of Municipal Preferred shall cease
upon termination of the Agreement with respect to such series. The Trust's
representations, warranties, covenants and obligations to the Auction
Agent under Sections 5 and 6.4 hereof shall survive the termination of the
Agreement with respect to any series of Municipal Preferred. Upon
termination of the Agreement with respect to any series of Municipal
Preferred, the Auction Agent shall, at the Trust's request, promptly
deliver to the Trust copies of all books and records maintained by it with
respect to Municipal Preferred in connection with its duties hereunder.
7.2 Communications.
Except for (i) communications authorized to be by telephone pursuant
to the Agreement or the Auction Procedures and (ii) communications in connection
with Auctions (other than those expressly required to be in writing), all
notices, requests and other communications to any party hereunder shall be in
writing (including telecopy or similar writing) and shall be given to such
party, addressed to it, at its address or telecopy number set forth below:
If to the Trust, [Name of Trust]
One Financial Center
<PAGE> 20
20
Boston, MA 02111
Attention:
Telecopier No.: (617) 345-0919
Telephone No.: (617) 426-3750
If to the Auction Agent, to the address or telecopy
number set forth in the
Request and Acceptance Letter,
or such other address or telecopy number as such party may hereafter specify for
such purpose by notice to the other party. Each such notice, request or
communication shall be effective when delivered at the address specified herein.
Communications shall be given on behalf of the Trust by a Trust Officer and on
behalf of the Auction Agent by telephone (confirmed by telecopy or in writing)
by an Authorized Officer.
7.3 Entire Agreement.
The Agreement contains the entire agreement between the parties
relating to, and superseding any prior agreement between the parties relating
to, the subject matter hereof, and there are no other representations,
endorsements, promises, agreements or understandings, oral, written or implied,
between the parties relating to the subject matter hereof except for agreements
relating to the compensation of the Auction Agent.
7.4 Benefits.
Nothing herein, express or implied, shall give to any Person, other
than the Trust, the Auction Agent and their respective successors and assigns,
any benefit of any legal or equitable right, remedy or claim hereunder.
7.5 Amendment; Waiver.
(a) The Agreement shall not be deemed or construed to be modified,
amended, rescinded, cancelled or waived, in whole or in part, except by a
written instrument signed by a duly authorized representative of the party
to be charged.
(b) Failure of either party hereto to exercise any right or remedy
hereunder in the event of a breach hereof by the other party shall not
constitute a waiver of any such right or remedy with respect to any
subsequent breach.
7.6 Successors and Assigns.
The Agreement shall be binding upon, inure to the benefit of, and be
enforceable by, the respective successors and assigns of each of the Trust and
the Auction Agent.
<PAGE> 21
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7.7 Severability.
If any clause, provision or section hereof shall be ruled invalid or
unenforceable by any court of competent jurisdiction, the invalidity or
unenforceability of such clause, provision or section shall not affect any of
the remaining clauses, provisions or sections hereof.
7.8 Governing Law.
The Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
If the Trust is a Massachusetts business trust, the following
provision is deemed to be included in the Basic Terms:
7.9 Declaration of Trust.
The Trust's Agreement and Declaration of Trust (as amended) is on
file with the Secretary of the Commonwealth of Massachusetts. This Agreement has
been executed on behalf of the Trust by the Vice President and Treasurer of the
Trust acting in such capacity and not individually, and the obligations of the
Trust set forth in this Agreement are not binding upon any of the Trust's
trustees, officers or shareholders individually, but are binding only upon the
assets and property of the Trust.
<PAGE> 22
EXHIBIT A
FORM OF
BROKER-DEALER AGREEMENT
<PAGE> 23
EXHIBIT B
SETTLEMENT PROCEDURES
<PAGE> 24
EXHIBIT C
[NAME OF TRUST]
NOTICE OF AUCTION DATE FOR
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
("Municipal Preferred")
NOTICE IS HEREBY GIVEN that the Auction Date of the next Auction for
Series __ of the Trust's Municipal Preferred is scheduled to be ____________,
19__ and the next Dividend Payment Date for Series __ of the Trust's Municipal
Preferred will be _____________, 19__.
[A Failure to Deposit in respect of the Series __ Municipal Preferred
currently exists. If, prior to 12:00 noon, New York City time, on the fourth
Business Day preceding the next scheduled Auction Date of the Series __
Municipal Preferred, such Failure to Deposit is not cured or the applicable Late
Charge is not paid, the next Auction will not be held. Notice of the next
Auction for the Series __ Municipal Preferred will be delivered when such
Failure to Deposit is cured and the applicable Late Charge is paid.(1)]
[NAME OF TRUST]
- --------
(1) Include this language if a Failure to Deposit exists.
<PAGE> 25
EXHIBIT D
[NAME OF TRUST]
NOTICE OF PROPOSED CHANGE OF
LENGTH OF RATE PERIOD OF
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED STOCK [SHARES]
("Municipal Preferred")
[Name of Trust] (the "Trust") may exercise its option to designate the
Rate Period of its Series __ Municipal Preferred commencing [the first day of
the Special Rate Period] as a Special Rate Period.
By 11:00 A.M., New York City time, on the second Business Day preceding
the first day of such proposed Special Rate Period, the Trust will notify of
either (a) its determination to exercise such option, designating the length of
such Special Rate Period for such series or (b) its determination not to
exercise such option.
[NAME OF TRUST]
Dated: _____ , 19__
<PAGE> 26
EXHIBIT E
[NAME OF TRUST]
NOTICE OF CHANGE OF LENGTH OF RATE PERIOD
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
("Municipal Preferred")
NOTICE IS HEREBY GIVEN that [NAME OF TRUST] (the "Trust") has
determined to designate the Rate Period of its Series __ Municipal Preferred
commencing on [the first day of the Special Rate Period] as a Special Rate
Period.
The Special Rate Period will be __________ [Rate Period Days].
The Auction Date for the Special Rate Period is [the Business Day next
preceding the first day of such Special Rate Period].
As a result of the Special Rate Period designation, the amount of
dividends payable on Series __ Municipal Preferred during the Special Rate
Period will be based on a 360-day year.
The Special Rate Period shall not commence if (a) an Auction for shares
of Municipal Preferred shall not be held on such Auction Date for any reason or
(b) an Auction for shares of Municipal Preferred shall be held on such Auction
Date but Sufficient Clearing Bids for such shares shall not exist in such
Auction.
The scheduled Dividend Payment Dates for such series of Municipal
Preferred during such Special Rate Period will be ____________ .
[Special Redemption Provisions, if any]
Attached hereto is a Municipal Preferred Basic Maintenance Report
showing that, as of the third Business Day next preceding such proposed Special
Rate Period, Moody's Eligible Assets (if Moody's is rating such shares of
Municipal Preferred) and S&P Eligible Assets (if S&P is rating such shares of
Municipal Preferred) each have an aggregate Discounted Value at least equal to
the Municipal Preferred Basic Maintenance Amount as of such Business Day
(assuming for purposes of the foregoing calculation that (i) the Maximum Rate is
the Maximum Rate on such Business Day as if such Business Day were the Auction
Date for the proposed Special Rate Period, and (ii) the Moody's Discount
<PAGE> 27
2
Factors applicable to Moody's Eligible Assets are determined by reference to the
first Moody's Exposure Period longer than the Moody's Exposure Period then
applicable to the Trust.)
[NAME OF TRUST]
Dated: ______ , 19__
<PAGE> 28
EXHIBIT F
[NAME OF TRUST]
NOTICE OF DETERMINATION NOT TO CHANGE
LENGTH OF RATE PERIOD OF
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
("Municipal Preferred")
NOTICE IS HEREBY GIVEN that [NAME OF TRUST] (the "Trust") has
determined not to exercise its option to designate a Special Rate Period of its
Series __ Municipal Preferred and the next succeeding Rate Period of such series
will be a Minimum Rate Period of ___ Rate Period Days.
[NAME OF TRUST]
Dated: ______ , 19__
<PAGE> 29
EXHIBIT G
[NAME OF TRUST]
NOTICE OF CURE OF
FAILURE TO DEPOSIT ON
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
("Municipal Preferred")
NOTICE IS HEREBY GIVEN that [NAME OF TRUST] (the "Trust") has cured its
Failure to Deposit and paid the applicable Late Charge with respect to its
Series __ Municipal Preferred. The dividend rate on the shares of Series __
Municipal Preferred for the current Dividend Period is % per annum, the
Dividend Payment Date for the current Dividend Period is scheduled to
be_________, 19__ and the next Auction Date is scheduled to be __________, 19__.
[NAME OF TRUST]
Dated: _______ , 19__
<PAGE> 30
EXHIBIT H
[NAME OF TRUST]
NOTICE OF CURE OF
FAILURE TO DEPOSIT ON
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
("Municipal Preferred")
NOTICE IS HEREBY GIVEN that [NAME OF TRUST] (the "Trust") has
cured its Failure to Deposit and paid the applicable Late Charge with respect to
its Series __ Municipal Preferred. The next Auction Date for the Series __
Municipal Preferred is scheduled to be _________ on 19__.
[NAME OF TRUST]
Dated: ________, 19__
<PAGE> 31
EXHIBIT I
[NAME OF TRUST]
NOTICE OF
[CAPITAL GAINS] [AND] [TAXABLE ORDINARY INCOME](1)
DIVIDEND FOR
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
("Municipal Preferred")
NOTICE IS HEREBY GIVEN that the amount of the dividend payable on
_______________, 19__ for Series __ of the Trust's Municipal Preferred will be
determined by the Auction to be held on _____________, 19__. Up to [$ A ](2) [$
B ](3) per share of the dividend payable on such date as determined by such
Auction will consist of [capital gains](2) [ordinary income taxable for Federal
income tax purposes](3). If the dividend amount payable on such date as
determined by such Auction is less than [$ A ](2) [$ B ](3) per share, the
entire amount of the dividend will consist of [capital gains](2) [ordinary
income taxable for Federal income tax purposes](3). [To the extent such dividend
amount exceeds [$ A ] per share, any excess up to [$ B ] per share will consist
of ordinary income taxable for Federal income tax purposes.](4)/ Accordingly,
the aforementioned composition of the dividend payable on _______________, 19__
should be considered in determining Orders to be submitted with respect to the
Auction to be held on _______________, 19___. The Rate Multiple in effect for
such Auction will be %.
[NAME OF TRUST]
- --------
(1) Include language with respect to capital gains, taxable ordinary income or
both, depending on the character of the designation to be made with
respect to the dividend(s).
(2) Include bracketed material if a portion of the dividend will be designated
capital gains.
(3) Include bracketed material if a portion of the dividend will be designated
ordinary income taxable for Federal income tax purposes and no portion of
the dividend will be designated capital gains.
(4) Include bracketed material if a portion of the dividend will be designated
capital gains and a portion will be designated ordinary income taxable for
Federal income tax purposes.
<PAGE> 32
2
(Footnotes continued)
A = the maximum amount of capital gains allocated to such series of Municipal
Preferred to be included in such dividend, divided by the number of shares
of Municipal Preferred.
B = the maximum amount of ordinary income taxable for Federal income tax
purposes allocated to such series of Municipal Preferred to be included in
such dividend, divided by the number of shares in such series.
<PAGE> 1
Exhibit (k)(2)
COLONIAL
Broker-Dealer Agreement
Basic Terms for Acting as a Broker-Dealer
-----------------------------------
July __, 1999
These basic terms ("Basic Terms") set forth the general terms and
conditions pursuant to which a broker-dealer identified in an Acceptance Letter
(together with its successors and assigns, a "BD") will act as a broker-dealer
for Municipal Auction Rate Cumulative Preferred ("Municipal Preferred") shares
issued by investment companies, now or hereafter organized, registered under the
Investment Company Act of 1940, as amended, as further identified by the Request
Letters (the "Trusts"), for which Colonial Management Associates, Inc.
("Adviser") is the investment adviser.
- --------------------------------------------------------------------------------
Each Trust has issued or may issue shares of Municipal Preferred,
pursuant to its Declaration of Trust and By-Laws. A bank or trust company
specified in the Request Letter will act as the auction agent (the "Auction
Agent") of such Trust pursuant to authority granted it in the Auction Agency
Agreement.
The By-Laws of each Trust shall provide that, for each Subsequent
Rate Period of any series of Municipal Preferred of such Trust then outstanding,
the Applicable Rate for such series for such Subsequent Rate Period shall,
except under certain conditions, be the rate per annum that the Auction Agent of
such Trust advises results from implementation of the Auction Procedures for
such series. The Board of Trustees of each Trust shall adopt a resolution
appointing the Auction Agent as auction agent for purposes of the Auction
Procedures for each series of Municipal Preferred of such Trust.
The Auction Procedures of each Trust will require the participation
of one or more Broker-Dealers for each series of Municipal Preferred of such
Trust. BD will act as a Broker-Dealer for each series of Municipal Preferred of
each Trust identified in a Request Letter.
1. Definitions and Rules of Construction.
1.1. Terms Defined by Reference to By-Laws.
Capitalized terms not defined herein shall have the respective
meanings specified in the By-Laws of the relevant Trust.
<PAGE> 2
2
1.2. Terms Defined Herein.
As used herein and in the Settlement Procedures, the following terms
shall have the following meanings, unless the context otherwise requires:
(a) "Acceptance Letter" shall mean the letter from Adviser to BD
pursuant to which the Adviser appoints BD as a Broker Dealer for each
series of Municipal Preferred issued by any Trust that has executed a
Request Letter.
(b) "Agreement", with respect to any Trust, shall mean the Basic
Terms, together with the Acceptance Letter and the Request Letter relating
to one or more series of Municipal Preferred of such Trust and any other
substantially similar agreement among such Trust, the Adviser, any Auction
Agent for such Trust and/or BD.
(c) "Auction" shall have the meaning specified in Section 2.1
hereof.
(d) "Auction Agency Agreement", with respect to any Trust, shall
mean the Auction Agency Agreement between such Trust and the Auction Agent
relating to one or more series of Municipal Preferred of such Trust.
(e) "Auction Procedures", with respect to any Trust, shall mean the
auction procedures constituting Part II of Section 12.1 of the By-Laws of
such Trust as of the date of issuance of the Municipal Preferred shares of
such Trust.
(f) "Authorized Officer" of an Auction Agent shall mean each Senior
Vice President, Vice President, Assistant Vice President, Assistant
Treasurer and Assistant Secretary of such Auction Agent assigned to its
Corporate Trust and Agency Group and every other officer or employee of
such Auction Agent designated as an "Authorized Officer" for purposes of
the Agreement in a communication to BD.
(g) "BD Officer" shall mean each officer or employee of BD
designated as a "BD Officer" for purposes of the Agreement in a
communication to any Auction Agent.
(h) "By-Laws", with respect to any Trust, shall mean the By-Laws, as
amended and restated, of such Trust, a copy of which will be attached to
the Request Letter of such Trust.
(i) "Municipal Preferred" shall mean the preferred shares, no par
value, of any Trust designated as its "Municipal Auction Rate Cumulative
Preferred Shares" and bearing such further designation as to series as the
Board of Trustees of such Trust or any committee thereof shall specify, as
set forth in a Request Letter.
<PAGE> 3
3
(j) "Request Letter", with respect to any Trust, shall mean the
letter from such Trust to the Adviser and the Auction Agent for such Trust
pursuant to which such Trust appoints BD as a Broker-Dealer for each
series of Municipal Preferred of such Trust.
(k) "Settlement Procedures" shall mean the Settlement Procedures
attached hereto as Exhibit A.
1.3. Rules of Construction.
Unless the context or use indicates another or different meaning or
intent, the following rules shall apply to the construction of each Agreement:
(a) Words importing the singular number shall include the plural
number and vice versa.
(b) The captions and headings herein are solely for convenience of
reference and shall not constitute a part of such Agreement nor shall they
affect its meaning, construction or effect.
(c) The words "hereof", "herein", "hereto", and other words of
similar import refer to such Agreement as a whole.
(d) All references herein to a particular time of day shall be to
New York City time.
2. The Auction.
2.1. Purpose; Incorporation by Reference of Auction Procedures and
Settlement Procedures.
(a) The provisions of the Auction Procedures of any Trust will be
followed by the Auction Agent of such Trust for the purpose of determining the
Applicable Rate for any Subsequent Rate Period of any series of Municipal
Preferred of such Trust for which the Applicable Rate is to be determined by an
Auction. Each periodic operation of such procedures is hereinafter referred to
as an "Auction."
(b) All of the provisions contained in the Auction Procedures and
the Settlement Procedures are incorporated herein by reference in their entirety
and shall be deemed to be a part hereof to the same extent as if such provisions
were fully set forth herein.
(c) BD agrees to act as, and assumes the obligations of, and
limitations and restrictions placed upon, a Broker-Dealer under each Agreement
for each series of Municipal Preferred. BD understands that other Persons
meeting the requirements specified in the definition of "Broker-Dealer"
contained in the Auction Procedures may execute Agreements and participate as
Broker-Dealers in Auctions.
<PAGE> 4
4
2.2. Preparation for Each Auction.
(a) Not later than 9:30 A.M. on each Auction Date for any series of
Municipal Preferred, the Auction Agent for such series shall advise the
Broker-Dealers for such series by telephone of the Maximum Rate therefor and the
Reference Rate(s) and Treasury Note Rate(s), as the case may be, used in
determining such Maximum Rate.
(b) In the event that any Auction Date for any series of Municipal
Preferred shall be changed after the Auction Agent for such series has given the
notice referred to in clause (vi) of paragraph (a) of the Settlement Procedures,
or after the notice referred to in Section 2.5(a) hereof, if applicable, such
Auction Agent, by such means as such Auction Agent deems practicable, shall give
notice of such change to BD, if it is a Broker-Dealer for such series, not later
than the earlier of 9:15 A.M. on the new Auction Date or 9:15 A.M. on the old
Auction Date.
(c) For purposes of maintaining its list of Existing Holders, the
Auction Agent for any series of Municipal Preferred from time to time may
request any Broker-Dealer to provide such Auction Agent with a list of Persons
who such Broker-Dealer believes should be Existing Holders based upon inquiries
of those Persons such Broker-Dealer believes are Beneficial Owners as a result
of the most recent Auction and with respect to each such Person, the number of
shares of such series of Municipal Preferred such Broker-Dealer believes are
owned by such Person. BD shall comply with any such request relating to a series
of Municipal Preferred in respect of which BD was named a Broker-Dealer, and the
Auction Agent shall keep confidential any such information so provided by BD and
shall not disclose any information so provided by BD to any Person other than
the Trust and BD.
(d) BD agrees to maintain a list of customers relating to a series
of Municipal Preferred and to use its best efforts, subject to existing laws and
regulations, to contact the customers on such list whom BD believes may be
interested in participating in the Auction on each Auction Date, as a Potential
Holder or a Potential Beneficial Owner, for the purposes set forth in the
Auction Procedures. Nothing herein shall require BD to submit an Order for any
customer in any Auction.
(e) The Auction Agent's registry of Existing Holders of shares of a
series of Municipal Preferred shall be conclusive and binding on BD. BD may
inquire of the Auction Agent between 3:00 P.M. on the Business Day preceding an
Auction for shares of a series of Municipal Preferred and 9:30 A.M. on the
Auction Date for such Auction to ascertain the number of shares of such series
in respect of which the Auction Agent has determined BD to be an Existing
Holder. If BD believes it is the Existing Holder of fewer shares of such series
than specified by the Auction Agent in response to BD's inquiry, BD may so
inform the Auction Agent of that belief. BD shall not, in its capacity as
Existing Holder of shares of such series, submit Orders in such Auction in
respect of shares of such series covering in the aggregate more than the number
of shares of such series specified by the Auction Agent in response to BD's
inquiry.
<PAGE> 5
5
2.3. Auction Schedule; Method of Submission of Orders.
(a) Each Trust and the Auction Agent for such Trust shall conduct
Auctions for Municipal Preferred in accordance with the schedule set forth
below. Such schedule with respect to any series of Municipal Preferred of any
Trust may be changed by the Auction Agent for such series with the consent of
such Trust, which consent shall not be unreasonably withheld. Such Auction Agent
shall give written notice of any such change to each Broker-Dealer of such
series. Such notice shall be given prior to the close of business on the
Business Day next preceding the first Auction Date on which such change shall be
effective.
<TABLE>
<CAPTION>
Time Event
---- -----
<S> <C>
By 9:30 A.M. Auction Agent for such series advises such Trust
and the Broker-Dealers for such series of the
applicable Maximum Rate and the Reference Rate(s)
and Treasury Note Rate(s), as the case may be,
used in determining such Maximum Rate as set forth
in Section 2.2(a) hereof.
9:30 A.M. - 1:30 P.M. Auction Agent assembles information communicated
to it by Broker-Dealers as provided in Section
2(a) of the Auction Procedures of such Trust.
Submission Deadline is 1:30 P.M.
Not earlier than 1:30 P.M. Auction Agent makes determinations pursuant to
Section 3(a) of the Auction Procedures of such
Trust.
By approximately 3:00 P.M. Auction Agent advises Trust of results of Auction
as provided in Section 3(b) of the Auction
Procedures of such Trust.
Submitted Bids and Submitted Sell Orders are
accepted and rejected and shares of such series of
Municipal Preferred allocated as provided in
Section 4 of the Auction Procedures of such Trust.
Auction Agent gives notice of Auction results as
set forth in Section 2.4(a) hereof.
</TABLE>
(b) BD shall submit Orders to the appropriate Auction Agent in
writing substantially in the form attached hereto as Exhibit B. BD shall submit
a separate Order to such Auction Agent for each Potential Holder or Existing
Holder with respect to whom BD is submitting an Order and shall not otherwise
net or aggregate such Orders prior to their submission to such Auction Agent.
(c) BD shall deliver to the appropriate Auction Agent (i) a written
notice in substantially the form attached hereto as Exhibit C of transfers of
shares of Municipal Preferred to
<PAGE> 6
6
BD from another Person other than pursuant to an Auction and (ii) a written
notice substantially in the form attached hereto as Exhibit D, of the failure of
any shares of Municipal Preferred to be transferred to or by any Person that
purchased or sold shares of Municipal Preferred through BD pursuant to an
Auction. Such Auction Agent is not required to accept any such notice described
in clause (i) for an Auction unless it is received by the Auction Agent by 3:00
P.M. on the Business Day preceding such Auction.
(d) BD and other Broker-Dealers may submit Orders in Auctions for
their own accounts (including Orders for their own accounts where the Order is
placed beneficially for a customer) unless the relevant Trust shall have
notified BD and all other Broker-Dealers that they may no longer do so, in which
case Broker-Dealers may continue to submit Hold Orders and Sell Orders for their
own accounts.
(e) BD agrees to handle its customers' orders in accordance with its
duties under applicable securities laws and rules.
(f) To the extent that pursuant to Section 4 of the Auction
Procedures of any Trust, BD continues to hold, sells, or purchases a number of
shares that is fewer than the number of shares in an Order submitted by BD to
the Auction Agent in which BD designated itself as an Existing Holder or
Potential Holder in respect of customer Orders, BD shall make appropriate pro
rata allocations among its customers for which it submitted Orders of similar
tenor. If as a result of such allocations, any Beneficial Owner would be
entitled or required to sell, or any Potential Beneficial Owner would be
entitled or required to purchase, a fraction of a share of Municipal Preferred
on any Auction Date, BD shall, in such manner as it shall determine in its sole
discretion, round up or down the number of shares of Municipal Preferred to be
purchased or sold on such Auction Date by any Beneficial Owner or Potential
Beneficial Owner on whose behalf BD submitted an Order so that the number of
shares so purchased or sold by each such Beneficial Owner or Potential
Beneficial Owner on such Auction Date shall be whole shares of Municipal
Preferred.
2.4. Notices.
(a) On each Auction Date for any series of Municipal Preferred, the
Auction Agent for such series shall notify BD, if BD is a Broker-Dealer of such
series, by telephone of the results of the Auction as set forth in paragraph (a)
of the Settlement Procedures. By approximately 11:30 A.M. on the Business Day
next succeeding such Auction Date, the relevant Auction Agent shall confirm to
BD in writing the disposition of all Orders submitted by BD in such Auction.
(b) BD shall notify each Existing Holder, Potential Holder,
Beneficial Owner or Potential Beneficial Owner of shares of Municipal Preferred
with respect to whom BD has submitted an Order as set forth in paragraph (b) of
the Settlement Procedures and take such other action as is required of BD
pursuant to the Settlement Procedures.
<PAGE> 7
7
2.5. Designation of Special Rate Period.
(a) If any Trust delivers to its Auction Agent a notice of the
Auction Date for any series of Municipal Preferred of such Trust for a Rate
Period thereof that next succeeds a Rate Period that is not a Minimum Rate
Period in the form of Exhibit C to the Auction Agency Agreement, and BD is a
Broker-Dealer of such series, the Auction Agent shall deliver such notice to BD
as promptly as practicable after its receipt of such notice from such Trust.
(b) If the Board of Trustees of any Trust proposes to designate any
succeeding Subsequent Rate Period of any series of Municipal Preferred of such
Trust as a Special Rate Period and such Trust delivers to its Auction Agent a
notice of such proposed Special Rate Period in the form of Exhibit D to the
Auction Agency Agreement, and BD is a Broker-Dealer for such series, such
Auction Agent shall deliver such notice to BD as promptly as practicable after
its receipt of such notice from the Trust.
(c) If the Board of Trustees of any Trust determines to designate
such succeeding Subsequent Rate Period as a Special Rate Period, and such Trust
delivers to its Auction Agent a notice of such Special Rate Period in the form
of Exhibit E to the Auction Agency Agreement not later than 11:00 A.M. on the
second Business Day next preceding the first day of such Rate Period (or by such
later time or date, or both, as may be agreed to by such Auction Agent), and BD
is a Broker-Dealer for such series, such Auction Agent shall deliver such notice
to BD not later than 3:00 P.M. on such second Business Day (or, if such Auction
Agent has agreed to a later time or date, as promptly as practicable
thereafter).
(d) If any Trust shall deliver to its Auction Agent a notice not
later than 11:00 A.M. on the second Business Day next preceding the first day of
any Rate Period (or by such later time or date, or both, as may be agreed to by
such Auction Agent) stating that such Trust has determined not to exercise its
option to designate such succeeding Subsequent Rate Period as a Special Rate
Period, in the form of Exhibit F to the Auction Agency Agreement, or shall fail
to timely deliver either such notice or a notice in the form of Exhibit E to the
Auction Agency Agreement], and BD is a Broker-Dealer for such series, such
Auction Agent shall deliver a notice in the form of Exhibit F to the Auction
Agency Agreement to BD not later than 3:00 P.M. on such second Business Day (or,
if such Auction Agent has agreed to a later time or date, as promptly as
practicable thereafter).
2.6. Allocation of Taxable Income.
If any Trust delivers to its Auction Agent a notice in the form of
Exhibit I to the Auction Agency Agreement designating all or a portion of any
dividend on shares of any series of Municipal Preferred of such Trust to consist
of net capital gains or other income taxable for Federal income tax purposes,
and BD is a Broker-Dealer for such series, such Auction Agent shall deliver such
notice to BD on the Business Day following its receipt of such notice from such
Trust. On or prior to the Auction Date referred to in such notice, BD will
contact each of its customers that is a Beneficial Owner of shares of such
series of Municipal Preferred or a Potential Beneficial Owner of shares of such
series of Municipal Preferred interested in submitting an Order in the Auction
to be held on such Auction Date, and BD will notify such Beneficial Owners and
<PAGE> 8
8
Potential Beneficial Owners of the contents of such notice. BD will be deemed to
have notified such Beneficial Owners and Potential Beneficial Owners if, for
each of them, (i) BD makes a reasonable effort to contact such Beneficial Owner
or Potential Beneficial Owner by telephone, and (ii) upon failing to contact
such Beneficial Owner or Potential Beneficial Owner by telephone BD mails
written notification to such Beneficial Owner or Potential Beneficial Owner at
the mailing address indicated in the account records of BD.
The Auction Agent for any series of Municipal Preferred shall be
required to notify BD if it is a Broker-Dealer for such series within two
Business Days after each Auction of such series that involves an allocation of
income taxable for Federal income tax purposes as to the dollar amount per share
of such taxable income and income exempt from Federal income taxation included
in the related dividend.
2.7. Failure to Deposit.
(a) If:
(i) any Failure to Deposit shall have occurred with respect to
shares of any series of Municipal Preferred of any Trust during any Rate
Period thereof (other than any Special Rate Period of more than 364 Rate
Period Days or any Rate Period succeeding any Special Rate Period of more
than 364 Rate Period Days during which a Failure to Deposit occurred that
has not been cured), but, prior to 12:00 Noon, New York City time, on the
third Business Day next succeeding the date on which such Failure to
Deposit occurred, such Failure to Deposit shall have been cured in
accordance with Section 2.7 of the Auction Agency Agreement and such Trust
shall have paid to the Auction Agent for such series the applicable Late
Charge as described in Section 2.7 of the Auction Agency Agreement,
then, if BD is a Broker-Dealer for such series, such Auction Agent shall deliver
a notice in the form of Exhibit G to the Auction Agency Agreement by first-class
mail, postage prepaid, to BD not later than one Business Day after its receipt
of the payment from such Trust curing such Failure to Deposit and such Late
Charge.
(b) If:
(i) any Failure to Deposit shall have occurred with respect to
shares of any series of Municipal Preferred of any Trust during any Rate
Period thereof (other than any Special Rate Period of more than 364 Rate
Period Days or any Rate Period succeeding any Special Rate Period of more
than 364 Rate Period Days during which a Failure to Deposit occurred but
has not been cured), and, prior to 12:00 Noon, New York City time, on the
third Business Day next succeeding the date on which such Failure to
Deposit occurred, such Failure to Deposit shall not have been cured as
described in Section 2.7 of the Auction Agency Agreement or such Trust
shall not have paid to the Auction Agent for such series the applicable
Late Charge described in Section 2.7 of the Auction Agency Agreement; or
<PAGE> 9
9
(ii) any Failure to Deposit shall have occurred with respect to
shares of any series of Municipal Preferred of any Trust during a Special
Rate Period thereof of more than 364 Rate Period Days, or during any Rate
Period thereof succeeding any Special Rate Period of more than 364 Rate
Period Days during which a Failure to Deposit occurred that has not been
cured, and, prior to 12:00 noon, New York City time, on the fourth
Business Day preceding the Auction Date for the Rate Period subsequent to
such Rate Period, such Failure to Deposit shall not have been cured as
described in Section 2.7 of the Auction Agency Agreement or such Trust
shall not have paid to the Auction Agent for such series the applicable
Late Charge described in Section 2.7 of the Auction Agency Agreement;
then such Auction Agent shall deliver a notice in the form of Exhibit H to the
Auction Agency Agreement to the Broker-Dealers for such series not later than
one Business Day after the receipt of the payment from such Trust curing such
Failure to Deposit and such Late Charge.
2.8. Service Charge to be Paid to BD.
On the Business Day next succeeding each Auction Date for any series
of Municipal Preferred specified in, or on Exhibit A to, the Request Letter of
any Trust, the Auction Agent for such series shall pay to BD from moneys
received from such Trust an amount equal to the product of (a) (i) in the case
of any Auction Date immediately preceding a Rate Period of such series
consisting of 364 Rate Period Days or fewer, 1/4 of 1%, or (ii) in the case of
any Auction Date immediately preceding a Rate Period of such series consisting
of more than 364 Rate Period Days, such percentage as may be agreed upon by such
Trust and BD with respect to such Rate Period, times (b) a fraction, the
numerator of which is the number of Rate Period Days in the Rate Period therefor
beginning on such Business Day and the denominator of which is 365 if such Rate
Period consists of 7 Rate Period Days and 360 for all other Rate Periods, times
(c) $25,000 times (d) the sum of (i) the aggregate number of shares of such
series placed by BD in such Auction that were (A) the subject of Submitted Bids
of Existing Holders submitted by BD and continued to be held as a result of such
submission and (B) the subject of Submitted Bids of Potential Holders submitted
by BD and purchased as a result of such submission plus (ii) the aggregate
number of shares of such series subject to valid Hold Orders (determined in
accordance with paragraph (d) of Section 2 of the Auction Procedures) submitted
to the Auction Agent by BD plus (iii) the number of shares of Municipal
Preferred deemed to be subject to Hold Orders of Existing Holders pursuant to
paragraph (c) of Section 2 of the Auction Procedures of such Trust that were
acquired by BD for its own account or were acquired by BD for its customers who
are Beneficial Owners.
For purposes of subclause (d)(iii) of the foregoing paragraph, if
any Existing Holder or Beneficial Owner who acquired shares of any series of
Municipal Preferred through BD transfers those shares to another Person other
than pursuant to an Auction, then the Broker-Dealer for the shares so
transferred shall continue to be BD; provided, however, that if the transfer was
effected by, or if the transferee is, a Broker-Dealer other than BD, then such
Broker-Dealer shall be the Broker-Dealer for such shares.
<PAGE> 10
10
2.9. Settlement.
(a) If any Existing Holder or Beneficial Owner with respect to whom
BD has submitted a Bid or Sell Order for shares of Municipal Preferred of any
series that was accepted in whole or in part fails to instruct its Agent Member
to deliver the shares of Municipal Preferred subject to such Bid or Sell Order
against payment therefor, BD, if it knows the identity of such Agent Member,
shall instruct such Agent Member to deliver such shares against payment therefor
and, if such Agent Member fails to comply with such instructions, BD may deliver
to the Potential Holder or Potential Beneficial Owner with respect to whom BD
submitted a Bid for shares of Municipal Preferred of such series that was
accepted in whole or in part a number of shares of Municipal Preferred of such
series that is less than the number of shares of Municipal Preferred of such
series specified in such Bid to be purchased by such Potential Holder or
Potential Beneficial Owner.
(b) Neither the Auction Agent nor the Trust shall have any
responsibility or liability with respect to the failure of an Existing Holder,
Beneficial Owner, Potential Holder or Potential Beneficial Owner or its
respective Agent Member to deliver shares of Municipal Preferred of any series
or to pay for shares of Municipal Preferred of any series sold or purchased
pursuant to the Auction Procedures or otherwise.
(c) Notwithstanding any provision of the Auction Procedures or the
Settlement Procedures to the contrary, in the event BD is an Existing Holder
with respect to shares of a series of Municipal Preferred and the Auction
Procedures provide that BD shall be deemed to have submitted a Sell Order in an
Auction with respect to such shares if BD fails to submit an Order in that
Auction with respect to such shares, BD shall have no liability to any Person
for failing to sell such shares pursuant to such a deemed Sell Order if (i) such
shares were transferred by the beneficial owner thereof without notification of
such transfer in compliance with the Auction Procedures or (ii) BD has indicated
to the Auction Agent pursuant to Section 2.2(e) of this Agreement that,
according BD's records, BD is not the Existing Holder of such shares.
(d) Notwithstanding any provision of the Auction Procedures or the
Settlement Procedures to the contrary, in the event an Existing Holder or
Beneficial Owner of shares of a series of Municipal Preferred with respect to
whom a Broker-Dealer submitted a Bid to the Auction Agent for such shares that
was accepted in whole or in part, or submitted or is deemed to have submitted a
Sell Order for such shares that was accepted in whole or in part, fails to
instruct its Agent Member to deliver such shares against payment therefor,
partial deliveries of shares of Municipal Preferred that have been made in
respect of Potential Holders' or Potential Beneficial Owners' Submitted Bids for
shares of such series that have been accepted in whole or in part shall
constitute good delivery to such Potential Holders and Potential Beneficial
Owners.
(e) Notwithstanding the foregoing terms of this Section, any
delivery or non-delivery of shares of Municipal Preferred of any series which
represents any departure from the results of an Auction for shares of such
series, as determined by the Auction Agent, shall be of no effect for purposes
of the registry of Existing Holders maintained by the Auction Agent pursuant to
the Auction Agency Agreement unless and until the Auction Agent shall have been
notified of such delivery or non-delivery.
<PAGE> 11
11
(f) The Auction Agent shall have no duty or liability with respect
to enforcement of this Section 2.9.
3. The Auction Agent.
3.1. Duties and Responsibilities.
(a) Each Auction Agent is acting solely as agent for the Trusts with
whom such Auction Agent has entered into Request Letters and owes no fiduciary
duties to any other Person, other than such Trusts, by reason of the Agreements
to which such Auction Agent is a party.
(b) Each Auction Agent undertakes to perform such duties and only
such duties as are specifically set forth in the Agreements to which it is a
party, and no implied covenants or obligations shall be read into such
Agreements against such Auction Agent.
(c) In the absence of bad faith or negligence on its part, each
Auction Agent shall not be liable for any action taken, suffered, or omitted or
for any error of judgment made by it in the performance of its duties under the
Agreements to which it is a party. Each Auction Agent shall not be liable for
any error of judgment made in good faith unless such Auction Agent shall have
been negligent in ascertaining the pertinent facts.
3.2. Rights of the Auction Agents.
(a) Each Auction Agent may rely and shall be protected in acting or
refraining from acting upon any communication authorized hereby and upon any
written instruction, notice, request, direction, consent, report, certificate,
share certificate or other instrument, paper or document believed in good faith
by it to be genuine. Each Auction Agent shall not be liable for acting upon any
telephone communication authorized by the Agreements to which it is a party that
such Auction Agent believes in good faith to have been given by the appropriate
Trust, by the Adviser or by a Broker-Dealer. Each Auction Agent may record
telephone communications with the Broker-Dealers.
(b) Each Auction Agent may consult with counsel of its choice and
the advice of such counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it hereunder
in good faith and in reliance thereon.
(c) Each Auction Agent shall not be required to advance, expend or
risk its own funds or otherwise incur or become exposed to financial liability
in the performance of its duties hereunder.
3.3. Auction Agents' Disclaimers.
Each Auction Agent makes no representation as to the validity or
adequacy of the Agreements to which it is a party, the Auction Agency Agreements
to which it is a party or the shares of Municipal Preferred of any series.
<PAGE> 12
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4. Miscellaneous.
4.1. Termination.
Any party to any Agreement may terminate such Agreement at any time
on five days' notice to the other parties to such Agreement, provided that the
Trust party to such Agreement shall not terminate the Agreement unless at least
one Broker-Dealer Agreement would be in effect for each series of Municipal
Preferred of such Trust after such termination. Each Agreement shall
automatically terminate with respect to any series of Municipal Preferred with
respect to which the relevant Auction Agency Agreement has terminated.
4.2. Participant in Securities Depository; Payment of Dividends in
Same-Day Funds.
(a) BD is, and shall remain for the term of the Agreements, a member
of, or participant in, the Securities Depository (or an affiliate of such a
member or participant).
(b) BD represents that it (or if BD does not act as Agent Member,
one of its affiliates) shall make all dividend payments on the Municipal
Preferred available in same-day funds on each Dividend Payment Date to customers
that use BD or affiliate as Agent Member.
4.3. Communications.
Except for (i) communications authorized to be by telephone by the
Agreement of any Trust or the Auction Procedures of such Trust and (ii)
communications in connection with Auctions (other than those expressly required
to be in writing), all notices, requests and other communications to any party
under such Agreement shall be in writing (including telecopy or similar writing)
and shall be given to such party, addressed to it, at its address or telecopy
number set forth below:
If to a Trust, [Name of Trust]
addressed: One Financial Center
Boston, MA 02111
Attention: Secretary
Telecopier No.: (617) 345-0919
Telephone No.: (617) 426-3750
If to the Adviser, Colonial Management Associates, Inc.
addressed: One Financial Center
Boston, MA 02111
Attention: Secretary
If to BD, to the address or telecopy number as set forth in the Acceptance
Letter.
<PAGE> 13
13
If to an Auction Agent, to the address or telecopy number as set forth in
the Request Letter, or such other address or telecopy number as such party may
hereafter specify for such purpose by notice to the other parties. Each such
notice, request or communication shall be effective when delivered at the
address specified herein. Communications shall be given on behalf of BD by a BD
Officer and on behalf of an Auction Agent by an Authorized Officer of such
Auction Agent. BD may record telephone communications with any Auction Agent.
4.4. Entire Agreement.
Each Agreement contains the entire agreement among the parties
thereto relating to the subject matter thereof, and there are no other
representations, endorsements, promises, agreements or understandings, oral,
written or implied, among the parties thereto relating to the subject matter
thereof. Each Agreement supersedes any prior agreement to which BD was a party
in respect of any Trust.
4.5. Benefits.
Nothing in any Agreement, express or implied, shall give to any
person, other than the Trust party to such Agreement, the Adviser, the Auction
Agent party to such Agreement and BD and their respective successors and
assigns, any benefit or any legal or equitable right, remedy or claim under such
Agreement.
4.6. Amendment; Waiver.
(a) Each Agreement shall not be deemed or construed to be modified,
amended, rescinded, canceled or waived, in whole or in part, except by a written
instrument signed by a duly authorized representative of the party to be
charged.
(b) Failure of any party to any Agreement to exercise any right or
remedy thereunder in the event of a breach thereof by any other party shall not
constitute a waiver of any such right or remedy with respect to any subsequent
breach.
4.7. Successors and Assigns.
Each Agreement shall be binding upon, inure to the benefit of, and
be enforceable by, the respective successors and assigns of the Trust party to
such Agreement, the Adviser, the Auction Agent party to such Agreement and BD.
4.8. Severability.
If any clause, provision or section hereof shall be ruled invalid or
unenforceable by any court of competent jurisdiction, the invalidity or
unenforceability of such clause, provision or section shall not affect any of
the remaining clauses, provisions or sections hereof.
4.9. GOVERNING LAW.
<PAGE> 14
14
EACH AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK.
4.10. Declaration of Trust.
The Declaration of each Trust is on file with the Secretary of State
of the Commonwealth of Massachusetts. Each Agreement to which a Trust that is a
Massachusetts business trust is a party has been duly executed on behalf of such
Trust by an officer of such Trust acting in such capacity and not individually,
and the obligations of such Trust set forth in such Agreement are not binding
upon any of such Trust's trustees, officers or shareholders individually, but
are binding only upon the assets and property of such Trust.
<PAGE> 15
EXHIBIT A
SETTLEMENT PROCEDURES
<PAGE> 1
Exhibit (L)
July 14, 1999
Colonial Municipal Income Trust
One Financial Center
Boston, Massachusetts 02111
Ladies and Gentlemen:
We have acted as counsel to Colonial Municipal Income Trust (the
"Trust") in connection with the Registration Statement of the Trust on Form N-2
(File No. 333-77261) under the Securities Act of 1933 and the Investment Company
Act of 1940 (File No. 811-04992) (the "Registration Statement") as amended (the
"Acts"), relating to the proposed sale of an aggregate of 3,600 Municipal
Auction Rate Cumulative Preferred Shares, Series F, each with a liquidation
preference of $25,000 per share plus accumulated but unpaid dividends, if any,
thereon (whether or not earned or declared) (the "Preferred Shares"). The
Preferred Shares are to be sold pursuant to the Underwriting Agreement
substantially in the form being filed as an exhibit to the Registration
Statement (the "Underwriting Agreement") among the Trust, Colonial Management
Associates, Inc. and Salomon Smith Barney Inc.
We have examined the Trust's Agreement and Declaration of Trust on file
in the office of the Secretary of State of the Commonwealth of Massachusetts, as
amended (the "Declaration of Trust"), and the proposed form of the Trust's
Amended and Restated By-Laws (the "Amended By-Laws") and are familiar with the
actions taken by the Trust in connection with the issuance and sale of the
Preferred Shares. We have also examined such other documents and records as we
have deemed necessary for the purposes of this opinion.
Based upon the foregoing, we are of the opinion that:
1. The Trust is a duly organized and validly existing unincorporated
association under the laws of the Commonwealth of Massachusetts.
2. Upon approval by the Trustees of the Trust (or by a duly constituted
committee thereof) of the Amended By-Laws, the Preferred Shares will have been
duly authorized and, when issued and paid for in accordance with the
Underwriting Agreement, will be validly issued, fully paid and nonassessable by
the Trust.
<PAGE> 2
Colonial Municipal Income Trust -2- July 14, 1999
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that a notice of such disclaimer be given
in each note, bond, contract, instrument, certificate or undertaking entered
into or executed by the Trust or its Trustees. The Declaration of Trust provides
for indemnification out of the property of the Trust for all loss and expense of
any shareholder of the Trust held personally liable solely by reason of his
being or having been a shareholder. Thus, the risk of a shareholder's incurring
financial loss on account of being a shareholder is limited to circumstances in
which the Trust itself would be unable to meet its obligations.
We understand that this opinion is to be used in connection with the
registration of the Preferred Shares for offering and sale pursuant to the Act.
We consent to the filing of this opinion with and as part of the Registration
Statement and to the references to our firm in the related prospectus under the
captions "Taxation" and "Legal Matters" in the Prospectus contained in the
Registration Statement.
Very truly yours,
/s/ Ropes & Gray
Ropes & Gray
<PAGE> 1
Exhibit (n)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-Effective Amendment No. 2 to the registration
statement on Form N-2 (the "Registration Statement") of our report dated January
13, 1999, relating to the financial statements and financial highlights of
Colonial Municipal Income Trust, which appears in such Statement of Additional
Information, and to the incorporation by reference of our report into the
Prospectus which constitutes part of this Registration Statement. We also
consent to the references to us under the heading "Independent Accountants" in
such Statement of Additional Information and to the references to us under the
headings "Financial Highlights" and "Experts" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 14, 1999
