<PAGE> 1
As filed with the Securities and Exchange Commission on November 19, 1999
1933 Act File No. 333-88637
1940 Act File No. 811-5655
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No. 2
[ ] Post-Effective Amendment No.
and/or
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 12
KEMPER MUNICIPAL INCOME TRUST
( Exact Name of Registrant Specified in Charter )
222 South Riverside Plaza
Chicago, Illinois 60606
Address of Principal Executive Offices ( Number, Street, City, State, Zip Code )
(312) 781-1121
( Registrant's Telephone Number, Including Area Code )
Philip J. Collora
Scudder Kemper Investments, Inc.
222 South Riverside Plaza
Chicago, Illinois 60606
Name and Address (Number, Street, State, Zip Code) of Agent for Service
Copies to:
Robert W. Helm, Esq.
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 20006-2401
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other
than securities offered in connection with a dividend reinvestment plan, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
Proposed Maximum
Title of Securities Amount Being Proposed Maximum Aggregate Offering Amount of
Being Registered Registered Offering Price Per Unit(1) Price(1) Registration Fee(2)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series E Preferred
Shares (par value $.01 10,000 $5,000 $50,000,000 $13,900
per share)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
(2) Transmitted prior to filing.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until 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, as amended, or until the Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
===============================================================================
<PAGE> 2
KEMPER MUNICPAL INCOME TRUST
CROSS-REFERENCE SHEET
PART A
<TABLE>
<CAPTION>
ITEM NO. CAPTION LOCATION IN PROSPECTUS
- -------- ------- ----------------------
<S> <C> <C>
1. Outside Front Cover..........................................Front Cover Page
2. Inside Front and Outside
Back Cover Page..............................................Inside Front Cover Page
3. Fee Table and Synopsis.......................................Not Applicable
4. Financial Highlights.........................................Financial Highlights
5. Plan of Distribution........................................ Front.Cover.Page; Prospectus Summary;
Description of Series E Preferred Shares;
Remarketing of Series E Preferred Shares;
Underwriting
6. Selling Shareholders.........................................Not Applicable
7. Use of Proceeds..............................................Prospectus Summary; Use of Proceeds
8. General Description of the Registrant........................Front Cover Page; Prospectus Summary; The Fund
9. Management...................................................Prospectus Summary; Management of the Fund
10. Capital Stock, Long-Term Debt, and Other Securities..........Front Cover Page; Financial Highlights;
Description of Series E Preferred Shares;
Capitalization; Description of Capital Structure
11. Defaults and Arrears on Senior Securities....................Not Applicable
12. Legal Proceedings............................................Not Applicable
13. Table of Contents of the Statement of Additional
Information.................................................Table of Contents for the Statement of Additional
Information
</TABLE>
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED NOVEMBER 19, 1999
PROSPECTUS
$50,000,000
KEMPER MUNICIPAL INCOME TRUST
PREFERRED SHARES
10,000 SHARES, SERIES E
LIQUIDATION PREFERENCE $5,000 PER SHARE
Kemper Municipal Income Trust (the "Fund") is selling 10,000 Series E
Preferred Shares. The Fund is a closed-end, diversified management investment
company. The Fund's investment adviser is Scudder Kemper Investments, Inc.
("Scudder Kemper" or the "Adviser"). The Fund's investment objective is to
provide a high level of current income exempt from federal income tax. The Fund
seeks to achieve this objective by investing in a diversified portfolio of
investment grade tax-exempt municipal securities. It is a condition of the
underwriter's obligation to purchase the Series E Preferred Shares that the
shares be rated "aaa" by Moody's Investors Service, Inc. ("Moody's") and "AAA"
by Standard & Poor's Rating Services, Inc. ("S&P") on the date of issue. The
Fund intends to emphasize investments in municipal securities with longer term
maturities, but the degree of this emphasis will depend upon market conditions,
as perceived by Scudder Kemper, at the time of investment, including the
relative yields available on securities of different maturities and expectations
of future changes in interest rates. There is no assurance that the Fund will
achieve its investment objective. An investment in the Fund is not appropriate
for all investors.
Investors in Series E Preferred Shares will be entitled to receive cash
dividends at an annual rate that may vary for successive dividend periods. The
dividend rate on the Series E Preferred Shares for the initial period, from and
including the date of issue to but excluding , 1999, will be %
per year. Generally, each dividend period, after the initial period, will be 28
days. For each period after the initial period, the remarketing agent will
determine the dividend rate for a particular period by remarketing the Series E
Preferred Shares on a business day. Investors may purchase and sell Series E
Preferred Shares through their broker-dealers in accordance with the remarketing
procedures specified herein. The Fund may redeem Series E Preferred Shares as
described under "Description of Series E Preferred Shares -- Redemption."
This Prospectus concisely sets forth information you should know before
investing in the Series E Preferred Shares. You should read this Prospectus
before you invest and keep it for future reference. The Fund's Statement of
Additional Information ("SAI"), dated November , 1999, contains additional
information about the Fund and is incorporated, in its entirety, by reference
into this Prospectus. The SAI can be obtained without charge by calling (800)
621-1048 or by writing to the Fund. A table of contents to the SAI is located at
page 41 of this Prospectus. The Fund's address is 222 South Riverside Drive,
Chicago, Illinois 60606 and its telephone number is (800) 621-1048. The SAI is
available, along with other Fund-related materials, at the Securities and
Exchange Commission's Internet Website (http://www.sec.gov).
------------------
INVESTING IN THE SERIES E PREFERRED SHARES INVOLVES CERTAIN RISKS. SEE THE
"PRINCIPAL INVESTMENT RISKS" SECTION BEGINNING ON PAGE 18 OF THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public Offering Price(1).................................... $5,000 $50,000,000
Sales Load.................................................. $ $
Proceeds to Fund(2)......................................... $ $
</TABLE>
(1) Minimum unit $100,000 (20 shares at $5,000 per share).
(2) Not including offering expenses incurred by the Fund, estimated to
be $768,900.
The public offering price per share will be increased by the amount of
dividends, if any, that have accumulated from the date the Series E Preferred
Shares are first issued.
------------------
The underwriter is offering the Series E Preferred Shares subject to
various conditions. The underwriter expects to deliver the Series E Preferred
Shares to purchasers, in book-entry form through The Depository Trust Company,
on or about , 1999.
------------------
SALOMON SMITH BARNEY
, 1999
<PAGE> 4
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. NEITHER THE FUND NOR THE UNDERWRITER HAS
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES
YOU WITH DIFFERENT INFORMATION, YOU SHOULD NOT RELY ON IT. NEITHER THE FUND NOR
THE UNDERWRITER IS MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION
WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION
APPEARING IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON THE FRONT COVER OF
THIS PROSPECTUS ONLY. THE FUND'S BUSINESS, FINANCIAL CONDITION, RESULTS OF
OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE THAT DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Financial Highlights........................................ 7
The Fund.................................................... 8
Use Of Proceeds............................................. 8
Ratings..................................................... 8
Capitalization.............................................. 9
Senior Securities........................................... 10
Portfolio Composition....................................... 11
Portfolio Statistics........................................ 12
Investment Objective And Policies........................... 12
Principal Investment Risks.................................. 18
Determination Of Net Asset Value............................ 20
Description Of Series E Preferred Shares.................... 20
Rating Agency Guidelines And Asset Coverage................. 27
Remarketing Of Series E Preferred Shares.................... 28
Book Entry System........................................... 30
The Remarketing Agent....................................... 30
Management Of The Fund...................................... 31
Custodian, Transfer Agent, Dividend Disbursing Agent, Paying
Agent And Registrar....................................... 32
Taxation.................................................... 33
Description Of Capital Structure............................ 35
Underwriting................................................ 38
Legal Matters............................................... 39
Independent Auditors........................................ 39
Further Information......................................... 39
Table Of Contents For The Statement Of Additional
Information............................................... 41
</TABLE>
i
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights selected information from this Prospectus. It may
not contain all of the information that is important to you. To understand the
offering of the Series E Preferred Shares fully, you should read this entire
Prospectus carefully, including the risk factors. This summary is qualified in
its entirety by reference to the detailed information included in this
Prospectus and the SAI.
THE OFFERING.................. The Fund is offering a total of 10,000 Series E
Preferred Shares, at a purchase price of $5,000
per share plus dividends, if any, that have
accumulated from the date the Fund first issues
the shares. The minimum initial purchase is
$100,000 (20 shares). The Series E Preferred
Shares are being offered by Salomon Smith
Barney Inc. as underwriter.
The Series E Preferred Shares will be preferred
shares of the Fund that entitle their holders
to receive cash dividends at an annual rate
that may vary for successive dividend periods.
In general, except as described under
"Description of Series E Preferred Shares --
Dividend Periods and Dividend Rates," each
dividend period will be 28 days. The
remarketing agent will determine the dividend
rate for a particular period by a remarketing
process initiated on the business day
immediately prior to the start of that dividend
period.
Investors and potential investors in the Series
E Preferred Shares may purchase and sell Series
E Preferred Shares through their
broker-dealers.
Investors in Series E 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
broker-dealer, will maintain record ownership
of the Series E Preferred Shares in book-entry
form. An investor's broker-dealer, in turn,
will maintain records of that investor's
beneficial ownership of Series E Preferred
Shares.
THE FUND...................... Kemper Municipal Income Trust is a closed-end,
diversified management investment company. The
Fund was organized as a Massachusetts business
trust on August 3, 1988 and is registered under
the Investment Company Act of 1940, as amended
(the "1940 Act"). The Fund's principal office
is located at 222 South Riverside Plaza,
Chicago, IL 60606 and its telephone number is
(800) 621-1048.
The Fund's common shares have traded on the New
York Stock Exchange ("NYSE") under the symbol
"KTF" since October 20, 1988. Additionally,
since July 24, 1989, the Fund has had 43,000
preferred shares outstanding in four series,
Series A, Series B, Series C, and Series D,
each with a liquidation preference of $5,000
per share. As of October 31, 1999, the Fund had
net assets of approximately $641 million. The
Fund is offering pursuant to this Prospectus
10,000 preferred shares of beneficial interest,
par value $0.01 per share, designated Series E
Preferred Shares.
1
<PAGE> 6
INVESTMENT OBJECTIVE AND
POLICIES...................... The Fund's investment objective is to provide a
high level of current income exempt from
federal income tax. An investment in the Series
E Preferred Shares may not be appropriate for
certain investors (e.g., most retirement plans)
and there can be no assurance that the Fund's
investment objective will be achieved.
The Fund seeks to achieve its objective by
investing in a diversified portfolio of
investment grade tax-exempt municipal
securities. During normal market conditions, at
least 80% of the Fund's net assets will be
invested in municipal securities. The Fund will
invest substantially all of its net assets in
tax-exempt municipal securities rated at the
time of purchase within the four highest grades
("Baa" or "BBB" or better) by Moody's or S&P,
respectively or unrated municipal securities
which, in the opinion of the Adviser, have
credit characteristics equivalent to, and will
be of comparable quality to, municipal
securities rated within the four highest grades
by Moody's or S&P. The Fund intends to
emphasize investments in municipal securities
with longer-term maturities (which are
generally understood to be securities with
maturities in excess of 7 years), but the
degree of this emphasis will depend upon market
conditions, as perceived by Scudder Kemper, at
the time of investment, including the relative
yields available on securities of different
maturities and expectations of future changes
in interest rates. The Fund may also employ
trading strategies such as purchasing and
selling securities on a "when-issued" and
forward delivery basis and engaging in hedging
techniques, including financial futures and
options transactions. The Fund may also invest
in inverse floaters. This activity is limited
so long as the Series E Preferred Shares are
rated by Moody's and S&P.
PRINCIPAL INVESTMENT RISKS.... The Fund is subject to interest rate and market
risks. The prices of municipal securities tend
to fall as interest rates rise. Securities that
have longer maturities tend to fluctuate more
in price in response to changes in market
interest rates than do securities with shorter
maturities. This risk is usually greater when
inverse floaters are held by the Fund.
Additionally, if interest rates drop and/or the
Fund purchases securities with lower interest
coupons, the Fund's income available over time
to make dividend payments on Series E Preferred
Shares could decline.
If interest rates fall, it is possible that
issuers of callable bonds with high interest
coupons will prepay their bonds before their
maturity date. If a bond was prepaid during a
period of declining interest rates, the Fund
would likely replace the security with a lower
yielding security.
The Fund is further subject to inflation risk
and ratings and asset coverage risk which could
require the Fund to alter its portfolio or
redeem preferred shares, including Series E
Preferred Shares and Series A-D Preferred
Shares. The Fund could be adversely affected if
computer systems on which the Fund relies are
unable
2
<PAGE> 7
to correctly process date-related information
on and after January 1, 2000. There is also a
risk to owners of Series E Preferred Shares
that the applicable dividend rates on the
Series E Preferred Shares could exceed both the
current yield on the Fund's portfolio
investments and the yield received on
investments made with the proceeds of the
offering. Further, there can be no assurance
that any or all Series E Preferred Shares will
be remarketed.
INVESTMENT ADVISER............ The Fund's investment adviser is Scudder Kemper
Investments, Inc. The Adviser is one of the
largest and most experienced investment
organizations worldwide. As of June 30, 1999,
total assets under management by the Adviser
were more than $290 billion for investment
company, corporate, pension, profit-sharing and
other accounts. The Adviser receives an
annualized fee, calculated and paid monthly, in
the amount of 0.55% of the Fund's average
weekly net assets. The Adviser will benefit
from an increase in the Fund's assets resulting
from the offering.
DIVIDENDS AND DIVIDEND
PERIODS....................... The Series E Preferred Shares entitle their
holders to receive cash dividends, out of
legally available funds and when declared by
the Board of Trustees, at an annual rate that
may vary over successive dividend periods.
Except as otherwise provided herein, the
dividend period, after the initial dividend
period, will be 28 days and dividends on the
Series E Preferred Shares will accumulate at
the dividend rate then in effect.
Based on the criteria set forth under
"Description of Series E Preferred
Shares -- Dividend Periods and Dividend Rates,"
the remarketing agent will establish a dividend
rate for each dividend period which will be the
lowest rate possible to permit shares to be
remarketed at $5,000 per share, subject to a
maximum dividend rate. The maximum dividend
rate will be 110% or 125% of the current
commercial paper rate depending upon the length
of time the maximum rate is in effect. Dividend
rates for the Series E Preferred Shares will be
conclusive and binding on the Fund and the
owners of such shares.
The dividend rate on the Series E Preferred
Shares for the period from and including the
date of issue to but excluding ,
1999 will be % per year. For subsequent
dividend periods, the remarketing agent will
determine the dividend rate on the Series E
Preferred Shares.
Dividends on the Series E Preferred Shares will
be cumulative from the date on which the Fund
originally issued Series E Preferred Shares
(the date of original issue) and will be
payable out of legally available funds, when
and if declared by the Board of Trustees, on
the dividend payment date. The dividend payment
date with respect to any dividend period is the
business day following the last day of the
dividend period.
The Depository Trust Company will credit any
dividends it receives to accounts on behalf of
the beneficial owners of the shares as of the
business day preceding that dividend payment
date.
3
<PAGE> 8
ASSET COVERAGE................ Under the Fund's Amended and Restated
Certificate of Designation for Preferred Shares
("Certificate of Designation"), which
establishes the rights and preferences of the
Series E Preferred Shares and other preferred
shares of the Fund, the Fund must maintain:
- asset coverage of all the preferred shares,
including Series E Preferred Shares and
Series A-D Preferred Shares, as required by
the rating agency or agencies rating the
preferred shares, and
- asset coverage of all the preferred shares,
including Series E Preferred Shares and
Series A-D Preferred Shares, of at least 200%
as required by the 1940 Act.
Based on the composition of the Fund's
portfolio and market conditions as of October
31, 1999, the asset coverage of the preferred
shares as measured pursuant to the 1940 Act
would be approximately 261% if the Fund were to
issue all Series E Preferred Shares offered in
this Prospectus, representing approximately 7%
of the Fund's capital.
REMARKETING OF THE PREFERRED
SHARES........................ The Fund will take all reasonable action
necessary so that, at all times, one or more
investment banks, brokers, dealers or other
organizations qualified to remarket the Series
E Preferred Shares and to establish dividend
rates is acting as the remarketing agent. The
remarketing agent is the entity appointed by
the Fund to act on its behalf in establishing
dividend rates and in remarketing the Series E
Preferred Shares. Salomon Smith Barney Inc.
will be the initial remarketing agent for the
Series E Preferred Shares. For the consequences
of the failure to appoint a remarketing agent,
see "Description of Series E Preferred
Shares -- Dividend Periods and Dividend Rates."
The remarketing agent will provide to owners
and prospective purchasers current information
as to dividend rates with respect to the Series
E Preferred Shares.
The remarketing agent will receive negotiable
fees from the Fund. Initially, this fee will be
established at an annual rate of 0.25% of the
net assets of the Fund attributable to the
outstanding Series E Preferred Shares. In
addition to such fees, the Fund will reimburse
the remarketing agent for reasonable
out-of-pocket expenses, such as legal fees,
incurred in connection with the performance of
its duties.
Payment in the amount of $5,000 per share for
shares remarketed will be made on the day of
remarketing, which is the first day of each
dividend period, through The Depository Trust
Company in accordance with its normal
procedures. These procedures currently provide
for receipt of and payment to the record owners
in immediately available funds.
Unless an owner has given irrevocable notice to
the contrary to the remarketing agent, an owner
will be deemed to have tendered its shares for
remarketing on the day following the last day
of the dividend period with respect to such
shares. An owner may not tender a portion of a
unit (20 or more shares) of
4
<PAGE> 9
Series E Preferred Shares unless the owner both
tenders at least 20 shares of such unit and
retains at least 20 shares of such unit. Thus,
a shareholder holding more than 20 but fewer
than 40 shares must tender all or none of its
shares.
An owner who elects to retain Series E
Preferred Shares will hold them at a dividend
rate that will be determined by the remarketing
agent. Before an owner makes an election to
retain or surrender its shares, the owner may
obtain a non-binding indication of the dividend
rate applicable to the next dividend period.
The actual dividend rate for a future dividend
period may be greater than or less than the
rate indicated in a non-binding indication (but
not greater than the maximum dividend rate) and
will not be definitively determined until after
a holder is required to elect to retain, or a
new purchaser is required to agree to purchase,
the Series E Preferred Shares.
The remarketing agent will use its best
efforts, on behalf of the owners of the Series
E Preferred Shares, to remarket all of the
shares tendered for sale by remarketing.
However, the remarketing agent is not obligated
to remarket Series E Preferred Shares under the
circumstances described under the caption "The
Remarketing Agent". The remarketing agent may
repurchase tendered shares for its own account.
Other broker-dealers may participate in the
remarketing process and receive commissions for
these services.
PAYMENT RISK..................
Payments to the owners of shares remarketed
will be made solely from the proceeds of
remarketing. Neither the Fund nor the
remarketing agent will be obligated to provide
funds to make payment to the owners of Series E
Preferred Shares tendered for remarketing.
There can be no assurance that any or all
Series E Preferred Shares will be remarketed.
SECONDARY MARKET TRADING......
The remarketing agent has advised the Fund that
it intends to make an over-the-counter
secondary market in the Series E Preferred
Shares outside of remarketings. The remarketing
agent would earn customary brokerage
commissions for trades in the secondary market,
which would be in addition to the annual
remarketing fee paid by the Fund. The
remarketing agent, however, has no obligation
to make a secondary market in the Series E
Preferred Shares outside of remarketings, and
there can be no assurance that a secondary
market for Series E Preferred Shares will
develop or, if it does develop, that it will
provide holders with liquidity of investment.
The Series E Preferred Shares will not be
listed for trading on a stock exchange. If the
remarketing agent purchases Series E Preferred
Shares in the secondary market or in a
remarketing, it may be in a position of owning
Series E Preferred Shares at the time it
determines the applicable dividend rate in a
remarketing. It may then tender the shares in
remarketing. As a result, the remarketing agent
has a potential conflict of interest in
establishing the dividend rate. The remarketing
agent intends to resolve any such conflicts
which may arise by remarketing all shares
tendered by other owners before remarketing any
shares owned by it.
5
<PAGE> 10
MANDATORY REDEMPTION.......... The Series E Preferred Shares are subject to
mandatory redemption at $5,000 per share, plus
an amount equal to accumulated but unpaid
dividends, if the asset coverage required by
either the rating agency or agencies rating the
Series E Preferred Shares or the 1940 Act is
not met and is thereafter not restored as
required. Any such redemption will be limited
to the number of preferred shares, including
Series E Preferred Shares and Series A-D
Preferred Shares, necessary to restore both the
required asset coverages.
OPTIONAL REDEMPTION...........
The Series E Preferred Shares are redeemable,
as a whole but not in part, at the option of
the Fund, if notice is mailed to the record
owner at least ten days prior to the date fixed
for redemption on the day following the last
day of any dividend period at $5,000 per share
plus an amount equal to accumulated dividends.
LIQUIDATION PREFERENCE........
The liquidation preference of the Series E
Preferred Shares is $5,000 per share, plus an
amount equal to accumulated but unpaid
dividends to the date of distribution.
RATINGS.......................
The Fund will not issue the Series E Preferred
Shares unless they are rated "aaa" by Moody's
and "AAA" by S&P.
VOTING RIGHTS.................
The 1940 Act requires that the holders of all
preferred shares, including Series E Preferred
Shares and Series A-D Preferred Shares, voting
as a separate class, have the right to elect at
least two Trustees of the Fund at all times and
to elect a majority of the Trustees if
dividends on any preferred shares, including
Series E Preferred Shares and Series A-D
Preferred Shares, are unpaid for two years. The
holders of all preferred shares, including
Series E Preferred Shares and Series A-D
Preferred Shares, will vote as a separate class
on other matters as required under the
Certificate of Designation, the Fund's Amended
and Restated Agreement and Declaration of Trust
("Declaration of Trust") and the 1940 Act. In
certain cases, the holders of Series E
Preferred Shares will vote as a separate class.
TAXATION......................
Dividends on Series E Preferred Shares will be
exempt from regular federal income tax in the
hands of owners of these shares to the extent
dividends are payable from tax-exempt income
earned on the Fund's investments. All or a
portion of the Fund's dividends may be subject
to the federal alternative minimum tax. The
Fund is currently required to allocate net
capital gain and other income taxable for
federal income tax purposes, if any,
proportionately between common shares of
beneficial interest and shares of Series E
Preferred Shares. The amount of taxable income
allocable to shares of Series E Preferred
Shares will depend upon the amount of income
realized by the Fund, but is not generally
expected to be significant.
Potential investors subject to the federal
alternative minimum tax should be aware that
the Fund may, from time to time, invest a
substantial portion of its portfolio in
municipal securities bearing income that is
taxable under the alternative minimum tax.
6
<PAGE> 11
FINANCIAL HIGHLIGHTS
The table below sets forth certain specified information for a common share
of beneficial interest of the Fund outstanding throughout each period presented.
The financial highlights for fiscal years ended November 30 (except as noted)
have been audited by Ernst & Young LLP, the Fund's independent auditors, whose
unqualified report is included in the Fund's November 30, 1998 Annual Report and
is incorporated by reference in the SAI. The Fund's unaudited financial
statements in its May 31, 1999 Semi-Annual Report are also incorporated by
reference in the SAI. The financial highlights should be read in conjunction
with the financial statements and notes thereto included in the Fund's November
30, 1998 Annual Report and the May 31, 1999 Semi-Annual Report, which are
available without charge by calling the Fund at 1-800-621-1048.
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED
MAY 31,* FOR THE FISCAL YEARS ENDED NOVEMBER 30,
1999 ---------------------------------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994 1993
----------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year..... $ 12.41 $ 12.33 $ 12.31 $ 12.41 $ 11.12 $ 13.25 $ 12.45
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. $ .46 $ .99 $ 1.04 $ 1.07 $ 1.10 $ 1.10 $ 1.16
Net realized and unrealized gain
(loss)................................ $ (.35) $ .16 $ .05 $ (.10) $ 1.29 $ (1.84) $ .66
Total from investment operations....... $ .11 $ 1.15 $ 1.09 $ .97 $ 2.39 $ (.74) $ 1.82
LESS DIVIDENDS
Distribution from net investment income
to common shareholders................ $ .42 $ .87 $ .87 $ .87 $ .87 $ .87 $ 87
Distribution from net investment income
to preferred shareholders............. $ .08 $ .20 $ .20 $ .20 $ .23 $ .16 $ .15
Distribution from net realized gain.... -- -- -- -- -- $ .36 --
Total dividends........................ $ .50 $ 1.07 $ 1.07 $ 1.07 $ 1.10 $ 1.39 $ 1.02
Less organization and offering expense
of remarketing of preferred shares.... -- -- -- -- -- -- --
Net asset value, end of year........... $ 12.02 $ 12.41 $ 12.33 $ 12.31 $ 12.41 $ 11.12 $ 13.25
Market value, end of year.............. $ 12.69 $ 14.63 $ 14.13 $ 13.13 $ 12.63 $ 11.00 $ 12.75
TOTAL RETURN
Based on net asset value............... .19% 7.96% 7.57% 6.56% 20.00% (7.36)% 13.80%
Based on market value.................. (10.32)% 10.60% 15.16% 11.57% 23.55% (4.66)% 8.00%
RATIOS TO AVERAGE NET ASSETS (excludes
preferred shares equity)
Expenses............................... 1.13% 1.02% 1.02% 1.06% 1.01% 1.03% .99%**
Net investment income.................. 8.08% 8.04% 8.66% 8.87% 9.22% 9.04% 8.90%**
RATIOS TO AVERAGE NET ASSETS (includes
preferred shares equity)
Expenses............................... .77% .70% .69% .72% .69% .70% .69%
Net investment income.................. 5.45% 5.47% 5.92% 6.03% 6.23% 6.13% 6.20%
SUPPLEMENTAL DATA
Net assets at end of year
(in thousands)........................ $465,177 $478,445 $471,179 $466,243 $464,684 $414,790 $493,108
Portfolio turnover rate (annualized)... 32% 17% 7% 26% 19% 12% 17%
<CAPTION>
FOR THE FISCAL YEARS ENDED NOVEMBER 30,
-----------------------------------------
1992 1991 1990 1989
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year..... $ 11.85 $ 11.25 $ 11.35 $ 11.13
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. $ 1.16 $ 1.18 $ 1.18 $ .92
Net realized and unrealized gain
(loss)................................ $ .49 $ .56 $ (.05) $ .33
Total from investment operations....... $ 1.65 $ 1.74 $ 1.13 $ 1.25
LESS DIVIDENDS
Distribution from net investment income
to common shareholders................ $ .87 $ .87 $ .87 $ .78
Distribution from net investment income
to preferred shareholders............. $ .18 $ .27 $ .36 $ .13
Distribution from net realized gain.... -- -- -- --
Total dividends........................ $ 1.05 $ 1.14 $ 1.23 $ .91
Less organization and offering expense
of remarketing of preferred shares.... -- -- -- $ .12
Net asset value, end of year........... $ 12.45 $ 11.85 $ 11.25 $ 11.25
Market value, end of year.............. $ 12.63 $ 12.00 $ 11.25 --
TOTAL RETURN
Based on net asset value............... 12.80% 13.55% 7.17% 9.23%
Based on market value.................. 12.72% 14.78% 5.58% 2.48%
RATIOS TO AVERAGE NET ASSETS (excludes
preferred shares equity)
Expenses............................... 1.04%** 1.08%** 1.01%** 1.12%**
Net investment income.................. 9.60%** 10.10%** 10.58%** 12.50%**
RATIOS TO AVERAGE NET ASSETS (includes
preferred shares equity)
Expenses............................... .71% .72% .65% .62%
Net investment income.................. 6.48% 6.76% 6.93% 6.88%
SUPPLEMENTAL DATA
Net assets at end of year
(in thousands)........................ $461,119 $434,924 $408,698 $407,989
Portfolio turnover rate (annualized)... 5% 4% 15% 38%
</TABLE>
- ---------------
* Annualized (for the ratios only)
** Unaudited
Note: Total return based on net asset value reflects changes in the Fund's net
asset value during the year. Total return based on market value reflects
changes in market value. Each figure includes reinvestment of dividends.
These figures will differ depending upon the level of any discount from or
premium to net asset value at which the Fund's shares trade during the
year. Ratios exclude the effect of distributions to preferred shares.
7
<PAGE> 12
THE FUND
The Fund is a closed-end, diversified management investment company. The
Fund was organized as a Massachusetts business trust on August 3, 1988, and is
registered under the 1940 Act. The Fund commenced investment operations on
October 20, 1988, upon the closing of an initial public offering of its common
shares. On October 31, 1999, the Fund had approximately 38,800,000 common shares
outstanding, 10,800 Series A Preferred Shares, 10,700 Series B Preferred Shares,
10,800 Series C Preferred Shares, and 10,700 Series D Preferred Shares and total
net assets of approximately $641 million. The Fund's address is 222 South
Riverside Plaza, Chicago, Illinois, 60606, and its telephone number is (800)
621-1048.
USE OF PROCEEDS
The net proceeds of this offering will be approximately $49 million, after
payment of the underwriting commission to the underwriter (Salomon Smith Barney
Inc.) and estimated offering costs. These net proceeds will be invested in
accordance with the Fund's investment objective and policies. It is presently
anticipated that it may take up to three months after completion of this
offering before such net proceeds are invested in longer term municipal
securities, depending upon market conditions and the availability of appropriate
municipal securities. Pending such investment, it is anticipated that the
proceeds will be invested in short-term tax-exempt securities. See "Investment
Objective and Policies."
RATINGS
It is a condition of the underwriter's obligation to purchase the Series E
Preferred Shares that they be rated "aaa" by Moody's and "AAA" by S&P on the
date of original issue. As recently described by Moody's, an issue of preferred
shares which is rated "aaa" is considered to be top-quality preferred stock with
good asset protection and the least risk of dividend impairment within the
universe of preferred stocks. As recently described by S&P, a preferred stock
rating is an assessment of the capacity and willingness of an issuer to pay
preferred stock dividends. An S&P credit rating of preferred stock does not
address the likelihood that a resale mechanism (e.g., Dutch auction or
remarketing) will be successful. A "AAA" rating, the highest rating assignable
by S&P, indicates an extremely strong capacity to pay preferred stock
obligations.
Ratings are not recommendations to purchase, hold or sell the Series E
Preferred Shares, inasmuch as the ratings do not comment on market price or
suitability for a particular investor. The ratings are based on current
information furnished to Moody's and S&P by the Fund and obtained by Moody's and
S&P from other sources. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information.
8
<PAGE> 13
CAPITALIZATION
The following table sets forth the capitalization of the Fund as of October
31, 1999, and as adjusted to give effect to the issuance of the Series E
Preferred Shares (including estimated offering expenses and sales loads of
$768,900).
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Shareholders' Equity:
Series A-D Preferred Shares, $0.01 par value, 43,000 shares
authorized and outstanding, as adjusted..................... $ 215,000 $ 215,000
Series E Preferred Shares, $0.01 par value, 10,000 shares
authorized and outstanding, as adjusted................ $ -- $ 50,000
Common shares, $.01 par value, unlimited number of shares
authorized, 38,808,200 shares outstanding.............. $ 388 $ 388
Capital in excess of par value............................ $ 432,748 $ 431,979
Undistributed net realized loss on investments............ $ (16,401) $ (16,401)
Unrealized appreciation of investments.................... $ 3,013 $ 3,013
Undistributed net investment income....................... $ 6,413 $ 6,413
Net Assets................................................ $ 641,161 $ 690,392
Less liquidation value of all Preferred Shares....... $(215,000) $(265,000)
Net assets attributable to common shares
outstanding......................................... $ 426,161 $ 425,392
</TABLE>
9
<PAGE> 14
SENIOR SECURITIES
The table below sets forth certain specified information for the senior
securities that are outstanding for the Fund; these securities are the Series
A-D Preferred Shares. The total number of shares outstanding, the involuntary
liquidating preference and average market value per share has remained the same
since the issuance of these securities in 1989. The calculation of asset
coverage per share is explained in a note to the table below. The information
presented for the fiscal years ended November 30, have been audited by Ernst &
Young LLP, the Fund's independent auditors.
<TABLE>
<CAPTION>
SIX MONTHS
PERIOD
ENDED
MAY 31 FOR THE FISCAL YEARS ENDED NOVEMBER 30
1999 -------------------------------------------------------------
SERIES A (UNAUDITED) 1998 1997 1996 1995
- -------- ----------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Number of Shares Outstanding................... 10,800 10,800 10,800 10,800 10,800
Asset Coverage Per Share*............................ $ 15,800 $ 16,100 $ 16,000 $ 15,800 $ 15,800
Involuntary Liquidating Preference Per Share......... $ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000
Average Market Value Per Share....................... $ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000
<CAPTION>
FOR THE FISCAL YEARS ENDED NOVEMBER 30
-------------------------------------------------------------
SERIES A 1994 1993 1992 1991
- -------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Total Number of Shares Outstanding................... 10,800 10,800 10,800 10,800
Asset Coverage Per Share*............................ $ 14,600 $ 16,500 $ 15,700 $ 15,100
Involuntary Liquidating Preference Per Share......... $ 5,000 $ 5,000 $ 5,000 $ 5,000
Average Market Value Per Share....................... $ 5,000 $ 5,000 $ 5,000 $ 5,000
<CAPTION>
FOR THE FISCAL YEARS ENDED NOVEMBER 30
-----------------------------
SERIES A 1990 1989
- -------- ---- ----
<S> <C> <C>
Total Number of Shares Outstanding................... 10,800 10,800
Asset Coverage Per Share*............................ $ 14,500 $ 14,500
Involuntary Liquidating Preference Per Share......... $ 5,000 $ 5,000
Average Market Value Per Share....................... $ 5,000 $ 5,000
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
PERIOD
ENDED
MAY 31 FOR THE FISCAL YEARS ENDED NOVEMBER 30
1999 -------------------------------------------------------------
SERIES B (UNAUDITED) 1998 1997 1996 1995
- -------- ----------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Number of Shares Outstanding................... 10,700 10,700 10,700 10,700 10,700
Asset Coverage Per Share*............................ $ 15,800 $ 16,100 $ 16,000 $ 15,800 $ 15,800
Involuntary Liquidating Preference Per Share......... $ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000
Average Market Value Per Share....................... $ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000
<CAPTION>
FOR THE FISCAL YEARS ENDED NOVEMBER 30
-------------------------------------------------------------
SERIES B 1994 1993 1992 1991
- -------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Total Number of Shares Outstanding................... 10,700 10,700 10,700 10,700
Asset Coverage Per Share*............................ $ 14,600 $ 16,500 $ 15,700 $ 15,100
Involuntary Liquidating Preference Per Share......... $ 5,000 $ 5,000 $ 5,000 $ 5,000
Average Market Value Per Share....................... $ 5,000 $ 5,000 $ 5,000 $ 5,000
<CAPTION>
FOR THE FISCAL YEARS ENDED NOVEMBER 30
-----------------------------
SERIES B 1990 1989
- -------- ---- ----
<S> <C> <C>
Total Number of Shares Outstanding................... 10,700 10,700
Asset Coverage Per Share*............................ $ 14,500 $ 14,500
Involuntary Liquidating Preference Per Share......... $ 5,000 $ 5,000
Average Market Value Per Share....................... $ 5,000 $ 5,000
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
PERIOD
ENDED
MAY 31 FOR THE FISCAL YEARS ENDED NOVEMBER 30
1999 -------------------------------------------------------------
SERIES C (UNAUDITED) 1998 1997 1996 1995
- -------- ----------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Number of Shares Outstanding................... 10,800 10,800 10,800 10,800 10,800
Asset Coverage Per Share*............................ $ 15,800 $ 16,100 $ 16,000 $ 15,800 $ 15,800
Involuntary Liquidating Preference Per Share......... $ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000
Average Market Value Per Share....................... $ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000
<CAPTION>
FOR THE FISCAL YEARS ENDED NOVEMBER 30
-------------------------------------------------------------
SERIES C 1994 1993 1992 1991
- -------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Total Number of Shares Outstanding................... 10,800 10,800 10,800 10,800
Asset Coverage Per Share*............................ $ 14,600 $ 16,500 $ 15,700 $ 15,100
Involuntary Liquidating Preference Per Share......... $ 5,000 $ 5,000 $ 5,000 $ 5,000
Average Market Value Per Share....................... $ 5,000 $ 5,000 $ 5,000 $ 5,000
<CAPTION>
FOR THE FISCAL YEARS ENDED NOVEMBER 30
-----------------------------
SERIES C 1990 1989
- -------- ---- ----
<S> <C> <C>
Total Number of Shares Outstanding................... 10,800 10,800
Asset Coverage Per Share*............................ $ 14,500 $ 14,500
Involuntary Liquidating Preference Per Share......... $ 5,000 $ 5,000
Average Market Value Per Share....................... $ 5,000 $ 5,000
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
PERIOD
ENDED
MAY 31 FOR THE FISCAL YEARS ENDED NOVEMBER 30
1999 -------------------------------------------------------------
SERIES D (UNAUDITED) 1998 1997 1996 1995
- -------- ----------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Number of Shares Outstanding................... 10,700 10,700 10,700 10,700 10,700
Asset Coverage Per Share*............................ $ 15,800 $ 16,100 $ 16,000 $ 15,800 $ 15,800
Involuntary Liquidating Preference Per Share......... $ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000
Average Market Value Per Share....................... $ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000
<CAPTION>
FOR THE FISCAL YEARS ENDED NOVEMBER 30
-------------------------------------------------------------
SERIES D 1994 1993 1992 1991
- -------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Total Number of Shares Outstanding................... 10,700 10,700 10,700 10,700
Asset Coverage Per Share*............................ $ 14,600 $ 16,500 $ 15,700 $ 15,100
Involuntary Liquidating Preference Per Share......... $ 5,000 $ 5,000 $ 5,000 $ 5,000
Average Market Value Per Share....................... $ 5,000 $ 5,000 $ 5,000 $ 5,000
<CAPTION>
FOR THE FISCAL YEARS ENDED NOVEMBER 30
-----------------------------
SERIES D 1990 1989
- -------- ---- ----
<S> <C> <C>
Total Number of Shares Outstanding................... 10,700 10,700
Asset Coverage Per Share*............................ $ 14,500 $ 14,500
Involuntary Liquidating Preference Per Share......... $ 5,000 $ 5,000
Average Market Value Per Share....................... $ 5,000 $ 5,000
</TABLE>
- ---------------
* Asset Coverage per share means the total assets of the Fund divided by the
total number of Preferred Shares outstanding at the end of the period.
10
<PAGE> 15
PORTFOLIO COMPOSITION
As of October 31, 1999, approximately 52% of the market value of the Fund's
portfolio was invested in long-term municipal securities and approximately 48%
was invested in short- and intermediate-term municipal securities. The following
tables set forth information with respect to the composition of the Fund's
investment portfolio (including contracts to purchase securities but excluding
temporary investments) as of October 31, 1999. Portfolio holdings and
composition are subject to change.
<TABLE>
<CAPTION>
HOLDINGS PERCENT
- -------- -------
<S> <C>
1. Revenue Bonds............................................ 71%
2. Pre-Refunded/Escrowed to Maturity Bonds.................. 22%
3. General Obligations...................................... 7%
4. Cash & Equivalents....................................... 0%
</TABLE>
Average maturity (dollar weighted) of the Fund: 17.1 years.
11
<PAGE> 16
PORTFOLIO STATISTICS
(S&P / MOODY'S -- AS OF OCTOBER 31, 1999)+
<TABLE>
<CAPTION>
SECURITIES RATINGS
- ------------------
<S> <C>
AAA/Aaa..................................................... 71%
AA/Aa....................................................... 10%
A/A......................................................... 7%
BBB/Baa..................................................... 9%
BB/Ba....................................................... 1%
Not rated................................................... 2%
</TABLE>
+ The ratings of S&P and Moody's represent their opinions as to the quality of
securities that they undertake to rate. The percentage shown reflects the
higher of Moody's or S&P's ratings. Ratings are relative and subjective and
not absolute standards of quality. S&P's rating categories may be modified
further by a plus (+) or minus (-) in AA, A, BBB, and BB ratings. Moody's
ratings categories may be modified further by a 1, 2 or 3 in Aa, A, and Baa,
and Ba ratings.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide a high level of current
income exempt from federal income tax. The Fund seeks to achieve this objective
by investing in a diversified portfolio of investment grade tax-exempt municipal
securities. Accordingly, the Fund would not ordinarily be a suitable investment
for tax-exempt retirement plans or other investors unable to benefit from
tax-exempt income. The Fund has not established any limit on the percentage of
its portfolio that may be invested in municipal securities subject to the
alternative minimum tax provisions of federal tax law, and a substantial portion
of the income produced by the Fund may be taxable under the alternative minimum
tax. The Fund, therefore, may not be suitable for investors who are subject to
the alternative minimum tax. The suitability of the Fund for these investors
will depend upon a comparison of the yield likely to be provided from the Fund
with the yield from comparable investments not subject to the alternative
minimum tax in light of each investor's tax position. See "Taxation."
PORTFOLIO INVESTMENTS
As a non-fundamental policy, during normal market conditions, at least 80%
of the Fund's net assets will be invested in municipal securities. The Fund will
invest substantially all of its net assets in tax-exempt municipal securities
rated at the time of purchase within the four highest grades ("Baa" or "BBB" or
better) by Moody's or S&P, respectively, or unrated municipal securities which,
in the opinion of the Adviser, have credit characteristics equivalent to, and
will be of comparable quality to, municipal securities rated within the four
highest grades by Moody's or S&P. The Fund may not invest more than 20% of its
net assets in such unrated municipal securities. Municipal securities rated
"Baa" or "BBB" are considered "investment grade" securities and are regarded as
having an adequate capacity to pay principal and interest, but they do have some
speculative characteristics. A general description of Moody's and S&P's ratings
of municipal securities is set forth in Appendix A to the SAI. The Fund intends
to emphasize investments in municipal securities with longer term maturities
(which are generally understood to be securities with maturities in excess of 7
years), but the degree of this emphasis will depend upon market conditions, as
perceived by the Adviser, at the time of investment, including the relative
yields available on securities of different maturities and expectations of
future changes in interest rates. However, the Fund will also engage in hedging
practices to the extent deemed appropriate by the Adviser to shorten the
effective weighted average maturity of the portfolio. These practices may be
limited by certain conditions imposed by Moody's or S&P. See "Rating Agency
Guidelines and Asset Coverage."
12
<PAGE> 17
The foregoing policies as to ratings of portfolio investments apply only at
the time of purchase of a security, and the Fund is not required to dispose of
the securities in the event Moody's or S&P subsequently downgrades its
assessment of the credit characteristics of a particular issuer.
During temporary defensive periods (e.g., times when, in the opinion of the
Adviser, temporary imbalances of supply and demand or other temporary
dislocations in the tax-exempt bond market adversely affect the price at which
municipal securities are available), the Fund may invest any percentage of its
net assets in taxable temporary investments. To the extent permitted by
applicable federal income tax law, the taxable income on such investments, if
any, will be allocated proportionately between holders of common shares and
holders of preferred shares, including the Series E Preferred Shares and the
Series A-D Preferred Shares. The Fund will invest only in temporary investments
which mature within one year from the date of their purchase by the Fund.
Although the Fund's investment policies permit a broader range of temporary
investments, so long as Moody's or S&P is rating the Series E Preferred Shares,
these investments must be U.S. Treasury securities, securitized receivables,
short-term money market instruments, certificates of deposit or other
securities. Temporary investments of the Fund may also include repurchase
agreements. Further, to the extent the Fund invests during temporary defensive
periods in taxable investments, the Fund will not at those times be in a
position to achieve its investment objective of tax-exempt income.
Except as where otherwise indicated, the foregoing investment objective and
policies are fundamental policies of the Fund and may not be changed without the
approval of both a majority of the outstanding common shares and preferred
shares, including the Series E Preferred Shares and the Series A-D Preferred
Shares, voting together as a single class and a majority of the preferred
shares, including the Series E Preferred Shares and the Series A-D Preferred
Shares, voting as a separate class. As used in this Prospectus, a "majority of
the outstanding shares" means the vote of (i) 67% or more of the shares present
at a meeting, if the holders of more than 50% of the shares are present or
represented by proxy, or (ii) more than 50% of the shares, whichever is less.
MUNICIPAL SECURITIES
Municipal securities include debt obligations issued by states, cities,
local authorities, possessions and certain territories of the United States to
obtain funds for various public purposes, including the construction of public
facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which municipal securities may be issued include the refinancing of
outstanding obligations, the obtaining of funds for general operating expenses
and for loans to other public institutions and facilities. In addition, certain
industrial development, private activity and pollution control bonds may be
included within the term "municipal securities" if the interest paid thereon
qualifies as exempt from federal income tax. Municipal securities in which the
Fund invests, except for temporary investments, bear interest that, in the
opinion of bond counsel to the issuer of a given municipal security, is exempt
from federal income tax, although the interest may be subject to the alternative
minimum tax. The Fund will not typically make an independent determination as to
whether a bond produces income exempt from federal income tax.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Industrial
development, private activity and pollution control bonds are, in most cases,
revenue bonds and do not generally constitute the pledge of the credit or taxing
power of the issuer of those bonds. There are, of course, variations in the
security of municipal securities, both within a particular classification and
between classifications, depending on numerous factors.
13
<PAGE> 18
Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of municipal authorities
or entities. Although lease obligations do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate, and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for that purpose on a
yearly basis. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
The Fund will seek to minimize these risks by not investing more than 10% of its
total assets in lease obligations that contain "non-appropriation" clauses, and
by only investing in those "non-appropriation" lease obligations where (1) the
nature of the leased equipment or property is such that its ownership or use is
essential to a governmental function of the municipality, (2) the lease payments
will commence amortization of principal at an early date resulting in an average
life of seven years or less for the lease obligation, (3) appropriate covenants
will be obtained from the municipal obligor prohibiting the substitution or
purchase of similar equipment if lease payments are not appropriated, (4) the
investment is of a size that will be attractive to institutional investors, and
(5) the underlying leased equipment has elements of portability and/or use that
enhance its marketability in the event foreclosure on the underlying equipment
is required.
Certain municipal securities may carry variable or floating rates of
interest whereby the rate of interest is not fixed but varies with changes in
specified market rates or indexes, such as a bank prime or a tax-exempt money
market index. As used in this Prospectus, the term municipal securities also
includes tax-exempt notes, municipal commercial paper and municipal lease
obligations having shorter term maturities, although, as noted above, the Fund
intends to emphasize investments in municipal securities with longer term
maturities.
The yields on municipal securities are dependent on a variety of factors,
including the condition of the general money market and the municipal securities
market, the size of a particular offering, the maturity of the obligation and
the rating of the issue. The ratings of Moody's and S&P represent their opinions
as to the quality of those municipal securities that they rate. It should be
emphasized, however, that ratings are general and are not absolute standards of
quality. Consequently, municipal securities with the same maturity, coupon and
rating may have different yields while obligations of the same maturity and
coupon with different ratings may have the same yield. The market value of
outstanding municipal securities will vary with changes in prevailing interest
rate levels and as a result of changing evaluations of the ability of their
issuers to meet interest and principal payments.
Obligations of issuers of municipal securities are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the U.S. Bankruptcy Code. In addition, the
obligations of these issuers may be affected in the future by laws enacted by
Congress or state legislatures, or referenda extending the time for payment of
principal and/or interest, or the imposition of other constraints upon
enforcement of these obligations or upon the ability of municipalities to levy
taxes. There is also the possibility that, as a result of legislation or other
conditions, the power or ability of any issuer to pay, when due, the principal
of and interest on its municipal securities may be materially affected.
ADDITIONAL INVESTMENT PRACTICES
In connection with the investment objective and policies described above,
the Fund may engage in investment and hedging techniques as described below. The
Fund may purchase and sell options on municipal securities, as well as purchase
municipal securities on a "when-issued" or "forward delivery" basis and enter
into repurchase agreements. These hedging practices entail risks and may be
changed without shareholder approval. However, these practices are limited by
certain conditions imposed by Moody's or S&P. See "Rating Agency Guidelines and
Asset Coverage."
14
<PAGE> 19
Securities Options Transactions. At times, the Fund may engage in any of
the following strategies for hedging purposes with the goal of preserving
capital rather than as a means of enhancing income.
The Fund may engage in options transactions on municipal securities, which
may be listed for trading on a national securities exchange or traded
over-the-counter. The Fund may write (sell) covered call options and secured put
options on up to 25% of its net assets and may purchase put and call options
provided that no more than 5% of its net assets may be invested in premiums on
such options. The SEC requires that obligations of investment companies, such as
the Fund, in connection with option sale positions, must comply with certain
segregation or cover requirements which are more fully described in the SAI.
There is no limitation on the amount of the Fund's assets which can be used to
comply with such segregation or cover requirements.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security at the agreed upon exercise (or
"strike") price during the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying security at
the strike price during the option period. Purchasers of options pay an amount,
known as a premium, to the option writer in exchange for the right under the
option contract.
The Fund may purchase put and call options in hedging transactions to
protect against a decline in the market value of municipal securities in the
Fund's portfolio (e.g., by the purchase of a put option) and to protect against
an increase in the cost of municipal securities that the Fund may seek to
purchase in the future (e.g., by the purchase of a call option). In the event
the Fund purchases put and call options, paying premiums therefor, and price
movements in the underlying securities are such that exercise of the options
would not be profitable for the Fund, to the extent such underlying securities
correlate in value to the Fund's portfolio securities, losses of the premiums
paid may be offset by an increase in the value of the Fund's portfolio
securities (in the case of a purchase of put options) or by a decrease in the
cost of acquisition of securities by the Fund (in the case of a purchase of call
options).
Over-the-counter options ("OTC options") differ from exchange-traded
options in several respects. They are transacted directly with dealers and not
with a clearing corporation, and there is a risk of non-performance by the
dealer. OTC options are available for a greater variety of securities and for a
wider range of expiration dates and exercise prices than for exchange-traded
options. Because OTC options are not traded on an exchange, pricing is normally
done by reference to information from a market maker, which information will be
carefully monitored by the Adviser and verified in appropriate cases.
It will generally be the Fund's policy, in order to avoid the exercise of
an option sold by it, to cancel its obligation under the option by entering into
a closing purchase transaction, if available, unless it is determined to be in
the Fund's interest to sell (in the case of a call option) or to purchase (in
the case of a put option) the underlying securities. A closing purchase
transaction consists of the Fund purchasing an option having the same terms as
the option sold by the Fund and has the effect of canceling the Fund's position
as a seller. The premium which the Fund will pay in executing a closing purchase
transaction may be higher than the premium received when the option was sold,
depending in large part upon the relative price of the underlying security at
the time of each transaction. To the extent options sold by the Fund are
exercised and the Fund either delivers portfolio securities to the holder of a
call option or liquidates securities in its portfolio as a source of funds to
purchase securities put to the Fund, the Fund's portfolio turnover rate may
increase, resulting in a possible increase in short term capital gains and a
possible decrease in long term capital gains.
During the option period the Fund, as a covered call writer, gives up the
potential appreciation above the exercise price should the underlying security
rise in value, and the Fund, as a secured put writer, retains the risk of loss
should the underlying security decline in value. For the covered call writer,
substantial appreciation in the value of the underlying security would result in
the security being "called away" at the strike price of the option which may be
substantially below the fair market value of such security. For the secured put
writer, substantial depreciation in the value of the underlying security would
result in the security being "put to" the writer at the strike price of the
option, which may be substantially in excess of the fair market value of such
security. If a covered call option or a secured put option expires unexercised,
the writer realizes a gain, and the buyer a loss, in the amount of the premium.
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As part of its option transactions, the Fund may also use index options,
subject to the limitation that the Fund may write (sell) options on up to 25% of
its net assets and may purchase put and call options without regard to any
percentage limitation. Indices on which the Fund may purchase and sell options
include indices on municipal securities. Through the writing or purchase of
index options, the Fund can achieve many of the same objectives as through the
use of options on individual securities. Options on securities indices are
similar to options on securities except that, rather than the right to take or
make delivery of a security at a specified price, an option on a securities
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the securities index upon which the
option is based is greater than, in the case of a call, or less than, in the
case of a put, the strike price of the option. If no active secondary market
exists for any index with respect to which the Fund purchases or sells options,
such options will be treated as illiquid securities for purposes of the Fund's
investment restrictions.
Price movements in securities which the Fund owns or intends to purchase
will not correlate perfectly with movements in the level of an index and,
therefore, the Fund bears the risk of a loss on an index option which is not
completely offset by movements in the price of such securities. Because index
options are settled in cash, a call writer cannot determine the amount of its
settlement obligations in advance and, unlike call writing on specific
securities, cannot provide in advance for, or cover, its potential settlement
obligations by acquiring and holding the underlying securities.
Interest Rate and Other Hedging Transactions. In order to protect the
value of its portfolio securities against declines resulting from changes in
interest rates or other market changes, the Fund may enter into various hedging
transactions, such as financial futures contracts and related options contracts.
The Fund may enter into various interest rate hedging transactions using
financial instruments with a high degree of correlation to the fixed income
securities which the Fund may purchase for its portfolio, including interest
rate futures contracts on such financial instruments (e.g., futures contracts on
U.S. Treasury securities) and interest rate related indices (municipal bond
indices), put and call options on such futures contracts and on such financial
instruments. The Fund expects to enter into these transactions to "lock in" a
return or spread on a particular investment or portion of its portfolio, to
protect against any increase in the price of securities the Fund anticipates
purchasing at a later date, or for other risk management strategies.
The Fund will not engage in the foregoing transactions for speculative
purposes, but only as a means to hedge risks associated with management of the
Fund's portfolio. Typically, investment in these contracts requires the Fund to
deposit with the applicable exchange or other specified financial intermediary
as a good faith deposit for its obligations an amount of cash or specified debt
securities, which initially is 1%-3% of the face amount of the contract and
which thereafter fluctuates on a periodic basis as the value of the contract
fluctuates. Thereafter, the Fund must make additional deposits equal to any net
losses due to unfavorable price movements of the contract, and will be credited
with an amount equal to any net gains due to favorable price movements. These
additional deposits or credits are calculated and required daily and are known
as "variation margin."
The SEC generally requires that when the Fund effects transactions of the
foregoing nature it must either segregate cash or liquid portfolio securities in
the amount of its obligations under the foregoing transactions, or cover such
obligations by maintaining positions in portfolio securities, futures contracts
or options that would serve to satisfy or offset the risk of such obligations.
When effecting transactions of the foregoing nature, the Fund will comply with
such segregation or cover requirements. There is no limitation as to the
percentage of the Fund's assets which may be invested in such transactions.
The Fund will typically enter into a futures contract or related option
only if it constitutes a bona fide hedging position under applicable
regulations. Otherwise, the Fund will limit its investments in futures contracts
and related options so that, immediately after such investment, the sum of the
amount of its initial margin deposits on open futures contracts and its premiums
on open options contracts will not exceed 5% of the Fund's total assets at
current value. The Fund may, however, invest more than such amount in the future
if it obtains authority to do so from the appropriate regulatory agencies
without
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rendering the Fund a commodity pool operator or adversely affecting its status
as an investment company for federal securities law or income tax purposes.
All of the foregoing transactions present certain risks. In particular, the
variable degree of correlation between price movements of futures contracts and
price movements in the security being hedged creates the possibility that losses
on the hedge may be greater than gains in the value of the Fund's securities. In
addition, these instruments may not be liquid in all circumstances and generally
are closed out by entering into offsetting transactions rather than by disposing
of the obligations. As a result, in volatile markets, the Fund may not be able
to close out a transaction without incurring losses. Although the contemplated
use of these contracts should tend to reduce the risk of loss due to a decline
in the value of the hedged security, at the same time the use of these contracts
could tend to limit any potential gain which might result from an increase in
the value of such security. Finally, the daily deposit requirements in future
contracts create an ongoing greater potential financial risk than do option
purchase transactions, where the exposure is limited to the cost of the premium
for the option.
Successful use of futures contracts and options thereon by the Fund is
subject to the ability of the Adviser to predict movements in the direction of
interest rates and other factors affecting markets for securities. If the
expectations of the Adviser are not met, the Fund would be in a worse position
than if a hedging strategy had not been pursued. For example, if the Fund has
hedged against the possibility of an increase in interest rates which would
adversely affect the price of securities in its portfolio and the price of such
securities increases instead, the Fund will lose part or all of the benefit of
the increased value of its securities because it will have offsetting losses in
its futures positions. In addition, in such situations, if the Fund has
insufficient cash to meet daily margin requirements, it may have to sell
securities to meet such requirements. Such sales of securities may be, but will
not necessarily be, at increased prices which reflect the rising market. The
Fund may have to sell securities at a time when it is disadvantageous to do so.
In addition to engaging in transactions utilizing options on futures
contracts, the Fund may purchase put and call options on securities and, as
developed from time to time, on interest indices and other instruments.
Purchasing options may increase investment flexibility and improve total return,
but also risks loss of the option premium if an asset the Fund has the option to
buy declines in value or if an asset the Fund has the option to sell increases
in value.
New options and futures contracts and various combinations thereof continue
to be developed and the Fund may invest in any such options and contracts as may
be developed to the extent consistent with its investment objectives and
regulatory requirements applicable to investment companies.
Income earned or deemed to be earned, if any, by the Fund from its hedging
activities will be taxable income of the Fund. To the extent permitted by
applicable federal income tax law, such income will be allocated to the holders
of common shares. See "Taxation."
If the Fund is engaged in hedging transactions and the expectation of the
Adviser of changes in interest rates or its evaluation of the normal yield
relationship between two securities proves to be incorrect, the Fund's income,
net asset value and potential capital gains may be decreased or its potential
capital losses may be increased. The Fund's use of options on securities and
securities indices, futures contracts, options on futures contracts, and other
hedging strategies will result in the loss of principal under various market
conditions (e.g., declining interest rates) and will involve other risks.
When-Issued And Forward Delivery Securities. Securities may be purchased
on a "when-issued" or on a "forward delivery" basis, which means that the
obligations will be delivered at a future date beyond customary settlement time.
The commitment to purchase a security for which payment will be made on a future
date may be deemed a separate security. Although the Fund is not limited in the
amount of securities for which it may have commitments to purchase on such
basis, it is expected that in normal circumstances, the Fund will not commit
more than 30% of its assets to such purchases. The Fund does not pay for or
start receiving interest on the securities until they are received. In order to
invest its assets immediately, while awaiting delivery of securities purchased
on such basis, the Fund will normally invest in shorter term securities that
offer same-day settlement and earnings, but that may bear interest at a lower
rate than longer term securities.
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<PAGE> 22
These transactions are subject to market fluctuations; the value of the
securities at delivery may be more or less than their purchase price, and yields
generally available on comparable securities when delivery occurs may be higher
than yields on the securities obtained pursuant to such transactions. Because
the Fund relies on the buyer or seller, as the case may be, to consummate the
transaction, failure by the other party to complete the transaction may result
in the Fund missing the opportunity of obtaining a price or yield considered to
be advantageous. The Fund will make commitments to purchase securities on such
basis only with the intention of actually acquiring these securities, but the
Fund may sell such securities prior to the settlement date if such sale is
considered to be advisable. To the extent the Fund engages in "when-issued" and
"forward delivery" transactions, it will do so for the purpose of acquiring
securities for the Fund's portfolio consistent with the Fund's investment
objective and policies and not for the purpose of investment leverage.
The SEC generally requires that when the Fund effects transactions of the
foregoing nature it must either segregate cash or liquid portfolio securities in
the amount of its obligations under the foregoing transactions, or cover such
obligations by maintaining positions in portfolio securities, futures contracts
or options that would serve to satisfy or offset the risk of such obligations.
When effecting transactions of the foregoing nature, the Fund will comply with
such segregation or cover requirements.
Repurchase Agreements. The Fund may enter into repurchase agreements (a
purchase of, and a simultaneous commitment to resell, a security at an agreed
upon price on an agreed upon date) only with member banks of the Federal Reserve
System and member firms of the NYSE. When participating in repurchase
agreements, the Fund buys securities from a vendor, e.g., a bank or brokerage
firm, with the agreement that the vendor will repurchase the securities at a
higher price at a later date. Such transactions afford an opportunity for the
Fund to earn a return on available cash at minimal market risk, although the
Fund may be subject to various delays and risks of loss if the vendor is unable
to meet its obligation to repurchase. The Fund's Trustees will consider the
creditworthiness of the vendor when evaluating whether to enter into a
repurchase agreement and thereafter the creditworthiness will be monitored. The
securities underlying a repurchase agreement will be marked to market every
business day so that the value of the collateral is at least equal to the value
of the loan, including the accrued interest thereon.
Inverse Floaters. The Fund may invest in inverse floaters, also called
residual interest bonds, whose interest rates bear an inverse relationship to
the interest rate on another security or the value of an index. Because changes
in the interest rate on the other security or index inversely affect the
residual interest paid on the inverse floater, the value of an inverse floater
is generally more volatile than that of a fixed rate bond. Inverse floaters tend
to underperform the market for fixed rate bonds in a rising interest rate
environment, but tend to outperform the market for fixed rate bonds when
interest rates decline. Although generally volatile, inverse floaters typically
offer the potential for yields exceeding the yields available on fixed income
bonds with comparable credit quality, coupon, call provisions, and maturity.
PRINCIPAL INVESTMENT RISKS
Interest Rate and Market Risk. The prices of municipal securities tend to
fall as interest rates rise. Securities that have longer maturities tend to
fluctuate more in price in response to changes in market interest rates than do
securities with shorter maturities. This risk is usually greater when inverse
floaters are held by the Fund. Although the Fund has no policy governing the
maturities or durations of its investments, the Fund expects that it will invest
in a portfolio of longer-term securities. This means that the Fund will be
subject to greater market risk (other things being equal) than a fund investing
solely in shorter-term securities. Market risk is often greater among certain
types of income securities, such as zero-coupon bonds, which do not make regular
interest payments. As interest rates change, these bonds often fluctuate in
price more than higher quality bonds that make regular interest payments.
Because the Fund may invest in these types of income securities, it may be
subject to greater market risk than a fund that invests only in very short-term
securities.
The Fund may invest in inverse floaters. Compared to similar fixed-rate
municipal bonds, the value of these bonds will fluctuate to a greater extent in
response to changes in prevailing long-term interest rates. Moreover, the income
earned on inverse floaters will fluctuate in response to changes in prevailing
short-
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<PAGE> 23
term interest rates. Thus, when these bonds are held by the Fund, an increase in
short- or long-term market interest rates will adversely affect the income
received from such bonds.
Income Risk. The Fund's income is based primarily on the interest it earns
from its investments, which can vary widely over the short- and long-term. If
interest rates drop and/or the Fund purchases securities with lower interest
coupons, the Fund's income available over time to make dividend payments on
Series E Preferred Shares could decline. This risk is magnified when prevailing
short-term interest rates increase and the Fund holds inverse floaters.
Call Risk. If interest rates fall, it is possible that issuers of callable
bonds with high interest coupons will "call" (or prepay) their bonds before
their maturity date. If a call were exercised by the issuer during a period of
declining interest rates, the Fund would likely replace the called security with
a lower yielding security.
Secondary Market and Liquidity Risk. At times, a substantial portion of
the Fund's assets may be invested in securities that are held by a relatively
limited number of institutional investors, including the Fund and various
accounts managed by the Adviser. Given the relatively limited number of holders
of such securities, under adverse market or economic conditions or in the event
of adverse changes in the financial condition of the issuer, the Fund could find
it more difficult to sell such securities when the Adviser 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. In such circumstances, it may also be
more difficult to determine the fair value of such securities for purposes of
computing the Fund's net asset value.
The secondary market for some municipal securities (including inverse
floaters and issues which are privately placed with the Fund) is less liquid
than that for taxable debt obligations or other more widely traded municipal
securities. No established resale market exists for certain of the municipal
securities in which the Fund may invest.
A secondary market may be subject to irregular trading activity, wide
bid/ask spreads and extended trade settlement periods. The Fund has no
limitation on the amount of its assets which may be invested in securities which
are not readily marketable or are subject to restrictions on resale. The risks
associated with illiquidity are particularly acute in situations where the
Fund's operations require cash, where, for example, the Fund tenders for its
common shares, and may result in the Fund borrowing to meet short-term cash
requirements.
Inflation Risk. Inflation is the reduction in the purchasing power of
money resulting from the increase in the price of goods and services. Inflation
risk is the risk that the inflation adjusted (or "real") value of a Series E
Preferred Share investment or the income from that investment will be worth less
in the future. As inflation occurs, the real value of the Series E Preferred
Shares and distributions declines. In an inflationary period, however, it is
expected that, through the auction process, dividend rates on Series E Preferred
Shares would increase, tending to offset this risk.
Ratings and Asset Coverage Risk. While Moody's and S&P assign ratings of
"aaa" or "AAA" to Series E Preferred Shares, the ratings do not eliminate or
necessarily mitigate the risks of investing in the Series E Preferred Shares. A
rating agency could downgrade the Series E Preferred Shares, which may make the
shares less liquid in the remarketing process or in the secondary market, though
probably with higher resulting dividend rates. If a rating agency downgrades the
Series E Preferred Shares, or if the asset coverage for the Series E Preferred
Shares declines to less than 200%, the Fund is required to alter its portfolio
or redeem the Series E Preferred Shares. The Fund may voluntarily redeem the
Series E Preferred Shares under the circumstances described in the SAI.
If an attempt is made to sell the Series E Preferred Shares through a
broker-dealer between remarketings, any or all of the shares may not be able to
be sold, or they may not be able to be sold for $5,000 per share or $5,000 per
share plus accumulated dividends. Changes in interest rates could affect the
price on shares sold in the secondary market. Broker-dealers that maintain a
secondary market for Series E Preferred Shares are not required to maintain this
market, and the Fund is not required to redeem shares if either a remarketing or
an attempted secondary market sale fails because of lack of buyers. The Series E
Preferred Shares are not registered on a stock exchange or on the National
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<PAGE> 24
Association of Securities Dealers Automated Quotations System ("NASDAQ") stock
market. If the Series E Preferred Shares are sold to a broker-dealer between
remarketings, the sale price of the shares sold may be less than their original
purchase price, especially when market interest rates have risen since the last
remarketing. Accrued dividends on the Series E Preferred Shares, however, should
at least partially compensate for the increased market interest rates.
Year 2000 Issue. Like other registered investment companies and financial
and business organizations worldwide, the Fund could be adversely affected if
computer systems on which the Fund relies, which primarily include those used by
the Adviser, its affiliates or other service providers, are unable to correctly
process date-related information on and after January 1, 2000. This risk is
commonly called the Year 2000 Issue ("Y2K Issue"). Failure to successfully
address the Y2K Issue could result in interruptions to and other material
adverse effects on the Fund's business and operations. The Adviser has engaged
in a review of the Y2K Issue as it may affect the Fund and is taking steps it
believes are reasonably designed to address the Y2K Issue, although there can be
no assurances that these steps will be sufficient. In addition, there can be no
assurances that the Y2K Issue will not have any adverse effect on the issuers
whose securities are held by the Fund or on global markets or economies
generally.
DETERMINATION OF NET ASSET VALUE
Net asset value of the Fund will be determined as of the close of regular
trading on the NYSE (generally 4:00 p.m. Eastern Time) on the last business day
of each week (generally Friday), and at such other times as the Fund may
authorize. The net asset value of the Fund equals the value of the Fund's assets
less the Fund's liabilities. Portfolio securities for which market quotations
are readily available are valued at current market value. Short-term investments
maturing in 60 days or less are valued at amortized cost when the Adviser
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.
DESCRIPTION OF SERIES E PREFERRED SHARES
The following is a brief description of the Series E Preferred Shares. This
description does not purport to be complete and is subject to and qualified in
its entirety by reference to the Fund's Declaration of Trust and its Certificate
of Designation. Copies of the Declaration of Trust and the Certificate of
Designation are filed as exhibits to the Fund's Registration Statement of which
this Prospectus is a part and may be inspected and copies thereof may be
obtained as described in the section entitled "Further Information."
GENERAL
Under the 1940 Act, the Fund is permitted to have outstanding more than one
series of preferred shares as long as no single series has priority over another
series as to the distribution of assets of the Fund or the payment of dividends.
Neither holders of common shares nor holders of any series of preferred shares
have pre-emptive rights to purchase any preferred shares that might be issued.
It is anticipated that the net asset value per share of preferred shares will
equal their original purchase price per share plus accumulated dividends per
share.
Under the Declaration of Trust, the Fund is authorized to issue an
unlimited number of Series E Preferred Shares. The Fund's Certificate of
Designation authorizes the issuance of 10,000 Series E Preferred Shares. The
Series E Preferred Shares will have a liquidation preference of $5,000 per
share, plus an amount equal to accumulated dividends.
When issued and sold, the Series E Preferred Shares will be fully paid and
non-assessable by the Fund and will not, by their terms, be convertible into or
exchangeable for shares of another class or have preemptive rights. The Series E
Preferred Shares will not be subject to any sinking fund, but will be subject to
mandatory redemption under certain circumstances described below. The Series E
Preferred Shares are also subject to redemption at the option of the Fund
provided certain conditions are met.
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The Series E Preferred Shares will be issued, offered, remarketed and
traded only in units of 20 or more shares with a minimum liquidation preference
of $100,000 or integral multiples of $5,000 in excess of $100,000.
The issuance of Series E Preferred Shares will create additional leverage,
which will affect the amount of income available for distribution on the common
shares and the net asset value of the common shares. The applicable dividend
rates on the Series E Preferred Shares and the Series A-D Preferred Shares could
exceed both the current yield on the Fund's portfolio investments and the yield
received on investments made with the proceeds of the offering.
Payments to the owners of shares remarketed will be made solely from the
proceeds of remarketing. Neither the Fund nor the remarketing agent will be
obligated to provide funds to make payment to the owners of Series E Preferred
Shares tendered for remarketing. There can be no assurance that any or all
Series E Preferred Shares will be remarketed.
The Fund will take all reasonable action necessary so that, at all times,
one or more investment banks, brokers, dealers or other organizations qualified
to remarket the Series E Preferred Shares and to establish dividend rates as
herein provided is acting as remarketing agent for the Series E Preferred
Shares. For the consequences of the failure to appoint a remarketing agent, see
"-- Dividend Periods and Dividend Rates" below.
DIVIDEND PERIODS AND DIVIDEND RATES
Dividend Periods. Series E Preferred Shares will normally have a dividend
period of 28 days, with the exception of the initial dividend period. In
addition, if the 28th day of the dividend period for the Series E Preferred
Shares is a day which is not immediately preceding a business day, then that
dividend period shall end on the next day which immediately precedes a business
day and the subsequent dividend period shall be decreased by the number of days
by which such dividend period was increased, subject to the requirement that the
subsequent dividend period must end on a day immediately preceding a business
day. Further, if a dividend period, which is not a seven-day period, is
immediately preceded by a dividend period consisting of seven days (a seven-day
dividend period) then such dividend period shall be decreased or increased by
the smallest number of days, if any, necessary for the dividend period to end on
the day the dividend period would have ended if it had not been immediately
preceded by a seven-day dividend period. Subject to the foregoing, the
remarketing agent, in its discretion, may from time to time, adjust the normal
28-day dividend period for the Series E Preferred Shares to a period not less
than seven days nor more than 30 days to assist in the remarketing process and
the dividend period shall, as soon as possible, thereafter be adjusted so as to
return to the normal 28-day dividend period ending on the day it would have
ended absent the adjustment.
Unless an owner has given irrevocable notice to the contrary to the
remarketing agent, an owner will be deemed to have tendered its shares for sale
by remarketing on the day following the last day of the dividend period with
respect to its shares.
Determination of Dividend Rates. Dividend rates for the Series E Preferred
Shares will be established by the remarketing agent. The rates so established
will be conclusive and binding on the Fund and the owners of the Series E
Preferred Shares. The remarketing agent will establish a dividend rate for each
dividend period (other than a seven-day dividend period) for the Series E
Preferred Shares which it determines will be the lowest rate which would permit
such shares to be remarketed at $5,000 per share, subject to a maximum dividend
rate.
In establishing the dividend rate, the remarketing agent will take into
account the following remarketing conditions: (i) short-term and long-term
market rates and indices of short-term and long-term rates; (ii) market supply
and demand for short-term and long-term securities; (iii) yield curves for
short-term and long-term securities comparable to the Series E Preferred Shares;
(iv) industry and financial conditions which may affect the Series E Preferred
Shares; (v) the number of shares to be remarketed; (vi) the number of potential
purchasers; (vii) if the Fund has notified the remarketing agent of its intent
to allocate income taxable for Federal income tax purposes to the Series E
Preferred Shares prior to the determination of the dividend rate for that
dividend period, the effect of any Federal income tax on the
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<PAGE> 26
allocated income at the highest rate applicable to corporations or individuals,
whichever is greater, and (viii) the dividend rate at which current and
potential owners would remain or become owners.
In certain circumstances, Series E Preferred Shares could have one or more
seven-day dividend periods. This would occur if, for any reason, the full amount
of dividends payable on the Series E Preferred Shares is not declared as a
dividend by the last business day of any dividend period or if, for any reason,
funds for the payment of the full amount of dividends payable on the Series E
Preferred Shares are not deposited with the agent appointed by the Fund to pay
dividends and other amounts due on Series E Preferred Shares by the last
business day of any dividend period. During any seven-day dividend period, all
Series E Preferred Shares will be entitled to dividends at a special
"non-payment rate" until the last day of the next succeeding seven-day dividend
period during which dividends have been paid or so deposited. This non-payment
rate is equal to 200% of the commercial paper rate, which is the interest rate
on 60-day commercial paper placed on behalf of issuers whose corporate bonds are
rated "Aa" by Moody's, "AA" by S&P or the equivalent of either such rating by
another rating agency, subject to certain adjustments and qualifications set
forth in the Fund's Certificate of Designation.
If the remarketing agent fails to establish a dividend rate of the Series E
Preferred Shares or there is no remarketing agent, the Series E Preferred Shares
will have successive seven-day dividend periods and will be entitled to
dividends at the maximum dividend rate. This will continue until the first day
of the next succeeding dividend period during which all such shares that have
been tendered for remarketing have been remarketed on the first day of the
period. In the unlikely event that the Fund is unable to retain a qualified
remarketing agent for an extended period of time, taking into account the
maximum dividend rate and the possibility of retaining a qualified remarketing
agent, the Fund will consider redeeming Series E Preferred Shares under the
optional redemption provision.
The "maximum dividend rate" is 110%, increasing on the seventh day of a
period in which the rate is the maximum dividend rate to 125%, of the commercial
paper rate. The maximum dividend rate will then decrease to 110% of the
commercial paper rate on the day that the dividend rate for the Series E
Preferred Shares is determined to no longer be the maximum dividend rate.
Calculation of Dividends. Dividends will be cumulative from the date of
original issue and will be payable on each dividend payment date in arrears,
when, as and if declared by the Board of Trustees of the Fund. Dividends will be
paid out of available funds, to the registered owner as of the fifth day
preceding the dividend payment date. Dividends will be calculated on the basis
of a year of 365/366 days for the actual number of days elapsed. Dividends will
be payable on the day following the last business day of such dividend period.
Payment of Dividends. Not later than 12:00 Noon, New York City time, on
the business day preceding the dividend payment date for the Series E Preferred
Shares, the Fund, will deposit with the paying agent sufficient funds for the
payment of the dividends, if such funds are available. The Fund will also give
to the paying agent instructions to apply the funds to the payment of dividends
on the dividend payment date. Each dividend will be paid to the registered owner
of Series E Preferred Shares as of the close of business on the record date,
which is the fifth day preceding such dividend payment date. Dividends in
arrears for any past dividend period may be declared by the Board of Trustees of
the Fund and paid on any date fixed by the Board of Trustees, whether or not a
regular dividend payment date, to registered owners of Series E Preferred Shares
on the record date which shall not be more than 15 days before a dividend
payment date. Nonetheless, no dividends may be declared on any Series E
Preferred Share, unless full cumulative dividends have been or contemporaneously
are being paid or provided for on all Series E Preferred Shares through all
dividend payment dates prior to a declaration. If all dividends in arrears on
all Series E Preferred Shares have not been declared and paid, or funds for the
payment thereof set apart, payment of dividends in arrears will be made in order
of dividend payment dates, commencing with the earliest. If the amount of any
payment does not fully provide for all dividends in arrears, the payment shall
be applied in the manner described in the preceding sentence, and with respect
to any dividend payment date as to which all dividends in arrears are not to be
paid, any partial payment will be made pro rata with respect to all Series E
Preferred Shares entitled to a dividend payment as of the dividend payment date
in proportion to the aggregate amounts remaining due with respect to the shares
as
22
<PAGE> 27
of the dividend payment date. Owners of Series E Preferred Shares shall not be
entitled to any dividends in excess of full cumulative dividends. No interest or
sum of money in lieu of interest shall be payable with respect to any dividend
payment which may be in arrears.
Gross-Up Payments. Holders of preferred shares shall be entitled to
receive, when, as and if declared by the Board of Trustees, out of funds legally
available therefor in accordance with the Declaration of Trust, the Certificate
of Designation, and applicable law, dividends in an amount equal to the
aggregate gross-up payments as follows:
If, in the case of any dividend period of 28 days or less, the Fund
allocates any net capital gains or other income taxable for Federal income tax
purposes to a dividend paid on Series E Preferred Shares (a taxable allocation)
without having given advance notice thereof to the remarketing agent as provided
below, solely by reason of the fact that the allocation is made retroactively as
a result of the redemption of all or a portion of the outstanding Series E
Preferred Shares or the liquidation of the Fund, the Fund shall, prior to the
end of the calendar year in which such dividend was paid, provide notice thereof
to the remarketing agent and direct the Fund's dividend disbursing agent for the
Series E Preferred Shares to send notice with a gross-up payment to each holder
of the shares that was entitled to such dividend payment during the calendar
year at the holder's address as the same appears or last appeared on the record
books of the Fund.
If, in the case of any dividend period of more than 28 days, the Fund makes
a taxable allocation to a dividend paid on Series E Preferred Shares, the Fund
shall, prior to the end of the calendar year in which the dividend was paid,
provide notice thereof to the remarketing agent and direct the Fund's dividend
disbursing agent for the Series E Preferred Shares to send notice with a
gross-up payment to each holder of shares that was entitled to such dividend
payment during the calendar year at the holder's address as the same appears or
last appeared on the record books of the Fund.
The Fund shall not be required to make gross-up payments with respect to
any net capital gains or other taxable income determined by the United States
Internal Revenue Service ("IRS") to be allocable in a manner different from that
allocated by the Fund.
A "gross-up payment" in respect of any dividend means payment to a holder
of Series E Preferred Shares 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 Series E Preferred Shares is
subject to the federal alternative minimum tax with respect to dividends
received from the Fund; and (iii) assuming that each holder of shares of Series
E Preferred Shares 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 of such gross-up payment is made.
Whenever the Fund intends to include any net capital gain or other income
taxable for Federal income tax purposes in any dividend on Series E Preferred
shares, the Fund shall, in the case of a dividend period of 28 days or less, and
may, in the case of any other dividend period greater than 28 days, notify the
remarketing agent of the amount to be so included not later than the dividend
payment date next preceding the last day of the dividend period on which the
dividend rate for such dividend is to be established (the allocation notice
date). Whenever the remarketing agent receives notice from the Fund, it will be
required in turn to notify each broker-dealer that is participating in the
remarketing process pursuant to a broker-dealer agreement, who, on or prior to
such allocation notice date, in accordance with its broker-dealer agreement,
will be required to notify its beneficial owners and potential beneficial owners
of Series E Preferred Shares believed by it to be interested in purchasing
Series E Preferred Shares in the remarketing process.
Method of Dividend Payment. Dividends on the Series E Preferred Shares
will be paid to The Depository Trust Company which will credit such dividends to
the accounts of its members on behalf of
23
<PAGE> 28
the beneficial owners of the shares as of the business day preceding the
dividend payment date. Payments will be made in accordance with The Depository
Trust Company's normal procedures, which currently provide for payments in
same-day funds.
VOTING RIGHTS
Except as otherwise indicated in this Prospectus and except as otherwise
required by applicable law, holders of preferred shares, including Series E
Preferred Shares and Series A-D Preferred Shares, will vote together with
holders of common shares as a single class. Each preferred share, including
Series E Preferred Shares and Series A-D Preferred Shares, will have one vote
per preferred share and each common share will have one vote per common share.
As a result, the holders of preferred shares, including Series E Preferred
Shares and Series A-D Preferred Shares, will have minority voting power when
they vote together with the holders of common shares. Series E Preferred Shares
and Series A-D Preferred Shares and other preferred shares, to the extent such
other shares are issued by Fund, will have the same voting rights and be a part
of the same class as the preferred shares.
In connection with the election of the Fund's Board of Trustees, holders of
preferred shares, including Series E Preferred Shares and Series A-D Preferred
Shares, voting as a separate class, shall be entitled to elect two of the Fund's
Trustees, and the remaining Trustees will be elected by holders of common shares
and preferred shares, including Series E Preferred Shares and Series A-D
Preferred Shares, voting together as a single class. In addition, if at any time
dividends on outstanding preferred shares are unpaid in an amount equal to two
full years' dividends applicable to those shares, then the number of Trustees of
the Fund will automatically be increased by the smallest number that, when added
to the two Trustees elected exclusively by the holders of preferred shares as
described above, would constitute a majority of the Board of Trustees. If such
situation occurs, at a special meeting of shareholders 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 Series E Preferred Shares
and Series A-D Preferred Shares, voting as a separate class, will be entitled to
elect additional Trustees. Such election will allow the preferred shareholders
to elect the smallest number of additional Trustees that will provide for a
majority of the total Board of Trustees to be elected exclusively by holders of
preferred shares. The terms of office of the persons who are Trustees at the
time of that election will continue. If the Fund thereafter shall pay, or
declare and set apart for payment in full, all dividends payable on all
outstanding preferred shares, including Series E Preferred Shares and Series A-D
Preferred Shares, for all past dividend periods, 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 (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.
The affirmative vote of the holders of a majority of all outstanding
preferred shares, voting as a separate class, will be required to amend, alter
or repeal any of the preferences, rights or powers of holders of preferred
shares so as to affect such preferences, rights or powers of the preferred
shares or any series thereof, authorized to be issued. The affirmative vote of
the holders of a majority of all outstanding preferred shares or series of
shares as the case may be, voting as a separate class, will be required to
approve any plan of reorganization adversely affecting such shares or any action
requiring a vote of security holders under Section 13(a) of the 1940 Act,
including, among other things, changes in the Fund's investment objective or
changes in the investment restrictions described as fundamental policies under
"Additional Information About Investments and Investment Techniques" and
"Investment Restrictions" in the SAI. The class vote of holders of preferred
shares described above will in each case be in addition to a separate vote of
the requisite percentage of common shares and preferred shares necessary to
authorize the action in question.
Each series of preferred stock will be entitled to vote as a separate class
on those matters that materially affect that series in a manner different from
that of other series or classes of the Fund's shares. As examples, each series
will have the right to vote as a separate series to veto any proposed amendment
to Fund's Declaration of Trust or any provision of a plan of merger or share
exchange that would cause
24
<PAGE> 29
any of the following results: (1) increase or decrease the aggregate number of
authorized shares of the series; (2) effect an exchange, reclassification, or
cancellation of all or part of the shares of the series; (3) effect an exchange,
or create a right of exchange, of all or any part of the shares of another class
or series for the shares of the series; (4) change the rights or preferences of
the shares of the series; (5) change the shares of the series, whether with or
without par value, into the same or a different number of shares, either with or
without par value, of the same or another class or series; or (6) cancel or
otherwise affect distributions on the shares of the series that have accrued but
have not been declared. In addition, each series will be entitled to vote as a
separate class where the shares of that series are to be exchanged for the
shares of another corporation pursuant to a plan of share exchange. All or
certain of the series will vote collectively as one class with respect to the
matters which materially affect such series in the same manner: e.g., creation
of a new class or series of shares having rights and preferences prior and
superior to the shares of some or all of the existing series, or an increase in
the rights and preferences or the number of authorized shares of a series having
rights and preferences prior or superior to the shares of some or all of the
existing series.
So long as any preferred shares, including Series E Preferred Shares and
Series A-D Preferred Shares, are outstanding, the Fund may not, without the
affirmative vote of the holders of at least 66 2/3% of the outstanding preferred
shares, in person or by proxy, 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 Fund is solvent and
does not foresee becoming insolvent.
The foregoing voting provisions will not apply to any Series E Preferred
Shares if, at or prior to the time when the act with respect to which such vote
would otherwise be required shall be effected, all outstanding Series E
Preferred Shares shall have been (i) redeemed or (ii) called for redemption and
sufficient funds shall have been deposited in trust to effect such redemption.
REDEMPTION
The Series E Preferred Shares may not be redeemed other than in whole,
unless, at the redemption date, all accumulated dividends on the outstanding
Series E Preferred Shares for all past dividend periods have been or are
contemporaneously paid or sufficient funds have been set aside for the payment
thereof.
Optional Redemption. Any Series E Preferred Share may be redeemed with
funds available therefor, at the option of the Fund, upon notice mailed by first
class mail to its record owner no more than 60 and no less than 10 days prior to
the date fixed for redemption (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 of Trust, the Certificate
of Designation and applicable law, at the redemption price of $5,000 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 Series E Preferred Shares may not be redeemed in part if
after such partial redemption fewer than 2,500 shares remain outstanding (ii) as
a whole but not in part, out of funds legally available therefor in accordance
with the Declaration of Trust, the Certificate of Designation and applicable
law, on the first day following any dividend period at a redemption price of
$5,000 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.
Mandatory Redemption. The Fund will be required to redeem, at a redemption
price equal to $5,000 per share plus accumulated dividends on the date fixed by
the Board of Trustees for redemption (whether or not declared), certain of the
Series E Preferred Shares to the extent permitted under the 1940 Act and
Massachusetts law, if the Rating Agency Required Asset Coverage (the asset
coverage required by S&P and Moody's) is not met for eight consecutive business
days or if the Fund fails to maintain the 1940 Act Asset Coverage (the asset
coverage required by the 1940 Act) and such failure is not cured on or before
the 1940 Act Cure Date (the last business day of the following month). Each such
eighth consecutive business day and the 1940 Act Cure Date is herein referred to
as a "Cure Date". The number of Series E Preferred Shares to be redeemed will be
equal to the lesser of (a) the minimum number of Series E Preferred Shares the
redemption of which, if deemed to have occurred immediately prior to the opening
of
25
<PAGE> 30
business on the Cure Date, would, together with all other series of the Fund's
preferred shares subject to redemption, result in the satisfaction of the Rating
Agency Required Asset Coverage or the 1940 Act Asset Coverage, as the case may
be, on such Cure Date (provided that, if there is no minimum number of shares
the redemption of which would have such result, all Series E Preferred Shares
then outstanding will be redeemed) and (b) the maximum number of Series E
Preferred Shares, together with all other shares of the Fund's preferred shares
subject to redemption, that can be redeemed out of funds expected to be
available therefor. In determining the number of shares of Series E Preferred
Shares required to be redeemed in accordance with the foregoing, the Fund will
allocate the number required to achieve the Rating Agency Required Asset
Coverage or the 1940 Act Asset Coverage, as the case may be, pro rata among each
series of preferred shares except as set forth below.
The Fund is required to effect such a mandatory redemption not later than
30 days after such Cure Date (the "Mandatory Redemption Date"), except that if
the Fund does not have funds available for the redemption of all of the required
number of Series E Preferred Shares which are subject to mandatory redemption or
the Fund otherwise is unable to effect such redemption within 30 days after such
Cure Date, the Fund will redeem those Series E Preferred Shares which it was
unable to redeem on the earliest practicable date on which the Fund will have
such funds available, upon like notice to record owners of Series E Preferred
Shares and the paying agent. The Fund is required to mail notice of redemption
to the record owners of Series E Preferred Shares and the paying agent at least
10 days prior to a Mandatory Redemption Date. By 12:00 p.m. New York City time
of the business day immediately following the Cure Date, the Fund will deposit
with the paying agent funds sufficient to redeem the specified number of
preferred shares.
Redemption Procedure. Notice of redemption will be addressed to the
registered owners of the Series E Preferred Shares at their addresses appearing
on the records of the Fund. The notice will set forth: (i) the redemption date;
(ii) the number and identity of Series E Preferred Shares to be redeemed; (iii)
the redemption price (specifying the amount of accumulated dividends to be
included therein); (iv) that dividends on the shares to be redeemed will cease
to accumulate on such redemption date; (v) the provision of the Certificate of
Designation under which redemption shall be made; and (vi) the place or places
where owners may surrender Series E Preferred Shares and obtain payment of the
redemption price. No defect in the notice of redemption or in the mailing
thereof will affect the validity of the redemption proceedings of preferred
shares as to which no defect shall have occurred.
If fewer than all of the Series E Preferred Shares are redeemed on any
date, the shares to be redeemed on such date will be selected by the Fund by lot
or such other method as is fair and equitable, subject to the requirements that
after such redemption, no owner may hold fewer than 20 shares and in the case of
a mandatory redemption, preferred shares must be redeemed pro rata among all
series.
By 12:00 p.m. New York City time on the date on which notice is given as
described under "--Optional Redemption" (or on such date as may be required in a
mandatory redemption), the Fund will deposit funds sufficient to redeem the
Series E Preferred Shares to be redeemed and will give the paying agent
instructions and authority to apply such funds to the payment of the redemption
price upon surrender of such shares. Upon the failure of the Fund to deposit
such funds, the Fund will liquidate portfolio securities in an amount which will
enable it to make such deposits and will deposit the proceeds of such sales in
accordance with the preceding sentence. Neither the Series E Preferred Shares to
be redeemed nor the funds so deposited with the paying agent shall be included
or reflected in any calculation of Rating Agency Required Asset Coverage as of a
business day occurring on or subsequent to the date of such deposit.
If notice of redemption has been given, then upon the deposit of funds
sufficient to effect such redemption, all rights of the owners of the shares so
called for redemption will cease, except the right of the owners of such shares
to receive the redemption price, but without interest, and such shares will no
longer be deemed to be outstanding for any purpose. The Fund will be entitled to
receive, from time to time, from the paying agent the interest, if any, earned
on such funds deposited with the paying agent and the owners of shares so
redeemed will have no claim to any interest. Any funds so deposited which are
unclaimed one year after the redemption date will be paid by the paying agent to
the Fund upon its
26
<PAGE> 31
request. Thereupon, the paying agent will be relieved of all responsibility to
the owners of shares and the owners may look only to the Fund for payment.
LIQUIDATION RIGHTS
In the event of a liquidation, dissolution or winding up of the Fund,
whether voluntary or involuntary, the owners of all series of preferred shares,
in preference to the holders of the common shares, will be entitled to a
payment, out of the assets of the Fund, or the proceeds thereof available for
distribution to shareholders after satisfaction of claims of creditors of the
Fund, of a liquidation distribution in the amount of $5,000 per share, plus an
amount equal to accumulated but unpaid dividends (whether or not earned or
declared but without interest) to the date payment of such distribution is made
in full or a sum sufficient for the payment thereof is set apart with the paying
agent. After payment of the full amount of the liquidation distribution, the
owners of the preferred shares will not be entitled to any further participation
in any distribution of assets of the Fund.
If, upon the liquidation, dissolution or winding up of the Fund, whether
voluntary or involuntary, the assets of the Fund or proceeds thereof available
for distribution to shareholders, after satisfaction of claims of creditors of
the Fund, are insufficient to pay in full the liquidation distribution to which
owners of any preferred shares are entitled, the assets or the proceeds thereof
will be distributed among the owners of all the preferred shares ratably.
In the event of a liquidation, dissolution or winding up of the Fund,
whether voluntary or involuntary, until payment in full is made to the owners of
the preferred shares of the liquidation distribution to which they are entitled,
no dividend or other distribution shall be made to the holders of common shares
and no purchase, redemption or other acquisition for any consideration by the
Fund shall be made in respect to the common shares. A consolidation or merger of
the Fund with or into any other company or companies, or a sale, lease or
exchange of all or substantially all of the assets of the Fund in consideration
for the issuance of equity securities of another company, shall not be deemed to
be a liquidation, dissolution or winding up of the Fund, provided that
consolidation, merger, sale, lease or exchange does not adversely affect any
designation right, preference or limitation of the preferred shares or any
shares issuable in exchange for preferred shares in any consolidation merger.
Series E Preferred Shares and Series A-D Preferred Shares and other
preferred shares, to the extent other shares are issued by the Fund, will share
equally and on a pro rata basis with all the preferred shares then outstanding
in connection with any liquidation, dissolution or winding up of the Fund.
RATING AGENCY GUIDELINES AND ASSET COVERAGE
So long as the Series E Preferred Shares are outstanding, the composition
of the Fund's portfolio will reflect guidelines established by Moody's and S&P
in connection with the Fund's receipt of a rating for such shares of "aaa" from
Moody's and "AAA" from S&P. Moody's and S&P issue ratings for various securities
reflecting the perceived creditworthiness of securities. The guidelines are
designed to ensure that assets underlying outstanding preferred stock 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 will
be adopted by the Fund in order to receive the above-described ratings for the
Series E Preferred Shares. 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.
The Fund intends to maintain assets having an aggregate value at least
equal to the rating agency required asset coverage. The value of these assets
will be determined by the Fund in accordance with guidelines established by the
Trustees of the Fund from time to time, by applying the greater of the discounts
required under guidelines established by Moody's and S&P in connection with the
Fund's receipt of a rating on the Series E Preferred Shares from Moody's of
"aaa" and from S&P of "AAA." To the extent any particular portfolio asset does
not satisfy the applicable Moody's and S&P guidelines, as the same may be
modified by the applicable agency from time to time, it will not be included for
purposes of calculating whether the rating agency required asset coverage is
met. Upon any failure to maintain such rating agency required assets, the Fund
will seek to alter the composition of its portfolio to meet the
27
<PAGE> 32
Rating Agency Required Asset Coverage on or prior to the Cure Date, thereby
incurring additional transaction costs and possible losses and/or gains on
disposition of portfolio securities. To the extent any such failure is not cured
in a timely manner, Series E Preferred Shares will be subject to redemption. See
"Description of Series E Preferred Shares -- Redemption."
So long as S&P is rating any of the Series E Preferred Shares and any of
the Series A-D Preferred Shares and so long as any Series E Preferred Shares or
Series A-D Preferred Shares are outstanding, the Fund will not issue any
additional shares of any series of preferred shares or any class or series of
shares ranking prior to the Series E Preferred Shares or Series A-D Preferred
Shares with respect to the payment of dividends or the distribution of assets
upon dissolution, liquidation or winding up of the Fund, or reissue any
preferred shares previously purchased by the Fund, unless it has received
written confirmation from S&P that any such issuance would not impair the
ratings then assigned by S&P to such shares. Also, the Fund will not, without
written permission from S&P, engage in any short sales of securities, lend
securities, merge or consolidate into or with any corporation, or use a pricing
service not approved by S&P.
1940 ACT ASSET COVERAGE
The Fund is required under the Certificate of Designation and the 1940 Act
to maintain as of the last business day of each month in which any preferred
shares are outstanding, asset coverage of at least 200% with respect to senior
securities which are stock (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 stock of a closed-end investment company as a condition of
paying dividends on its common stock). If the Fund fails to maintain the 1940
Act Asset Coverage and such failure is not cured as of the 1940 Act Cure Date,
the Fund will be required under certain circumstances to redeem preferred
shares. See "Description of Series E Preferred Shares -- Redemption."
Based on the composition of the Fund's portfolio and market conditions as
of October 31, 1999, the 1940 Act Asset Coverage with respect to the Series E
Preferred Shares, assuming the issuance on the date hereof of all the Series E
Preferred Shares, would be computed as follows:
<TABLE>
<S> <C> <C> <C> <C>
Value of Fund assets less liabilities not constituting
senior securities $690,392,516
= = 261%
- ------------------------------------------------------ -----------
Senior securities representing indebtedness plus
liquidation value of all preferred shares $265,000,000
</TABLE>
REMARKETING OF SERIES E PREFERRED SHARES
TENDER FOR SALE BY REMARKETING; RETENTION OF SHARES
So that no owner, through inadvertence, may fail to tender any Series E
Preferred Share for remarketing at the end of a dividend period, each Series E
Preferred Share will be deemed to have been automatically tendered for sale by
remarketing on the day following the last day of each dividend period, unless
the owner thereof shall have given irrevocable notice to the contrary to the
remarketing agent. Any notice by the owner shall be irrevocable when given.
Notice may be telephonic or written and must be delivered prior to 3:00 p.m.,
New York City time, on the last business day of a dividend period. An owner may
not tender a portion of a unit of Series E Preferred Shares unless the owner
both tenders at least 20 shares of the unit and retains at least 20 shares of
the unit. Thus, a shareholder holding more than 20 but less than 40 shares must
tender all or none of such shares.
The failure to give notice of an election to retain any Series E Preferred
Shares will constitute the irrevocable tender for sale by remarketing of such
shares. An owner who has not given notice that it will retain its Series E
Preferred Shares will have no further rights with respect to its shares upon the
remarketing of the shares, except the right to receive any declared but unpaid
dividends thereon and the proceeds of their remarketing.
An owner who elects to retain Series E Preferred Shares will hold them at
the dividend rate as shall be determined by the remarketing agent. Prior to
making its decision to retain any shares, an owner may obtain from the
remarketing agent a non-binding indication with respect to the dividend rate
applicable to
28
<PAGE> 33
the next dividend period. The actual dividend rate for the dividend period may
be greater than or less than the rate indicated in the non-binding indication
(but not greater than the maximum dividend rate) and will not be determined
until after a holder is required to elect to retain its Series E Preferred
Shares or a new purchaser is required to agree to purchase the Series E
Preferred Shares.
THE REMARKETING PROCESS
The remarketing agent will use its best efforts, on behalf of the owners of
Series E Preferred Shares, to remarket all shares tendered for sale by
remarketing, provided, however, that the remarketing agent will not be obligated
to remarket such shares under the circumstances described under the caption "The
Remarketing Agent". Each Series E Preferred Share will be remarketed at $5,000
per share. The remarketing agent may purchase tendered shares for its own
account. See "The Remarketing Agent." Remarketing will be done without charge to
the owners. During remarketing, the remarketing agent may divide or combine
units of shares tendered.
The remarketing process will be conducted on the following schedule (all
times are New York City time):
<TABLE>
<S> <C>
Last Business Day of a Dividend Period:
Beginning Not Later Than 1:00 The remarketing agent will determine and, upon request, make
p.m.: available to all interested persons, non-binding indications
of the dividend rate based upon then current remarketing
conditions.
By 3:00 p.m.: Owners of Series E Preferred Shares will be deemed to have
tendered shares for remarketing at $5,000 per share unless
they have given contrary instructions to the remarketing
agent.
After 3:00 p.m.: The remarketing agent will solicit and receive orders from
prospective investors to purchase tendered Series E
Preferred Shares. The remarketing agent will establish a
dividend rate, which will be the lowest rate, not in excess
of the maximum dividend rate, which it determines will
permit the remarketing of the Series E Preferred Shares at
$5,000 per share.
First Day of Next Dividend Period:
Opening of Business: The remarketing agent will continue, if necessary,
remarketing shares as described above.
By 1:00 p.m.: The remarketing agent will have completed remarketing and
will advise the owners as to the dividend rate applicable to
the dividend period commencing on that day and of any
failure to remarket.
By 2:30 p.m.: New owners must deliver the purchase price as instructed by
the remarketing agent. Former owners will be paid the
proceeds of the remarketing of their shares.
</TABLE>
SETTLEMENT
Settlement of transactions will take place on the day of remarketing, which
is the first day of each dividend period, in accordance with the normal
procedures of The Depository Trust Company, which provides for receipt of and
payment to the record owners in same day funds.
LIQUIDITY -- EFFECT OF FAILED REMARKETING
In order to maintain a liquid market for the Series E Preferred Shares on
the date of tender, the remarketing agent will establish a dividend rate, which
will be the lowest rate not in excess of the maximum dividend rate, which it
determines will permit the remarketing of Series E Preferred Shares at $5,000
per share. Nevertheless, if for any reason a unit of Series E Preferred Shares
is not remarketed at $5,000 per share on the day of its tender, those shares
will be retained by their owner and any Series E Preferred Shares to be sold
will be selected from those tendered pro rata or in such other manner as the
remarketing agent deems appropriate so that no owner will beneficially own less
than one unit. If one or
29
<PAGE> 34
more units of Series E Preferred Shares are not remarketed, all Series E
Preferred Shares will have successive seven-day dividend periods and all Series
E Preferred Shares will be entitled to dividends at the maximum dividend rate,
until the first day of the next successive dividend period on the first day of
which all Series E Preferred Shares tendered for remarketing have been
remarketed.
PAYMENTS TO THE OWNERS OF SERIES E PREFERRED SHARES REMARKETED WILL BE MADE
SOLELY FROM THE PROCEEDS OF REMARKETING. NEITHER THE FUND NOR THE REMARKETING
AGENT WILL BE OBLIGATED TO PROVIDE FUNDS TO MAKE PAYMENT TO THE OWNERS OF SERIES
E PREFERRED SHARES TENDERED FOR REMARKETING. THERE CAN BE NO ASSURANCE THAT ANY
OR ALL SERIES E PREFERRED SHARES WILL BE REMARKETED.
SECONDARY MARKET
The remarketing agent has advised the Fund that it intends to make an
over-the-counter secondary market in the Series E Preferred Shares outside of
remarketings. The remarketing agent would earn customary brokerage commissions
for trades in the secondary market, which would be in addition to the annual
remarketing fee paid by the Fund. However, the remarketing agent has no
obligation to make a secondary market in the Series E Preferred Shares outside
of remarketings, and there can be no assurance that a secondary market for the
Series E Preferred Shares will develop or, if it does develop, that it will
provide holders with liquidity of investment. If the remarketing agent purchases
Series E Preferred Shares in the secondary market or in a remarketing, it may be
in a position of owning Series E Preferred Shares subject to a remarketing at
the time it determines the applicable dividend rate in a remarketing and may
tender shares in such remarketing. As a result, the remarketing agent has a
potential conflict of interest in establishing the dividend rate.
BOOK ENTRY SYSTEM
The Depository Trust Company initially will act as securities depository
for the remarketing agent with respect to the Series E Preferred Shares. So long
as The Depository Trust Company is the securities depository, one certificate
for the Series E Preferred Shares will be registered in the name of Cede & Co.
("Cede"), as nominee of the security depository, and Cede will be the holder of
record of all of the Series E Preferred Shares. The Depository Trust Company,
which is a New York-chartered limited purpose trust company, performs services
for its participants, some of which (and/or their representatives) own The
Depository Trust Company. The Depository Trust Company maintains lists of its
participants and will maintain the positions (ownership interests) held by the
remarketing agent in the Series E Preferred Shares, whether as a holder for its
own account or as a nominee for another holder.
THE REMARKETING AGENT
The Fund will take all reasonable action necessary so that, at all times,
one or more investment banks, brokers, dealers or other organizations qualified
to remarket the Series E Preferred Shares and to establish dividend rates is
acting as remarketing agent for the Series E Preferred Shares. Salomon Smith
Barney Inc. will be the initial remarketing agent for the Series E Preferred
Shares.
Pursuant to a remarketing agreement (an agreement between the Fund and the
remarketing agent) the remarketing agent will provide to owners, dealers and
prospective purchasers current information as to dividend rates with respect to
the Series E Preferred Shares. The remarketing agent will receive negotiable per
annum fees from the Fund. Initially, this fee will be established at 0.25% of
the assets of the Fund attributable to the outstanding Series E Preferred
Shares. In addition to such fees, the Fund will reimburse the remarketing agent
for reasonable out-of-pocket expenses, such as legal fees, incurred in
connection with the performance of its duties.
The remarketing agent will act as agent for the owners of the Series E
Preferred Shares in connection with the remarketing of such shares. The
performance of its duties by the remarketing agent and the right of the
remarketing agent to purchase the Series E Preferred Shares for its own account
may result in conflicts of interest. The remarketing agent intends to resolve
any such conflicts which may arise by remarketing all shares tendered by other
owners before remarketing any shares owned by it.
30
<PAGE> 35
The remarketing agent may resign and be relieved from its duties under the
remarketing agreement on 30 days prior written notice delivered to the Fund, and
the Fund may remove the remarketing agent provided that the Fund gives at least
30 days prior written notice to the remarketing agent of such removal. In
addition, the remarketing agent may terminate the remarketing agreement with
immediate effect, if any of the conditions described in the immediately
succeeding paragraph under which the remarketing agent is not obligated to
remarket the Series E Preferred Shares shall occur. Any successor remarketing
agent must be an investment bank, broker, dealer or other organization qualified
to remarket the Series E Preferred Shares and to establish dividend rates and
must have entered into a remarketing agreement with the Fund. For the
consequences of the failure to appoint a successor remarketing agent. See
"Description of Series E Preferred Shares -- Dividend Periods and Dividend
Rates."
The remarketing agent is not obligated to remarket the Series E Preferred
Shares if there is a material misstatement or omission in any disclosure
document provided by the Fund in connection with the remarketing of the Series E
Preferred Shares or if at any time the remarketing agent has determined that it
is not advisable to remarket the Series E Preferred Shares by reason of: (i) a
pending or proposed change in applicable tax laws; (ii) a material adverse
change in the financial condition of the Fund; (iii) a banking moratorium; (iv)
domestic or international hostilities; (v) a downgrading or withdrawal of one or
more of the ratings of the Series E Preferred Shares; (vi) an imposition of
material restrictions on the Series E Preferred Shares or similar obligations;
(vii) an amendment of the Fund's Declaration of Trust, Certificate of
Designation or its By-Laws which, in the opinion of the Remarketing Agent,
materially and adversely changes the nature of the Series E Preferred Shares or
the remarketing procedures; or (viii) a failure by the Fund, on any dividend
payment date for any Series E Preferred Share, to have paid, or set apart with
the paying agent, funds for the payment of, the dividend on such Series E
Preferred Share on such date.
Broker-dealer Participation in Remarketing. Broker-dealers which obtain
purchasers of Series E Preferred Shares will be paid a commission by the
remarketing agent based upon the number of shares sold, which will not be in
excess of the amount of the remarketing fee to be paid to the remarketing agent.
Broker-dealers also will be paid a commission on the same basis with respect to
each consecutive additional dividend period for which Series E Preferred Shares
are held by owners obtained by them. Salomon Smith Barney Inc. will be acting as
a broker-dealer in connection with the remarketing of the Series E Preferred
Shares.
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES
The management of the Fund, including general supervision of the duties
performed by the Adviser under the Investment Management Agreement, as described
below, is the responsibility of the Fund's Board of Trustees under the laws of
the Commonwealth of Massachusetts.
INVESTMENT ADVISER
Scudder Kemper Investments, Inc., the global investment management business
of Zurich Financial Services, is one of the largest and most experienced
investment counsel firms in the world, managing assets for institutional and
corporate clients, retirement and pension plans, insurance companies, mutual
fund investors and individuals. Scudder Kemper offers a full range of investment
counsel and asset management capabilities, based on a combination of proprietary
research and disciplined, long-term investment strategies. Zurich Financial
Services Group is a financial services holding company incorporated in
Switzerland and owned 57% by Zurich Allied AG and 43% by Allied Zurich p.l.c.
The Adviser has served as investment adviser to the Fund since December 31,
1997, when the Adviser replaced Zurich Kemper Investments, Inc. and its
predecessors, which had served as the Fund's investment adviser since the
inception of the Fund. As of June 30, 1999, the Adviser had more than $290
billion in assets under management. The Adviser's principal office is located at
345 Park Avenue, New York, New York 10154.
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<PAGE> 36
Philip G. Condon and Eleanor R. Brennan, C.F.A. serve as Co-Portfolio
Managers of the Fund and have been responsible for the day-to-day management of
the Fund's portfolio since April 1999. Mr. Condon is a Managing Director of the
Adviser and has been the Director of the Municipal Bond Group since December
1997. He was the Head of Municipal Bond Research from May 1986 to December 1997.
He joined the Adviser in 1983. Mr. Condon received a B.A. and M.B.A. from the
University of Massachusetts, Amherst. Ms. Brennan is a Senior Vice President of
the Adviser and, since 1995 has served as Co-Portfolio Manager of the Fund and
lead portfolio manager on several other Scudder and Kemper municipal funds.
Prior to 1995, Ms. Brennan worked for the Vanguard Group of Investment
Companies. She received a B.A. from Ursinus College and an M.S. from Drexel
University.
The Investment Management Agreement between the Fund and the Adviser
provides that the Adviser acts as investment adviser, manages the Fund's
investments, administers the Fund's business affairs, furnishes offices,
necessary facilities and equipment, provides clerical, bookkeeping and
administrative services, provides shareholder and information services and
permits any of its officers or employees to serve without compensation as
Trustees or officers of the Fund if duly elected to such positions. Under the
Investment Management Agreement, the Fund agrees to assume and pay the charges
and expenses of its operations including, by way of example, the compensation of
the Trustees other than those affiliated with the Adviser, charges and expenses
of independent auditors, of legal counsel, of any transfer or dividend
disbursing agent, of any registrar of the Fund and of the custodian (including
fees for safekeeping of securities), costs of calculating net asset value, all
costs of acquiring and disposing of portfolio securities, interest, if any, on
obligations incurred by the Fund, costs of share certificates, membership dues
in the Investment Company Institute or any similar organization, reports and
notices to shareholders, other like miscellaneous expenses and all taxes and
fees to federal, state or other governmental agencies.
For services and facilities provided by the Adviser under the Investment
Management Agreement, the Fund pays the Adviser an annualized fee, calculated
and paid monthly, in the amount of 0.55% of the average weekly net assets of the
Fund. Average weekly net assets, for purposes of determining the advisory fee,
shall mean the average weekly value of the total assets of the Fund, minus the
sum of accrued liabilities of the Fund (other than the liquidation value of any
preferred shares) and accumulated dividends on any preferred shares, including
Series E Preferred Shares and Series A-D Preferred Shares. Because the Adviser's
fees are based on the average weekly net assets of the Fund, the Adviser will
benefit from an increase in the Fund's assets resulting from the offering.
The Investment Management Agreement provides that the Adviser shall not be
liable for any error of judgment or of law, or for any loss suffered by the Fund
in connection with the matters to which the Investment Management Agreement
relates, except a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Adviser in the performance of its obligations and
duties or by reason of its reckless disregard of its obligations and duties
under the Investment Management Agreement.
The Investment Management Agreement will continue in effect only if such
continuance is specifically approved at least annually by the Board of Trustees
or by vote of a majority of the outstanding common shares and all preferred
shares voting as a single class and, in either case, by a majority of the Board
of Trustees who are not parties to the Investment Management Agreement or
"interested persons" (as defined under the 1940 Act) of any such party. The
Investment Management Agreement terminates automatically if it is assigned and
may be terminated without penalty by vote of a majority of the Fund's
outstanding voting securities or by either party on 60 days' written notice to
the other party.
CUSTODIAN, TRANSFER AGENT, DIVIDEND
DISBURSING AGENT, PAYING AGENT AND REGISTRAR
The Fund's securities and cash are held under a custodian agreement by
State Street Bank and Trust Company, whose principal place of business is 225
Franklin Street, Boston, Massachusetts 02110. Investors Fiduciary Trust Company
("IFTC"), whose principal place of business is 127 West 10th Street, Kansas
City, Missouri 64105, serves as transfer agent, registrar and dividend
disbursing agent for the Fund's common shares. Pursuant to a services agreement
with IFTC, Kemper Service Company, an affiliate of the Adviser, serves as
Shareholder Service Agent for the Fund and, as such, performs all of IFTC's
duties
32
<PAGE> 37
as transfer agent and dividend-disbursing agent. The Depository Trust Company
will act as securities depository for the Series E Preferred Shares. Deutsche
Bank will act as transfer agent, registrar, dividend disbursing agent, and
paying agent for the Series E Preferred Shares.
TAXATION
GENERAL
The following information is meant as a general summary for U.S. taxpayers.
It is based on the advice of Dechert Price & Rhoads, special counsel to the
Fund, and reflects provisions of the Internal Revenue Code (the "Code"),
existing U.S. Department of Treasury regulations, rulings published by the IRS,
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 Fund. There may be
other tax considerations applicable to particular investors. In addition, income
earned through an investment in the Fund may be subject to foreign, state, or
local taxes. Please see the SAI for additional information. You should rely on
your own tax adviser for advice about the tax consequences of investing in the
Fund.
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as the
Fund so qualifies, in any taxable year in which it distributes at least 90% of
the sum of its (x) net investment income (i.e., investment company taxable
income as that term is defined in the Code, without regard to the deduction for
dividends paid) and (y) its net tax-exempt income (see below), the Fund will not
be subject to federal income tax on its net investment income and net capital
gain (i.e., the excess of net long-term capital gain over net short-term capital
loss) that it distributes. The Fund intends to distribute all or substantially
all of such income and gain each year.
Based in part on certain representations made by the Fund to Dechert Price
& Rhoads relating to the lack of any present intention to redeem or purchase
Series E Preferred Shares at any time in the future, it is the opinion of
Dechert Price & Rhoads that the Series E Preferred Shares will constitute stock
of the Fund and distributions with respect to the Series E Preferred Shares
(other than distributions in redemption of Series E Preferred Shares that are
treated as exchanges of stock under Section 302(b) of the Code) thus will
constitute dividends to the extent of the Fund's current and accumulated
earnings and profits as calculated for federal income tax purposes. This opinion
relies in part on a published ruling of the IRS stating that certain preferred
stock similar in many material respects to the Series E Preferred Shares
represents equity. It is possible, however, that the IRS might take a contrary
position asserting, for example, that the Series E Preferred Shares constitute
debt of the Fund. If this position were upheld, the discussion of the treatment
of distributions below would not apply. Instead, distributions by the Fund to
holders of Series E Preferred Shares would constitute interest, whether or not
they exceeded the earnings, and profits of the Fund would be included in full in
the income of the recipient and would be taxed as ordinary income. In such
event, the Fund would not be required to make payments to such shareholders to
offset the effect of paying federal income tax on fund distributions so
recharacterized as interest. Dechert Price & Rhoads has advised the Fund that,
in its opinion, should the IRS pursue in court the position that the Series E
Preferred should be treated as debt for federal income tax purposes, the IRS
would be unlikely to prevail.
Each dividend distribution ordinarily will primarily constitute income
exempt from federal income tax (i.e., qualify as an "exempt-interest" dividend,
which is excludable from the shareholder's gross income). A portion of dividends
attributable to interest on certain municipal securities, however, may be a
preference item for alternative minimum tax purposes." In addition, for
corporations, alternative minimum taxable income is increased by a percentage of
the amount by which an alternative measure of income that includes interest on
all tax-exempt securities exceeds the amount otherwise determined to be
alternative minimum taxable income. Accordingly, the portion of the Fund's
dividends that would otherwise be tax-exempt to shareholders may cause certain
shareholders to be subject to the federal alternative minimum tax or may
increase the tax liability of a shareholder who is subject to such tax.
Investors should thus consider the possible effect of an investment in the Fund
on their federal alternative minimum tax liability.
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<PAGE> 38
Furthermore, exempt-interest dividends are included in determining what portion,
if any, of a person's social security and railroad retirement benefits will be
includible in gross income subject to federal income tax. Distributions of any
taxable net investment income (which term includes short-term capital gain) will
be taxable as ordinary income. Distributions of the Fund's net capital gain, if
any, will be taxable to shareholders as long-term capital gain, regardless of
the length of time they held their shares. Distributions, if any, in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after that basis has been reduced to zero, will constitute
capital gain to the shareholder (assuming the shares are held as a capital
asset).
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.
Dividends and other distributions declared by the Fund in October, November
or December of any year and payable to shareholders of record on a date in any
of those months will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The IRS has taken
the position that if a RIC has more than one class of shares, it may designate
distributions made to each class in any year as consisting of no more than that
class's proportionate share of particular types of income for that year,
including tax-exempt interest and net capital gain. A class's proportionate
share of a particular type of income for a year is determined according to the
percentage of total dividends paid by the RIC during that year that was paid to
the class. Thus, the Fund is required to allocate a portion of its net capital
gain and other taxable income to the Series E Preferred Shares. The Fund
anticipates that the dividends paid on the Series E Preferred Shares will
primarily constitute exempt-interest dividends. The amount of net capital gain
and ordinary income allocable to the Series E Preferred Shares (the "taxable
distribution") will depend upon the amount of such gain and income realized by
the Fund and the total dividends paid by the Fund on its common shares and all
preferred shares, including Series E Preferred Shares and Series A-D Preferred
Shares, during a taxable year, but taxable distributions generally are not
expected to be significant. The tax treatment of additional dividends also may
affect the Fund's calculation of the allocable portion of net capital gain and
other taxable income to the Fund's common shares and the preferred shares,
including Series E Preferred Shares and Series A-D Preferred Shares.
Although the matter is not free from doubt, due to the absence of direct
regulatory or judicial authority, Dechert Price & Rhoads has given the Fund an
opinion that under current law the manner in which the Fund intends to allocate
items of tax-exempt income, net capital gain, and other taxable income, if any,
among the Fund's common shares and the preferred shares including the Series E
Preferred Shares will be respected for U.S. federal income tax purposes. It is
possible that the IRS could disagree with counsel's opinion and attempt to
reallocate the Fund's net capital gain or other taxable income. In the event of
such a reallocation, some of the dividends identified by the Fund as exempt-
interest dividends to holders of Series E Preferred Shares may be
recharacterized as additional net capital gain or other taxable income. In the
event of such recharacterization, however, the Fund would not be required to
make payments to such shareholders to offset the tax effect of such
reallocation.
Interest on indebtedness incurred or continued by a shareholder to purchase
or carry Series E Preferred Shares is not deductible for federal income tax
purposes to the extent that interest relates to exempt-interest dividends
received from the Fund.
If at any time when Series E Preferred Shares are outstanding the Fund does
not meet the asset coverage requirements of the 1940 Act, the Fund will be
required to suspend distributions to holders of common shares until the asset
coverage is restored. See "Description of Series E Preferred Shares --
Restrictions on Dividends and Other Payments." Such a suspension may prevent the
Fund from meeting the 90% distribution requirement described above, and may,
therefore, jeopardize the Fund's qualification for taxation as a RIC. Upon any
failure to maintain the asset coverage requirements of the 1940 Act and to cure
any such failure on or before a specified time, the Fund must redeem preferred
shares in order to
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<PAGE> 39
maintain or restore the requisite asset coverage and avoid the adverse
consequences to the Fund and its shareholders of failing to qualify for
treatment as a RIC. See "Description of Series E Preferred Shares --
Redemption." There can be no assurance, however, that any such action would
achieve that objective.
Certain of the Fund's investment practices are subject to special Code
provisions that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to recognize income or gain without receiving cash with which
to make distributions in the amounts necessary to satisfy the requirements for
maintaining RIC status and for avoiding income and excise taxes. The Fund will
monitor its transactions and may make certain tax elections in order to mitigate
the effect of these rules and to attempt to prevent disqualification of the Fund
as a RIC.
If the Fund pays dividends in respect of gross-up payments, it will
generally designate such payments as exempt-interest dividends except to the
extent that net capital gain or other taxable income is allocated thereto as
described above. The federal income tax consequences of such dividends under
existing law are uncertain.
SALES OF SERIES E PREFERRED SHARES
A shareholder will generally recognize gain or loss on the sale of Series E
Preferred Shares (including transfers in connection with a redemption or
repurchase of Series E Preferred Shares) equal to the difference between the
holder's adjusted tax basis in the Series E Preferred Shares and the amount
realized. If the Series E Preferred Shares are held as capital assets, the gain
or loss will be a capital loss and will be long-term if the Series E Preferred
Shares have been held for more than one year. Any loss realized on a disposition
of Series E Preferred Shares held for six months or less will be disallowed to
the extent of any exempt-interest dividends received with respect to those
Series E Preferred Shares, and any such loss that is not disallowed will be
treated as a long-term, rather than a short-term, capital loss to the extent of
any capital gain distributions received with respect to those Series E Preferred
Shares. A shareholder's holding period is suspended for any periods during which
the shareholder's risk of loss is diminished as a result of holding one or more
other positions in substantially similar or related property, or through certain
options or short sales. Any loss realized on a sale or exchange of Series E
Preferred Shares will be disallowed to the extent those Series E Preferred
Shares are replaced by other Series E Preferred Shares within a period of 61
days beginning 30 days before and ending 30 days after the date of disposition
of the original Series E Preferred Shares. In that event, the basis of the
replacement Series E Preferred Shares will be adjusted to reflect the disallowed
loss.
BACKUP WITHHOLDING
The Fund is required to withhold 31% of all taxable dividends, capital gain
dividends and repurchase proceeds payable to any individuals and certain other
non-corporate shareholders who do not provide the Fund with a correct taxpayer
identification number or certification of exempt status or fail to report full
dividend or interest income.
The foregoing briefly summarizes some of the important United States
federal income tax consequences of investing in the Series E Preferred Shares,
reflects the federal tax law, as of the date of this Prospectus, and does not
address special tax rules applicable to certain types of investors, such as
corporate and foreign investors. Other federal, state or local tax
considerations may apply to a particular investor, including state alternative
minimum tax. Investors should consult their tax advisers.
DESCRIPTION OF CAPITAL STRUCTURE
GENERAL
The Declaration of Trust permits the Board of Trustees to issue an
unlimited number of full and fractional common shares of beneficial interest,
$.01 par value per common share. The common shares outstanding are fully paid
and nonassessable by the Fund. The common shares have no preemptive, conversion,
exchange or redemption rights. Each common share has one vote, with fractional
shares voting proportionately. Common shares are freely transferable, and
holders thereof are entitled to dividends as declared by the Board of Trustees,
and, if the Fund were liquidated, would receive the net assets of the
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<PAGE> 40
Fund after payment of any preferential liquidating distribution to holders of
all preferred shares. Under the rules of the NYSE applicable to listed
companies, the Fund is required to hold an annual meeting of shareholders. If
the Fund is converted to an open-end investment company or if for any other
reason common shares are no longer listed on the NYSE (or any other national
securities exchange the rules of which require annual meetings of shareholders),
the Fund does not intend to hold annual meetings of shareholders.
The issuance of the Series E Preferred Shares will create leverage which
will affect the amount of income available for distribution on the common shares
and the net asset value of the common shares. The applicable dividend rates on
the Series E Preferred Shares could exceed both the current yield on the Fund's
portfolio investments and the yield received on investments made with the
proceeds of the issuance of the offering of the shares of Series E Preferred
Shares and, therefore, the offering could result in a decline in the Fund's net
asset value and a reduction of net investment income available for distribution
on common shares.
So long as any Series E Preferred Shares or any other preferred shares are
outstanding, holders of common shares will not be entitled to receive any
dividends of or other distributions from the Fund, unless at the time of such
declaration, (1) all accrued dividends on preferred shares or accrued interest
on borrowings has been paid and (2) the value of the Fund's total assets
(determined after deducting the amount of such dividend or other distribution),
less all liabilities and indebtedness of the Fund not represented by senior
securities, is at least 300% of the aggregate amount of such securities
representing indebtedness and at least 200% of the aggregate amount of
securities representing indebtedness plus the aggregate liquidation value of the
outstanding preferred shares (expected to equal the aggregate original purchase
price of the outstanding preferred shares plus redemption premium, if any,
together with any accrued and unpaid dividends thereon, whether or not earned or
declared and on a cumulative basis). In addition to the requirements of the 1940
Act, the Fund is required to comply with other asset coverage requirements as a
condition of the Fund obtaining a rating of the preferred shares from a rating
agency. These requirements include an asset coverage test more stringent than
under the 1940 Act.
The following table shows the amount of (i) shares authorized, (ii) shares
held by the Fund for its own account, and (iii) shares outstanding for each
class of authorized securities of the Fund as of October 31, 1999:
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OUTSTANDING
SHARES AMOUNT HELD EXCLUSIVE OF
TITLE OF CLASS AUTHORIZED BY FUND AMOUNT HELD BY FUND
-------------- ---------- ----------- -------------------
<S> <C> <C> <C>
Common Shares...................................... Unlimited 0 38,808,200
Series A Preferred Shares.......................... 10,800 0 10,800
Series B Preferred Shares.......................... 10,700 0 10,700
Series C Preferred Shares.......................... 10,800 0 10,800
Series D Preferred Shares.......................... 10,700 0 10,700
Series E Preferred Shares.......................... 10,000 0 0
</TABLE>
The Fund has no present intention of offering additional common shares
except for the issuance of common shares under the Fund's dividend reinvestment
plan, which allows holders of common shares to reinvest dividends and capital
gain distributions from the Fund, if any, in additional common shares. The
dividend reinvestment plan is not available to holders of any series of
preferred shares. Other offerings of its common shares, if made, will require
approval of the Board of Trustees. Any additional offering will not be sold at a
price per common share below the then-current net asset value (exclusive of
underwriting discounts and commissions) except in connection with an offering to
existing holders of common shares or with the consent of a majority of the
Fund's outstanding common shares. In addition, the Fund expects that it would
commence a continuous offering of its shares in the event it converted to an
open-end investment company.
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Declaration of Trust disclaims shareholder liability for acts or obligations of
the Fund and requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Fund or the Board of
Trustees. The Declaration
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<PAGE> 41
of Trust provides for indemnification out of Fund property for all loss and
expense of any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund would be
unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Fund are
not binding upon Trustees individually but only upon the property of the Fund
and that the Trustees will not be liable for errors of judgment or mistakes of
fact or law, but nothing in the Declaration of Trust protects a Trustee against
any liability to which he/she would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his/her office.
The common shares have traded on the NYSE since October 20, 1988. The
following table shows the ranges of the Fund's net asset value per common share
and sales prices, and the volume of shares traded:
<TABLE>
<CAPTION>
NET ASSET VALUE PUBLIC OFFERING PRICE VOLUME TRADED
--------------- --------------------- -------------
QUARTER ENDED HIGH LOW HIGH LOW (IN 1000S)
------------- ------ ------ --------- --------- -------------
<S> <C> <C> <C> <C> <C>
August 31, 1999.............................. $11.96 $11.29 $12.938 $12.000 2522
May 31, 1999................................. $12.30 $12.00 $13.188 $12.250 3284
February 28, 1999............................ $12.45 $12.27 $14.875 $12.125 3945
November 30, 1998............................ $12.68 $12.32 $14.938 $13.625 1827
</TABLE>
At October 31, 1999, the net asset value per common share was $10.98 and
the closing price per common share on the NYSE was $10.6875.
CONVERSION TO OPEN-END STATUS
The Board of Trustees may at any time propose conversion of the Fund to an
open-end management investment company depending upon their judgment as to the
advisability of such action in light of circumstances then prevailing. In
considering whether to submit an open-ending proposal to shareholders, the
Trustees might consider, among other factors, the differences in operating
expenses between open-end and closed-end funds (due to the expenses of
continuously offering shares and of standing ready to effect redemptions), the
potentially adverse tax consequences to non-redeeming shareholders once a fund
is open-ended, and the impact of open-ending on portfolio management policies.
Such a conversion would require the approval of both a majority of the Fund's
outstanding common shares and preferred shares, including Series E Preferred
Shares and Series A-D Preferred Shares voting together as a single class and a
majority of the outstanding preferred shares, including Series E Preferred
Shares and Series A-D Preferred Shares, voting as a separate class on such
conversion. Conversion of the Fund to an open-end investment company would
require the redemption of all outstanding preferred shares, including Series E
Preferred Shares and Series A-D Preferred Shares, which would eliminate the
leveraged capital structure of the Fund with respect to the common shares. A
delay in conversion could result following shareholder approval due to the
Fund's inability to redeem the preferred shares. 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 next computed net asset value less any redemption charge as might be in
effect at the time of redemption. If the Fund is converted to an open-end
management investment company, it could be required to liquidate portfolio
securities to meet requests for redemption, and its shares would no longer be
listed on the NYSE. If the Fund were to experience significant redemptions as an
open-end fund, the decrease in total assets could result in a higher expense
ratio and inefficiencies in portfolio management. In this regard, the Fund could
reserve the right to effect redemptions in-kind with portfolio securities, which
would subject redeeming shareholders to transaction costs in liquidating those
securities.
REPURCHASE OF COMMON SHARES
Shares of closed-end management investment companies frequently trade at a
discount from net asset value but in some cases trade at a premium. In
recognition of the possibility that the Fund's shares might similarly trade at a
discount, the Fund may from time to time take action to attempt to reduce or
eliminate a market value discount from net asset value by repurchasing its
common shares in the open market or by tendering for its own shares at net asset
value. The Board of Trustees, in consultation with
37
<PAGE> 42
the Adviser, reviews on a quarterly basis the possibility of open market
repurchases and/or tender offers for Fund shares. There are no assurances that
the Board of Trustees will, in fact, decide to undertake either of these actions
or, if undertaken, that such actions will result in the Fund's shares trading at
a price which is equal to or approximates their net asset value. In addition,
the Board of Trustees will not necessarily announce when it has given
consideration to these matters. Notwithstanding the foregoing, so long as any
preferred shares are outstanding, the Fund may not purchase, redeem or otherwise
acquire any common shares unless (1) all accumulated dividends on any preferred
shares have been paid or set aside for payment through the date of such
purchase, redemption or other acquisition and (2) at the time of such purchase,
redemption or acquisition the Rating Agency Required Asset Coverage and the 1940
Act Asset Coverage (determined after deducting the acquisition price of the
common shares) are met.
Subject to the Fund's investment policies and restrictions with respect to
borrowings, the Fund may incur debt to finance repurchases and/or tenders.
Interest on any such borrowings will reduce the Fund's net investment income.
Although the Board of Trustees believes that share repurchases and tenders
generally would have a favorable effect on the market price of the Fund's common
shares, it should be recognized that the acquisition of shares by the Fund will
decrease the total assets of the Fund and, therefore, have the effect of
increasing the Fund's expense ratio. In addition, any purchase by the Fund of
its common shares at a time when the Series E Preferred Shares are outstanding
will increase the leverage applicable to the outstanding common shares then
remaining. Such leverage would be further increased if the Fund were to borrow
money to finance repurchases. Although the Fund's investment restriction allows
it to borrow up to one-third of its total assets to repurchase common shares,
under the Fund's Certificate of Designation, the Fund may not borrow more than
5% of its total assets for temporary purposes, including share repurchases,
without the prior written permission of Moody's and S&P. Such leverage may
exaggerate changes in the net asset value and the yield on the Fund's portfolio.
Repurchases of common shares may result in the Fund being required to redeem
Series E Preferred Shares to satisfy asset coverage requirements. Because of the
nature of the Fund's investment objective and policies and the Fund's portfolio,
the Adviser does not anticipate that repurchases and tenders should have a
materially adverse effect on the Fund's investment performance and does not
anticipate any material difficulty in disposing of portfolio securities in order
to consummate share repurchases and tenders.
The portfolio turnover rate of the Fund may or may not be affected by the
Fund's repurchases of shares pursuant to a tender offer.
DESCRIPTION OF SERIES A-D PREFERRED SHARES
On July 24, 1989, pursuant to the original Certificate of Designation for
Preferred Shares, the Fund issued 10,800 Series A Preferred Shares, 10,700
Series B Preferred Shares, 10,800 Series C Preferred Shares and 10,700 Series D
Preferred Shares at an offering price of $5,000 per share. Each such series has
a dividend period of 28 days. The Series A-D Preferred Shares are neither senior
nor subordinate to the Series E Preferred Shares offered herein and are subject
to equal voting, liquidation and ownership rights as the Series E Preferred
Shares.
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement between
Salomon Smith Barney Inc. (the "underwriter") and the Fund dated the date of
this Prospectus, the underwriter has agreed to purchase, and the Fund has agreed
to sell, the 10,000 shares of Series E Preferred Shares offered hereby.
The underwriting agreement provides that the obligations of the underwriter
to purchase the shares included in this offering are subject to the approval of
certain legal matters by counsel and to certain other conditions. The
underwriter is obligated to purchase all of the Series E Preferred Shares
offered hereby if it purchases any of the shares. In the underwriting agreement,
the Fund and the Adviser have agreed to indemnify the underwriter against
certain liabilities, including liabilities arising under the Securities Act of
38
<PAGE> 43
1933, as amended, or to contribute payments the underwriter may be required to
make for any of those liabilities.
The Fund has been advised by the underwriter that it proposes initially to
offer some of the Series E Preferred Shares directly to the public at the public
offering price set forth on the cover page of this Prospectus and some of the
shares to certain dealers at the public offering price less a concession not in
excess of $ per share. The underwriting commission the Fund will pay of
$ per share is equal to % of the initial offering price. After the
initial public offering, the underwriter may change the public offering price
and the concession. Investors must pay for any Series E Preferred Shares
purchased in the initial public offering on or before , 1999.
The Fund anticipates that the underwriter may from time to time act as a
broker or dealer in connection with the execution of the Fund's portfolio
transactions after it has ceased to be an underwriter. 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 Fund. The Fund anticipates that the underwriter, or one of
its affiliates, may, from time to time, act as remarketing agent and as a
broker-dealer with respect to the Series E Preferred Shares, and will receive
fees for so acting, as set forth under "The Remarketing Agent."
The principal business address of Salomon Smith Barney Inc. is 388
Greenwich Street, New York, NY 10013.
LEGAL MATTERS
Vedder, Price, Kaufmann & Kammholz, Chicago, Illinois, serves as counsel to
the Fund and to the non-interested Trustees. Dechert Price & Rhoads, Washington,
DC, which is serving as special counsel to the Fund with respect to the offering
of Series E Preferred Shares, will pass on the legality of the shares offered
hereby. Certain legal matters will be passed on for the underwriter by Simpson
Thacher & Bartlett, New York, New York. Simpson Thacher & Bartlett will rely as
to certain matters under Massachusetts law on the opinion of Dechert Price &
Rhoads.
INDEPENDENT AUDITORS
The financial statements of the Fund at November 30, 1998 and the selected
per share data and ratios set forth under the caption "Financial Highlights" for
each of the fiscal years ended November 30, 1994-1998 have been audited by Ernst
& Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606, independent
auditors, as set forth in their report incorporated by reference in the SAI, and
are included in reliance upon their report given upon Ernst & Young's authority
as experts in accounting and auditing. Ernst & Young audits and reports on the
Fund's annual financial statements, reviews certain regulatory reports and the
Fund's federal income tax returns, and performs other professional accounting,
auditing, tax and advisory services when engaged to do so by the Fund.
FURTHER INFORMATION
The Fund has filed with the SEC, Washington, DC, a registration statement
under the Securities Act of 1933 with respect to the Series E Preferred Shares
offered hereby. Further information concerning these securities and the Fund may
be found in the registration statement, of which this Prospectus constitutes a
part, on file with the SEC. The registration statement may be inspected without
charge at the SEC'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 SEC.
The Fund 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 SEC. Such reports, proxy and
information statements and other information can be inspected and copied at the
public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, DC 20549 and the SEC's regional offices, including offices at Seven
World Trade Center, New York, New York 10048.
39
<PAGE> 44
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
SEC at 450 Fifth Street, N.W., Washington, DC 20549 at prescribed rates. Such
reports and other information concerning the Fund may also be inspected at the
offices of the NYSE. The SEC maintains a Web site (http:\\www.sec.gov) that
contains the SAI, material incorporated by reference into this Prospectus and
the SAI, and reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. In addition,
reports, proxy and information statements and other information concerning the
Fund can be inspected at the offices of the NYSE, 20 Broad Street, New York, New
York 10005.
40
<PAGE> 45
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information......................................... 2
Additional Information About Investments And Investment
Techniques................................................ 2
Investment Restrictions..................................... 5
Trustees And Officers....................................... 7
Ownership Of Fund Shares.................................... 9
Investment Management And Other Services.................... 9
Portfolio Transactions...................................... 12
Net Asset Value............................................. 13
Rating Agency Required Asset Coverage....................... 14
Taxes....................................................... 21
Independent Auditors........................................ 25
Financial Statements........................................ 25
Glossary.................................................... 26
Appendix A Ratings Of Municipal Bonds....................... 31
Appendix B Tax Equivalent Yield Table....................... 36
</TABLE>
41
<PAGE> 46
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$50,000,000
KEMPER MUNICIPAL INCOME TRUST
PREFERRED SHARES
10,000 SHARES, SERIES E
------------
PROSPECTUS
, 1999
------------
SALOMON SMITH BARNEY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 47
PART B
<TABLE>
<CAPTION>
ITEM NO. CAPTION LOCATION IN STATEMENT OF ADDITIONAL INFORMATION
- -------- ------- -----------------------------------------------
<S> <C> <C>
14. Cover Page...................................................Cover Page
15. Table of Contents............................................Table of Contents
16. General Information and History..............................Other Information
Investment Objective and Policies............................Additional Information about Investments and
17. Investment Techniques; Investment Restrictions
Trustees and Officers; Investment Management and
18. Management...................................................Other Services
19. Control Persons and Principal Holders of Securities......... Not Applicable
20. Investment Advisory and Other Services.......................Investment Management and Other Services
21. Brokerage Allocation and Other Practices.....................Portfolio Transactions
22. Tax Status...................................................Taxes
23. Financial Statements.........................................Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration
Statement.
<PAGE> 48
SUBJECT TO COMPLETION, DATED NOVEMBER 17, 1999
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.
KEMPER MUNICIPAL INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
, 1999
This Statement of Additional Information ("SAI") relating to the offering
of Series E Preferred Shares is not a prospectus, but should be read in
conjunction with the Prospectus for the Kemper Municipal Income Trust (the
"Fund") dated , 1999. This SAI does not include all information that a
prospective investor should consider before purchasing shares of the Fund, and
investors should obtain and read the Prospectus prior to purchasing shares. A
copy of the Prospectus may be obtained without charge, by calling
1-800-621-1048.
The Prospectus and this SAI omit certain of the information contained in
the registration statement filed with the Securities and Exchange Commission,
Washington, D.C. The registration statement may be obtained from the SEC upon
payment of the fee prescribed, or inspected at the SEC's office at no charge.
<PAGE> 49
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION......................................... 2
ADDITIONAL INFORMATION ABOUT INVESTMENTS AND INVESTMENT
TECHNIQUES.................................................. 2
INVESTMENT RESTRICTIONS..................................... 5
TRUSTEES AND OFFICERS....................................... 7
OWNERSHIP OF FUND SHARES.................................... 9
INVESTMENT MANAGEMENT AND OTHER SERVICES.................... 9
PORTFOLIO TRANSACTIONS...................................... 12
NET ASSET VALUE............................................. 13
RATING AGENCY REQUIRED ASSET COVERAGE....................... 14
TAXES....................................................... 21
INDEPENDENT AUDITORS........................................ 25
FINANCIAL STATEMENTS........................................ 25
GLOSSARY.................................................... 26
APPENDIX A RATINGS OF MUNICIPAL BONDS....................... 31
APPENDIX B TAX EQUIVALENT YIELD TABLE....................... 36
</TABLE>
------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY THE PROSPECTUS OF THE FUND DATED, 1999 AS SUPPLEMENTED FROM TIME
TO TIME, WHICH IS INCORPORATED HEREIN BY REFERENCE. THIS STATEMENT OF ADDITIONAL
INFORMATION SHOULD BE READ IN CONJUNCTION WITH SUCH PROSPECTUS, A COPY OF WHICH
MAY BE OBTAINED WITHOUT CHARGE BY CONTACTING YOUR FINANCIAL INTERMEDIARY OR
CALLING THE FUND AT 1-800-621-1048.
<PAGE> 50
GENERAL INFORMATION
The Fund is a closed-end, diversified management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund's investment objective is to provide a high level of current
income exempt from federal income tax. The Fund seeks to achieve this objective
by investing in a diversified portfolio of investment grade tax exempt municipal
securities. No assurances can be given that the Fund will achieve its investment
objective. The Fund's investment adviser is Scudder Kemper Investments, Inc.
(the "Adviser").
Capitalized terms used in this SAI and not otherwise defined herein have
the meanings given them in the Glossary attached hereto and in the Fund's
Prospectus.
ADDITIONAL INFORMATION ABOUT INVESTMENTS
AND INVESTMENT TECHNIQUES
Some of the different types of securities in which the Fund may invest,
subject to its investment objectives, policies and restrictions, are described
in the Prospectus, dated , 1999, under "Investment Objective and
Policies." Additional information concerning certain of the Fund's investments
and investment techniques is set forth below.
MUNICIPAL SECURITIES
Municipal securities are issued to obtain funds for various public and
private purposes. Municipal securities include long-term obligations, which are
often called municipal bonds, as well as tax-exempt commercial paper, project
notes and municipal notes such as tax, revenue and bond anticipation notes of
short maturity, generally less than three years. Market rates of interest
available with respect to municipal securities may be lower than those available
with respect to taxable securities, although such differences may be partially
or wholly offset by the effects of federal income tax on income derived from
taxable securities. While most municipal bonds pay a fixed rate of interest
semi-annually in cash, some bonds pay no periodic cash interest but instead make
a single payment at maturity representing both principal and interest. Municipal
securities may be issued or subsequently offered with interest coupons
materially greater or less than those then prevailing, with price adjustments
reflecting such deviation.
In general, there are three categories of municipal securities the interest
on which is exempt from federal income tax and is not a tax preference item for
purposes of the federal alternative minimum tax ("AMT") ("Preference Items"):
(i) certain "public purpose" obligations (whenever issued), which include
obligations issued directly by state and local governments or their agencies to
fulfill essential governmental functions; (ii) certain obligations issued before
August 8, 1986 for the benefit of non-governmental persons or entities; and
(iii) certain "private activity bonds" issued after August 7, 1986, which
include "qualified Section 501(c)(3) bonds" or refundings of certain obligations
included in the second category. Interest on obligations in the last category is
exempt from federal income tax but is treated as a Preference Item that could
subject the recipient to, or increase the recipient's liability for, the AMT.
For corporate shareholders, the Fund's distributions derived from interest on
all municipal securities (whenever issued) is included in "adjusted current
earnings" for purposes of the AMT (to the extent not already included in
alternative minimum taxable income as income attributable to private activity
bonds). In assessing the federal income tax treatment of interest on any such
obligation, the Fund will rely on an opinion of the issuer's counsel (when
available) obtained by the issuer or other reliable authority and will not
undertake any independent verification thereof.
The two principal classifications of municipal bonds are "general
obligation" and "revenue" bonds. Issuers of general obligation bonds include
states, counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects including the
construction or improvement of schools, highways and roads, water and sewer
systems and a variety of other public purposes. The basic security of general
obligation bonds is the issuer's pledge of its faith, credit, and taxing power
for the payment of principal and interest. The taxes that can be levied for the
payment of debt service may be limited or unlimited as to rate and amount.
Revenue bonds are generally secured by the net revenues derived from a
particular facility or group of facilities or, in some cases, from the proceeds
of a special excise or other specific revenue source. Revenue
2
<PAGE> 51
bonds have been issued to fund a wide variety of capital projects including:
electric, gas, water, sewer and solid waste disposal systems; highways, bridges
and tunnels; port, airport and parking facilities; transportation systems;
housing facilities, colleges and universities and hospitals. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may be used to
make principal and interest payments on the issuer's obligations. Housing
finance authorities have a wide range of security including partially or fully
insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a state's
ability (without legal obligation) to make up deficiencies in the debt service
reserve fund. Lease rental revenue bonds issued by a state or local authority
for capital projects are normally secured by annual lease rental payments from
the state or locality to the authority sufficient to cover debt service on the
authority's obligations. Such payments are usually subject to annual
appropriations by the state or locality. Industrial development and pollution
control bonds, although nominally issued by municipal authorities, are in most
cases revenue bonds and are generally not secured by the taxing power of the
municipality, but are usually secured by the revenues derived by the authority
from payments of the industrial user or users. The Fund may on occasion acquire
revenue bonds which carry warrants or similar rights covering equity securities.
Such warrants or rights may be held indefinitely, but if exercised, the Fund
anticipates that it would, under normal circumstances, dispose of any equity
securities so acquired within a reasonable period of time.
The obligations of any person or entity to pay the principal of and
interest on a municipal security are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Act, and laws, if any, which may be enacted by
Congress or state legislatures extending the time for payment of principal or
interest, or both, or imposing 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 any person or entity to pay when due
principal of and interest on a municipal security may be materially affected.
There have been recent instances of defaults and bankruptcies involving
municipal securities which were not foreseen by the financial and investment
communities. The Fund will take whatever action it considers appropriate in the
event of anticipated financial difficulties, default or bankruptcy of either the
issuer of any municipal security or of the underlying source of funds for debt
service. Such action may include retaining the services of various persons or
firms (including affiliates of the Adviser) to evaluate or protect any real
estate, facilities or other assets securing any such obligation or acquired by
the Fund as a result of any such event, and the Fund may also manage (or engage
other persons to manage) or otherwise deal with any real estate, facilities or
other assets so acquired. The Fund anticipates that real estate consulting and
management services may be required with respect to properties securing various
municipal securities in its portfolio or subsequently acquired by the Fund. The
Fund will incur additional expenditures in taking protective action with respect
to portfolio obligations in default and assets securing such obligations. To
enforce its rights in the event of a default in the payment of interest or
repayment of principal, or both, the Fund may take possession of and manage the
assets or have a receiver appointed to collect and disburse pledged revenues
securing the issuer's obligations on such securities, which may increase the
operating expenses and adversely affect the net asset value of the Fund. Any
income derived from the ownership of operation of such assets may not be
tax-exempt. In addition, the Fund's intention to qualify as a "regulated
investment company" ("RIC") under the Internal Revenue Code of 1986 (the "Code")
may limit the extent to which the Fund may exercise its rights by taking
possession of such assets, because as a RIC the Fund is subject to certain
limitations on its investments and on the nature of its income. See "Taxes".
The yields on municipal securities are dependent on a variety of factors,
including purposes of issue and source of funds for repayment, general money
market conditions, general conditions of the municipal bond market, size of a
particular offering, maturity of the obligation and rating of the issue. The
ratings of Moody's and S&P represent their opinions as to the quality of the
municipal securities which they undertake to rate. It should be emphasized,
however, that ratings are based on judgment and are not absolute standards of
quality. Consequently, municipal securities with the same maturity, coupon and
rating may have different yields while obligations of the same maturity and
coupon with different ratings
3
<PAGE> 52
may have the same yield. In addition, the market price of municipal securities
will normally fluctuate with changes in interest rates, and therefore the net
asset value of the Fund will be affected by such changes.
Hospital bond ratings are often based on feasibility studies which contain
projections of expenses, revenues and occupancy levels. Among the influences
affecting a hospital's gross receipts and net income available to service its
debt are demand for hospital services, the ability of the hospital to provide
the services required, management capabilities, economic developments in the
service area, efforts by insurers and government agencies to limit rates and
expenses, confidence in the hospital, service area economic developments,
competition, availability and expense of malpractice insurance, Medicaid and
Medicare funding and possible federal legislation limiting the rates of increase
of hospital charges.
Electric utilities face problems in financing large construction programs
in an inflationary period, cost increases and delay occasioned by safety and
environmental considerations (particularly with respect to nuclear facilities),
difficulty in obtaining fuel at reasonable prices and in achieving timely and
adequate rate relief from regulatory commissions, effects of energy conservation
and limitations on the capacity of the capital market to absorb utility debt.
Bonds to finance life care facilities are normally secured only by the
revenues of each facility and not by state or local government tax payments,
they are subject to a wide variety of risks. Primarily, the projects must
maintain adequate occupancy levels to be able to provide revenues sufficient to
meet debt service payments. Moreover, since a portion of housing, medical care
and other services may be financed by an initial deposit, it is important that
the facility maintain adequate financial reserves to secure estimated actuarial
liabilities. The ability of management to accurately forecast inflationary cost
pressures is an important factor in this process. The facilities may also be
affected adversely by regulatory cost restrictions applied to health care
delivery in general, particularly state regulations or changes in Medicare and
Medicaid payments or qualifications, or restrictions imposed by medical
insurance companies. They may also face competition from alternative health care
or conventional housing facilities in the private or public sector.
It is the Fund's present intention not to invest 25% or more of its assets
in issuers located in the same state, in industrial development bonds (IDBs), or
in securities, the interest of which is paid from similar types of projects.
High Yield Municipal Securities. The Fund may invest in securities rated
below investment grade, commonly known as "junk bonds." Such securities are
regarded, on balance as predominately speculative with respect to the issuer's
ability to pay interest and repay principal owed. The lower rating of these
securities reflects a greater possibility that the financial condition of the
issuer, or adverse changes in general economic conditions, or both, may impair
the ability of the issuer to make payments of income and principal. In addition,
these medium and lower rated or unrated municipal securities are frequently
traded only in markets where the number of potential purchasers and sellers, if
any, is very limited. This consideration may have the effect of limiting the
Fund's ability to purchase such securities and may also have the effect of
limiting the ability of the Fund to sell such securities at their fair value in
order to respond to changes in the economy or the financial markets.
Like those of other fixed-income securities, the values of such
lower-related securities fluctuate in response to changes in interest rates. In
addition, the values of certain of such securities are also affected by general
economic conditions and business conditions affecting the specific industries of
the issuers. Changes by recognized rating services in their rating of any
fixed-income securities and 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 cash income
derived from such securities, but will affect the Fund's net asset values.
4
<PAGE> 53
INVESTMENT RESTRICTIONS
The following investment restrictions of the Fund are designated as
fundamental policies and as such cannot be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities, which as used
in this SAI means the lesser of (a) 67% of the shares of the Fund present or
represented by proxy at a meeting if the holders of more than 50% of the
outstanding shares are present or represented at the meeting or (b) more than
50% of outstanding shares of the Fund. Except with respect to borrowings, all
percentage limitations set forth below apply immediately after a purchase or
initial investment and no subsequent change in any applicable percentage
resulting from market fluctuations require elimination of any security from the
portfolio. The following investment restrictions may not be changed without the
approval of a majority of the outstanding Common Shares of beneficial interest
and of all preferred shares, including Series E Preferred Shares and Series A-D
Preferred Shares, voting together as a class, and the approval of a majority of
the outstanding preferred shares, including Series E Preferred Shares and Series
A-D Preferred Shares, voting together as a separate class. Other fundamental
policies are set forth in the Prospectus. The Fund will not:
1. issue senior securities, as defined in the 1940 Act, other than
(i) preferred shares which immediately after issuance will have asset
coverage of at least 200%, (ii) the borrowing described under subparagraph
(3) below or (iii) transactions involving futures contracts or the writing
of options within the limits described in the Registration Statement;
2. make short sales of securities or purchase any securities on
margin (except for such short term credits as are necessary for the
clearance of transactions), or write or purchase put or call options,
except to the extent that the purchase of a stand-by commitment may be
considered the purchase of a put, and except for transactions involving
options within the limits described in the Registration Statement;
3. borrow money, except for temporary or emergency purposes or for
repurchase of its shares, and then only in an amount not exceeding
one-third of the value of the Fund's total assets including the amount
borrowed; however, the Fund will not purchase any securities for its
portfolio at any time when borrowings exceed 5% of its total assets (taken
at value);
4. underwrite any issue of securities, except to the extent that the
purchase of municipal securities in accordance with its investment
objective, policies and limitations may be deemed to be an underwriting;
5. invest more than 25% of its total assets in securities of issuers
in any one industry; provided, however, that such limitation shall not be
applicable to municipal securities other than those municipal securities
backed only by the assets and revenues of non-governmental issuers, nor
shall it apply to municipal securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities;
6. purchase or sell real estate, but this shall not prevent the Fund
from investing in municipal securities secured by real estate or interest
therein;
7. purchase or sell commodities or commodities contracts, except for
transactions involving futures contracts or options on such contracts
within the limits described in the Registration Statement;
8. make loans, other than by entering into repurchase agreements and
through the purchase of municipal securities or temporary investments in
accordance with its investment objective, policies and limitations;
9. invest in securities other than municipal securities and temporary
investments, as those terms are described in the Registration Statement;
5
<PAGE> 54
10. invest more than 5% of its total assets in securities of any one
issuer, except that this limitation shall not apply to securities of the
United States government, its agencies and instrumentalities or to the
investment of 25% of its total assets; or
11. invest more than 10% of its total assets in repurchase agreements
maturing in more than seven days.
For the purpose of applying the limitation set forth in subparagraph (10)
above, an issuer shall be deemed a separate issuer 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 obligations of a superior
governmental entity, it shall be included in the computation of securities owned
that are issued by such superior governmental entity. If, however, a security is
guaranteed by a governmental entity or some other entity, as in the case of 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.
Whenever an investment policy or investment restriction set forth in the
Prospectus or this SAI states a maximum percentage of assets that may be
invested in any security or other asset or describes a policy regarding quality
standards, such percentage limitation or standard shall be determined
immediately after and as a result of the Fund's acquisition of such security or
asset. Accordingly, any later increase or decrease resulting from a change in
values, assets or other circumstances will not compel the Fund to dispose of
such security or other asset. Notwithstanding the foregoing, the Fund must
always be in compliance with the borrowing policies set forth above.
6
<PAGE> 55
TRUSTEES AND OFFICERS
The Trustees and Executive Officers of the Fund and their principal
occupations during the last five years are set forth below.
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS DURING
NAME, ADDRESS AND AGE THE FUND THE PAST FIVE YEARS
- --------------------- -------------- ----------------------------------------------
<S> <C> <C>
James E. Akins Trustee Consultant on International, Political and
2904 Garfield Terrace, N.W. Economic Affairs; formerly a career United
Washington, DC 20008 States Foreign Service Officer, Energy Advisor
Date of birth: 10/15/26 for the White House, and United States
Ambassador to Saudi Arabia.
James R. Edgar Trustee Distinguished Fellow, University of Illinois
1007 W. Nevada Institute of Government and Public Affairs;
Urbana, IL 61801 Director, Kemper Insurance Companies (not
Date of birth: 7/22/46 affiliated with the Kemper Funds); formerly,
Governor, State of Illinois.
Arthur R. Gottschalk Trustee Retired; formerly, President, Illinois
10642 Brookridge Drive Manufacturers Association; Trustee, Illinois
Frankfort, IL Masonic Medical Center; formerly, Illinois
Date of birth: 2/13/25 State Senator; formerly, Vice President, The
Reuben H. Donnelly Corporation.
Frederick T. Kelsey Trustee Retired; formerly, consultant to Goldman,
4010 Arbor Lane Sachs & Co.; formerly, President, Treasurer
Unit 102 and Trustee of Institutional Liquid Assets and
Northfield, IL 60093 its affiliated mutual funds; Trustee of the
Date of birth: 4/25/27 Northern Institutional Funds; formerly Trustee
of the Pilot Funds.
*Thomas W. Littauer Trustee and Managing Director, Scudder Kemper Investments,
Two International Place Vice President Inc.; formerly, Head of Broker Dealer Division
Boston, MA 02110 of Putnam Investment Management; formerly,
Date of birth: 4/26/55 President of Client Management Services for
Fidelity Investments.
Fred B. Renwick Trustee Professor of finance, New York University,
3 Hanover Square Stern School of Business; Director, the
Suite 20H Wartburg Home Foundation; Chairman, Investment
New York, NY 10004 Committee of Morehouse College Board of
Date of birth: 2/1/30 Trustees; Director, American Bible Society
Investment Committee; formerly, member of the
Investment Committee of Atlanta University
Board of Trustees; formerly, Director of Board
of Pensions, Evangelical Lutheran Church of
America.
John G. Weithers Trustee Retired; formerly, Chairman of the Board and
311 Springlake Chief Executive Officer, Chicago Stock
Hinsdale, IL 60521 Exchange; Director, Federal Life Insurance
Date of birth: 8/8/33 Company; President of the Members of the
Corporation and Trustee, DePaul University.
Mark S. Casady President Managing Director, Scudder Kemper Investments,
Two International Place Inc.
Boston, MA 02110
Date of birth: 9/21/60
</TABLE>
- ---------------
<TABLE>
<S> <C> <C>
*Mr. Littauer is an "interested person" of the Fund (as that term is defined in the 1940 Act).
</TABLE>
7
<PAGE> 56
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS DURING
NAME, ADDRESS AND AGE THE FUND THE PAST FIVE YEARS
- --------------------- -------------- ----------------------------------------------
<S> <C> <C>
Philip J. Collora Vice President Senior Vice President, Scudder Kemper
222 South Riverside Plaza and Secretary Investments, Inc.
Chicago, IL 60606
Date of birth: 11/15/45
Eleanor R. Brennan Vice President Senior Vice President, Scudder Kemper
Two International Place Investments, Inc.
Boston, MA 02110
Date of birth: 3/3/64
Phillip G. Condon Vice President Managing Director, Scudder Kemper Investments,
Two International Place Inc.
Boston, MA 02110
Date of birth: 8/15/60
John R. Hebble Treasurer Senior Vice President, Scudder Kemper
222 South Riverside Plaza Investments, Inc.
Chicago, IL 60606
Date of birth: 6/27/58
Maureen E. Kane Assistant Vice President, Scudder Kemper Investments,
Two International Place Secretary Inc.; formerly Assistant Vice President of an
Boston, MA 02110 unaffiliated investment management firm;
Date of birth: 2/14/62 formerly, Associate Staff Attorney of an
unaffiliated investment management firm;
formerly, Associate, Peabody & Arnold (law
firm).
Brenda Lyons Assistant Senior Vice President, Scudder Kemper
345 Park Avenue Treasurer Investments, Inc.
New York, NY 10154
Date of birth: 2/21/63
Ann M. McCreary Vice President Managing Director, Scudder Kemper Investments,
345 Park Avenue Inc.
New York, NY 10154
Date of birth: 11/6/56
Caroline Pearson Assistant Senior Vice President, Scudder Kemper
345 Park Avenue Secretary Investments, Inc., formerly, Associate,
New York, NY 10154 Dechert Price & Rhoads.
Date of birth: 4/1/62
Robert C. Peck, Jr. Vice President Managing Director, Scudder Kemper Investments,
222 South Riverside Plaza, Inc.; formerly, Executive Vice President, Van
Chicago, IL 60606 Kampen American Capital, Inc.; Senior Vice
Date of birth: 10/1/46 President, Manufacturers Hanover Investment
Corporation.
Kathryn L. Quirk Vice President Managing Director, Scudder Kemper Investments,
345 Park Avenue Inc.
New York, NY 10154
Date of birth: 12/3/52
Linda J. Wondrack Vice President Senior Vice President, Scudder Kemper
Two International Place Investments, Inc.
Boston, MA 02110
Date of birth: 9/12/64
</TABLE>
The Board has an audit and governance committee that is composed of Messrs.
Akins, Gottschalk, Kelsey, Renwick, and Weithers. The Committee makes
recommendations regarding the selection of independent auditors for the Fund,
confers with the independent auditors regarding the Fund's financial statements,
the results of audits and related matters, seeks and reviews nominees for Board
membership and performance other tasks as the Board assigns.
8
<PAGE> 57
COMPENSATION OF TRUSTEES
The Trustees and Officers who are "interested persons" as designated above
receive no compensation from the Fund. The table below shows actual amounts paid
or accrued to those trustees who are not designated "interested persons" for the
fiscal year ended November 30, 1998.
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION TOTAL COMPENSATION FROM
NAME FROM FUND FUND AND FUND COMPLEX(3)
---- ------------ ------------------------
<S> <C> <C>
James E. Akins.......................................... $5,800 $140,800
James R. Edgar(1)....................................... N/A N/A
Arthur R. Gottschalk(2)................................. $5,800 $146,300
Frederick T. Kelsey(2).................................. $5,800 $141,300
Fred B. Renwick......................................... $5,800 $141,300
John G. Weithers........................................ $5,900 $146,300
</TABLE>
- ---------------
(1) Appointed to the Board on May 27, 1999.
(2) Includes deferred fees. Pursuant to a deferred compensation agreement with
the Fund, deferred amounts accrued interest monthly at a rate approximate to
the yield of Zurich Money Funds -- Zurich Money Market Fund. Total deferred
fees (including interest thereupon) payable from the Fund is $21,600.
(3) Includes compensation for service on the Boards of 15 Kemper Funds with 50
fund portfolios. Each Trustee currently serves as Trustee of 16 Kemper Funds
with 56 fund portfolios.
OWNERSHIP OF FUND SHARES
As of August 31, 1999, the Trustees and Officers of the Fund as a Group
owned less than 1% of the outstanding common shares of the Fund and less than 1%
of the outstanding preferred shares of the Fund.
As of August 31, 1999, no person(s) owned, beneficially or of record, more
than 5% of the common outstanding shares of the Fund or more than 5% of the
outstanding preferred shares of the Fund.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT ADVISER
Scudder Kemper Investments, Inc., the global investment management business
of Zurich Financial Services Group, is one of the largest and most experienced
investment management organizations in the world, managing more than $290
billion in assets for institutional and corporate clients, retirement and
pension plans, insurance companies, mutual fund investors, and individuals.
Scudder Kemper Investments, Inc., offers a full range of investment counsel and
asset management capabilities, based on a combination of proprietary research
and disciplined, long-term investment strategies.
On December 31, 1997, Zurich Insurance Company ("Zurich") acquired a
majority interest in the Adviser, and Zurich Kemper Investments, Inc., a Zurich
subsidiary, became part of the Adviser. The Adviser's name changed to Scudder
Kemper Investments, Inc. On September 7, 1998, the businesses of Zurich
(including Zurich's 70% interest in the Adviser) and the financial services
businesses of B.A.T. Industries p.l.c. ("B.A.T.") were combined to form a new
global insurance and financial services company known as Zurich Financial
Services Group.
Headquartered in Zurich, Switzerland, Zurich Financial Services Group is
one of the global leaders in the financial services industry, providing its
customers with the products and solutions in the area of
9
<PAGE> 58
financial protection and asset accumulation. The Group has four core businesses:
non-life and life insurance, reinsurance and asset management.
The Investment Management Agreement provides that the Adviser will provide
portfolio management services, place portfolio transactions in accordance with
policies expressed in the Fund's registration statement, pay the Fund's office
rent, and render significant administrative services on behalf of the Fund (not
otherwise provided by third parties) necessary for the Fund's operating as a
closed-end investment company, including, but not limited to, preparing reports
to and meeting materials for the Fund's Board and reports and notices to Fund
shareholders; supervising, negotiating contractual arrangements with, to the
extent appropriate, and monitoring the performance of various third-party and
affiliated service providers to the Fund (such as the Fund's transfer and
pricing agents, custodian, accountants and others) and other persons in any
capacity deemed necessary or desirable to Fund operations; preparing and making
filings with the SEC and other regulatory and self-regulatory organizations,
including but not limited to, preliminary and definitive proxy materials,
post-effective amendments to the Registration Statement and semi-annual reports
on Form N-SAR; overseeing the tabulation of proxies by the Fund's transfer
agent; assisting in the preparation and filing of the Fund's federal, state and
local tax returns; preparing and filing the Fund's federal excise tax returns
pursuant to Section 4982 of the Code; providing assistance with investor and
public relations matters; monitoring the valuation of portfolio securities and
the calculation of net asset value; monitoring the registration of shares of the
Fund under applicable federal and state securities laws; maintaining or causing
to be maintained for the Fund all books, records and reports and any other
information required under the 1940 Act, to the extent such books, records and
reports and other information are not maintained by the Fund's custodian or
other agents of the Fund; assisting in establishing accounting policies of the
Fund; assisting in the resolution of accounting issues that may arise with
respect to the Fund's operations and consulting with the Fund's independent
accountants, legal counsel and other agents as necessary in connection
therewith; establishing and monitoring the Fund's operating expense budgets;
reviewing the Fund's bills; processing the payment of bills that have been
approved by an authorized person; assisting the Fund in determining the amount
of dividends and distributions available to be paid by the Fund to its
shareholders, preparing and arranging for the printing of dividend notices to
shareholders, and providing the transfer and dividend paying agent and the
custodian with such information as is required for such parties to effect the
payment of dividends and distributions; and otherwise assisting the Fund in the
conduct of its business, subject to the direction and control of the Fund's
Board of Trustees.
Under the Investment Management Agreement, which was last approved by the
Board of Trustees on July 29, 1999, and by the Shareholders of the Fund on
December 17, 1998, the Fund is responsible for other expenses, including
organizational expenses (including out-of-pocket expenses, but not including the
Adviser's overhead or employee costs); brokers' commissions or other costs of
acquiring or disposing of any portfolio securities of the Fund; legal, auditing
and accounting expenses; payment for portfolio pricing or valuation services to
pricing agents, accountants, bankers and other specialists, if any; taxes and
governmental fees; the fees and expenses of the Fund's transfer agent; expenses
of preparing share certificates and any other expenses, including clerical
expenses, of issuance, offering, distribution, sale, redemption or repurchase of
shares; the expenses of and fees for registering or qualifying securities for
sale; the fees and expenses of those Trustees who are not "interested persons"
of the Fund (as defined in the 1940 Act); the cost of printing and distributing
reports, notices and dividends to current shareholders; and the fees and
expenses of the Fund's custodians, subcustodians, dividend disbursing agents and
registrars. The Fund may arrange to have third parties assume all or part of the
expenses of sale, underwriting and distribution of shares of the Fund. The Fund
is also responsible for expenses of shareholders' and other meetings and its
expenses incurred in connection with litigation and the legal obligation it may
have to indemnify Officers and Trustees of the Fund with respect thereto. The
Fund is also responsible for the maintenance of books and records which are
required to be maintained by the Fund's custodian or other agents of the Fund;
telephone, telex, facsimile, postage and other communications expenses; any
fees, dues and expenses incurred by the Fund in connection with membership in
investment company trade organizations; expenses of printing and mailing
prospectuses and statements of additional information of the Fund and
supplements thereto to current shareholders; costs of stationery; fees payable
to the Adviser
10
<PAGE> 59
and to any other Fund advisors or consultants; expenses relating to investor and
public relations; interest charges, bond premiums and other insurance expense;
freight, insurance and other charges in connection with the shipment of the
Fund's portfolio securities; and other expenses.
The Adviser is responsible for the payment of the compensation and expenses
of all Trustees, Officers and executive employees of the Fund (including the
Fund's share of payroll taxes) affiliated with the Adviser and making available,
without expense to the Fund, the services of such Trustees, Officers and
employees as may duly be elected Officers of the Fund, subject to their
individual consent to serve and to any limitations imposed by law. The Fund is
responsible for the fees and expenses (specifically including travel expenses
relating to Fund business) of Trustees not affiliated with the Adviser
("Non-Interested Trustees") Under the Investment Management Agreement, the
Adviser also pays the Fund's share of payroll taxes. During the Fund's most
recent fiscal year, no compensation, direct or otherwise (other than through
fees paid to the Adviser), was paid or became payable by the Fund to any of its
Officers or Trustees who were affiliated with the Adviser.
In return for the services provided by the Adviser as investment manager
and the expenses it assumes under the Investment Management Agreement, the Fund
pays the Adviser a management fee computed at an annual rate of 0.55% of the
Fund's average weekly net assets. The Fund paid the Adviser $3,800,000,
$3,638,000 and $3,699,000 under the Investment Management Agreement for the
fiscal periods ending November 30, 1998, 1997 and 1996, respectively.
The Investment Management Agreement further provides that the Adviser shall
not be liable for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with matters to which such agreement relates,
except a loss resulting from willful misfeasance, bad faith or gross negligence
on the part of the Adviser in the performance of its duties or from reckless
disregard by the Adviser of its obligations and duties under such agreement. The
Investment Management Agreement also provides that purchase and sale
opportunities, which are suitable for more than one client of the Adviser, will
be allocated by the Adviser in an equitable manner. Lastly, the Investment
Management Agreement contains a provision stating that it supersedes all prior
agreements.
The Investment Management Agreement may be terminated without penalty upon
sixty (60) days' written notice by either party. The Fund may agree to terminate
its Investment Management Agreement either by the vote of a majority of the
outstanding voting securities of the Fund, or by a vote of the Board. The
Investment Management Agreement may also be terminated at any time without
penalty by the vote of a majority of the outstanding voting securities of the
Fund or by a vote of the Board if a court establishes that the Adviser or any of
its Officers or directors has taken any action resulting in a breach of the
Adviser's covenants under the Investment Management Agreement. As stated above,
the Investment Management Agreement automatically terminates in the event of its
assignment.
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The Fund's securities and cash are held under a custodian agreement by
State Street Bank and Trust Company ("State Street"), whose principal place of
business is 225 Franklin Street, Boston, Massachusetts 02110. Investors
Fiduciary Trust Company serves as transfer agent, registrar and dividend
disbursing agent for the Fund's shares. Pursuant to a services agreement with
State Street, Kemper Service Company, an affiliate of the Adviser, serves as
Shareholder Service Agent for the Fund and, as such, performs all of State
Street's duties as transfer agent and dividend-paying agent. The Depository
Trust Company ("DTC") will act as Securities Depository for the Municipal
Preferred shares. Deutsche Bank will act as the Registrar, Transfer Agent and
Paying Agent for the Series E Preferred Shares.
11
<PAGE> 60
PORTFOLIO TRANSACTIONS
The primary objective of the Adviser in placing orders for the purchase and
sale of securities for the Fund is to obtain the most favorable net results,
taking into account such factors as price, commission where applicable, size of
order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
Scudder Investor Services, Inc. ("SIS") with commissions charged on comparable
transactions, as well as by comparing commissions paid by the Fund to reported
commissions paid by others. The Adviser routinely reviews commission rates,
execution and settlement services performed and makes internal and external
comparisons.
The Fund's purchases and sales of fixed-income securities are generally
placed by the Adviser with primary market makers for these securities on a net
basis, without any brokerage commissions being paid by the Fund. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the Underwriter.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply brokerage and research services to the Adviser or the
Fund. The term "research services" includes advice as to the value of
securities; the advisabiliy of investing in, purchasing or selling securities;
the availability of securities or purchasers or sellers of securities; and
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts. The
Adviser is authorized when placing portfolio transactions, if applicable, for
the Fund to pay a brokerage commission in excess of that which another broker
might charge for executing the same transaction on account of execution services
and the receipt of research services. The Adviser has negotiated arrangements,
which are not applicable to most fixed-income transactions, with certain
broker/dealers pursuant to which a broker/dealer will provide research services
to the Adviser or the Fund in exchange for the direction by the Adviser of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Adviser may place orders with a broker/dealer on the basis that the
broker/dealer has or has not sold shares of a Portfolio. In effecting
transactions in over-the counter securities, orders are placed with the
principal market makers for the security being traded unless, after exercising
care, it appears that more favorable results are available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will place
orders for portfolio transactions through SIS, which is a corporation registered
as a broker/dealer and a subsidiary of the Adviser; SIS will place orders on
behalf of the Fund with issuers, underwriters or other brokers and dealers. SIS
will not receive any commission, fee or other renumeration from the Fund for
this service.
Although certain research services from broker/dealers may be useful to the
Fund or the Adviser, it is the opinion of the Adviser that such information only
supplements the Adviser's own research effort since the information must still
be analyzed, weighed, and reviewed by the Adviser's staff. Such information may
be useful to the Adviser in providing services to clients other than the Fund,
and not all such information is used by the Adviser in connection with the Fund.
Conversely, such information provided to the Adviser by broker/dealers through
whom other clients of the Adviser effect securities transactions may be useful
to the Adviser in providing services to the Fund.
The Fund paid no brokerage commissions during the fiscal years ended
November 30, 1998, 1997 and 1996, as all portfolio transactions were effected on
a principal basis. The rates of portfolio turnover for each of the fiscal years
ended November 30, 1998, 1997 and 1996 were approximately 17%, 7%, and 26%,
respectively.
12
<PAGE> 61
NET ASSET VALUE
Net asset value of the Fund will be determined as of the close of regular
trading on the New York Stock Exchange ("NYSE") (generally 4:00 p.m. New York
City time) on the last Business Day of each week (generally Friday), and at such
other times as the Fund may authorize. The net asset value of the Fund equals
the value of the Fund's assets less the Fund's liabilities. Portfolio securities
for which market quotations are readily available are valued at current market
value. Short-term investments maturing in 60 days or less are valued at
amortized cost when the Adviser 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 market value following
procedures adopted by the Board of Trustees.
Portfolio securities for which market quotations are readily available are
generally valued at market value as of the value time in the manner described
below. All other securities may be valued at fair value as determined in good
faith by or under the direction of the Board.
With respect to securities listed primarily on foreign exchanges, such
securities may trade on days when the Fund's net asset value is not computed;
and therefore, the net asset value may be significantly affected on days when
the investor has no access to the Fund.
An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between the
most recent bid quotation and the most recent asked quotation ( the "Calculated
Mean"). Lacking a Calculated Mean, the security is valued at the most recent bid
quotation. An equity security which is traded on The Nasdaq Stock Market Inc.
("Nasdaq") is valued at its most recent sale price. Lacking any sales, the
security is valued at the most recent bid quotation. The value of an equity
security not quoted in Nasdaq, but traded in another over-the-counter market, is
its most recent sale price. Lacking any sales, the security is valued at the
Calculated Mean. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation.
Debt securities are valued at prices supplied by a pricing agent(s) which
reflect broker/dealer supplied valuations and electronic data processing
techniques. Money market instruments purchased with an original maturity of
sixty days or less, maturing at par, shall be valued at amortized cost, which
the Board believes approximates market value. If it is not possible to value a
particular debt security pursuant to these valuation methods, the value of such
security is the most recent bid quotation supplied by a bona fide marketmaker.
If it is not possible to value a particular debt security pursuant to the above
methods, the Adviser of the Fund may calculate the price of that debt security,
subject to limitations established by the Board.
An exchange-traded options contract on securities, currencies, futures and
other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean, the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate on the
valuation date.
If a security is traded on more than one exchange, or upon one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Valuation Committee of the Board, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by the Fund is
determined in a manner which, in the discretion of the Valuation Committee, most
fairly reflects market value of the property on the valuation date.
13
<PAGE> 62
Following the valuation of securities or other portfolio assets in terms of
the currency in which the market quotation used is expressed ("Local Currency"),
the value of these portfolio assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rate on the valuation date.
RATING AGENCY REQUIRED ASSET COVERAGE
The Rating Agency Required Asset Coverage must be met on each Valuation
Date. Rating Agency Required Asset Coverage as of any business day, for all
preferred shares including Series E Preferred shares and Series A-D Preferred
Shares, is the dollar amount equal to the sum of:
(i)(A) the product of the number of preferred shares outstanding on
such date multiplied by $5,000 (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 preferred shares), plus any redemption
premium applicable to any preferred shares then subject to redemption,
(B) the aggregate amount of dividends that will have accumulated at
the respective Dividend Rates (whether or not earned or declared) to
(but not including) the first respective Dividend Payment Dates for any
preferred shares outstanding that follow such Valuation Date,
(C) the aggregate amount of dividends that would accumulate on
shares of each series of preferred shares 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 seventh day of the Dividend Period commencing on
such Dividend Payment Date) for a Seven-Day Dividend Period of shares of
such series to commence on such Dividend Payment Date, assuming solely
for purposes of the foregoing, that if by such Valuation Date the
Remarketing Agent adjusts the Dividend Period with respect to shares of
such series, such Maximum Rate shall be the higher of (a) the Maximum
Rate for the seventh day of a Seven-Day Dividend Period of shares of
such series to commence on such Dividend Payment Date, and (b) the
Maximum Rate for the first day of a Seven-Day Dividend Period of shares
of such series to commence on such Dividend Payment Date, multiplied by
the Volatility Factor applicable to the first day of a Seven-Day
Dividend Period, or, in the event the Remarketing Agent, with respect to
shares of such series, adjusts a Dividend Period as to be more than 49
days, the Volatility Factor applicable to a Dividend Period of that
length (plus the aggregate amount of dividends that would accumulate at
the Maximum Rate or rates on any other preferred shares outstanding from
such respective Dividend Payment Dates through the 49th day after such
Valuation Date) (except that (1) if such Valuation Date occurs at a time
when, pursuant to paragraph 3(g) of the Certificate of Designation, the
Fund did not deposit sufficient funds for the payment of declared
dividends and such failure 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 Dividend Rate in effect
immediately prior to such Dividend Payment Date will remain in effect,
the dividend for purposes of calculation would accumulate at such
applicable Dividend Rate in respect of those days),
(D) the amount of anticipated expenses of the Fund for the 90 days
subsequent to such Valuation Date,
(E) the amount of any Gross-up Payment in respect of any preferred
shares 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 clearing securities transactions) less:
(ii) the value (i.e., for purposes of current Moody's guides, the face
value of cash, short-term municipal securities 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
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<PAGE> 63
to the date upon which any of (i)(A) through (i)(F) become payable,
otherwise the Moody's Adjusted Value, or for purposes of current S&P
guides, the face value of cash, short-term municipal securities rated
"A-l+" or "SP-l+" and that 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 the S&P Adjusted Value) of any of the Fund's assets
irrevocably deposited by the Fund for the payment of any of (i)(A) through
(i)(F).
Rating Agency Required Asset Coverage will be met if the Fund owns Rating
Agency Required Assets with a value equal to or greater than the product of (i)
the number of preferred shares, Series E Preferred Shares and Series A-D
Preferred Shares then outstanding and (ii) $5,000.
As defined and more fully described below, the term "Adjusted Value" as
used herein is calculated by making certain adjustments to the total Market
Value of the Fund's portfolio securities.
On each Valuation Date, the Fund will calculate and determine pursuant to
the procedures set forth below, the following: (i) the Market Value of each
Rating Agency Required Asset owned by the Fund on that date; (ii) the Adjusted
Value of each such Rating Agency Required Asset; (iii) the aggregate Adjusted
Value of all such Rating Agency Required Assets; (iv) the value of all such
Rating Agency Required Assets; and (v) whether the Rating Agency Required Asset
Coverage is met as of that date. Each such calculation will be set forth in a
certificate (the "Certificate of Rating Agency Required Asset Coverage"), which
must be delivered to the Paying Agent not later than the close of business on
the fifth Business Day following the Date of Original Issue and not later than
the close of business on the third Business Day following (i) any Valuation Date
on which the Rating Agency Required Asset Coverage is not met, (ii) the first
Valuation Date succeeding any Valuation Date referred to in clause (i) above on
which the Rating Agency Required Asset Coverage is met, (iii) the last Valuation
Date of each month, (iv) any redemption by the Fund of the Common Shares, and
(v) any request by S&P. So long as S&P or Moody's is rating the Series E
Preferred Shares, a Certificate of Rating Agency Required Asset Coverage shall
be delivered to S&P (if S&P is rating the preferred shares) and Moody's (if
Moody's is rating the preferred shares) not later than the close of business on
the fifth Business Day following the Date of Original Issue and not later than
the close of business on the third Business Day following a Valuation Date
specified in (i) or (ii) directly above. Failure to deliver a Certificate of
Rating Agency Required Asset Coverage shall be deemed to be delivery of a
Certificate of Rating Agency Required Asset Coverage indicating that the Fund
does not own assets with a value equal to the Rating Agency Required Asset
Coverage.
The definitions and methods of calculation of "Market Value," "Adjusted
Value," "Rating Agency Required Assets" and "Rating Agency Required Asset
Coverage" may be changed from time to time by the Fund without shareholder
approval, but only in the event the Fund receives written confirmation from S&P
and Moody's that any such change would not impair the ratings then assigned to
the Series E Preferred Shares. To the extent these definitions and methods of
calculation are changed by S&P or Moody's in a manner that would impair the
ratings then assigned to the Series E Preferred Shares if the Fund failed to
take action to meet such revised definitions and methods of calculation, the
Fund will take such action as is reasonably necessary to comply with such
revised definitions and methods of calculation so as to maintain the then
current rating or will redeem the then outstanding Series E Preferred Shares
(see "Description of Series E Preferred Shares -- Redemption -- Optional
Redemption" in the Prospectus).
In connection with the confirmation of Rating Agency Required Asset
Coverage to be given with respect to (i) the Date of Original Issue, (ii) the
last Valuation Date of each fiscal quarter of the Fund, and (iii) a randomly
selected date within each fiscal quarter, the Fund's independent public
accountants will deliver to the Paying Agent and to S&P (if S&P is rating the
Series E Preferred Shares) and Moody's (if Moody's is rating the preferred
Shares) a written communication ("Rating Agency Accountant's Confirmation")
confirming (i) the mathematical accuracy of the calculations reflected in such
Certificate, (ii) that the method used by the Fund in determining whether or not
the Rating Agency
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<PAGE> 64
Required Asset Coverage was met in accordance with the applicable requirements
of the Certificate of Designation, (iii) that the price quotations obtained by
the Fund in such determination conform to the written price quotations obtained
by the Fund from the pricing services utilized by the Fund and (iv) that the
assets listed as Rating Agency Required Assets in such Certificate, including
Escrowed Bonds and any economic defeasance thereof, conform to the description
of Rating Agency Required assets in the Fund's Certificate of Designation. The
Fund will cause the Rating Agency Accountant's Confirmation to be delivered to
the Paying Agent not later than the close of business on the tenth Business Day
following the Date of Original Issue and by the close of business on the tenth
Business Day following each such Valuation Date. If any Rating Agency
Accountant's Confirmation differs from the Fund's Certificate of Rating Agency
Required Asset Coverage, the Rating Agency Accountant's Confirmation will
control and the Fund will notify S&P (if S&P is rating the Series E Preferred
Shares) and Moody's (if Moody is rating the Series E Preferred Shares) of such
difference.
If the Rating Agency Required Asset Coverage is not met as required, the
Fund may: (i) purchase or otherwise acquire additional Rating Agency Required
Assets; (ii) sell all or a portion of its Rating Agency Required Assets at a
price which is higher than the Adjusted Value of such Rating Agency Required
Assets; (iii) liquidate all or a portion of its municipal securities options or
financial futures contracts or related options contracts, if any; or (iv)
purchase Series E Preferred Shares, or effect any combination of these
transactions, so that the Rating Agency Required Asset Coverage will be met.
If a Rating Agency Accountant's Confirmation has been delivered to the
Paying Agent with respect to a Valuation Date on which the Rating Agency
Required Asset Coverage was not met, the Fund will cause a Rating Agency
Accountant's Confirmation, in respect of the next Valuation Date on which the
Rating Agency Required Asset Coverage is met, to be delivered to the Paying
Agent by the fifth Business Day following such next Valuation Date.
If the Rating Agency Required Asset Coverage is not met for eight
consecutive Business Days, the Fund will be obligated to redeem, to the extent
of funds available, the minimum number of Series E Preferred Shares necessary to
restore the Rating Agency Required Asset Coverage or, if the Rating Agency
Required Asset Coverage cannot be so restored, all of the Series E Preferred
Shares. See "Description of Series E Preferred Shares Redemption-Mandatory
Redemption" in the Prospectus.
The Fund may use cash or proceeds generated from sales of assets owned by
the Fund to purchase or redeem Series E Preferred Shares. As a result of the
discount to Market Value of Rating Agency Required Assets (other than cash,
demand deposits, next-day federal funds, and next-day repurchase obligations)
required by Calculation II and other adjustments required by Calculation III
described below under "Calculations of Coverage-Calculation III," the aggregate
Market Value of the Rating Agency Required Assets as of a specified date will
necessarily be greater than the value of the Rating Agency Required Assets as of
the same date for purposes of determining whether the Rating Agency Required
Asset Coverage is met. Therefore, if the Fund can sell Rating Agency Required
Assets at their Market Value, the redemption of Series E Preferred Shares with
such proceeds will reduce the Rating Agency Required Asset Coverage by a greater
amount than the sale of Rating Agency Required Assets will reduce the Adjusted
Value of all Rating Agency Required Assets. In addition, liquidation of all or a
portion of the Fund's municipal securities options or financial futures
contracts or related options contracts may increase the Adjusted Value of all
Rating Agency Required Assets.
The Fund expects that its net income will exceed the dividend payments on
the Series E Preferred Shares because the principal amount of its
income-producing assets will exceed the amount of preferred shares including
Series E Preferred Shares and Series A-D Preferred Shares on which dividends are
computed (i.e., $5,000 multiplied by the number of preferred shares including
Series E Preferred Shares and Series A-D Preferred Shares outstanding) and
because the Fund's income-producing assets are expected generally to produce a
yield higher than the highest dividend rate applicable to the preferred shares
including Series E Preferred Shares and Series A-D Preferred Shares.
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<PAGE> 65
Calculation of Coverage -- Calculation I: Each Eligible Security's Market
Value shall be calculated on each Valuation Date. The Market Value of each
Rating Agency Required Asset other than Eligible Securities will be computed as
follows:
A. cash shall be valued at face amount;
B. demand and time deposits, next-day federal funds and next-day
repurchase agreements will be valued at face amount plus accrued interest,
if any, to the date of valuation; and
C. the Market Value of any Other Securities constituting Rating Agency
Required Assets shall be calculated on each Valuation Date.
Calculation of Coverage -- Calculation II: The Adjusted Value of Eligible
Securities will be the lesser of the S&P Adjusted Value and the Moody's Adjusted
Value, determined as follows:
(i) S&P "AAA" Rating Guidelines ("S&P Adjusted Value"). The S&P
Adjusted Value of an S&P Eligible Security (a Security eligible for
consideration under S&P's guidelines shall be the Market Value of such S&P
Eligible Security divided by 155% for a "AAA" rated S&P Eligible Security,
160% for an "AA" rated S&P Eligible Security, 175% for an "A" rated S&P
Eligible Municipal Security, 215% for a "BBB" rated S&P Eligible Security
and 220% for an unrated S&P Eligible Security ("S&P Security Discount
Factors").
Notwithstanding the foregoing, the S&P Security Discount Factors
for short term S&P Eligible Securities will be 115%, so long as such S&P
Eligible Securities are rated "A-1+" or "SP-1+" by S&P and mature or
have a demand feature exercisable in 30 days or less, or 120% so long as
such S&P Eligible Securities are rated "A-1" or "SP-1" by S&P and mature
or have a demand feature exercisable in 30 days or less or 125% if such
S&P Eligible Securities are not rated by S&P but are rated "VMIG-1",
"P-1" or "MIG-1" by Moody's; provided, however, that if such S&P
Eligible Securities are backed by any l letter of credit, liquidity
facility or guarantee from a bank or other financial institution, the
short term debt of such bank or institution must have a rating of at
least "A-1+" from S&P; and further provided that such Moody's rated
short term S&P Eligible Securities may comprise no more than 50% of all
short term S&P Eligible Securities.
For purposes of determining "S&P Eligible Securities," the S&P
guidelines impose certain minimum issue size, issuer, geographical
diversification and other (other than short term S&P Eligible Securities):
(A) In order to be considered S&P Eligible Securities, municipal
securities must:
(1) Be interest bearing and pay interest at least semiannually;
(2) Be payable in U.S. dollars;
(3) Be rated "BBB" or higher by S&P or if not rated by S&P but
rated by another nationally recognized statistical rating
organization ("NRSRO"), be rated the equivalent of at least "A" by an
NRSRO; provided that such NRSRO-rated securities will be included in
S&P Eligible Securities only to the extent the fair market value of
such securities does not, when aggregated with any unrated
securities, exceed 50% of the aggregate fair market value of all S&P
Eligible Securities. For purposes of determining the S&P Security
Discount Factors applicable to such NRSRO-rated securities, any such
security will be deemed to have an S&P rating which is one full
rating category lower than its NRSRO rating;
(4) Not have been issued in a private placement (excluding
Escrowed Bonds an Inverse Floaters); and
(5) 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 at least $10 million, be issued by an issuer with a total
of at least $50 million of municipal securities outstanding.
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<PAGE> 66
(B) Municipal securities as that term is used herein of any one
issuer or guarantor (excluding bond insurers) will be considered S&P
Eligible Securities only to the extent the Market Value of such
municipal securities does not exceed 10% of the aggregate Market Value
of the S&P Eligible Securities (excluding short term S&P Eligible
Securities), provided that 2% is added to the applicable S&P Discount
Factor for every 1% by which the Market Value of such securities exceeds
5% of the aggregate Market Value of the S&P Eligible Securities
(excluding short term S&P Eligible Securities). In the case of
securities not so rated, any one issuer or guarantor (excluding bond
insurers) shall be considered S&P Eligible Securities only to the extent
the Market Value of such securities does not exceed 5% of the aggregate
Market Value of the S&P Eligible Securities (excluding short-term S&P
Eligible Securities). The percentage limits stated above do not apply to
Escrowed Bonds.
(C) Municipal securities issued by issuers in any one state or
territory shall be considered S&P Eligible Securities only to the extent
the Market Value of such municipal securities does not exceed 25% of the
aggregate Market Value of the S&P Eligible Securities (excluding short
term S&P Eligible Securities). The percentage limit does not apply to
Escrowed Bonds.
(D) Certain securities involved in hedging transactions as
described below in "Effects of Hedging Transactions" shall be considered
S&P Eligible Securities.
(E) Inverse Floaters, as defined herein, shall be considered S&P
Eligible Securities.
(ii) Moody's "aaa" Rating Guidelines. The Moody's Adjusted Value of
each Moody's Eligible Security shall be the Market Value of such Moody's
Eligible Security divided by 151% for a "Aaa" rated Moody's Eligible
Security, 159% for a "Aa" rated Moody's Eligible Municipal Security, 168%
for an "A" rated Moody's Eligible Security, 173% for a "Baa" rated Moody's
Eligible Security, 187% for a security not rated by Moody's but rated
"BBB-" by S&P, and 225% for a security not rated by Moody's or by S&P
("Moody's Security Discount Factors").
Notwithstanding the foregoing, the Moody's Security Discount Factor
for short term Moody's Eligible Securities will be 115%, so long as such
Moody's Eligible Securities are rated at least "MIG-1", "VMIG-1" or "P-1"
by Moody's or "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.
The Moody's guidelines impose the following limitations on the portion
of the Fund's Eligible Securities which may be Moody's Eligible Securities:
<TABLE>
<CAPTION>
MAXIMUM % WITH MAXIMUM % ISSUED
ANY ONE UNDERLYING BY OR WITHIN ANY ONE
ELIGIBLE SECURITIES WITH RATING OF: OBLIGOR STATE OR TERRITORY
----------------------------------- ------------------ --------------------
<S> <C> <C>
"Aaa"..................................... 100 100
"Aa"...................................... 20 60
"A"....................................... 10 40
"Baa"..................................... 6 20
Not rated by Moody's but rated "BBB-" or
higher by S&P........................... 4 12
</TABLE>
Current Moody's guidelines also require that securities constituting
Moody's Eligible Securities pay interest in cash, be publicly rated "Baa"
or higher by Moody's or, if not rated by Moody's but rated by S&P, be rated
at least "BBB-" by S&P, not have suspended ratings and be part of an issue
with an original issue size of at least $10 million. For purposes of
determining the Moody's Discount Factors applicable to such S&P-rated
Moody's Eligible Securities, any such security (excluding short term
securities) will be deemed to have a Moody's rating which is one full
rating category lower than its S&P rating.
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<PAGE> 67
(iii) Aggregate Adjusted Value. The total of the Adjusted Values of
S&P or Moody's Eligible Securities and other Rating Agency Required Assets
is the aggregated Adjusted Value of the Rating Agency Required Assets.
In accordance with procedures established by the Board of Trustees (and set
forth in a certificate signed by an officer of the Fund, filed with the records
of the Fund and available for inspection by the shareholders of the Fund), the
discount factor applied to determine the Adjusted Value of any Rating Agency
Required Asset may be changed from that set forth above if Moody's and S&P have
advised or, if both of such rating services are not then rating the Series E
Preferred Shares, the one which is, has advised the Fund in writing that the
revised discount factor would not, or that a failure to use the revised discount
factor would, adversely affect their respective then-current ratings of the
Series E Preferred Shares. If other securities become includible in Rating
Agency Required Assets, the calculation of the Adjusted Value of such other
securities will be determined in accordance with procedures as are established
by the Board of Trustees (and set forth in a certificate signed by an officer of
the Fund, filed with the records of the Fund and available for inspection by the
shareholders of the Fund) and as are acceptable to Moody's and S&P if the Series
E Preferred Shares are then rated by both such rating services, or, if not rated
by both, to the one such rating service then rating the Series E Preferred
Shares.
Calculation of Coverage -- Calculation III: The value of the Rating Agency
Required Assets will be calculated by: (i) reducing the aggregate Adjusted Value
of the Rating Agency Required Assets by (A) the amount of all known liabilities
(including, without limitation, indebtedness, operating expenses payable and
securities sold under agreements to repurchase) which appear on the applicable
Valuation Date on the Fund's balance sheet and the amount of operating expenses
projected by the Fund to be incurred by the Fund's balance sheet and the amount
of operating expenses projected by the Fund to be incurred by the Fund during
the succeeding three months, (B) so long as the preferred shares, including
Series E Preferred Shares and Series A-D Preferred Shares, are rated by S&P, the
amount described under "-- Effect of Hedging Transactions" below, and (C) an
aggregate amount for all preferred shares, including Series E Preferred Shares
and Series A-D Preferred Shares, calculated for each series of preferred shares,
as of the Valuation Date, as follows: the amount of accumulated but unpaid
dividends on such series (unless set aside with the Paying Agent for payment) to
the Valuation Date plus dividends projected to accumulate on such series from
and including the Valuation Date to but excluding the first day of the next
Dividend Period for such series at the Dividend Rate for such series in effect
for such series on the Valuation Date plus the amount of dividends which would
accumulate on the shares of such series from and including the first day of the
next Dividend Period for such series through the 49th day following the
Valuation Date at the Dividend Rate in effect on such Valuation Date multiplied
by [the Volatility Factor], and (ii) increasing the aggregate Adjusted Value of
Rating Agency Required Assets by (A) the amount of receivables for portfolio
securities sold as of the Valuation Date, (B) the amount of any interest
receivable on portfolio securities as of the Valuation Date and (C) the value of
the Fund's assets irrevocably deposited by the Fund for the payment of any of
(i)(A) through (i)(C) above.
Effect of Hedging Transactions. For so long as any shares of Preferred
Shares are rated by S&P, the Fund will not purchase or sell futures contracts,
write, purchase or sell options on futures contracts or write put options
(except covered put options) or call options (except covered call options) on
portfolio securities unless it receives written confirmation from S&P that
engaging in such transactions will not impair the ratings then assigned to the
Preferred Shares by S&P, except that the Fund may purchase or sell futures
contracts based on the Bond Buyer Municipal Bond Index (the "Municipal Index")
or United States Treasury Bonds or Notes ("Treasury Bonds") and write, purchase
or sell put and call options on such contracts (collectively, "S&P Hedging
Transactions"), subject to the following limitations:
(1) the Fund will not engage in any S&P Hedging Transaction based on
the Municipal Index (other than transactions which terminate a futures
contract or option held by the Fund by taking an opposite position thereto
("Closing Transactions")), which would cause the Fund at the time of such
transaction to own or have sold the least of (i) more than 1,000
outstanding futures contracts based on the Municipal Index, (ii)
outstanding futures contracts based on the Municipal Index exceeding in
number 25% of the quotient of the Market Value of the Fund's total assets
divided by $1,000 or
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<PAGE> 68
(iii) outstanding futures contracts based on the Municipal Index exceeding
in number 10% of the average number of daily traded futures contracts based
on the Municipal Index in the 30 days preceding the time of effecting such
transactions as reported by The Wall Street Journal;
(2) the Fund will not engage in any S&P Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) which would cause the Fund
at the time of such transaction to own or have sold the lesser of (i)
outstanding futures contracts based on Treasury Bonds exceeding in number
50% of the quotient of the Market Value of the Fund's total assets divided
by $100,000 ($200,000 in the case of the two-year United States Treasury
Note) or (ii) 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;
(3) the Fund will engage in Closing Transactions to close out any
outstanding futures contract which the Fund owns or has sold or any
outstanding option thereon owned by the Fund in the event (i) the Fund does
not have S&P Eligible Assets with an aggregate Discounted Value equal to or
greater than the Rating Agency Required Asset Coverage on two consecutive
Valuation Dates and (ii) the Fund is required to pay additional margin due
to fluctuation in contract price ("Variation Margin") on the second such
Valuation Date;
(4) the Fund will engage in a Closing Transaction to close out any
outstanding futures contract or option thereon in the month prior to the
delivery month under the terms of such futures contract or option thereon
unless the Fund holds the securities deliverable under such terms; and
(5) when the Fund writes a futures contract or option thereon, it will
either maintain an amount of cash, cash equivalents or high grade (rated
"A" or better by S&P), fixed-income securities in a segregated account with
the Fund's custodian, so that the amount so segregated plus the amount of
margin paid on such contract ("Initial Margin") and any Variation Margin
held in the amount of or on behalf of the Fund's broker with respect to
such futures contract or option equals the Market Value of the futures
contract or option, or, in the event the Fund writes a futures contract or
option thereon which requires delivery of an underlying security, it shall
hold such underlying security in its portfolio.
For purposes of determining whether the Fund has S&P Eligible Securities
with a Discounted Value that equals or exceeds the Rating Agency Required Asset
Coverage, 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 shall be reduced by an amount equal to (i) 30% of
the aggregate settlement value, as marked to market, of any outstanding futures
contracts based on the Municipal Index which are owned by the Fund plus (ii) 25%
of the aggregate settlement value, as marked to market, of any outstanding
futures contract based on Treasury Bonds which contracts are owned by the Fund.
For as long as any Preferred Shares are rated by Moody's, the Fund will not
buy or sell futures contracts, write, purchase or sell call options on futures
contracts or purchase put options on futures contracts or write call options
(except covered call options) on portfolio securities unless it receives written
confirmation from Moody's that engaging in such transactions would not impair
the ratings then assigned to the shares of Preferred Shares by Moody's, except
that the Fund may purchase or sell exchange-traded futures contracts based on
the Municipal Index or Treasury Bonds and purchase, write or sell exchange-
traded put options on such futures contracts and purchase, write or sell
exchange-traded call options on such futures contracts (collectively, "Moody's
Hedging Transactions"), subject to the following limitations:
(1) the Fund will not engage in any Moody's Hedging Transaction based
on the Municipal Index (other than Closing Transactions) which would cause
the Municipal Bonds rated by Moody's but not rated by S&P may comprise no
more than 50% of short-term municipal securities that qualify as S&P
Eligible Securities;
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<PAGE> 69
(2) the S&P Security Discount Factor for funds to be received for
sales of municipal securities that are due in more than five Business days
from such Valuation Date will be the S&P Security Discount Factor
applicable to the municipal securities sold; and
(3) no S&P Security Discount Factor will be applied to cash or to
funds to be received for sales of municipal securities if such funds are
due within five business days of such Valuation Date. For purposes of
calculating S&P Eligible Securities as of any Valuation Date, funds to be
received for sales of municipal securities is the book value of such funds
to be received for municipal securities sold as of or prior to such
Valuation Date. For purposes of the foregoing, anticipation notes rated
"SP-1" or, if not rated by S&P, rated "VMIG-1" by Moody's, which do not
mature or have a demand feature exercisable in 30 days and which do not
have a long-term rating, shall be considered to be short-term Municipal
Securities.
Other Rating Agency Guidelines. If the Fund purchases securities on a
"when-issued" or "forward delivery" basis, the cash or securities segregated by
the Fund to satisfy its purchase obligations will have an Adjusted Value of
zero. The contract to purchase will have an Adjusted Value of zero unless the
settlement date is within 49 days, in which case the contract to purchase will
have an Adjusted Value equal to the lesser of the purchase price and the
Adjusted Value, if any, the security contracted to be purchased would have if it
were owned by the Fund.
So long any Preferred Shares are outstanding and Moody's and S&P, or both,
are rating the Preferred Shares, the Fund will not borrow money unless it has
received written confirmation from Moody's or S&P, or both, as appropriate, that
the proposed borrowing would not impair the ratings then assigned by such
ratings agency to the Preferred Shares. Notwithstanding the foregoing, the Fund
may, without obtaining the written confirmation described above, borrow money
for the purpose of clearing securities transactions if (i) the Ratings Agency
Required Asset Coverage would continue to be satisfied after giving effect to
such borrowing 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 Fund at the time of the borrowing; for purposes of the
foregoing, "temporary purpose" means that the borrowing is to be repaid within
sixty days and is not to be extended or renewed.
TAXES
Set forth below is a discussion of certain U.S. federal income tax issues
concerning the Fund and the purchase, ownership, and disposition of Series E
Preferred Shares. This discussion does not purport to be complete or to deal
with all aspects of federal income taxation that may be relevant to shareholders
in light of their particular circumstances. This discussion is based upon
present provisions of the regulations promulgated thereunder, and judicial and
administrative ruling authorities, all of which are subject to change, which
change may be retroactive. Prospective investors should consult their own tax
advisers with regard to the federal tax consequences of the purchase, ownership,
or disposition of Fund shares, as well as the tax consequences arising under the
laws of any state, foreign country, or other taxing jurisdiction.
TAX STATUS OF THE FUND
The Fund has elected to be, and intends to qualify for treatment each year,
as a regulated investment company ("RIC") under Subchapter M of the Code.
Accordingly, the Fund intends to satisfy certain requirements relating to
sources of its income and diversification of its assets and to distribute
substantially all of its net tax-exempt income, net investment income (i.e.,
investment company taxable income as that term is defined in the Code without
regard to the deduction for dividends paid) and net capital gain (i.e., the
excess of long-term capital gain over short-term capital loss) in accordance
with the timing requirements imposed by the Code, so as to maintain its RIC
status. By doing so, the Fund will avoid any federal income tax on any net
investment income and net capital gain it distributes to its shareholders. If
the Fund failed to qualify for treatment as a RIC for any taxable year, it would
be taxed on the full
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<PAGE> 70
amount of its taxable income for that year without being able to deduct the
distributions it makes to its shareholders and the shareholders would treat all
distributions, including those that otherwise would qualify as "exempt-interest
dividends" (described below), as dividends (that is, ordinary income) to the
extent of the Fund's earnings and profits.
In order to qualify as a RIC, the Fund must, among other things, (a) derive
in each taxable year at least 90% of its gross income from dividends, interest,
payments with respect to certain securities loans, and gains from the sale or
other disposition of stock, securities or foreign currencies, or other income
derived with respect to its business of investing in such stock, securities or
currencies; and (b) diversify its holdings so that, at the end of each fiscal
quarter, (i) at least 50% of the value of the Fund's total assets is represented
by cash and cash items, U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other securities
limited, in respect of any one issuer, to an amount not greater than 5% of the
value of the Fund's total assets and 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. Government
securities and the securities of other regulated investment companies).
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax at
the Fund level. To avoid the tax, the Fund must distribute during each calendar
year an amount equal to the sum of (1) at least 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (2) at
least 98% of its capital gain net income for a one-year period generally ending
on October 31 of the calendar year, and (3) all ordinary income and capital gain
net income for previous years that were not distributed during such years. To
avoid application of the excise tax, the Fund intends to make distributions in
accordance with the calendar year distribution requirement.
DISTRIBUTIONS
In general, distributions of net investment income are taxable to a U.S.
shareholder as ordinary income, whether paid in cash or shares. Distributions of
net capital gain are taxable as long-term capital gain, whether paid in cash or
shares and regardless of the U.S. shareholder's holding period.
The Fund will designate distributions made to holders of Common Shares and
to holders of preferred shares, including the Series E Preferred Shares, in
accordance with each class's proportionate share of each item of Fund income
(such as tax-exempt interest, net capital gain and other taxable income).
Shareholders will be notified annually as to the U.S. federal tax status of
distributions, and shareholders receiving distributions in the form of newly
issued shares will receive a report as to the net asset value of the shares
received.
TAX-EXEMPT INCOME
The Fund intends to invest a sufficient amount of its assets in municipal
securities to qualify to distribute "exempt-interest dividends" (as defined in
the Code) to shareholders. The Fund's dividends payable from net tax-exempt
interest earned from municipal securities will qualify as exempt-interest
dividends if, at the close of each quarter of the Fund's taxable year, at least
50% of the value of its total assets consists of securities the interest on
which is exempt from the regular federal income tax under Code Section 103.
Exempt-interest dividends distributed to shareholders are not included in
shareholders' gross income for regular federal income tax purposes, but
shareholders are nonetheless required to report tax-exempt interest dividends on
their federal income tax returns. The Fund will determine periodically which
distributions will be designated as exempt-interest dividends. If the Fund earns
income which is not eligible to be so designated, the Fund intends to distribute
income. Such distributions will be subject to federal, state and local taxes, as
applicable, in the hands of shareholders.
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Interest on certain types of private activity bonds is not exempt from
federal income tax when received by "substantial users" (as defined in the
Code). A "substantial user" includes any "nonexempt person" who regularly uses
in its trade or business part of a facility financed from the proceeds of
private activity bonds. The Fund may invest periodically in private activity
bonds and, therefore, may not be an appropriate investment for entities that are
substantial users of facilities financed by private activity bonds or "related
persons' of substantial users. Generally, an individual will not be a related
person of a substantial user under the Code unless he/she or his/her immediate
family owns indirectly in aggregate more than 50% of the equity value of the
substantial user.
Opinions relating to the tax status of interest derived from individual
municipal securities are rendered by bond counsel to the issuer. Although the
Fund's Adviser attempts to determine that any security it contemplates
purchasing on behalf of the Fund is issued with an opinion indicating that
interest payments will be exempt from federal and (as applicable) state tax,
neither the Adviser nor the Fund's counsel makes any review of proceedings
relating to the issuance of municipal securities or the bases of such opinions.
Interest on indebtedness incurred or continued by a shareholder to purchase
or carry Series E Preferred Shares is not deductible for federal income tax
purposes to the extent that interest relates to exempt-interest dividends
received from the Fund.
From time to time, proposals have been introduced in Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal securities, and similar proposals may be introduced in the
future. If such a proposal were enacted, the availability of municipal
securities for investment by the Fund could be adversely affected. Under these
circumstances, Fund management would re-evaluate the Fund's investment
objectives and policies and would consider either changes in the structure of
the Fund or its dissolution.
BACKUP WITHHOLDING
The Fund generally will be required to withhold federal income tax at a
rate of 31% ("backup withholding") from dividends paid (other than
exempt-interest dividends), and capital gain distributions to individuals and
certain other non-corporate shareholders if (1) the shareholder fails to furnish
the Fund with the shareholder's correct taxpayer identification number or social
security number, (2) the IRS notifies the shareholder or the Fund that the
shareholder has failed to report properly certain interest and dividend income
to the IRS and to respond to notices to that effect, or (3) when required to do
so, the shareholder fails to certify that he or she is not subject to backup
withholding. Any amounts withheld may be credited against the shareholder's
federal income tax liability.
OTHER TAXATION
An investment in Series E Preferred Shares is not appropriate for non-U.S.
investors or as a retirement plan investment. Non-U.S. shareholders may be
subject to U.S. tax rules that differ significantly from those summarized above,
including the likelihood that ordinary income dividends to them would be subject
to withholding of U.S. tax at a rate of 30% (or a lower treaty rate, if
applicable).
STATE AND LOCAL TAXES
The exemption of interest income for federal income tax purposes does not
necessarily result in exemption under the income or other tax laws of any state
or local taxing authority. Shareholders of the Fund may be exempt from state and
local taxes on distributions of tax-exempt interest income derived from
obligations of the state and/or municipalities of the state in which they are
resident, but taxable generally on income derived from obligations of other
jurisdictions. The Fund will report annually to shareholders the percentages
representing the proportionate ratio of its net tax-exempt income earned in each
state.
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FUND INVESTMENTS
Market Discount. Any recognized gain or other income attributable to
market discount on long-term tax-exempt Municipal Obligations (i.e., obligations
with a term of more than one year) purchased other than, in general, at their
original issue, is taxable as ordinary income. If the Fund purchases such a
security at a price lower than the stated redemption price of such debt
security, the excess of the stated redemption price over the purchase price is
"market discount." If the amount of market discount is more than a de minimis
amount, a portion of such market discount must be included as ordinary income
(not capital gain and not tax-exempt income) by the Fund in each taxable year in
which the Fund owns an interest in such debt security and receives a principal
payment on it. In particular, the Fund will be required to allocate that
principal payment first to the portion of the market discount on the debt
security that has accrued but has not previously been includable in income. In
general, the amount of market discount that must be included for each period is
equal to the lesser of (i) the amount of market discount accruing during such
period (plus any accrued market discount for prior periods not previously taken
into account) or (ii) the amount of the principal payment with respect to such
period. Generally, market discount accrues on a daily basis for each day the
debt security is held by the Fund at a constant rate over the time remaining to
the debt security's maturity or, at the election of the Fund, at a constant
yield to maturity which takes into account the semi-annual compounding of
interest. Gain realized on the disposition of a market discount obligation must
be recognized as ordinary interest income (not capital gain) to the extent of
the "accrued market discount."
Original Issue Discount. Certain debt securities acquired by the Fund may
be treated as debt securities that were originally issued at a discount. Very
generally, original issue discount is defined as the difference between the
price at which a security was issued and its stated redemption price at
maturity. Although no cash on account of such discount is actually received by
the Fund, original issue discount that accrues on a debt security in a given
year generally is treated for federal income tax purposes as interest and,
therefore, such income would be subject to the distribution requirements
applicable to regulated investment companies. Some debt securities may be
purchased by the Fund at a discount that exceeds the original issue discount on
such debt securities, if any. This additional discount represents market
discount for federal income tax purposes (see above). The Fund's investment in
zero coupon and certain other securities will cause it to realize income prior
to the receipt of cash payments with respect to these securities. The Fund may
be required to liquidate securities that it might otherwise have continued to
hold in order to generate cash to enable it to distribute that income to its
shareholders and thereby remain qualified for treatment as a RIC and avoid
imposition of the excise tax described above.
Lower-Rated and Unrated Securities. Investments in lower-rated or unrated
securities may present special tax issues for the Fund to the extent that the
issuers of these securities default on their obligations pertaining thereto. The
federal tax law is not entirely clear regarding the consequences of the Fund's
taking certain positions in connection with ownership of distressed securities.
For example, there is uncertainty regarding: (i) when the Fund may or must cease
to accrue interest, original issue discount or market discount on these
securities; (ii) when and to what extent deductions may be taken for bad debts
or worthless securities; (iii) how payments received on obligations in default
should be allocated between principal and income; and (iv) whether exchanges of
debt obligations in a workout context are taxable.
Taxable Transactions. The Fund may realize some net capital gain as a
result of market transactions, including sales of portfolio securities and
rights to when-issued securities and options and futures transactions. The Fund
may also realize taxable income from certain short-term taxable obligations,
securities loans, a portion of discount with respect to certain stripped
municipal securities or their stripped coupons, and certain realized gains or
income attributable to accrued market discount. Any distributions by the Fund of
those net capital gains or taxable income would be taxable to its shareholders.
However, it is expected that those amounts, if any, would normally be
insubstantial in relation to the tax-exempt interest earned by the Fund.
Options, Futures and Forward Contracts. Any regulated futures contracts
and certain options (namely, nonequity options and dealer equity options) in
which the Fund may invest may be "section
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1256 contracts." Gains (or losses) on these contracts generally are considered
to be 60% long-term and 40% short-term capital gains or losses. Also, section
1256 contracts held by the Fund at the end of each taxable year (and on certain
other dates prescribed in the Code) are "marked to market" with the result that
unrealized gains or losses are treated as though they were realized.
Transactions in options, futures and forward contracts undertaken by the
Fund may result in "straddles" for federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by the Fund, and
losses realized by the Fund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which the losses are
realized. In addition, certain carrying charges (including interest expense)
associated with positions in a straddle may be required to be capitalized rather
than deducted currently. Certain elections that the Fund may make with respect
to its straddle positions may also affect the amount, character and timing of
the recognition of gains or losses from the affected positions.
Because only a few regulations implementing the straddle rules have been
promulgated, the consequences of such transactions to the Fund are not entirely
clear. The straddle rules may increase the amount of short-term capital gain
realized by the Fund, which is taxed as ordinary income when distributed to
shareholders. Because application of the straddle rules may affect the character
of gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders as ordinary income or long-term capital gain may be
increased or decreased substantially as compared to a fund that did not engage
in such transactions.
Constructive Sales. Under certain circumstances, the Fund may recognize
gain from a constructive sale of an "appreciated financial position" it holds if
it enters into a short sale, forward contract or other transaction that
substantially reduces the risk of loss with respect to the appreciated position.
In that event, the Fund would be treated as if it had sold and immediately
repurchased the property and would be taxed on any gain (but not loss) from the
constructive sale. The character of gain from a constructive sale would depend
upon the Fund's holding period in the property. Loss from a constructive sale
would be recognized when the property was subsequently disposed of, and its
character would depend on the Fund's holding period and the application of
various loss deferral provisions of the Code. Constructive sale treatment does
not apply to transactions closed in the 90-day period ending with the 30th day
after the close of the taxable year, if certain conditions are met.
INDEPENDENT AUDITORS
Ernst & Young LLP, 233 South Wacker Drive, Chicago, IL 60606 are the
independent accountants for the Fund, providing audit services, tax return
preparation, and assistance and consultation with respect to the preparation of
filings with the SEC.
FINANCIAL STATEMENTS
The audited financial statements included in the Annual Report of the Fund
for the fiscal year ended November 30, 1998, which was prepared by the Fund's
independent accountants, and the unaudited financial statements included in the
semi-annual report of the Fund for the period ended May 31, 1999, are hereby
incorporated by reference into this SAI. No other parts of the Annual Report and
Semi-Annual Report are incorporated by reference herein.
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GLOSSARY
"Adjusted Value" has the meaning set forth on page 15 of this SAI.
"Adviser" means Scudder Kemper Investments, Inc.
"Board of Trustees" or "Board" means the Board of Trustees of the Fund,
from time to time.
"Business Day" means a day on which banks located in the city of New York
are not required or authorized by law or regulation to be closed and on which
the New York Stock Exchange is open.
"By-laws" means the By-laws of the Fund dated October 11, 1988.
"Calculated Mean" has the meaning set forth on page 13 of this SAI.
"Certificate of Designation" shall mean the Fund's Amended and Restated
Certificate of Designation for Preferred Shares specifying the powers,
preferences and rights of the Preferred Shareholders.
"Certificate of Rating Agency Required Asset Coverage" has the meaning set
forth on page 15 of this SAI.
"Closing Transaction" has the meaning set forth on page 19 of this SAI.
"CMOs" shall mean debt obligations which may be issued by GNMA, FNMA or
FHLMC or real estate investment management conduits, any of which may be
comprised of one or more classes, each with a fixed latest stated maturity and
bearing interest at either a fixed or floating rate, if such CMO (1) have a
current rating by Standard & Poor's of AAA and by Moody's of Aaa or, if
specifically advised in writing by Moody's and Standard & Poor's that the rating
of the Preferred Shares will not be adversely affected thereby, are in the
highest rating category of a nationally recognized statistical rating agency;
(ii) are payable in United States currency; (iii) are directly secured by GNMA
Certificates, FNMA Certificates or FHLMC Certificates; (iv) were issued as part
of an issue of collateralized mortgage obligations which were originally offered
to the public in an aggregate principal amount at least equal to $100,000,000;
(v) are not included in a class or tranche of an issue of collateralized
mortgage obligations which class or tranche (a) constitutes a planned
amortization class bond, (b) has a coupon that floats inversely against or as a
multiple of an index, or (c) consists of an interest-only or principal only
stripped obligation; (vi) are not part of a "Z" class or tranche of an issue;
(vii) have a weighted average life not more than ten years unless Standard &
Poor's shall have advised the Fund in writing that the inclusion of a CMO with
weighted average life of greater than ten years will not affect its rating on
the Preferred Shares; and (viii) satisfy such other criteria as may be
established by Moody's and Standard & Poor's.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Rate" shall mean, on any date, the inherent rate on
60-day commercial paper placed on behalf of issuers whose corporate bonds are
rated Aa by Moody's, AA by S&P's or the equivalent of either such rating by
another rating agency, subject to certain adjustments and qualifications set
forth in the Fund's Certificate of Designation of Preferred Shares.
"Commission" means the U.S. Securities and Exchange Commission.
"Common Shares" means the Common Shares, par value $0.01 per share, of the
Fund.
"Date of Original Issue" shall mean the date on which the Fund originally
issued Series E Preferred Shares.
"Declaration of Trust" means the Agreement and Declaration of Trust of the
Fund dated August 3, 1988, as amended and restated on October 7, 1988.
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"Dividend Payment Date" shall mean with respect to any Dividend Period, the
day following the last day thereof.
"Dividend Period" has the meaning set forth on page 14 of this SAI
"Dividend Rate" has the meaning set forth on page 14 of this SAI.
"DTC" means The Depository Trust Company.
"Eligible Securities" means if rated by S&P, securities which are S&P's
Eligible Securities and, if rated by Moody's, securities which are Moody's
Eligible Securities. Municipal securities included as Eligible Securities shall
be bonds that are issued by any of the 50 states; the territories and their
subdivisions, counties, cities, towns, villages, and school districts; agencies
such as authorities and special districts created by the states; and certain
federally sponsored agencies such as local housing authorities. Payments made on
such bonds are exempt from federal income taxes and are generally exempt from
state and local sales taxes in the state of issuance.
"Escrowed Bond" means a municipal security that (i) has been determined to
be legally defeased in accordance with Standard & Poor's legal defeasance
criteria, (ii) has been determined to be economically defeased in accordance
with Standard & Poor's economic defeasance criteria and assigned a rating of
"AAA" by S&P's, (iii) is not rated by S&P's but have been determined to be
legally defeased by Moody's, or (iv) has been determined to be economically
defeased by Moody's and assigned a rating no lower than the rating that is
Moody's equivalent of "AAA" by S&P's rating.
"Fund" means the Kemper Municipal Income Trust.
"Gross-up Payment" means in respect of any dividend, a payment to a holder
of any Series E Preferred Shares of an amount which, giving effect to any
Taxable Allocation made with respect to such dividend, would cause such holder's
after-tax returns (taking into account both any Taxable Allocation and the
Gross-up Payment) to be equal to the after-tax return the holder would have
received if no such Taxable Allocation 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 any preferred shares is subject to the Federal
alternative minimum tax with respect to dividends received from the Fund; and
(iii) assuming that each holder of any preferred shares 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.
"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.
"Inverse Floater" shall mean trust certificates or other instruments
evidencing interests in one or more municipal securities that qualify as S&P's
Eligible Securities (and satisfy the issuer and size requirements of the
definition of S&P's Eligible Securities) the interest rates on which are
adjusted at short term intervals on a basis that is inverse to the simultaneous
readjustment of the interest rates on corresponding floating rate trust
certificates or other instruments issued by the same issuer, provided that the
ratio of the aggregate dollar amount of floating rate instruments to inverse
floating rate instruments issued by the same issuer does not exceed one to one
at their time of original issuance unless the floating rate instrument has only
one reset remaining until maturity.
"IRS" means the United States Internal Revenue Service.
"Local Currency" has the meaning set forth on page 14 of this SAI.
"Market Value" of any asset of the Fund shall mean the market value thereof
determined by the valuation methods, including the pricing service adopted by
the Fund's Board of Trustees. Market Value of any asset shall include any
interest accrued thereon. Securities for which quotations are not readily
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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. A pricing
service may employ electronic data processing techniques or a matrix system, or
both, to determine valuations. In the event the pricing service is unable to
value a security, the security shall be valued at the lower of two dealer bids
obtained by the Fund from dealers who are members of the National Association of
Securities Dealers, Inc. and make a market in the security, at least one of
which shall be in writing.
"Maximum Rate" shall mean on any date on which a Dividend Rate is
determined, 110%, increasing on the seventh day after such Dividend Rate is
determined to be a Maximum Rate to 125% of the Commercial Paper Rate and
decreasing to 110% of the Commercial Paper Rate on the day such Dividend Rate is
determined to no longer be the Maximum Rate. The Remarketing Agent shall round
each applicable Maximum Rate to the nearest one-thousandth (0.001) of one
percent per annum, with any such number ending in five ten-thousandths (0.0005)
of one percent or more being rounded upwards to the nearest one-thousandth
(0.001) of one percent.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Adjusted Value" has the meaning set forth on page 18 of this SAI.
"Moody's Eligible Securities" means each security eligible for
consideration under Moody's guidelines in effect as of the date of this
Certificate of Designation.
"Moody's Hedging Transactions" has the meaning set forth on page 20 of this
SAI.
"Moody's Security Discount Factors" shall have the meaning set forth on
page 18 of this SAI.
"Nasdaq" means the Nasdaq Stock Market Inc.
"NYSE" means the New York Stock Exchange.
"1934 Act" means the Securities Exchange Act of 1934, as amended.
"1940 Act" means the Investment Company Act of 1940, as amended from time
to time.
"NRSRO" means a nationally recognized statistical rating organization.
"Paying Agent" shall mean, at any time, the agent appointed by the Fund to
pay dividends and other amounts due on Series E Preferred Shares and to perform
such other duties as are provided herein.
"Rating Agency Accountant's Confirmation" has the meaning set forth on page
16 of this SAI.
"Rating Agency Required Asset Coverage" has the meaning set forth on page
14 of this SAI.
"Rating Agency Required Assets" has the meaning set forth on page 15 of
this SAI.
"Registration Statement" refers to the Form N-2 filing with the SEC of
which this SAI is a part.
"Remarketing Agent" shall mean, at any time, the entity or entities
appointed by the Fund to act on its behalf in establishing Dividend Rates for
the Series E Preferred Shares and to act on behalf of the owners in remarketing
the Series E Preferred Shares. The "Initial Remarketing Agent" is Salomon Smith
Barney Inc.
"SEC" means the United States Securities and Exchange Commission.
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"Series A-D Preferred Shares" is described in "Description of Capital
Structure" in the Prospectus.
"Seven-Day Dividend Period" means a Dividend Period consisting of seven
days.
"Short Term Money Market Instruments" shall mean the following types of
financial instruments, provided that such instruments, on the date of purchase
or other acquisition by the Fund, have remaining terms to maturity not in excess
of 90 days from such date:
(a) commercial paper that is rated at the time of the Fund's
investment therein, or contractual commitment providing for such
investment, at least "P-1" by Moody's and "A-1+" by S&P, and is issued by
an issuer whose long-term unsecured debt obligations are rated at least
"AA3" by Moody's;
(b) demand or time deposits in, certificates of deposit of, or
banker's acceptances issued by, (i) a depository institution or trust
company incorporated under the laws of the United States or any state
thereof or the District of Columbia, or (ii) a United States branch office
or agency of a foreign depository institution or trust company (provided
that such branch office or agency is subject to banking regulation under
the laws of the United States, any state thereof or the District of
Columbia) if, in each case, the commercial paper, if any, and the long-term
unsecured debt obligations (other than such obligations the rating of which
is based on the credit of a person or entity other than depository
institution or trust company) of such depository institution or trust
company at the time of the Fund's investment therein, or contractual
commitment providing for such investment, have (A) credit rating from
Moody's of at least (P-1) and S&P of at least (A-1+), in the case of
commercial paper, and (B) a credit rating from Moody's of at least Aa3 and
from S&P of at least (AA-), in the case of long term, unsecured debt
obligations; provided, however, that in the case of any such investment
that matures in no more than one Business Day from the date of purchase or
other acquisition by the Fund, all of the foregoing requirements will be
applicable, except that the required long-term unsecured debt credit rating
of such depository institution or trust company from Moody's need only be
at least (A2); and provided, further, however, that the foregoing credit
rating requirements will be deemed to be met with respect to a depository
institution or trust company if (X) such depository institution or trust
company is the principal depository institution in a holding company
system, (Y) the commercial paper, if any, of such depository institution or
trust company is not rated below (P-1) by Moody's or (A-1+) by S&P and (Z)
the commercial paper, if any, and the long-term, unsecured debt obligations
of such holding company meet all of the foregoing credit rating
requirements;
(c) repurchase obligations with respect to any security entered into
with a depository institution, trust company or securities dealer (acting
as principal) which meets the credit rating requirements for long-term
unsecured debt obligations and commercial paper described in clause (b)
above;
(d) Eurodollar demand or time deposits in, or certificates of deposit
of, the head office or a branch office of a depository institution or trust
company, the commercial paper, if any, and the long-term, unsecured debt
obligations of such which meet all of the credit rating requirements
specified in clause (b) above; provided that the interest receivable by the
Fund on such investment is not subject to withholding or similar taxes.
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., or its successors.
"S&P Adjusted Value" has the meaning set forth on page 17 of this SAI.
"S&P Eligible Securities" has the meaning set forth on page 17 of this SAI.
"S&P Hedging Transactions" has the meaning set forth on page 17 of this
SAI.
"S&P Security Discount Factors" has the meaning set forth on page 17 of
this SAI.
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"Treasury Bonds" has the meaning set forth on page 19 of this SAI.
"Underwriter" means Salomon Smith Barney Inc.
"Unit" means at least twenty (20) Series E Preferred Shares.
"Underwriting Agreement" means the Agreement between the issuer and the
Underwriter covering terms and conditions of new issue of securities to be
offered to the public.
"Valuation Date" has the meaning set forth on page 15 of this SAI.
"Variation Margin" means, in connection with an outstanding financial
futures contract owned or sold by the Fund, the amount of cash or securities
paid to or received from a broker (subsequent to the Initial Margin payment)
from time to time as the price of such financial futures contract fluctuates.
"Volatility Factor" means, as of any Valuation Date, a multiplicative
factor equal to 228% for each Dividend Period.
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APPENDIX A
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.
MUNICIPAL BOND RATINGS
Aaa -- Bonds which are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated "A" possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payment 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.
Note -- Those bonds in the "Aa", "A," "Baa," "Ba" and "B" categories which
Moody's believes possess the strongest credit attributes within those categories
are designated by the symbols "Aa1," "A1," "Baa1," "Ba1" and "B1."
Short-term Notes -- The four ratings of Moody's for short-term notes are
"MIG 1/VMIG1," "MIG 2/VMIG2," "MIG 3/VMIG3" and "MIG 4/VMIG4." "MIG 1/VMIG1"
denotes "best quality . . . strong protection by established cash flows." "MIG
2/VMIG2" denotes "high quality" with ample margins of protection. "MIG 3/VMIG3"
notes are of "favorable quality . . . but . . . lacking the
31
<PAGE> 80
undeniable strength of the preceding grades." "MIG 4/VMIG4" notes are of
"adequate quality . . . [p]rotection commonly regarded as required of an
investment security is present . . . there is specific risk."
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment ability of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
ability for repayment of short-term promissory obligations. Prime-1 repayment
ability will often be evidenced by the following characteristics: leading market
positions in well established industries; high rates of return on Trusts
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed financial
charges and high internal cash generation; and 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
ability 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, may 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 supporting institutions) have an acceptable
ability 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 may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICES,
A DIVISION OF THE MCGRAW-HILL
COMPANIES, INC., MUNICIPAL DEBT RATINGS
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program. It
takes into consideration the creditworthiness of guarantors, insurers or other
forms of credit enhancement on the obligation.
The issue credit rating is not a recommendation to purchase, sell or hold a
financial obligation, 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 obligors or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's 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.
Issue credit ratings can be either long term or short term. Short-term
ratings are generally assigned to those obligations considered short term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days -- including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-
32
<PAGE> 81
term obligations. The result is a dual rating, in which the short-term ratings
address the put feature, in addition to the usual long-term rating. Medium-term
notes are assigned long-term ratings.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of payment-capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with the terms
of obligation;
II. Nature of and provisions of the obligation; and
III. 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.
The issue ratings definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above.
AAA -- Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA -- Debt rated "AA" differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A -- Debt rated "A" is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories. However, the obligor's capacity to meet its financial commitment on
the obligation is still strong.
BBB -- Debt rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment to the
obligation.
BB, B, CCC, CC and C -- Debt rated "BB," "B," "CCC," "CC" and "C" is
regarded as having significant speculative characteristics. "BB" indicates the
least degree of speculation and "C" the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposures to adverse
conditions.
BB -- An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions, which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B -- An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC -- An obligation rated "CCC" is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC -- An obligation rated "CC" is currently highly vulnerable to
nonpayment.
C -- The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
33
<PAGE> 82
D -- Debt rated "D" is in payment default. The "D" rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Plus (+) or Minus (-) -- The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
c -- The "c" subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable.
p -- 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, 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 his own judgment
with respect to such likelihood and risk.
* -- Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
r -- The "r" highlights derivative, hybrid, and certain other obligations
that Standard & Poor's believes may experience high volatility or high
variability in expected returns as a result of noncredit risks. Examples of such
obligations are securities with principal or interest return indexed to
equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
N.R. -- Not rated. Debt obligations of issuers outside the United States
and its territories are rated on the same basis as domestic corporate and
municipal issues. The ratings measure the creditworthiness of the obligor but do
not take into account currency exchange and related uncertainties.
DESCRIPTION OF STANDARD & POOR'S SHORT-TERM ISSUE RATINGS
A Standard & Poor's note 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-1".
A-3 -- Issues carrying this designation have an 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.
34
<PAGE> 83
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 Standard & Poor's
believes that such payments will be made during such grace period.
A Commercial Paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
DESCRIPTION OF STANDARD & POOR'S SHORT-TERM ISSUE CREDIT RATINGS
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
-- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 -- Strong capacity to pay principal and interest. An issue determined
to possess a very strong capacity to pay debt service is given a plus "+"
designation.
SP-2 -- Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 -- Speculative capacity to pay principal and interest.
35
<PAGE> 84
APPENDIX B
TAX EQUIVALENT YIELD TABLE
The table below gives the approximate yield a taxable security must earn at
various income brackets to produce after-tax yields equivalent to those of
tax-exempt bonds yielding from 4% to 6% under the regular federal income tax law
and tax rates applicable to individuals for 1999.
<TABLE>
<CAPTION>
(TAXABLE INCOME*) A FEDERAL TAX EXEMPT YIELD OF:
- ---------------------------------------- ------------------------------------------
MARGINAL 4% 4.5% 5% 5.5% 6%
INCOME ------ ------ ------ ------ ------
SINGLE RETURN JOINT RETURN TAX BRACKET IS EQUIVALENT TO A FULLY TAXABLE YIELD OF:
- ------------------- ------------------- ----------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Up to $25,750 Up to $43,050 15.00% 4.71% 5.29% 5.88% 6.47% 7.06%
$25,751-$62,450 $43,051-$104,050 28.00 5.56 6.25 6.94 7.64 8.33
$62,451-$130,250 $104,051-$158,550 31.00 5.80 6.52 7.25 7.97 8.70
$130,251-$283,150 $158,551-$283,150 36.00 6.25 7.03 7.81 8.59 9.38
Over $283,150 Over $283,150 39.60 6.62 7.45 8.28 9.11 9.93
</TABLE>
- ---------------
* Net amount subject to federal income tax after deductions and exemptions.
The above indicated federal income tax brackets do not take into account
the effect of a reduction in the deductibility of itemized deductions for
individual taxpayers with adjusted gross income in excess of $126,600. The tax
brackets also do not show the effects of phase out of personal exemptions for
single filers with adjusted gross income in excess of $126,600 and joint filers
with adjusted gross income in excess of $189,950. The effective marginal tax
rates and equivalent taxable yields of those taxpayers will be higher than those
indicated above.
Yields shown are for illustration purposes only and are not meant to
represent the Fund's actual or expected yield. No assurance can be given that
the Fund will achieve any specific tax-exempt yield. While it is expected that
the Fund will invest principally in obligations the interest from which is
exempt from the regular federal income tax, other income received by the Fund
may be taxable. The table does not take into account state or local taxes, if
any, payable on Fund distributions. It should also be noted that the interest
earned on certain "private activity bonds", while exempt from the regular
federal income tax, is treated as a tax preference item which could subject the
recipient to the alternative minimum tax. The illustrations assume that the
alternative minimum tax is not applicable and do not take into account any tax
credits that may be available.
The information set forth above is as of the date of this SAI. Subsequent
tax law changes could result in prospective or retroactive changes in the tax
brackets, tax rates, and tax-equivalent yields set forth above. Investors should
consult their tax adviser for additional information.
36
<PAGE> 85
KEMPER MUNICIPAL INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
, 1999
------------------------
INVESTMENT ADVISER
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston Massachusetts 02110
TRANSFER AGENT
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
Deutsche Bank
4 Albany Street
New York, New York 10006
SHAREHOLDER SERVICE AGENT
Kemper Service Company
P.O. Box 419066
Kansas City, Missouri 64141
LEGAL COUNSEL
Vedder, Price, Kaufmann & Kammholz
222 North LaSalle Street
Chicago, Illinois 60601
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, DC 20006
INDEPENDENT ACCOUNTANTS
Ernst & Young LLP
233 South Wacker Drive
Chicago, Illinois 60606
<PAGE> 86
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
1. Financial Statements:
Included in Part A
Financial Highlights
Included in Part B
The Annual Report for fiscal year ending November 30, 1998 and the
Semi-Annual Report for the period ended May 31, 1999 are incorporated by
reference.
2. Exhibits
(a) (1) Amended and Restated Agreement and Declaration of Trust of
the Registrant.*
(2) Amended and Restated Certificate of Designation for
Preferred Shares.**
(b) By-Laws of the Registrant.*
(c) Not Applicable
(d) Form of Specimen Certificate representing the Registrant's Series E
Preferred Shares of beneficial interest.**
(e) Not Applicable
(f) Not Applicable
(g) Investment Management Agreement between the Registrant and Scudder
Kemper Investments, Inc. is filed herewith.
(h) Form of Underwriting Agreement between the Registrant and Salomon
Smith Barney Inc.**
(i) Not Applicable
(j) Custodian Agreement between the Registrant and State Street Bank and
Trust Company is filed herewith.
(k) (1) Form of Remarketing Agreement between the Registrant and
Salomon Smith Barney Inc.**
(k) (2) Form of Amended and Restated Agency Agreement between the
Registrant and Deutsche Bank, as the Registrar, Transfer
Agent and Paying Agent.**
(l) Opinion and Consent of Dechert Price & Rhoads.**
<PAGE> 87
(m) Not Applicable.
(n) (1) Consent of Ernst & Young LLP**
(o) Not Applicable
(p) Not Applicable
(q) Not Applicable
- -------------------------
*Previously filed with the Fund's Registration Statement dated October 8, 1999.
**Previously filed with the Fund's Pre-effective Amendment No. 1 to the
Registration Statement dated November 18, 1999.
Item 25. Marketing Agreements
Reference is made to the Form of Remarketing Agreement (Exhibit (k)(1) to the
Registration Statement).
Item 26. Other Expenses of Issuance and Distribution*
Registration Fees.................................................. $ 13,900
Printing and Engraving Expenses.................................... $ 40,000
Rating Agency Fees and Expenses.................................... $ 50,000
Legal Fees and Expenses............................................ $125,000
Blue Sky Fees...................................................... $ 5,000
Accounting Fees and Expenses....................................... $ 20,000
Miscellaneous Expenses............................................. $ 15,000
Total.................................................. $268,900
Item 27. Person Controlled by or Under Common Control
Not Applicable
Item 28. Number of Holders of Securities
- 2 -
<PAGE> 88
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Series A - D Preferred Shares of beneficial interest, 43,000
par value $.01 per share as of
October 8, 1999
Common Shares of beneficial interest, 38,808,200.135
par value $.01 per share as of
October 8, 1999
Item 29. Indemnification
A policy of insurance covering Scudder Kemper Investment, Inc., its
affiliates including Scudder Investor Services, Inc., and all of the registered
investment companies advised by Scudder Kemper Investments, Inc. insures the
Registrant's trustees and officers and others against liability arising by
reason of an alleged breach of duty caused by any negligent act, error or
accidental omission in the scope of their duties. Article VII, Section 2 and
Article VIII of the Registrant's Amended and Restated Agreement and Declaration
of Trust states as follows:
Article VII, Section 2. Limitation of Liability. The Trustees shall not be
responsible or liable in any event for any neglect or wrongdoing of any officer,
agent, employee, investment advisor or manager, principal underwriter or
custodian, nor shall any Trustee be responsible for the act or omission of any
other Trustee. Nothing in this Declaration of Trust shall protect any Trustee
against any liability to which such Trustee would otherwise by subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of the office of Trustee.
Every note, bond, contract, instrument, certificate, Share or undertaking
and every other act or thing whatsoever executed or done by or on behalf of the
Trust or the Trustees or any of them in connection with the Trustee shall be
conclusively deemed to have been executed or done only in or with respect to
their or his capacity as Trustees or Trustee and neither such Trustees or
Trustee nor the Shareholders shall be personally liable thereon.
Every note, bond, contract, instrument, certificate or undertaking made or
issued by the Trustees or by any officers or officer shall give notice that this
Declaration of Trust is on file with the Secretary of State of the Commonwealth
of Massachusetts and shall recite that the same was executed or made by or on
behalf of the Trust by them as Trustees or Trustee or as officers or officer and
not individually and that the obligations of such instrument are not binding
upon any of them or the Shareholders individually but are binding only upon the
assets and property of the Trust and may contain such further recital as he or
they may deem appropriate, but the omission thereof shall not operate to bind
any Trustees or Trustee or officers or officer or Shareholders or Shareholder
individually.
All persons extending credit to, contracting with or having any claim
against the Trust shall look only to the assets of the Trust for payment under
such credit, contract or claim; and neither the Shareholders nor the Trustees,
nor any of the Trust's officers, employees or agents, whether past, present or
future, shall be personally liable therefor.
- 3 -
<PAGE> 89
Article VIII. Indemnification. Subject to the exceptions and limitations
contained in this Article, every person who is, or has been, a Trustee or
officer of the Trust (including persons who serve at the request of the Trust as
directors, officers or trustees of another organization in which the Trust has
an interest as a shareholder, creditor or otherwise) hereinafter referred to as
a "Covered Person", shall be indemnified by the Trust to the fullest extent
permitted by law against liability and against all expenses reasonably incurred
or paid by him in connection with any claim, action, suit or proceeding in which
he becomes involved as a party or otherwise by virtue of his being or having
been such a Trustee, director or officer and against amounts paid or incurred by
him in settlement thereof.
No indemnification shall be provided hereunder to a Covered Person:
(a) against any liability to the Trust or its Shareholders by reason of
a final adjudication by the court or other body before which the
proceeding was brought that he engaged in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved
in the conduct of his office;
(b) with respect to any matter as to which he shall have been finally
adjudicated not to have acted in good faith in the reasonable belief
that his action was in the best interests of the Trust; or
(c) in the event of a settlement or other disposition not involving a
final adjudication (as provided in paragraph (a) or (b)) and
resulting in a payment by a Covered Person, unless there has been
either a determination that such Covered Person did not engage in
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office by the
court or other body approving the settlement or other disposition or
a reasonable determination, based on a review of readily available
facts (as opposed to a full trial-type inquiry) that he did not
engage in such conduct:
(i) by a vote of a majority of the Disinterested Trustees acting
on the matter (provided that a majority of the Disinterested
Trustees then in office act on the matter); or
(ii) by written opinion of independent legal counsel.
The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not affect any other
rights to which any Covered Person may now or thereafter be entitled, shall
continue as to a person who has ceased to be such a Covered Person and shall
insure to the benefit of the heirs, executors and administrators of such a
person. Nothing contained herein shall affect any rights to indemnification to
which Trust personnel other than Covered Persons may be entitled by contract or
otherwise under law.
Expenses of preparation and presentation of a defense to any claim,
action, suit or proceeding subject to a claim for indemnification under this
Article VIII shall be advanced by the Trust prior to final disposition thereof
upon receipt of an undertaking by or on behalf of the recipient to repay such
amount if it is ultimately determined that he is not entitled to indemnification
under this Article VIII, provided that either:
(a) such undertaking is secured by a surety bond or some other
appropriate security or the Trust shall be insured against losses
arising out of any such advances; or
(b) a majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees then in
office act on the matter) or independent legal counsel in a written
opinion shall determine, based upon a review of the readily
available facts (as opposed to a full trial-type inquiry), that
there is reason to believe that the recipient ultimately will be
found entitled to indemnification.
- 4 -
<PAGE> 90
As used in this Article VIII, a "Disinterested Trustee" is one (a) who is
not an Interested Person of the Trust (including anyone who has been exempted
from being an Interested Person by any rule, regulation or order of the
Commission), and (b) against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or similar
grounds is then or has been pending.
As used in this Article VIII, the words "claim", "action", "suit" or
"proceeding" shall apply to all claims, actions, suits, proceedings (civil,
criminal or other, including appeals), actual or threatened; and the words
"liability" and "expenses" shall include without limitation, attorneys fees,
costs, judgments, amounts paid in settlement, fines, penalties and other
liabilities.
In case any Shareholders or former Shareholder shall be held to be
personally liable solely by reason of his or her being or having been a
Shareholder and not because of his or her acts or omissions or for some other
reason, the Shareholder or former Shareholder (or his or her heirs, executors,
administrators or other entity, its corporate or other general successor) shall
be entitled to be held harmless from and indemnified against all loss or expense
arising from such liability but only out of the assets of the Trust; provided,
however, there shall be no liability or obligation of the Trust arising
hereunder to reimburse any Shareholder for taxes paid by reason of such
Shareholder's ownership of Shares or for losses suffered by reason of any
changes in value of any Trust assets.
Item 30. Business and Other Connections of Investment Adviser
A description of the business of Scudder Kemper Investments, Inc., is set
forth under the captions "Prospectus Summary" and "Management of the Fund" in
the Prospectus and "Investment Management and Other Services" in the SAI part of
this Registration Statement.
The information as to the Trustees and Officers of Scudder Kemper
Investments, Inc., set forth in Form ADV of Scudder Kemper Investment, Inc.
filed with the Securities and Exchange Commission (File No. 801-252), as amended
through the date hereof, is incorporated herein by reference.
Item 31. Location of Accounts and Records
Accounts and Records of the Fund are maintained at (i) the Fund's office,
222 South Riverside Plaza, Chicago, Illinois 60606, (ii) the offices of Scudder
Kemper Investments, Inc., 345 Park Avenue, New York, New York, 10154-0010, and
(iii) the offices of Scudder Kemper Investments, Inc., 2 International Place,
Boston, Massachusetts 02110-4103.
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, maintains all the records in its capacity as custodian of
the Registrant's assets. Kemper Service Company, Post Office Box 419066, Kansas
City, Missouri 64141 maintains all the required records in its capacity as
sub-transfer agent of the Registrant.
Item 32. Management Services
Not Applicable.
Item 33. Undertakings
1. Registrant undertakes to suspend offering of its Series E Preferred Shares
until it amends its Prospectus if (a) subsequent to the effective date of
its Registration Statement, the net asset value declines more than 10
- 5 -
<PAGE> 91
percent from its net asset value as of the effective date of the
Registration Statement, or (b) the net asset value increases to an amount
greater than its net proceeds as stated in the Prospectus.
2. Not Applicable.
3. Not Applicable.
4. Not Applicable.
5. (a) That, for the purpose of determining any liability under the
Securities Act of 1933, each post- effective amendment that contains a
form of prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant under Rule 497(h) under the Securities Act of 1933 shall be
deemed to be part of this Registration Statement as of the time it was
declared effective; and
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each post- effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of securities
at that time shall be deemed to be the initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of
receipt of a written or oral request, any Statement of Additional
Information.
- 6 -
<PAGE> 92
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment company Act of 1940, the Registrant has duly caused this November
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Washington, D.C. on this 19th day of November, 1999.
KEMPER MUNICIPAL INCOME TRUST
By: /s/ Mark S. Casady*
--------------------
Mark S. Casady
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
/s/ Mark S. Casady* President (Principal Executive November 19, 1999
- ------------------------ Officer)
Mark S. Casady
/s/ James E. Akins* Trustee November 19, 1999
- ------------------------
James E. Akins
/s/ James R. Edgar* Trustee November 19, 1999
- ------------------------
James R. Edgar
/s/ Arthur T. Gottschalk* Trustee November 19, 1999
- ----------------------------
Arthur T. Gottschalk
/s/ Frederick T. Kelsey* Trustee November 19, 1999
- ----------------------------
Frederick T. Kelsey
/s/ Thomas W. Littauer* Trustee November 19, 1999
- ----------------------------
Thomas W. Littauer
- 7 -
<PAGE> 93
/s/ John G. Weithers* Trustee November 19, 1999
- ------------------------
John G. Weithers
/s/ John R. Hebble* Treasurer (Principal Financial November 19, 1999
- ------------------------ Officer)
John R. Hebble
By /s/ Robert W. Helm
- ------------------------
Robert W. Helm
Attorney-in-fact
- 8 -
<PAGE> 94
KEMPER MUNICIPAL INCOME TRUST
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
- ----------- -------
2 (g) Investment Management Agreement between the Registrant and
Scudder Kemper Investments, Inc.
2(j) Custodian Agreement between the Registrant and State Street
Bank and Trust Company.
<PAGE> 1
EXHIBIT 2(g)
INVESTMENT MANAGEMENT AGREEMENT
KEMPER MUNICIPAL INCOME TRUST
222 SOUTH RIVERSIDE PLAZA
CHICAGO, ILLINOIS 60606
SEPTEMBER 7, 1998
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
INVESTMENT MANAGEMENT AGREEMENT
Ladies and Gentlemen:
KEMPER MUNICIPAL INCOME TRUST (the "Fund") has been established as a
Massachusetts business trust to engage in the business of an investment company.
The Fund has issued common and preferred shares of beneficial interest (the
"Shares").
The Fund has selected you to act as the investment manager of the Fund and to
provide certain other services, as more fully set forth below, and you have
indicated that you are willing to act as such investment manager and to perform
such services under the terms and conditions hereinafter set forth. Accordingly,
the Fund agrees with you as follows:
1. Delivery of Documents. The Fund engages in the business of investing and
reinvesting its assets in the manner and in accordance with its investment
objectives, policies and restrictions. The Fund has furnished you with copies
properly certified or authenticated of each of the following documents related
to the Fund:
(a) The Declaration of Trust ("Declaration"), as amended to date.
(b) By-Laws of the Fund as in effect on the date hereof (the "By-Laws").
(c) Resolutions of the Trustees of the Fund and the shareholders of the
Fund selecting you as investment manager and approving the form of this
Agreement.
The Fund will furnish you from time to time with copies, properly certified or
authenticated, of all amendments of or supplements, if any, to the foregoing.
2. Portfolio Management Services. As manager of the assets of the Fund, you
shall provide continuing investment management of the assets of the Fund in
accordance with its investment objectives, policies and restrictions; the
applicable provisions of the Investment Company Act of 1940 (the "1940 Act") and
the Internal Revenue Code of 1986, as amended, (the "Code") relating to
regulated investment companies and all rules and regulations thereunder; and all
other applicable federal and state laws and regulations of which you have
knowledge; subject always to policies and instructions adopted by the Fund's
Board of Trustees. In connection therewith, you shall use reasonable efforts to
manage the Fund so that it will qualify as a regulated investment company under
Subchapter M of the Code and regulations issued thereunder. The Fund shall have
the benefit of the investment analysis and research, the review of current
economic conditions and trends and the consideration of long-range investment
policy generally available to your investment advisory clients. In managing the
Fund in accordance with the requirements set forth in this section 2, you shall
be entitled to receive and act upon advice of counsel to the Fund. You shall
also make available to the Fund promptly upon request all of the Fund's
investment records and ledgers as are necessary to assist the Fund in complying
with the requirements of the 1940 Act and other applicable laws. To the extent
required by law, you shall furnish to regulatory authorities having the
requisite authority any information or reports
<PAGE> 2
in connection with the services provided pursuant to this Agreement which may be
requested in order to ascertain whether the operations of the Fund are being
conducted in a manner consistent with applicable laws and regulations.
You shall determine the securities, instruments, investments, currencies,
repurchase agreements, futures, options and other contracts relating to
investments to be purchased, sold or entered into by the Fund and place orders
with broker-dealers, foreign currency dealers, futures commission merchants or
others pursuant to your determinations and all in accordance with Fund policies.
You shall determine what portion of the Fund's portfolio shall be invested in
securities and other assets and what portion, if any, should be held uninvested.
You shall furnish to the Fund's Board of Trustees periodic reports on the
investment performance of the Fund and on the performance of your obligations
pursuant to this Agreement, and you shall supply such additional reports and
information as the Fund's officers or Board of Trustees shall reasonably
request.
3. Administrative Services. In addition to the portfolio management services
specified above in section 2, you shall furnish at your expense for the use of
the Fund such office space and facilities in the United States as the Fund may
require for its reasonable needs, and you (or one or more of your affiliates
designated by you) shall render to the Fund administrative services on behalf of
the Fund necessary for operating as a closed-end investment company and not
provided by persons not parties to this Agreement including, but not limited to,
preparing reports to and meeting materials for the Fund's Board of Trustees and
reports and notices to Fund shareholders; supervising, negotiating contractual
arrangements with, to the extent appropriate, and monitoring the performance of,
accounting agents, custodians, depositories, transfer agents and pricing agents,
accountants, attorneys, printers, underwriters, brokers and dealers, insurers
and other persons in any capacity deemed to be necessary or desirable to Fund
operations; preparing and making filings with the Securities and Exchange
Commission (the "SEC") and other regulatory and self-regulatory organizations,
including, but not limited to, preliminary and definitive proxy materials,
post-effective amendments to the Fund's Registration Statement, and semi-annual
reports on Form N-SAR; overseeing the tabulation of proxies by the Fund's
transfer agent; assisting in the preparation and filing of the Fund's federal,
state and local tax returns; preparing and filing the Fund's federal excise tax
return pursuant to Section 4982 of the Code; providing assistance with investor
and public relations matters; monitoring the valuation of portfolio securities
and the calculation of net asset value; monitoring the registration of Shares of
the Fund under applicable federal and state securities laws; maintaining or
causing to be maintained for the Fund all books, records and reports and any
other information required under the 1940 Act, to the extent that such books,
records and reports and other information are not maintained by the Fund's
custodian or other agents of the Fund; assisting in establishing the accounting
policies of the Fund; assisting in the resolution of accounting issues that may
arise with respect to the Fund's operations and consulting with the Fund's
independent accountants, legal counsel and the Fund's other agents as necessary
in connection therewith; establishing and monitoring the Fund's operating
expense budgets; reviewing the Fund's bills; processing the payment of bills
that have been approved by an authorized person; assisting the Fund in
determining the amount of dividends and distributions available to be paid by
the Fund to its shareholders, preparing and arranging for the printing of
dividend notices to shareholders, and providing the transfer and dividend paying
agent, the custodian, and the accounting agent with such information as is
required for such parties to effect the payment of dividends and distributions;
and otherwise assisting the Fund as it may reasonably request in the conduct of
the Fund's business, subject to the direction and control of the Fund's Board of
Trustees. Nothing in this Agreement shall be deemed to shift to you or to
diminish the obligations of any agent of the Fund or any other person not a
party to this Agreement which is obligated to provide services to the Fund.
4. Allocation of Charges and Expenses. Except as otherwise specifically provided
in this section 4, you shall pay the compensation and expenses of all Trustees,
officers and executive employees of the Fund (including the Fund's share of
payroll taxes) who are affiliated persons of you, and you shall make available,
without expense to the Fund, the services of such of your directors, officers
and employees as may duly be elected officers of the Fund, subject to their
individual consent to serve and to any limitations imposed by law. You shall
provide at your expense the portfolio management services described in section 2
hereof and the administrative services described in section 3 hereof.
<PAGE> 3
You shall not be required to pay any expenses of the Fund other than those
specifically allocated to you in this section 4. In particular, but without
limiting the generality of the foregoing, you shall not be responsible, except
to the extent of the reasonable compensation of such of the Fund's Trustees and
officers as are directors, officers or employees of you whose services may be
involved, for the following expenses of the Fund: organization expenses of the
Fund (including out of-pocket expenses, but not including your overhead or
employee costs); fees payable to you and to any other Fund advisors or
consultants; legal expenses; auditing and accounting expenses; maintenance of
books and records which are required to be maintained by the Fund's custodian or
other agents of the Fund; telephone, telex, facsimile, postage and other
communications expenses; taxes and governmental fees; fees, dues and expenses
incurred by the Fund in connection with membership in investment company trade
organizations; fees and expenses of the Fund's accounting agent for which the
Fund is responsible pursuant to the terms of the Fund Accounting Services
Agreement, custodians, subcustodians, transfer agents, dividend disbursing
agents and registrars; payment for portfolio pricing or valuation services to
pricing agents, accountants, bankers and other specialists, if any; expenses of
preparing share certificates and, except as provided below in this section 4,
other expenses in connection with the issuance, offering, distribution, sale,
redemption or repurchase of securities issued by the Fund; expenses relating to
investor and public relations; expenses and fees of registering or qualifying
Shares of the Fund for sale; interest charges, bond premiums and other insurance
expense; freight, insurance and other charges in connection with the shipment of
the Fund's portfolio securities; the compensation and all expenses (specifically
including travel expenses relating to Fund business) of Trustees, officers and
employees of the Fund who are not affiliated persons of you; brokerage
commissions or other costs of acquiring or disposing of any portfolio securities
of the Fund; expenses of printing and distributing reports, notices and
dividends to shareholders; expenses of printing and mailing Prospectuses and
statements of additional information of the Fund and supplements thereto; costs
of stationery; any litigation expenses; indemnification of Trustees and officers
of the Fund; and costs of shareholders' and other meetings.
5. Management Fee. For all services to be rendered, payments to be made and
costs to be assumed by you as provided in sections 2, 3, and 4 hereof, the Fund
shall pay you in United States Dollars on the last day of each month the unpaid
balance of a fee equal to the excess of (a) 1/12 of .55 of 1 percent of the
average weekly net assets of the Fund for such month; over (b) any compensation
waived by you from time to time (as more fully described below). You shall be
entitled to receive during any month such interim payments of your fee hereunder
as you shall request, provided that no such payment shall exceed 75 percent of
the amount of your fee then accrued on the books of the Fund and unpaid.
The net asset value of the Fund shall be calculated at such time or times as the
Trustees may determine in accordance with the provisions of the 1940 Act. On
each day when net asset value is not calculated, the net asset value shall be
deemed to be the net asset value as of the close of business on the last day on
which such calculation was made for the purpose of the foregoing computations.
You may waive all or a portion of your fees provided for hereunder and such
waiver shall be treated as a reduction in purchase price of your services. You
shall be contractually bound hereunder by the terms of any publicly announced
waiver of your fee, or any limitation of the Fund's expenses, as if such waiver
or limitation were fully set forth herein.
6. Avoidance of Inconsistent Position; Services Not Exclusive. In connection
with purchases or sales of portfolio securities and other investments for the
account of the Fund, neither you nor any of your directors, officers or
employees shall act as a principal or agent or receive any commission. You or
your agent shall arrange for the placing of all orders for the purchase and sale
of portfolio securities and other investments for the Fund's account with
brokers or dealers selected by you in accordance with Fund policies. If any
occasion should arise in which you give any advice to clients of yours
concerning the Shares of the Fund, you shall act solely as investment counsel
for such clients and not in any way on behalf of the Fund.
<PAGE> 4
Your services to the Fund pursuant to this Agreement are not to be deemed to be
exclusive and it is understood that you may render investment advice, management
and services to others. In acting under this Agreement, you shall be an
independent contractor and not an agent of the Fund. Whenever the Fund and one
or more other accounts or investment companies advised by you have available
funds for investment, investments suitable and appropriate for each shall be
allocated in accordance with procedures believed by you to be equitable to each
entity. Similarly, opportunities to sell securities shall be allocated in a
manner believed by you to be equitable. The Fund recognizes that in some cases
this procedure may adversely affect the size of the position that may be
acquired or disposed of for the Fund.
7. Limitation of Liability of Manager. As an inducement to your undertaking to
render services pursuant to this Agreement, the Fund agrees that you shall not
be liable under this Agreement for any error of judgment or mistake of law or
for any loss suffered by the Fund in connection with the matters to which this
Agreement relates, provided that nothing in this Agreement shall be deemed to
protect or purport to protect you against any liability to the Fund or its
shareholders to which you would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of your duties, or
by reason of your reckless disregard of your obligations and duties hereunder.
8. Duration and Termination of This Agreement. This Agreement shall remain in
force until April 1, 1998, and continue in force from year to year thereafter,
but only so long as such continuance is specifically approved at least annually
(a) by the vote of a majority of the Trustees who are not parties to this
Agreement or interested persons of any party to this Agreement, cast in person
at a meeting called for the purpose of voting on such approval, and (b) by the
Trustees of the Fund, or by the vote of a majority of the outstanding voting
securities of the Fund. The aforesaid requirement that continuance of this
Agreement be "specifically approved at least annually" shall be construed in a
manner consistent with the 1940 Act and the rules and regulations thereunder and
any applicable SEC exemptive order therefrom.
This Agreement may be terminated with respect to the Fund at any time, without
the payment of any penalty, by the vote of a majority of the outstanding voting
securities of the Fund or by the Fund's Board of Trustees on 60 days' written
notice to you, or by you on 60 days' written notice to the Fund. This Agreement
shall terminate automatically in the event of its assignment.
This Agreement may be terminated with respect to the Fund at any time without
the payment of any penalty by the Board of Trustees or by vote of a majority of
the outstanding voting securities of the Fund in the event that it shall have
been established by a court of competent jurisdiction that you or any of your
officers or directors has taken any action which results in a breach of your
covenants set forth herein.
9. Amendment of this Agreement. No provision of this Agreement may be changed,
waived, discharged or terminated orally, but only by an instrument in writing
signed by the party against whom enforcement of the change, waiver, discharge or
termination is sought, and no amendment of this Agreement shall be effective
until approved in a manner consistent with the 1940 Act and rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
10. Limitation of Liability for Claims. The Declaration, a copy of which,
together with all amendments thereto, is on file in the Office of the Secretary
of the Commonwealth of Massachusetts, provides that the name "Kemper Municipal
Income Trust" refers to the Trustees under the Declaration collectively as
Trustees and not as individuals or personally, and that no shareholder of the
Fund, or Trustee, officer, employee or agent of the Fund, shall be subject to
claims against or obligations of the Fund to any extent whatsoever, but that the
Fund estate only shall be liable.
You are hereby expressly put on notice of the limitation of liability as set
forth in the Declaration and you agree that the obligations assumed by the Fund
pursuant to this Agreement shall be limited in all cases to the Fund and its
<PAGE> 5
assets, and you shall not seek satisfaction of any such obligation from the
shareholders or any shareholder of the Fund, or from any Trustee, officer,
employee or agent of the Fund.
11. Miscellaneous. The captions in this Agreement are included for convenience
of reference only and in no way define or limit any of the provisions hereof or
otherwise affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
In interpreting the provisions of this Agreement, the definitions contained in
Section 2(a) of the 1940 Act (particularly the definitions of "affiliated
person," "assignment" and "majority of the outstanding voting securities"), as
from time to time amended, shall be applied, subject, however, to such
exemptions as may be granted by the SEC by any rule, regulation or order.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts, provided that nothing herein shall be construed
in a manner inconsistent with the 1940 Act, or in a manner which would cause the
Fund to fail to comply with the requirements of Subchapter M of the Code.
This Agreement shall supersede all prior investment advisory or management
agreements entered into between you and the Fund.
<PAGE> 6
Advisor K
If you are in agreement with the foregoing, please execute the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Fund, whereupon this letter shall become a binding contract
effective as of the date of this Agreement.
Your very truly,
KEMPER MUNICIPAL INCOME TRUST
By: /s/ Mark S. Casady
---------------------------
Vice President
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: /s/ Steve Beckwith
----------------------------
Treasurer
<PAGE> 1
EXHIBIT 2(j)
CUSTODIAN CONTRACT
between
KEMPER MUNICIPAL INCOME TRUST
and
STATE STREET BANK AND TRUST COMPANY
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
1. Employment of Custodian and Property to be Held By It...........................................1
2. Duties of the Custodian with Respect to Property of
the Fund Held by the Custodian in the United States.............................................2
2.1 Holding Securities.......................................................................2
2.2 Delivery of Securities...................................................................2
2.3 Registration of Securities...............................................................4
2.4 Bank Accounts............................................................................4
2.5 Availability of Federal Funds............................................................5
2.6 Collection of Income.....................................................................5
2.7 Payment of Fund Monies...................................................................5
2.8 Liability for Payment in Advance of Receipt of
Securities Purchased.....................................................................7
2.9 Appointment of Agents....................................................................7
2.10 Deposit of Securities in U.S. Securities System..........................................7
2.11 Fund Assets Held in the Custodian's
Direct Paper System......................................................................8
2.12 Segregated Account.......................................................................9
2.13 Ownership Certificates for Tax Purposes .................................................9
2.14 Proxies..................................................................................9
2.15 Communications Relating to Fund Securities..............................................10
3. Duties of the Custodian with Respect to Property of
the Fund Held Outside the United States........................................................10
3.1 Appointment of Foreign Sub-Custodians...................................................10
3.2 Assets to be Held.......................................................................10
3.3 Foreign Securities Depositories.........................................................10
3.4 Agreements with Foreign Banking Institutions............................................11
3.5 Access of Independent Accountants of the Fund...........................................11
3.6 Reports by Custodian....................................................................11
3.7 Transactions in Foreign Custody Account.................................................11
3.8 Liability of Foreign Sub-Custodians.....................................................12
3.9 Liability of Custodian..................................................................12
3.10 Reimbursement for Advances..............................................................12
3.11 Monitoring Responsibilities.............................................................13
3.12 Branches of U.S. Banks..................................................................13
3.13 Tax Law.................................................................................13
</TABLE>
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
4. Payments for Sales or Repurchases or Redemptions
of Shares......................................................................................13
5. Proper Instructions............................................................................14
6. Actions Permitted without Express Authority....................................................14
7. Evidence of Authority..........................................................................15
8. Duties of Custodian with Respect to the Books of Account
and Calculations of Net Asset Value and Net Income.............................................15
9. Records........................................................................................15
10. Opinion of Fund's Independent Accountants......................................................16
11. Reports to Fund by Independent Public Accountants..............................................16
12. Compensation of Custodian......................................................................16
13. Responsibility of Custodian....................................................................16
14. Effective Period, Termination and Amendment....................................................17
15. Successor Custodian............................................................................18
16. Interpretive and Additional Provisions.........................................................19
17. Massachusetts Law to Apply.....................................................................19
18. Prior Contracts................................................................................19
19. Shareholder Communications Election............................................................19
</TABLE>
<PAGE> 4
CUSTODIAN CONTRACT
This Contract between Kemper Municipal Income Trust, a business trust
organized and existing under the laws of The Commonwealth of Massachusetts and
having its principal place of business at 222 South Riverside Plaza, Chicago,
Illinois 60606 (the "Fund"), and State Street Bank and Trust Company, a
Massachusetts trust company having its principal place of business at 225
Franklin Street, Boston, Massachusetts 02110 (the "Custodian"),
WITNESSETH:
THAT, in consideration of the mutual covenants and agreements hereinafter
contained, the parties hereto do hereby agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its assets,
including securities which it desires to be held in places within the United
States of America ("domestic securities") and securities it desires to be held
outside the United States of America ("foreign securities") pursuant to the
provisions of the Fund's declaration of trust (the "Declaration of Trust"). The
Fund agrees to deliver to the Custodian all securities and cash owned by it and
all payments of income, payments of principal or capital distributions received
by it with respect to all securities owned by the Fund from time to time, and
the cash consideration received by it for such new or treasury shares of
beneficial interest of the Fund ("Shares") as may be issued or sold from time to
time. The Custodian shall not be responsible for any property of the Fund held
or received by the Fund and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (as such term is defined in Article 5
of this Contract), the Custodian shall from time to time employ one or more
sub-custodians located in the United States of America, including any state or
political subdivision thereof and any territory over which its political
sovereignty extends (the "United States" or "U.S."), but only in accordance with
an applicable vote by the board of trustees of the Fund (the "Board of
Trustees") and provided that the Custodian shall have no more or less
responsibility or liability to the Fund on account of any actions or omissions
of any sub-custodian so employed than any such sub-custodian has to the
Custodian. The Custodian may employ as sub-custodians for the Fund's foreign
securities the foreign banking institutions and foreign securities depositories
designated in Schedule A hereto but only in accordance with the provisions of
Article 3.
<PAGE> 5
2. Duties of the Custodian with Respect to Property of the Fund Held By the
Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate for
the account of the Fund all non-cash property to be held by it in the
United States including all domestic securities owned by the Fund other
than (a) securities which are maintained in a "U.S. Securities System" (as
such term is defined in Section 2.10 of this Contract) and (b) commercial
paper of an issuer for which State Street Bank and Trust Company acts as
issuing and paying agent ("Direct Paper") which is deposited and/or
maintained in the Custodian's Direct Paper System pursuant to Section 2.11.
2.2 Delivery of Securities. The Custodian shall release and deliver domestic
securities owned by the Fund and held by the Custodian or in a U.S.
Securities System account of the Custodian, which account shall not include
any assets of the Custodian other than assets held as a fiduciary,
custodian or otherwise for its customers ("U.S. Securities System Account")
or in the Custodian's Direct Paper book-entry system account, which account
shall not include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for its customers ("Direct Paper System
Account") only upon receipt of Proper Instructions from the Fund, which may
be continuing instructions when deemed appropriate by the parties, and only
in the following cases:
1) Upon sale of such securities for the account of the Fund and receipt
of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a U.S. Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other similar
offers for securities of the Fund;
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of the
Fund or into the name of any nominee or nominees of the Custodian or
into the name or nominee name of any agent appointed pursuant to
Section 2.9 or into the name or nominee name of any sub-custodian
appointed pursuant to Article 1; or for exchange for a different
number of bonds, certificates or other evidence representing the same
aggregate face amount or number of units; provided that, in any such
case, the new securities are to be delivered to the Custodian;
<PAGE> 6
7) Upon the sale of such securities for the account of the Fund, to the
broker or its clearing agent, against a receipt, for examination in
accordance with "street delivery" custom; provided that, in any such
case, the Custodian shall have no responsibility or liability for any
loss arising from the delivery of such securities prior to receiving
payment for such securities except as may arise from the Custodian's
own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions
for conversion contained in such securities, or pursuant to any
deposit agreement; provided that, in any such case, the new securities
and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar securities
or the surrender of interim receipts or temporary securities for
definitive securities; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;
10) For delivery in connection with any loans of securities made by the
Fund, but only against receipt of adequate collateral as agreed upon
from time to time by the Custodian and the Fund, which may be in the
form of cash or obligations issued by the United States government,
its agencies or instrumentalities, except that in connection with any
loans for which collateral is to be credited to the Custodian's U.S.
Securities System Account, the Custodian will not be held liable or
responsible for the delivery of securities owned by the Fund prior to
the receipt of such collateral;
11) For delivery as security in connection with any borrowings by the Fund
requiring a pledge of assets by the Fund, but only against receipt of
amounts borrowed;
12) For delivery in accordance with the provisions of any agreement among
the Fund, the Custodian and a broker-dealer registered under the
Securities Exchange Act of 1934 (the "Exchange Act") and a member of
The National Association of Securities Dealers, Inc. ("NASD"),
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange, or of
any similar organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any agreement among
the Fund, the Custodian, and a Futures Commission Merchant registered
under the Commodity Exchange Act, relating to compliance with the
rules of the Commodity Futures Trading Commission and/or any Contract
Market, or any similar
<PAGE> 7
organization or organizations, regarding account deposits in
connection with transactions by the Fund;
14) Upon receipt of instructions from the transfer agent for the Fund (the
"Transfer Agent"), for delivery to such Transfer Agent or to the
holders of shares in connection with distributions in kind, as may be
described from time to time in the Fund's currently effective
prospectus and statement of additional information (the "Prospectus"),
in satisfaction of requests by holders of Shares for repurchase or
redemption; and
15) For any other proper corporate purpose, but only upon receipt of, in
addition to Proper Instructions from the Fund, a certified copy of a
resolution of the Board of Trustees or of the executive committee
thereof signed by an officer of the Fund and certified by the Fund's
Secretary or Assistant Secretary specifying the securities of the Fund
to be delivered, setting forth the purpose for which such delivery is
to be made, declaring such purpose to be a proper corporate purpose,
and naming the person or persons to whom delivery of such securities
shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the Fund
or in the name of any nominee of the Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively to the Fund, unless
the Fund has authorized in writing the appointment of a nominee to be used
in common with other registered investment companies having the same
investment adviser as the Fund, or in the name or nominee name of any agent
appointed pursuant to Section 2.9 or in the name or nominee name of any
sub-custodian appointed pursuant to Article 1. All securities accepted by
the Custodian on behalf of the Fund under the terms of this Contract shall
be in "street name" or other good delivery form. If, however, the Fund
directs the Custodian to maintain securities in "street name", the
Custodian shall utilize reasonable efforts only to (i) timely collect
income due the Fund on such securities and (ii) notify the Fund of relevant
corporate actions including, without limitation, pendency of calls,
maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of the Fund, subject
only to draft or order by the Custodian acting pursuant to the terms of
this Contract, and shall hold in such account or accounts, subject to the
provisions hereof, all cash received by it from or for the account of the
Fund, other than cash maintained by the Fund in a bank account established
and used in accordance with Rule 17f-3 under the Investment Company Act of
1940, as amended. Funds held by the Custodian for the Fund may be deposited
by it to its credit as Custodian in the banking department of the Custodian
or in such other banks or trust companies as it may in its discretion deem
necessary or desirable; provided, however, that every such bank or trust
company shall be qualified to act as a custodian under the Investment
Company Act of 1940, as amended (the "Investment Company Act") and that
each such bank or trust company and the funds to be deposited with each
such bank or trust company shall on
<PAGE> 8
behalf of the Fund be approved by vote of a majority of the Board of
Trustees. Such funds shall be deposited by the Custodian in its capacity as
Custodian and shall be withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon agreement between the Fund and the
Custodian, the Custodian shall, upon the receipt of Proper Instructions
from the Fund, make federal funds available to the Fund as of specified
times agreed upon from time to time by the Fund and the Custodian in the
amount of checks received in payment for Shares of the Fund which are
deposited into the Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to United States-registered securities held hereunder to which
the Fund shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and
other payments with respect to domestic bearer securities if, on the date
of payment by the issuer, such securities are held by the Custodian or its
agent thereof and shall credit such income, as collected, to the Fund's
account. Without limiting the generality of the foregoing, the Custodian
shall detach and present for payment all coupons and other income items
requiring presentation as and when they become due and shall collect
interest when due on securities held hereunder. Collection of income due
the Fund on domestic securities loaned pursuant to the provisions of
Section 2.2 (10) shall be the responsibility of the Fund; the Custodian
will have no duty or responsibility in connection therewith, other than to
provide the Fund with such information or data in its possession as may be
necessary to assist the Fund in arranging for the timely delivery to the
Custodian of the income to which the Fund is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from the Fund,
which may be continuing instructions when deemed appropriate by the
parties, the Custodian shall pay out monies of the Fund in the following
cases only:
1) Upon the purchase of domestic securities, options, futures contracts
or options on futures contracts for the account of the Fund but only
(a) against the delivery of such securities or evidence of title to
such options, futures contracts or options on futures contracts to the
Custodian (or any bank, banking firm or trust company doing business
in the United States or abroad which is qualified under the Investment
Company Act to act as a custodian and has been designated by the
Custodian as its agent for this purpose) registered in the name of the
Fund or in the name of a nominee of the Custodian referred to in
Section 2.3 hereof or in proper form for transfer; (b) in the case of
a purchase effected through a U.S. Securities System, in accordance
with the conditions set forth in Section 2.10 hereof; (c) in the case
of a purchase involving the Direct Paper System, in accordance with
the conditions set forth in Section 2.11; (d) in the case of
repurchase agreements entered into between the Fund and the Custodian,
or another bank, or a broker-dealer which is a member of NASD, (i)
against delivery of the securities either in certificate form or
through
<PAGE> 9
an entry crediting the Custodian's account at the Federal Reserve Bank
with such securities or (ii) against delivery of the receipt
evidencing purchase by the Fund of securities owned by the Custodian
along with written evidence of the agreement by the Custodian to
repurchase such securities from the Fund or (e) for transfer to a time
deposit account of the Fund in any bank, whether domestic or foreign;
such transfer may be effected prior to receipt of a confirmation from
a broker and/or the applicable bank pursuant to Proper Instructions
from the Fund as defined in Article 5;
2) In connection with conversion, exchange or surrender of securities
owned by the Fund as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued by the Fund as set
forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the Fund,
including but not limited to the following payments for the account of
the Fund: interest, taxes, management fees, accounting fees, transfer
agent fees, legal fees and operating expenses of the Fund whether or
not such expenses are to be in whole or part capitalized or treated as
deferred expenses;
5) For the payment of any dividends on Shares of the Fund declared
pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in addition to
Proper Instructions from the Fund, a certified copy of a resolution of
the Board of Trustees or of the executive committee thereof signed by
an officer of the Fund and certified by the Fund's Secretary or an
Assistant Secretary, specifying the amount of such payment, setting
forth the purpose for which such payment is to be made, declaring such
purpose to be a proper purpose, and naming the person or persons to
whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased. Except
as specifically stated otherwise in this Contract, in any and every case
where payment for purchase of domestic securities for the account of the
Fund is made by the Custodian in advance of receipt of the securities
purchased in the absence of specific written instructions from the Fund to
so pay in advance, the Custodian shall be absolutely liable to the Fund for
such securities to the same extent as if the securities had been received
by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act to act
as a custodian, as its agent to carry out such of the
<PAGE> 10
provisions of this Article 2 as the Custodian may from time to time direct;
provided, however, that the appointment of any agent shall not relieve the
Custodian of its responsibilities or liabilities hereunder.
2.10 Deposit of Securities in U.S. Securities Systems. The Custodian may deposit
and/or maintain domestic securities owned by the Fund in a clearing agency
registered with the Securities and Exchange Commission (the "SEC") under
Section 17A of the Exchange Act, which acts as a securities depository, or
in the book-entry system authorized by the U.S. Department of the Treasury
and certain federal agencies (a "U.S. Securities System") in accordance
with applicable Federal Reserve Board and SEC rules and regulations, if
any, and subject to the following provisions:
1) The Custodian may keep domestic securities of the Fund in a U.S.
Securities System provided that such securities are represented in a
U.S. Securities System Account;
2) The records of the Custodian with respect to securities of the Fund
which are maintained in a U.S. Securities System shall identify by
book-entry those securities belonging to the Fund;
3) The Custodian shall pay for domestic securities purchased for the
account of the Fund upon (i) receipt of advice from the U.S.
Securities System that such securities have been transferred to the
U.S. Securities System Account and (ii) the making of an entry on the
records of the Custodian to reflect such payment and transfer for the
account of the Fund; the Custodian shall transfer securities sold for
the account of the Fund upon (i) receipt of advice from the U.S.
Securities System that payment for such securities has been
transferred to the U.S. Securities System Account and (ii) the making
of an entry on the records of the Custodian to reflect such transfer
and payment for the account of the Fund. Copies of all advices from
the U.S. Securities System of transfers of securities for the account
of the Fund shall identify the Fund, be maintained for the Fund by the
Custodian and be provided to the Fund at its request. Upon request,
the Custodian shall furnish the Fund confirmation of each transfer to
or from the account of the Fund in the form of a written advice or
notice and shall furnish to the Fund copies of daily transaction
sheets reflecting each day's transactions in the U.S. Securities
System for the account of the Fund;
4) The Custodian shall provide the Fund with any report obtained by the
Custodian on the U.S. Securities System's accounting system, internal
accounting control and procedures for safeguarding securities
deposited in the U.S. Securities System;
5) The Custodian shall have received from the Fund the initial or annual
certificate, as the case may be, required by Article 14 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage to the
Fund resulting from use of the U.S.
<PAGE> 11
Securities System by reason of any negligence, misfeasance or
misconduct of the Custodian or any of its agents or of any of its or
their employees or from failure of the Custodian or any such agent to
enforce effectively such rights as it may have against the U.S.
Securities System; at the election of the Fund, it shall be entitled
to be subrogated to the rights of the Custodian with respect to any
claim against the U.S. Securities System or any other person which the
Custodian may have as a consequence of any such loss or damage if and
to the extent that the Fund has not been made whole for any such loss
or damage.
2.11 Fund Assets Held in the Custodian's Direct Paper System. The Custodian may
deposit and/or maintain securities owned by the Fund in the Direct Paper
System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System will
be effected in the absence of Proper Instructions from the Fund;
2) The Custodian may keep securities of the Fund in the Direct Paper
System only if such securities are represented in the Direct Paper
System Account which shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian or otherwise for
customers;
3) The records of the Custodian with respect to securities of the Fund
which are maintained in the Direct Paper System shall identify by
book-entry those securities belonging to the Fund;
4) The Custodian shall pay for securities purchased for the account of
the Fund upon the making of an entry on the records of the Custodian
to reflect such payment and transfer of securities to the account of
the Fund. The Custodian shall transfer securities sold for the account
of the Fund upon the making of an entry on the records of the
Custodian to reflect such transfer and receipt of payment for the
account of the Fund;
5) The Custodian shall furnish the Fund confirmation of each transfer to
or from the account of the Fund, in the form of a written advice or
notice, of Direct Paper on the next business day following such
transfer and shall furnish to the Fund copies of daily transaction
sheets reflecting each day's transaction in the Direct Paper System
for the account of the Fund; and
6) Upon the reasonable request of the Fund, the Custodian shall provide
the Fund with any report on the Direct Paper System's system of
internal accounting controls which had been prepared as of the time of
such request.
2.12 Segregated Account. The Custodian shall upon receipt of Proper Instructions
from the Fund establish and maintain a segregated account or accounts for
and on behalf of the Fund, into
<PAGE> 12
which account or accounts may be transferred cash and/or securities,
including securities maintained in a U.S. Securities System Account by the
Custodian pursuant to Section 2.10 hereof (i) in accordance with the
provisions of any agreement among the Fund, the Custodian and a
broker-dealer registered under the Exchange Act and a member of the NASD
(or any futures commission merchant registered under the Commodity Exchange
Act), relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange (or the
Commodity Futures Trading Commission or any registered Contract Market), or
of any similar organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund, (ii) for purposes
of segregating cash or government securities in connection with options
purchased, sold or written by the Fund or commodity futures contracts or
options thereon purchased or sold by the Fund, (iii) for the purposes of
compliance by the Fund with the procedures required by Investment Company
Act Release No. 10666, or any subsequent release or releases of the SEC
relating to the maintenance of segregated accounts by registered investment
companies and (iv) for other proper corporate purposes, but only, in the
case of this clause (iv), upon receipt of, in addition to Proper
Instructions from the Fund, a certified copy of a resolution of the Board
of Trustees or of the executive committee thereof signed by an officer of
the Fund and certified by the Fund's Secretary or an Assistant Secretary,
setting forth the purpose or purposes of such segregated account and
declaring such purposes to be proper corporate purposes.
2.13 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to domestic securities of the Fund held by it and in connection
with transfers of such securities.
2.14 Proxies. The Custodian shall, with respect to the domestic securities held
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of
the Fund or a nominee of the Fund, all proxies, without indication of the
manner in which such proxies are to be voted, and shall promptly deliver to
the Fund such proxies, all proxy soliciting materials and all notices
relating to such securities.
2.15 Communications Relating to Fund Securities. Subject to the provisions of
Section 2.3, the Custodian shall transmit promptly to the Fund all written
information (including, without limitation, pendency of calls and
maturities of domestic securities and expirations of rights in connection
therewith and notices of exercise of call and put options written by the
Fund and the maturity of futures contracts purchased or sold by the Fund)
received by the Custodian from issuers of the securities being held for the
Fund. With respect to tender or exchange offers, the Custodian shall
transmit promptly to the Fund all written information received by the
Custodian from issuers of the securities whose tender or exchange is sought
and from the party (or his agents) making the tender or exchange offer. If
the Fund desires to take action with respect to any tender offer, exchange
offer or any other similar
<PAGE> 13
transaction, the Fund shall notify the Custodian at least three (3)
business days prior to the date on which the Custodian is to take such
action.
3. Duties of the Custodian with Respect to Property of the Fund Held Outside
of the United States
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
instructs the Custodian to employ as sub-custodians for the Fund's
securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories designated
on Schedule A hereto (the "foreign sub-custodians"). Upon receipt of Proper
Instructions, together with a certified resolution of the Board of
Trustees, the Custodian and the Fund may agree to amend Schedule A hereto
from time to time to designate additional foreign banking institutions and
foreign securities depositories to act as sub-custodian. Upon receipt of
Proper Instructions, the Fund may instruct the Custodian to cease the
employment of any one or more such foreign sub-custodians for maintaining
custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5 under
the Investment Company Act of 1940, and (b) cash and cash equivalents in
such amounts as the Custodian or the Fund may determine to be reasonably
necessary to effect the Fund's foreign securities transactions. The
Custodian shall identify on its books as belonging to the Fund, the foreign
securities of the Fund held by each foreign sub-custodian.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon in
writing by the Custodian and the Fund, assets of the Funds shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as sub-custodians
pursuant to the terms hereof. Where possible, such arrangements shall
include entry into agreements containing the provisions set forth in
Section 3.4 hereof.
3.4 Agreements with Foreign Banking Institutions. Each agreement with a foreign
banking institution shall provide that (a) the assets of the Fund will not
be subject to any right, charge, security interest, lien or claim of any
kind in favor of the foreign banking institution or its creditors or agent,
except a claim of payment for their safe custody or administration; (b)
beneficial ownership of the assets of the Fund will be freely transferable
without the payment of money or value other than for custody or
administration; (c) adequate records will be maintained identifying the
assets as belonging to the Custodian on behalf of its customers; (d)
officers of or auditors employed by, or other representatives of the
Custodian, including to the extent permitted under applicable law the
independent public accountants for the Fund, will be given access to the
books and records of the foreign banking institution relating to its
actions under its agreement with the Custodian; and (e)
<PAGE> 14
assets of the Fund held by the foreign sub-custodian will be subject only
to the instructions of the Custodian or its agents.
3.5 Access of Independent Accountants of the Fund. Upon request of the Fund,
the Custodian will use reasonable efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of
any foreign banking institution employed as a foreign sub-custodian insofar
as such books and records relate to the performance of such foreign banking
institution under its agreement with the Custodian.
3.6 Reports by Custodian. The Custodian will supply to the Fund from time to
time, as mutually agreed upon, statements in respect of the securities and
other assets of the Fund held by foreign sub-custodians, including but not
limited to an identification of entities having possession of Fund
securities and other assets and advices or notifications of any transfers
of securities to or from each custodial account maintained by a foreign
banking institution for the Custodian on behalf of its customers
indicating, as to securities acquired for the Fund the identity of the
entity having physical possession of such securities.
3.7 Transactions in Foreign Custody Account. (a) Except as otherwise provided
in paragraph (b) of this Section 3.7, the provision of Sections 2.2 and 2.7
of this Contract shall apply, mutatis mutandis to the foreign securities of
the Fund held outside the United States by foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of the Fund
and delivery of securities maintained for the account of the Fund may be
effected in accordance with the customary established securities trading or
securities processing practices and procedures in the jurisdiction or
market in which the transaction occurs, including, without limitation,
delivering securities to the purchaser thereof or to a dealer therefor (or
an agent for such purchaser or dealer) against a receipt with the
expectation of receiving later payment for such securities from such
purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may be
maintained in the name of such entity's nominee to the same extent as set
forth in Section 2.3 of this Contract, and the Fund agrees to hold any such
nominee harmless from any liability as a holder of record of such
securities.
3.8 Liability of Foreign Sub-Custodians. Each agreement pursuant to which the
Custodian employs a foreign banking institution as a foreign sub-custodian
shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the
Custodian and the Fund from and against any loss, damage, cost, expense,
liability or claim arising out of or in connection with the institution's
performance of such obligations. At the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with respect to
any claims against a foreign banking institution as a consequence of any
such loss, damage, cost, expense, liability or claim if and to the extent
<PAGE> 15
that the Fund has not been made whole for any such loss, damage, cost,
expense, liability or claim.
3.9 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set forth
with respect to sub-custodians generally in this Contract and, regardless
of whether assets are maintained in the custody of a foreign banking
institution, a foreign securities depository or a branch of a U.S. bank as
contemplated by Section 3.12 hereof, the Custodian shall not be liable for
any loss, damage, cost, expense, liability or claim resulting from
nationalization, expropriation, currency restrictions, or acts of war or
terrorism or any loss where the sub-custodian has otherwise exercised
reasonable care. Notwithstanding the foregoing provisions of this Section
3.9, in delegating custody duties to State Street London Ltd., the
Custodian shall not be relieved of any responsibility to the Fund for any
loss due to such delegation, except such loss as may result from (a)
political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation, nationalization, insurrection,
civil strife or armed hostilities) or (b) other losses (excluding a
bankruptcy or insolvency of State Street London Ltd. not caused by
political risk) due to Acts of God, nuclear incident or other losses under
circumstances where the Custodian and State Street London Ltd. have
exercised reasonable care.
3.10 Reimbursement for Advances. If the Fund requires the Custodian to advance
cash or securities for any purpose for the benefit of the Fund including
the purchase or sale of foreign exchange or of contracts for foreign
exchange, or in the event that the Custodian or its nominee shall incur or
be assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Contract, except
such as may arise from its or its nominee's own negligent action, negligent
failure to act or willful misconduct, any property at any time held for the
account of the Fund shall be security therefor and should the Fund fail to
repay the Custodian promptly, the Custodian shall be entitled to utilize
available cash and to dispose of the Fund's assets to the extent necessary
to obtain reimbursement.
3.11 Monitoring Responsibilities. The Custodian shall furnish annually to the
Fund (during the month of June) information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be similar
in kind and scope to that furnished to the Fund in connection with the
initial approval of this Contract. In addition, the Custodian will promptly
inform the Fund in the event that the Custodian learns of a material
adverse change in the financial condition of a foreign sub-custodian or any
material loss of the assets of the Fund or in the case of any foreign
sub-custodian not the subject of an exemptive order from the SEC is
notified by such foreign sub-custodian that there appears to be a
substantial likelihood that its shareholders' equity will decline below
$200 million (U.S. dollars or the local currency equivalent thereof) or
that its shareholders' equity has declined below $200 million (in each case
computed in accordance with generally accepted U.S. accounting principles).
<PAGE> 16
3.12 Branches of U.S. Banks. (a) Except as otherwise set forth in this Contract,
the provisions hereof shall not apply where the custody of Fund assets are
maintained in a foreign branch of a banking institution which is a "bank"
as defined by Section 2(a)(5) of the Investment Company Act meeting the
qualification set forth in Section 26(a) of said Act. The appointment of
any such branch as a sub-custodian shall be governed by Article 1 of this
Contract.
(b) Cash held for the Fund in the United Kingdom shall be maintained in an
interest bearing account established for the Fund with the Custodian's
London branch, which account shall be subject to the direction of the
Custodian, State Street London Ltd. or both.
3.13 Tax Law. The Custodian shall have no responsibility or liability for any
obligations now or hereafter imposed on the Fund or the Custodian as
custodian of the Fund by the tax law of the United States. It shall be the
responsibility of the Fund to notify the Custodian of the obligations
imposed on the Fund or the Custodian as custodian of the Fund by the tax
law of jurisdictions other than those mentioned in the above sentence,
including responsibility for withholding and other taxes, assessments or
other governmental charges, certifications and governmental reporting. The
sole responsibility of the Custodian with regard to such tax law shall be
to use reasonable efforts to assist the Fund with respect to any claim for
exemption or refund under the tax law of jurisdictions for which the Fund
has provided such information.
4. Payments for Sales or Repurchases or Redemptions of Shares
The Custodian shall receive from the distributor for the Shares or from the
Transfer Agent and deposit into the account of the Fund such payments as are
received for Shares of the Fund issued or sold from time to time by the Fund.
The Custodian will provide timely notification to the Fund and the Transfer
Agent of any receipt by it of payments for Shares of the Fund.
From such funds as may be available for the purpose but subject to the
limitations of the Declaration of Trust and any applicable votes of the Board of
Trustees pursuant thereto, the Custodian shall, upon receipt of instructions
from the Transfer Agent, make funds available for payment to holders of Shares
who have delivered to the Transfer Agent a request for redemption or repurchase
of their Shares. In connection with the redemption or repurchase of Shares, the
Custodian is authorized upon receipt of instructions from the Transfer Agent to
wire funds to or through a commercial bank designated by the redeeming
shareholders. In connection with the redemption or repurchase of Shares, the
Custodian shall honor checks drawn on the Custodian by a holder of Shares, which
checks have been furnished by the Fund to the holder of Shares, when presented
to the Custodian in accordance with such procedures and controls as are mutually
agreed upon from time to time between the Fund and the Custodian.
<PAGE> 17
5. Proper Instructions
Proper Instructions as used throughout this Contract means a writing signed
or initialed by one or more person or persons as the Board of Trustees shall
have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes them
to have been given by a person authorized to give such instructions with respect
to the transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. If given pursuant to procedures to be agreed upon by the
Custodian and the Fund, Proper Instructions may include communications effected
directly between electro-mechanical or electronic devices. For purposes of this
Section, Proper Instructions shall include instructions received by the
Custodian pursuant to any three - party agreement which requires a segregated
asset account in accordance with Section 2.12.
6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from the
Fund:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Contract, provided that all such payments shall be accounted for to
the Fund;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Fund, checks, drafts and
other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Fund except as
otherwise directed by the Board of Trustees.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a certified copy of a vote of the Board of
Trustees as conclusive evidence (a) of the authority of any person to act in
accordance with such vote or (b) of any determination or of any action by the
Board of Trustees pursuant to the Declaration of Trust as described in such
vote, and such vote may be considered as in full force and effect until receipt
by the Custodian of written notice to the contrary.
<PAGE> 18
8. Duties of Custodian with Respect to the Books of Account and Calculation of
Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Trustees to keep the books of
account of the Fund and/or compute the net asset value per share of the
outstanding Shares of the Fund or, if directed in writing to do so by the Fund,
shall itself keep such books of account and/or compute such net asset value per
share. If so directed, the Custodian shall also calculate daily the net income
of the Fund as described in the Prospectus and shall advise the Fund and the
Transfer Agent daily of the total amount of such net income and, if instructed
in writing by an officer of the Fund to do so, shall advise the Transfer Agent
periodically of the division of such net income among its various components.
The calculations of the net asset value per share and the daily income of the
Fund shall be made at the time or times described from time to time in the
Prospectus.
9. Records
The Custodian shall with respect to the Fund create and maintain all
records relating to its activities and obligations under this Contract in such
manner as will meet the obligations of the Fund under the Investment Company
Act, with particular attention to Section 31 thereof and Rules 31a-1 and 31a-2
thereunder. All such records shall be the property of the Fund and shall at all
times during the regular business hours of the Custodian be open for inspection
by duly authorized officers, employees or agents of the Fund and employees and
agents of the SEC. The Custodian shall, at the Fund's request, supply the Fund
with a tabulation of securities owned by the Fund and held by the Custodian and
shall, when requested to do so by the Fund and for such compensation as shall be
agreed upon between the Fund and the Custodian, include certificate numbers in
such tabulations.
10. Opinion of Fund's Independent Accountants
The Custodian shall take all reasonable action, as the Fund may from time
to time request, to obtain from year to year favorable opinions from the Fund's
independent accountants with respect to its activities hereunder in connection
with the preparation of the Fund's Form N-1A and N-SAR or other annual reports
to the SEC and with respect to any other SEC requirements.
11. Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund at such times as the Fund may
reasonably require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for safeguarding
securities, futures contracts and options on futures contracts, including
securities deposited and/or maintained in a Securities System, relating to the
services provided by the Custodian under this Contract; such reports shall be of
sufficient scope and
<PAGE> 19
in sufficient detail, as may reasonably be required by the Fund to provide
reasonable assurance that any material inadequacies would be disclosed by such
examination, and, if there are no such inadequacies, the reports shall so state.
12. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian as agreed upon from time to time between the Fund and
the Custodian.
13. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Contract and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties, including any
futures commission merchant acting pursuant to the terms of a three-party
futures or options agreement. The Custodian shall be held to the exercise of
reasonable care in carrying out the provisions of this Contract, but shall be
kept indemnified by and shall be without liability to the Fund for any action
taken or omitted by it in good faith without negligence. It shall be entitled to
rely on and may act upon advice of counsel (who may be counsel for the Fund) on
all matters, and shall be without liability for any action reasonably taken or
omitted pursuant to such advice.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States (except as specifically provided in Section 3.9)
and, regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a U.S. bank
as contemplated by Section 3.12 hereof, the Custodian shall not be liable for
any loss, damage, cost, expense, liability or claim resulting from, or caused
by, the direction of or authorization by the Fund to maintain custody or any
securities or cash of the Fund in a foreign country including, but not limited
to, losses resulting from nationalization, expropriation, currency restrictions,
or acts of war or terrorism.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to the Custodian.
<PAGE> 20
If the Fund requires the Custodian, its affiliates, subsidiaries or agents,
to advance cash or securities for any purpose (including but not limited to
securities settlements, the purchase or sale of foreign exchange or of contracts
for foreign exchange, and assumed settlement), or in the event that the
Custodian or its nominee shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the performance
of this Contract, except such as may arise from its or its nominee's own
negligent action, negligent failure to act or willful misconduct, any property
at any time held for the account of the applicable Fund shall be security
therefor and should the Fund fail to repay the Custodian promptly, the Custodian
shall be entitled to utilize available cash and to dispose of the Fund's assets
to the extent necessary to obtain reimbursement.
14. Effective Period, Termination and Amendment
This Contract shall become effective as of the date of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however that the Custodian shall not with respect to the Fund act under Section
2.10 hereof in the absence of receipt of an initial certificate of the Secretary
or an Assistant Secretary that the Board of Trustees has approved the initial
use of a particular Securities System by the Fund, as required by Rule 17f-4
under the Investment Company Act and that the Custodian shall not with respect
to the Fund act under Section 2.11 hereof in the absence of receipt of an
initial certificate of the Secretary or an Assistant Secretary that the Board of
Trustees has approved the initial use of the Direct Paper System by the Fund;
provided further, however, that the Fund shall not amend or terminate this
Contract in contravention of any applicable federal or state regulations, or any
provision of the Declaration of Trust, and further provided, that the Fund may
at any time by action of the Board of Trustees (i) substitute another bank or
trust company for the Custodian by giving notice as described above to the
Custodian or (ii) immediately terminate this Contract in the event of the
appointment of a conservator or receiver for the Custodian by the Comptroller of
the Currency or upon the happening of a like event at the direction of an
appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall likewise
reimburse the Custodian for its costs, expenses and disbursements.
15. Successor Custodian
If a successor custodian shall be appointed by the Board of Trustees, the
Custodian shall, upon termination, deliver to such successor custodian at the
offices of the Custodian, duly endorsed and in the form for transfer, all
securities of the Fund then held by it hereunder and shall transfer to an
account of the successor custodian all of the securities of the Fund held in a
Securities System.
<PAGE> 21
If no such successor custodian shall be appointed, the Custodian shall, in like
manner, upon receipt of a certified copy of a vote of the Board of Trustees,
deliver at the offices of the Custodian and transfer such securities, funds and
other properties in accordance with such vote. In the event that no written
order designating a successor custodian or certified copy of a vote of the Board
of Trustees shall have been delivered to the Custodian on or before the date
when such termination shall become effective, then the Custodian shall have the
right to deliver to a bank or trust company, which is a "bank" as defined in the
Investment Company Act, doing business in Boston, Massachusetts, or New York,
New York, of its own selection, having an aggregate capital, surplus, and
undivided profits, as shown by its last published report, of not less than
$25,000,000, all securities, funds and other properties held by the Custodian
and all instruments held by the Custodian relative thereto and all other
property held by it under this Contract on behalf of the Fund and to transfer to
an account of such successor custodian all of the securities of the Fund held in
any Securities System. Thereafter, such bank or trust company shall be the
successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Trustees to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
16. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and the
Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Declaration of Trust. No interpretive or additional provisions made as
provided in the preceding sentence shall be deemed to be an amendment of this
Contract.
17. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
18. Prior Contracts
<PAGE> 22
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund and the Custodian relating to the custody of the
assets of the Fund.
19. Shareholder Communications Election
SEC Rule 14b-2 requires banks which hold securities for the account of
customers to respond to requests by issuers of securities for the names,
addresses and holdings of beneficial owners of securities of that issuer held by
the bank unless the beneficial owner has expressly objected to disclosure of
this information. In order to comply with the rule, the Custodian needs the Fund
to indicate whether it authorizes the Custodian to provide the Fund's name,
address, and share position to requesting companies whose securities the Fund
owns. If the Fund tells the Custodian "no", the Custodian will not provide this
information to requesting companies. If the Fund tells the Custodian "yes" or
does not check either "yes" or "no" below, the Custodian is required by the rule
to treat the Fund as consenting to disclosure of this information for all
securities owned by the Fund or any funds or accounts established by the Fund.
For the Fund's protection, the Rule prohibits the requesting company from using
the Fund's name and address for any purpose other than corporate communications.
Please indicate below whether the Fund consents or objects by
checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name,
address, and share positions.
NO [ ] The Custodian is not authorized to release the Fund's name,
address, and share positions.
<PAGE> 23
Cust. K
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of March 15, 1999.
ATTEST KEMPER MUNICIPAL INCOME TRUST
By: /s/ Mark S. Casady
- -------------------------- ------------------------------------
Name: Name: Mark S. Casady
Title: President
ATTEST STATE STREET BANK AND TRUST COMPANY
By: /s/ Ronald E. Logue
- -------------------------- ------------------------------------
Marc L. Parsons Ronald E. Logue
Associate Counsel Executive Vice President
