<PAGE> 1
As filed with the Securities and Exchange Commission on November 17, 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. 1
[ ] Post-Effective Amendment No.
and/or
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 11
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 17, 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
2
<PAGE> 7
and Series A-D Preferred Shares. The Fund could
be adversely affected if computer systems on
which the Fund relies are unable 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
3
<PAGE> 8
shares as of the business day preceding that
dividend payment date.
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
4
<PAGE> 9
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 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
certain circumstances. 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 certain 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, 1994-1998 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 FOR THE FISCAL YEARS ENDED NOVEMBER 30,
MAY 31,* ------------------------------------------------------------------
1999 1993
(UNAUDITED) 1998 1997 1996 1995 1994 (UNAUDITED)
----------- -------- -------- -------- -------- -------- -----------
<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
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
<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% 10.51%
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)
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 1994-1998 have been audited by
Ernst & Young LLP, the Fund's independent auditors.
<TABLE>
<CAPTION>
SIX MONTHS
PERIOD
ENDED FOR THE FISCAL YEARS ENDED NOVEMBER 30
MAY 31 -----------------------------------------------------------------------------
1999
SERIES A (UNAUDITED) 1998 1997 1996 1995 1994
- -------- ----------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total Number of Shares
Outstanding.................... 10,800 10,800 10,800 10,800 10,800 10,800
Asset Coverage Per Share*...... $ 15,800 $ 16,100 $ 16,000 $ 15,800 $ 15,800 $ 14,600
Involuntary Liquidating
Preference Per Share......... $ 5,000 $ 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 $ 5,000
<CAPTION>
FOR THE FISCAL YEARS ENDED NOVEMBER 30
-----------------------------------------------------------------------------
1993 1992 1991 1990 1989
SERIES A (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- -------- ----------- ----------- ----------- ----------- -----------
<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*...... $ 16,500 $ 15,700 $ 15,100 $ 14,500 $ 14,500
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
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
PERIOD
ENDED FOR THE FISCAL YEARS ENDED NOVEMBER 30
MAY 31 -----------------------------------------------------------------------------
1999
SERIES B (UNAUDITED) 1998 1997 1996 1995 1994
- -------- ----------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total Number of Shares
Outstanding.................... 10,700 10,700 10,700 10,700 10,700 10,700
Asset Coverage Per Share*...... $ 15,800 $ 16,100 $ 16,000 $ 15,800 $ 15,800 $ 14,600
Involuntary Liquidating
Preference Per Share......... $ 5,000 $ 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 $ 5,000
<CAPTION>
FOR THE FISCAL YEARS ENDED NOVEMBER 30
-----------------------------------------------------------------------------
1993 1992 1991 1990 1989
SERIES B (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- -------- ----------- ----------- ----------- ----------- -----------
<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*...... $ 16,500 $ 15,700 $ 15,100 $ 14,500 $ 14,500
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
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
PERIOD
ENDED FOR THE FISCAL YEARS ENDED NOVEMBER 30
MAY 31 -----------------------------------------------------------------------------
1999
SERIES C (UNAUDITED) 1998 1997 1996 1995 1994
- -------- ----------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total Number of Shares
Outstanding.................... 10,800 10,800 10,800 10,800 10,800 10,800
Asset Coverage Per Share*...... $ 15,800 $ 16,100 $ 16,000 $ 15,800 $ 15,800 $ 14,600
Involuntary Liquidating
Preference Per Share......... $ 5,000 $ 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 $ 5,000
<CAPTION>
FOR THE FISCAL YEARS ENDED NOVEMBER 30
-----------------------------------------------------------------------------
1993 1992 1991 1990 1989
SERIES C (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- -------- ----------- ----------- ----------- ----------- -----------
<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*...... $ 16,500 $ 15,700 $ 15,100 $ 14,500 $ 14,500
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
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
PERIOD
ENDED FOR THE FISCAL YEARS ENDED NOVEMBER 30
MAY 31 -----------------------------------------------------------------------------
1999
SERIES D (UNAUDITED) 1998 1997 1996 1995 1994
- -------- ----------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total Number of Shares
Outstanding.................... 10,700 10,700 10,700 10,700 10,700 10,700
Asset Coverage Per Share*...... $ 15,800 $ 16,100 $ 16,000 $ 15,800 $ 15,800 $ 14,600
Involuntary Liquidating
Preference Per Share......... $ 5,000 $ 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 $ 5,000
<CAPTION>
FOR THE FISCAL YEARS ENDED NOVEMBER 30
-----------------------------------------------------------------------------
1993 1992 1991 1990 1989
SERIES D (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- -------- ----------- ----------- ----------- ----------- -----------
<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*...... $ 16,500 $ 15,700 $ 15,100 $ 14,500 $ 14,500
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
</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. During temporary defensive periods, the dividend rates on the Series
E Preferred Shares will be more likely to approximate the net return on the
Fund's investment portfolio, with the result that the benefits of leverage to
the holders of common shares may be reduced or eliminated during these periods.
This is because the spread between interest rates being paid on the preferred
shares and interest being earned on the Fund's portfolio investments will have
narrowed, leaving less excess interest to be allocated to the common shares.
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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<PAGE> 20
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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<PAGE> 21
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 certain circumstances.
If an attempt is made to sell the Series E Preferred Shares 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 Association of Securities
Dealers Automated Quotations
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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 (one vote per $5,000 liquidation preference) 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 certain of the
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 certain circumstances. 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 more units of Series E Preferred Shares are not
remarketed, all Series E Preferred Shares will have
29
<PAGE> 34
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
36
<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.
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 owned. 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.
IN CONNECTION WITH THE INVESTMENT OBJECTIVE AND POLICIES DESCRIBED IN THE
FUND'S PROSPECTUS, THE FUND MAY ENGAGE IN CERTAIN INVESTMENT AND HEDGING
TECHNIQUES AS SET FORTH 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 MAY BE LIMITED BY CERTAIN CONDITIONS IMPOSED BY MOODY'S
OR S&P. SEE THE PROSPECTUS UNDER "RATING AGENCY GUIDELINES AND ASSET COVERAGE"
AND "INVESTMENT OBJECTIVE AND POLICIES."
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
ALLOCATION OF BROKERAGE IS SUPERVISED BY THE ADVISER
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.
38
<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 is filed herewith.
(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 is filed herewith.
(e) Not Applicable
(f) Not Applicable
(g) Investment Management Agreement between the Registrant and Scudder
Kemper Investments, Inc.*
(h) Form of Underwriting Agreement between the Registrant and Salomon
Smith Barney Inc is filed herewith.
(i) Not Applicable
(j) Custodian Agreement between the Registrant and State Street Bank and
Trust Company.*
(k) (1) Form of Remarketing Agreement between the Registrant and
Salomon Smith Barney Inc. is filed herewith.
(k) (2) Form of Amended and Restated Agency Agreement between the
Registrant and Deutsche Bank, as the Registrar, Transfer
Agent and Paying Agent is filed herewith.
(l) Opinion and Consent of Dechert Price & Rhoads is filed herewith.
<PAGE> 87
(m) Not Applicable.
(n) (1) Consent of Ernst & Young LLP is filed herewith.
(o) Not Applicable
(p) Not Applicable
(q) Not Applicable
- -------------------------
*Previously filed with the Fund's Registration Statement dated October 8, 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 17th 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 17, 1999
- ------------------------ Officer)
Mark S. Casady
/s/ James E. Akins* Trustee November 17, 1999
- ------------------------
James E. Akins
/s/ James R. Edgar* Trustee November 17, 1999
- ------------------------
James R. Edgar
/s/ Arthur T. Gottschalk* Trustee November 17, 1999
- ----------------------------
Arthur T. Gottschalk
/s/ Frederick T. Kelsey* Trustee November 17, 1999
- ----------------------------
Frederick T. Kelsey
/s/ Thomas W. Littauer* Trustee November 17, 1999
- ----------------------------
Thomas W. Littauer
- 7 -
<PAGE> 93
/s/ John G. Weithers* Trustee November 17, 1999
- ------------------------
John G. Weithers
/s/ John R. Hebble* Treasurer (Principal Financial November 17, 1999
- ------------------------ Officer)
John R. Hebble
By /s/ Robert W. Helm
- ------------------------
Robert W. Helm
Attorney-in-fact
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KEMPER MUNICIPAL INCOME TRUST
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
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2 (a) (2) Amended and Restated Certificate of Designation for Preferred
Shares
2 (d) Form of Specimen Share Certificate representing the
Registrant's Series E Preferred Shares of beneficial
interest.
2 (h) Form of Underwriting Agreement between the Registrant and
Salomon Smith Barney, Inc.
2 (k) (1) Form of Remarketing Agreement between the Registrant and
Salomon Smith Barney Inc.
2 (k) (2) Form of Amended and Restated Agency Agreement between the
Registrant and Deutsche Bank, as the Registrar, Transfer
Agent and Paying Agent
2 (l) Opinion and Consent of Dechert Price & Rhoads
2 (n) (1) Consent of Ernst & Young LLP
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EXHIBIT 2(a)(2)
KEMPER MUNICIPAL INCOME TRUST
AMENDED AND RESTATED CERTIFICATE OF DESIGNATION
FOR PREFERRED SHARES
KEMPER MUNICIPAL INCOME TRUST, a Massachusetts business trust, hereby
certifies that, pursuant to the authority contained in Article III of its
Amended and Restated Agreement and Declaration of Trust, its Board of Trustees
has adopted the following resolution restating the designations and powers,
rights, preferences and privileges of its previously issued class and various
series of preferred shares of beneficial interest and creating an additional
series of the class of its preferred shares of beneficial interest as follows:
RESOLVED, That, pursuant to authority expressly granted to and vested in
the Board of Trustees by the provisions of the Amended and Restated Agreement
and Declaration of Trust of Kemper Municipal Income Trust (the "Fund") , the
Board of Trustees hereby restates the issuance by the Fund of 43,000 preferred
shares of beneficial interest, $.01 par value, and hereby fixes the designations
and the powers, rights, preferences and privileges and the qualifications,
limitations and restrictions of the shares of such class and series below as
Series A, B, C and D; and authorizes the issuance by the Fund of 10,000
preferred shares of beneficial interest, $.01 par value, and hereby fixes the
designations and the powers, rights, preferences and privileges and the
qualifications, limitations and restrictions of the shares of such class and
series as Series E, as follows:
PREFERRED SHARES
The designation of the preferred shares of beneficial interest, $.01 par
value, of the Fund is Preferred Shares of Beneficial Interest (the "Preferred
Shares"), consisting of 53,000 Preferred Shares that the Fund has authority to
issue. The Preferred Shares shall be designated and issuable in series as
follows:
SERIES A: A series of 10,800 Preferred Shares is hereby designated
"Preferred Shares, Series A." Each share of Preferred Shares, Series A shall be
issued on July 27, 1989; have an initial Dividend Payment Date (as herein
defined) of August 22, 1989; and have such other preferences, limitations and
relative voting rights, in addition to those required by applicable law, as are
set forth in this resolution. The Preferred Shares, Series A shall constitute a
separate series of Preferred Shares of the Fund, and each share of Preferred
Shares, Series A shall be identical.
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SERIES B: A series of 10,700 Preferred Shares is hereby designated
"Preferred Shares, Series B." Each share of Preferred Shares, Series B shall be
issued on July 27, 1989; have an initial Dividend Payment Date of August 29,
1989; and have such other preferences, limitations and relative voting rights,
in addition to those required by applicable law, as are set forth in this
resolution. The Preferred Shares, Series B shall constitute a separate series of
Preferred Shares of the Fund, and each share of Preferred Shares, Series B shall
be identical.
SERIES C: A series of l0,800 Preferred Shares is hereby designated
"Preferred Shares, Series C." Each share of Preferred Shares, Series C shall be
issued on July 27, 1989; have an initial Dividend Payment Date of September 5,
1989; and have such other preferences, limitations and relative voting rights,
in addition to those required by applicable law, as are set forth in this
resolution. The Preferred Shares, Series C shall constitute a separate series of
Preferred Shares of the Fund, and each share of Preferred Shares, Series C shall
be identical.
SERIES D: A series of 10,700 Preferred Shares is hereby designated
"Preferred Shares, Series D." Each share of Preferred Shares, Series D shall be
issued on July 27, 1989; have an initial Dividend Payment Date of September 12,
1989; and have such other preferences, limitations and relative voting rights,
in addition to those required by applicable law, as are set forth in this
resolution. The Preferred Shares, Series D shall constitute a separate series of
Preferred Shares of the Fund, and each share of Preferred Shares, Series D shall
be identical.
SERIES E: A series of 10,000 Preferred Shares is hereby designated
"Preferred Shares, Series E." Each share of Preferred Shares, Series E shall be
issued on November , 1999; have an initial Dividend Payment Date of December
22, 1999; and have such other preferences, limitations and relative voting
rights, in addition to those required by applicable law, as are set forth in
this resolution. The Preferred Shares, Series E shall constitute a separate
series of Preferred Shares of the Fund, and each share of Preferred Shares,
Series E shall be identical.
Each Preferred Share within a particular series shall have the identical
Dividend Period and Dividend Rate as each other share within such series.
1. Definitions
Adjusted Value shall have the meaning described in paragraph 6.
Agent Member shall mean a designated member of the Depository who will
maintain records for a beneficial owner of the Preferred Shares.
Agreement and Declaration shall mean the Amended and Restated Agreement
and Declaration of Trust of the Fund dated October 7, 1988.
Allocation Notice Date shall have the meaning set forth in paragraph 2.
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Business Day shall mean 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.
Certificates of Deposit shall mean certificates of deposit which, at the
time of the Fund's investment therein, or contractual commitment providing for
such investment, (i) have remaining terms to maturity of one year or less, (ii)
are rated at least "P-1" by Moody's and "A-l+" by Standard & Poor's, and (iii)
are issued by an obligor whose long term unsecured debt obligations (other than
such obligation the ratings of which are based on the credit of a person or
entity other than such obligor) are rated at least "Aa3" by Moody's and "AA-" by
Standard & Poor's.
Certificate of Designation shall mean the Fund's Amended and Restated
Certificate of Designation executed on the date set forth herein.
Certificate of Determination shall mean a certificate in substantially
the following form completed to the extent applicable:
Certificate of Determination
Certificate No.____________________ Date________________
The Dividend Periods for the Preferred Shares listed on the attachment
hereto shall be as specified thereon and shall commence on and end on the date
or dates specified thereon. The Dividend Rate (expressed as a percentage per
annum) for each such Dividend Period shall be as specified on the attachment
hereto.
The undersigned, being a duly elected or appointed _______________ of the
Fund, hereby certifies that this Certificate of Determination was duly approved
by the Board of Trustees of the Fund, a committee thereof or an officer
designated by the Board of Trustees.
------------------------------------------------
Certificate of Rating Agency Required Asset Coverage shall mean a
certificate delivered to the Paying Agent setting forth, among other things, the
Fund's Compliance with Rating Agency Required Asset Coverage.
Code shall mean the Internal Revenue Code of 1986, as amended from time
to time.
Commercial Paper Dealer shall mean Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Goldman, Sachs & Co. and such other dealers as the Fund may
from time to time appoint, or in lieu of any thereof, their respective
affiliates or successors.
Commercial Paper Rate on any date shall mean (i) the interest equivalent
of the rate on 60-day commercial paper placed on behalf of issuers whose
corporate bonds are rated "AA" by Standard & Poor's and "Aa" by Moody's, or the
equivalent of such rating by another rating
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agency, as such rate is made available by the Federal Reserve Bank of New York
on a discount basis or otherwise for the Business Day immediately preceding such
date, or (ii) if the Federal Reserve Bank of New York does not make available
such a rate, then the arithmetic average of the interest equivalent of such
rates on commercial paper placed on behalf of such issuers, as quoted on a
discount basis or otherwise by the Commercial Paper Dealers to the Remarketing
Agent for the close of business on the Business Day immediately preceding such
date. If any Commercial Paper Dealer does not quote a rate required to determine
the Commercial Paper Rate, the Commercial Paper Rate shall be determined on the
basis of the quotation or quotations furnished by the remaining Commercial Paper
Dealer or Dealers or, if none of the Commercial Paper Dealers quotes such a
rate, by any substitute Commercial Paper Dealer or Dealers selected by the Fund
to provide such rate or rates not being supplied by any Commercial Paper Dealer.
Common Shares shall mean the common shares of beneficial interest, $.01
par value, of the Fund.
Cure Date shall have the meaning set forth in paragraph 3.
Date of Original Issue shall mean the date on which the Fund originally
issues each series of Preferred Shares.
Depository shall mean the organization appointed by the Fund to perform
depository functions with respect to the Preferred Shares.
Dividend Payment Date shall mean with respect to any Dividend Period the
Business day next succeeding the last day thereof.
Dividend Period shall mean, as to each Preferred Share of a series, the
period commencing on the Date of Original Issue and ending on the date specified
for such series on the Date of Original Issue and thereafter, as to such series,
the period commencing on the day following each Dividend Period for such series
and ending on the 28th day thereafter, except as provided in paragraph 2(b).
Dividend Rate shall mean each rate at which a dividend shall be payable
on each series of Preferred Shares as described in paragraph 2.
Eligible Securities shall mean, if rated by Standard & Poor's, securities
which are Standard & Poor'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.
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Escrowed Bonds shall mean municipal securities that (i) have been
determined to be legally defeased in accordance with Standard & Poor's legal
defeasance criteria, (ii) have been determined to be economically defeased in
accordance with Standard & Poor's economic defeasance criteria and assigned a
rating of "AAA" by Standard & Poor's, (iii) are not rated by Standard & Poor's
but have been determined to be legally defeased by Moody's, or (iv) have been
determined to be economically defeased by Moody's and assigned a rating no lower
than the rating that is Moody's equivalent of "AAA" by Standard & Poor's rating.
Gross-up Payment shall mean, in respect of any dividend, a payment to a
holder of 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 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 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.
Inverse Floater shall mean trust certificates or other instruments
evidencing interests in one or more municipal securities that qualify as
Standard & Poor's Eligible Securities (and satisfy the issuer and size
requirements of the definition of Standard & Poor'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.
Mandatory Redemption Date shall have the meaning set forth in paragraph
3(b) below.
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
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.
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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 shall mean Moody's Investors Service, Inc.
Moody's Adjusted Value shall have the meaning set forth in paragraph 6.
Moody's Eligible Securities shall mean each security eligible for
consideration under Moody's guidelines in effect as of the date of this
Certificate of Designation.
Moody's Security Discount Factors shall have the meaning set forth in
paragraph 6.
1940 Act shall mean the Investment Company Act of 1940, as amended from
time to time.
1940 Act Cure Date, with respect to the failure by the Fund to maintain
the 1940 Act Asset Coverage as of the last day of each month, means the last
Business Day of the following such month.
1940 Act Asset Coverage means asset coverage, as defined in section 18(h)
of the 1940 Act, of at least 200% of the aggregate liquidation preference with
respect to all outstanding senior securities of the Fund which are stock,
including all outstanding Preferred Shares and other preferred shares of
beneficial interest of the Fund (or such other asset coverage as may 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).
Non-Payment Period with respect to all of the outstanding Preferred
Shares of a series shall mean (i) the period commencing on a Dividend Payment
Date for such series of Preferred Shares, if the Fund fails to declare on the
Business Day preceding such Dividend Payment Date for payment on such Dividend
Payment Date the full amount of dividends payable on such series of Preferred
Shares, and ending on and including the day next preceding the Dividend Payment
Date next succeeding the Business Day on which the full amount of all unpaid
dividends with respect to such series of Preferred Shares shall have been so
declared or (ii) the period commencing on a Dividend Payment Date for such
series of Preferred Shares, if the Fund fails to deposit for payment on such
Dividend Payment Date the full amount of such dividends payable on such series
of Preferred Shares and ending on and including the day next preceding the
Dividend Payment Date next succeeding the Business Day on which the full amount
of such dividends have been so deposited.
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Non-Payment Rate shall mean on any date during a Non-Payment Period on
which a Dividend Rate is determined, 200% of the Commercial Paper Rate.
Other Securities shall mean other securities or obligations, including
mortgage loans and other mortgage related securities not otherwise included in
the definition of Eligible Securities, if (i) the inclusion of such securities
or obligations is deemed by the Board of Trustees to be in the interests of the
Fund, (ii) Moody's and Standard & Poor's or if both such Rating Agencies are
not then rating the Preferred Shares, the one which is, has advised in writing
that the inclusion of such other securities in Rating Agency Required Assets
will not adversely affect their then-current ratings of the Preferred Shares,
and (iii) such securities are eligible for investment by the Fund under
applicable laws and regulations.
Owner shall mean, with respect to each Preferred Share, the owner of
record thereof as shown from time to time on the Stock Register.
Paying Agent shall mean, at any time, the agent appointed by the Fund to
pay dividends and other amounts due on the Preferred Shares and to perform such
other duties as are provided herein.
Pricing Service shall mean S&P J.J. Kenny Evaluation Services, Muller
Data Corp., or any other pricing service approved by Standard & Poor's or
Moody's, or both, if appropriate.
Rating Agency shall mean Moody's or Standard & Poor's or if Moody's or
Standard & Poor's shall no longer engage in the business of issuing ratings for
securities comparable to the Preferred Shares, such other entity so engaged as
shall be selected by the Fund.
Rating Agency Required Assets shall mean Eligible Securities and Other
Securities, both as defined herein.
Rating Agency Required Asset Coverage as of any Valuation Date, shall
mean 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 pursuant to paragraph 2(b) of this Certificate of
Designation, with respect to shares of such series, such Maximum Rate shall be
the
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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, pursuant to paragraph 2(b) of this
Certificate of Designation, 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 2(g), 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 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
Standard & Poor's 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 Standard & Poor's 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).
Remarketing Agent shall mean at any time, the entity or entities
appointed by the Fund to act on its behalf in establishing Dividend Rates and
Dividend Periods for Preferred Shares and to act on behalf of beneficial owners
in remarketing such Preferred Shares.
Remarketing Conditions shall mean the factors listed in paragraph 2(d)
below.
Seven-Day Dividend Period shall mean a Dividend Period of seven days;
provided that if the seventh day of such period shall not be a day immediately
preceding a Business Day, such Seven-Day Dividend Period shall end on the next
day which immediately precedes a Business Day, and the subsequent Dividend
Period (if a Seven-Day Dividend Period) shall be decreased by the number of days
by which such Seven-Day Dividend Period was increased, subject to the
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requirement that such subsequent Seven-Day Dividend Period must end on a day
immediately preceding a Business Day.
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-l+" by Standard & Poor's, 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 deposits of, or
bankers' 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 or a person
or entity other than such 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 (i)
credit ratings from Moody's of at least "P-1" and Standard & Poor's of at least
"A-1+", in the case of commercial paper, and (ii) a credit rating from Moody's
of at least "Aa3" and from Standard & Poor's 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 Standard & Poor's 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
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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.
Standard & Poor's shall mean Standard & Poor's Rating Services, Inc., a
division of the McGraw-Hill Companies, Inc.
Standard & Poor's Adjusted Value shall mean the Market Value of a
Standard & Poor's Eligible Security divided by the Standard & Poor's Eligible
Security Discount Factors.
Standard & Poor's Eligible Securities shall have the meaning set forth in
paragraph 6.
Standard & Poor's Security Discount Factors shall have the meaning set
forth in paragraph 6.
Stock Register shall mean the register of the Fund identifying the Owners
of the Preferred Shares, which may be maintained by the Paying Agent.
Taxable Allocation shall have the meaning set forth in paragraph 2.
Unit shall mean 20 or more Preferred Shares.
U.S. Treasury Securities shall mean interest bearing obligations issued
and fully guaranteed as to principal and interest by the United States (but not
its agencies or instrumentalities).
Valuation Date shall mean the date on which the Rating Agency Required
Asset Coverage must be calculated, i.e. each Business Day.
Value shall have the meaning described in paragraph 6.
Volatility Factor shall mean, as of any Valuation Date, a multiplicative
factor equal to 228% for Dividend Periods of lengths as described in paragraph
2.
2. Dividends. Dividends on each Preferred Share shall be cumulative from
the Date of Original Issue and shall be payable in arrears, when, as and if
declared by the Board of Trustees out of funds available therefor, at the rates,
on the dates, for the periods and otherwise in the manner provided in this
paragraph 2.
(a) Initial Dividend Periods and Dividend Rates. The initial Dividend
Period and the Dividend Rate and Dividend Payment Date therefor for each series
of Preferred Shares shall be as set forth in a Certificate of Determination. The
initial Dividend Period for each Preferred Share shall commence on the Date of
Original Issue.
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(b) Subsequent Dividend Periods. Except as provided above with respect
to the initial Dividend Period for each series of Preferred Shares and except as
provided below with respect to a Seven-Day Dividend Period, Preferred Shares of
a series shall have a 28-day Dividend Period subject to the following
adjustments: (i) if a Dividend Period ends on a day which is not immediately
preceding a Business Day, such 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 preceding Dividend Period was
increased; (ii) with respect to a Dividend Period which is not a Seven-Day
Dividend Period and which was immediately preceded by one or more Seven-Day
Dividend Periods, such Dividend Period shall be decreased or increased by the
smallest number of days, if any, necessary for such Dividend Period to end on
the day such Dividend Period would have ended if it had not been preceded by one
or more Seven-Day Dividend Periods; and (iii) the Remarketing Agent, in its
discretion, may from time to time, subject to the requirements of (i) and (ii)
above, adjust the normal 28-day Dividend Period for a series of Preferred Shares
to a period not less than seven days nor more than 30 days to assist in the
remarketing process and such Dividend Period shall, as soon as possible within
the limits set forth herein, thereafter be adjusted so as to return to the
normal 28-day Dividend Period ending on the day it would have ended had no
adjustment been made.
Each Dividend Period for each series of Preferred Shares during a
Non-Payment Period in respect of a series of Preferred Shares shall be,
automatically, a Seven-Day Period. If, for any reason, (i) the Remarketing Agent
fails to establish a Dividend Rate for any series of Preferred Shares, (ii)
there is no Remarketing Agent for the Preferred Shares, or (iii) a Preferred
Share of a series is not remarketed at $5,000 on the day of its tender, all
Preferred Shares of that series will have successive Seven-Day Dividend Periods
until the next Dividend Period on the first day of which all Preferred Shares of
that series tendered for remarketing have been remarketed. Upon giving of notice
of redemption of any Preferred Share, each subsequent Dividend Period for such
Preferred Share shall end on or prior to the day next preceding the redemption
date therefor.
(c) Subsequent Dividend Rates. Subsequent to its initial Dividend
Period, (A) the Dividend Rate for each Preferred Share of a series during each
Dividend Period in respect of such series which is not a Seven-Day Dividend
Period shall be the Dividend Rate, which shall not exceed the Maximum Rate,
established for such Dividend Period for such Preferred Share by the Remarketing
Agent in the manner provided herein and (B) the Dividend Rate for each Preferred
Share of a series during a Seven-Day Dividend Period which is not during a
Non-Payment Period shall be the Maximum Rate and the Dividend Rate for each
Preferred Share of a series during a Seven-Day Dividend Period which is during a
Non-Payment Period shall be the Non-Payment Rate.
(d) Determination of Dividend Periods and Rates for Remarketed
Preferred Shares. Subject to clauses (a), (b) and (c) of this paragraph 2, the
Remarketing Agent for each Preferred Share shall establish (i) a Dividend Period
for Preferred Shares, Series A; Preferred Shares, Series B; Preferred Shares,
Series C; Preferred Shares, Series D and Preferred Shares, Series E of 28 days,
and (ii) that Dividend Rate (which shall not exceed the Maximum Rate) for
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<PAGE> 12
each Dividend Period for each such series which it shall determine would be the
rate, but no higher than the rate, which would permit all of the Preferred
Shares of such series to be remarketed at $5,000 per Preferred Share. In
establishing each Dividend Rate, the Remarketing Agent shall take into account
the following factors ("Remarketing Conditions"): (i) short-term and long-term
market rates and indices of such 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 Preferred Shares, (iv)
industry and financial conditions which may affect the Preferred Shares, (v) the
number of Preferred 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 Preferred
Shares prior to the determination of the Dividend Rate for that Dividend Period,
the effect of any Federal income tax on the 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.
(e) Certificate of Determination. On each day on which any series of
Preferred Shares shall begin a new Dividend Period, the Board of Trustees or its
delegate shall approve the Dividend Period and the Dividend Rate therefor and a
Certificate of Determination setting forth such Dividend Period and Dividend
Rate shall be prepared and executed by a trustee, the president, any vice
president, the treasurer, any assistant treasurer, the secretary or any
assistant secretary of the Fund. In preparing a Certificate of Determination,
the Dividend Period and the Dividend Rate of Preferred Shares of a series shall
be as established by the Remarketing Agent.
(f) Computation of Dividends. Each Dividend Rate shall be expressed as
a percentage per annum. Dividends in respect of each series of Preferred Shares
shall be payable on each Dividend Payment Date for such series of Preferred
Shares, for the Dividend Period commencing on the Dividend Payment Date
immediately preceding such Dividend Payment Date and ending on the day
immediately preceding such Dividend Payment Date, in an amount equal to $5,000
multiplied by the Dividend Rate applicable to such Dividend Period for such
series of Preferred Shares. Dividends shall be calculated on the basis of a year
of 365/366 days for the actual number of days elapsed.
(g) Payment of Dividends. (i) Current Dividends. Not later than 12:00
noon, New York City time on the Business Day immediately preceding each Dividend
Payment Date for each series of Preferred Shares, the Fund, to the extent it
shall have funds available therefor out of income earned on the Fund's
investments, shall deposit with the Paying Agent sufficient funds for the
payment of the dividend, if declared, on such series of Preferred Shares payable
on such Dividend Payment Date, together with irrevocable instructions to the
Paying Agent to apply such funds and the proceeds therefrom to the payment of
such dividend on such Dividend Payment Date and, if the Stock Register shall not
be maintained by the Paying Agent, together with instructions relating to the
manner of payment and the addresses of the Owners to whom payment is to be made.
Each such dividend shall be paid to the Owner of each Preferred Share of such
series as of the close of business on the record date therefor, which shall be
the fifth day
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<PAGE> 13
preceding such Dividend Payment Date. Nevertheless, no dividends shall be
declared or paid on any Dividend Payment Date for any series of Preferred
Shares, unless full cumulative dividends on all Preferred Shares payable on all
Dividend Payment Dates prior to or concurrent with such Dividend Payment Date
shall have been or contemporaneously shall be declared and paid or funds for the
payment thereof set apart with the Paying Agent. In addition, dividends on
Preferred Shares will be designated as exempt-interest dividends up to the
proportionate amount of tax-exempt income of the Fund allocable to the Preferred
Shares for purposes of Section 852 of the Code; provided, however, that to the
extent required under the Code, the Fund shall designate such dividends as
exempt-interest and capital gain dividends (with the amount not so designated to
be treated as taxable income) in the amounts required under the Code.
(ii) Dividends in Arrears. Dividends in arrears for any past
Dividend Period may be declared by the Board of Trustees and paid on any date
fixed by the Board of Trustees, whether or not a regular Dividend Payment Date,
to the Owners of Preferred Shares on the record date therefor, which shall not
be more than 15 days before such Dividend Payment Date, as may be fixed by the
Board of Trustees. If all dividends in arrears on all Preferred Shares have not
been declared and paid, or funds for the payment thereof set apart, payment of
dividends in arrears shall be made in order of Dividend Payment Dates,
commencing with the earliest as provided below. If the amount of any such
payment does not fully provide for all dividends in arrears, any such 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 shall be made pro rata with respect to all
Preferred Shares entitled to a dividend payment as of such Dividend Payment Date
in proportion to the aggregate amounts remaining due in respect of such
Preferred Shares as of such Dividend Payment Date. No interest or sum of money
in lieu of interest shall be payable in respect of any dividend payment which
may be in arrears.
(iii) Method of Payment. Dividends on the Preferred Shares will be
paid to the Depository which will credit such dividends to the accounts of the
Agent Members of the beneficial owners as of the Business Day immediately
preceding the Dividend Payment Date. Payments will be made in accordance with
the Depository's normal procedures.
(h) Limitations. So long as any of the Preferred Shares shall remain
outstanding, the Fund shall not declare, pay or set aside for payment any
dividend or other distribution in respect of any of the Common Shares or
purchase or otherwise acquire for consideration any Common Shares, unless full
cumulative dividends on all Preferred Shares for all past Dividend Periods ended
on or prior to the date of such action shall have been declared and paid or
sufficient funds set aside for the payment thereof. Owners of Preferred Shares
shall not be entitled to any dividends in excess of full cumulative dividends as
provided in this paragraph 3 except as the Board may declare in order to
preserve the Fund's status as a regulated investment company under the Code.
(i) Gross-up Payments Holders of the Preferred Shares shall be
entitled to receive, when, as and if declared by the Board of Trustees, out of
funds legally available therefor
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<PAGE> 14
in accordance with the Agreement and Declaration and applicable law, dividends
in an amount equal to the aggregate Gross-up Payments as follows:
(i) Periods of 28 Days or Less. If, in the case of any 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 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 such
allocation is made retroactively as a result of the redemption of all or a
portion of the outstanding 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 Preferred Shares to send such notice with a
Gross-up Payment to each holder of such shares that was entitled to such
dividend payment during such calendar year at such holder's address as the same
appears or last appeared on the record books of the Fund.
(ii) Periods Greater Than 28 Days. If, in the case of any Dividend
Period of more than 28 days, the Fund makes a Taxable Allocation to a dividend
paid on Preferred Shares, 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 Preferred Shares to send
such notice with a Gross-up Payment to each holder of shares that was entitled
to such dividend payment during such calendar year at such holder's address as
the same appears or last appeared on the record books of the Fund.
(iii) Internal Revenue Service Determination of Allocations 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 Internal Revenue Service
to be allocable in a manner different from that allocated by the Fund.
(iv) Notification of Allocations. Whenever the Fund intends to
include any net capital gain or other income taxable for Federal income tax
purposes in any dividend on 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 ("Allocation Notice Date"). Whenever the Remarketing Agent receives
such 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 Preferred Shares believed
by it to be interested in purchasing Preferred Shares in the remarketing
process.
3. Redemption.
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<PAGE> 15
(a) Optional Redemption. (i) Subject to the provisions of subparagraph
(iv) of this paragraph (a), to the extent permitted under the 1940 Act and
Massachusetts law and upon notice mailed by first class mail to its Owners no
more than 60 and no less than 10 days prior to the date fixed for redemption,
Preferred Shares of any series may be redeemed, at the option of the Fund, as a
whole or from time to time in part, on the second Business Day preceding any
Dividend Payment Date for shares of such series, out of funds legally available
therefor, at a redemption price per share equal to the sum of $5,000 plus an
amount equal to accumulated but unpaid dividends thereon (whether or not earned
or declared) to (but not including) the date fixed for redemption; provided,
however, that (1) shares of a series may not be redeemed in part if after such
partial redemption fewer than 2500 shares of such series remain outstanding; and
(2) unless otherwise provided herein, Preferred Shares of a series are
redeemable by the Fund during the Dividend Period thereof only on the second
Business Day next preceding the last Dividend Payment Date for such Dividend
Period.
(ii) If fewer than all of the outstanding Preferred Shares are to
be redeemed pursuant to subparagraph (i) of this paragraph (a), the number of
Preferred Shares of such series to be redeemed shall be determined by the Board
of Trustees, and such shares shall be redeemed pro rata from holders of shares
of such series in proportion to the number of shares of such series held by such
holders.
(iii) Subject to the provisions of subparagraph (iv) of this
paragraph (a), shares of any series of Preferred Shares may be redeemed, at the
option of the Fund, as a whole but not in part, out of funds legally available
therefor, on the first day following any Dividend Period thereof at a redemption
price per share equal to the sum of $5,000 plus an amount equal to accumulated
but unpaid dividends thereon (whether or not earned or declared) to (but not
including) to the date fixed for redemption.
(iv) The Fund may not on any date mail a notice of redemption
pursuant to paragraph (d)(i) of this paragraph 3 in respect of a redemption
contemplated to be effected pursuant to this paragraph (a) unless on such date
(a) the Fund has available deposit securities with maturity or tender dates not
later than the day preceding the applicable redemption date and having a value
not less than the amount (including any applicable premium) due to holders of
Preferred Shared by reason of the redemption of such shares on such redemption
date and (b) the Adjusted Value of Eligible Securities at least equal the Rating
Agency Required Asset Coverage, and would at least equal the Rating Agency
Required Asset Coverage immediately subsequent to such redemption if such
redemption were to occur on such date.
(b) Mandatory Redemption. If the Rating Agency Required Asset Coverage
is not met for eight consecutive Business Days or if the Fund fails to maintain
the 1940 Act Asset Coverage and such failure is not cured in accordance with
paragraph 5 on or before the 1940 Act Cure Date (each of such eighth consecutive
Business Day and the 1940 Act Cure Date is herein referred to as a "Cure Date"),
then the Fund shall (i) mail a notice of redemption to the Owners of the
Preferred Shares and the Paying Agent on a date which is at least 10 days prior
to
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<PAGE> 16
the redemption date for the Preferred Shares, such redemption date being not
later than the 30th day following such Cure Date (the "Mandatory Redemption
Date"), and (ii) redeem on the Mandatory Redemption Date fixed in such notice,
out of funds available therefor, at a redemption price equal to $5,000 per
share, plus in each case an amount equal to accumulated dividends on such
Preferred Shares (whether or not declared) to the Mandatory Redemption Date, the
number of Preferred Shares equal to the lesser of (A) the minimum number of
Preferred Shares the redemption of which, if deemed to have occurred immediately
prior to the opening of business on such Cure Date would, together with all
other preferred shares of beneficial interest of the Fund subject to redemption,
have caused the Rating Agency Required Asset Coverage or 1940 Act Asset
Coverage, as the case may be, to have been met on such Cure Date and (B) the
maximum number of Preferred Shares, together with any other preferred shares of
beneficial interest of the Fund subject to redemption, that can be redeemed out
of funds expected to be available therefor on such Mandatory Redemption Date. In
determining the number of Preferred Shares of a series required to be redeemed
in accordance with this paragraph 3(b), the Fund shall allocate the number of
Preferred Shares required to be redeemed in order to meet the Rating Agency
Required Asset Coverage or 1940 Act Asset Coverage pro rata among each series of
Preferred Shares. Funds for the redemption of the number of Preferred Shares
required to be redeemed pursuant to this paragraph 3(b) shall be deposited with
the Paying Agent by noon, New York City Time, on the Business Day immediately
following the Cure Date. If the Fund does not have funds available for the
redemption on the Mandatory Redemption Date of all the Preferred Shares to be
redeemed pursuant to paragraph 3(b)(ii)(A) or if the Fund is otherwise unable to
effect such redemption on or prior to 30 days after such Cure Date, the Fund
shall redeem those Preferred Shares which it was unable to redeem on the
earliest practicable date next following the day on which the Fund shall first
have funds available for the redemption of such Preferred Shares as shall be
specified on like notice of redemption delivered to the Owners and the Paying
Agent. Notwithstanding the fact that the Fund shall not have redeemed the full
number of Preferred Shares required to restore the Rating Agency Required Asset
Coverage or the 1940 Act Asset Coverage as contemplated above, dividends shall
be declared and paid on the outstanding Preferred Shares.
(c) Restrictions on Redemption of Preferred Shares. Notwithstanding
the provisions of this paragraph 3, Preferred Shares may not be redeemed, other
than in whole, unless, at the redemption date all accumulated dividends on the
outstanding Preferred Shares for all Dividend Periods ending on or prior to such
redemption date, shall have been or, contemporaneously are being paid, or
sufficient funds for the payment thereof shall have been or, contemporaneously
are being deposited with the Paying Agent.
(d) Redemption Procedure. (i) Notice. Notice of redemption of
Preferred Shares shall be addressed to the Owners thereof at their addresses
appearing on the Stock Register and mailed within the time periods specified in
paragraph 3(a) and 3(b) above by first class mail, postage prepaid. The Fund
shall provide the Paying Agent with written notice of the redemption and the
information contained in the notice of redemption at least one day prior to the
date the notice of redemption is mailed to the Owners of the Preferred Shares.
For purposes of the calculation of the date of redemption and the dates on which
notices are given pursuant to
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<PAGE> 17
this paragraph 3(d), a notice of redemption shall be deemed to be given on the
day such notice is first so mailed. Each such notice shall set forth (A) the
redemption date, (B) the quantity, series designation and CUSIP number of the
Preferred Shares to be redeemed, (C) the redemption price (specifying the amount
of accumulated dividends to be included therein), (D) that dividends on the
Preferred Shares to be redeemed will cease to accumulate on such redemption
date, (E) the provision of this resolution under which redemption shall be made,
and (F) the place or places where Owners may surrender their Preferred Shares
and obtain payment of the redemption price. No defect in any notice of
redemption or in the mailing thereof shall affect the validity of the redemption
proceedings of Preferred Shares as to which no defect shall have occurred. In
the event the Fund obtains appropriate exemptive or no-action relief from the
staff of the Securities and Exchange Commission, the number of days notice
required for a mandatory redemption may be reduced to such number of days as the
Board of Trustees shall determine if Standard & Poor's and Moody's each has
agreed or if both such Rating Agencies are not then rating the Preferred Shares,
the one which has agreed, that the revised notice provision would not adversely
affect its then current rating of the Preferred Shares.
(ii) Selection of Preferred Shares. If fewer than all of the
outstanding Preferred Shares are to be redeemed on any date, the Preferred
Shares to be redeemed shall be selected by the Fund or its agents by lot or such
other method as the Board shall determine to be fair and equitable, subject to
paragraph (a)(ii) above and, in the case of a Mandatory Redemption, the
requirement that Preferred Shares must be redeemed pro rata among all series. In
the case of a redemption under paragraph 3(a) above, the Fund may apply the
aforementioned procedures to one series of Preferred Shares rather than across
the entire class of Preferred Shares.
(iii) Deposit of Funds. Not later than 12:00 noon, New York City
time, on the date on which notice is given pursuant to paragraph 3(a) above (or
any such date as may be required pursuant to mandatory redemption as set forth
in paragraph 3(b) above), the Fund shall deposit with the Paying Agent funds
sufficient to redeem the Preferred Shares to be redeemed on such date and shall
give to the Paying Agent irrevocable instructions and authority to apply such
funds and the proceeds therefrom to the payment of the redemption price, plus
accumulated dividends, whether or not earned or declared, upon surrender of such
Preferred Shares. Upon the failure of the Fund to deposit such funds, the Fund
will immediately 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 this paragraph. Neither the Preferred Shares to be redeemed nor
the funds so deposited with the Paying Agent shall be included in or reflected
in any calculation of Rating Agency Required Asset Coverage as of a Valuation
Date occurring on or subsequent to the date of such deposit.
(iv) Effect of Deposit. If notice of redemption shall have been
given, upon the irrevocable deposit of funds sufficient to effect such
redemption, all rights of the Owners of the Preferred Shares so called for
redemption shall cease, except the right of such Owners to receive the
redemption price, plus accumulated dividends, whether or not earned or declared,
but without interest, and such Preferred Shares shall no longer be deemed to be
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<PAGE> 18
outstanding for any purpose. The Fund shall 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 the Preferred Shares so redeemed shall
have no claim to any such interest. Any funds so deposited which shall be
unclaimed at the end of one year from such redemption date shall be paid by the
Paying Agent to the Fund upon its request. Thereupon, the Paying Agent shall be
relieved of all responsibility to the Owners of such Preferred Shares; and such
Owners shall look only to the Fund for payment.
(e) Purchase of the Preferred Shares. Nothing contained in this
resolution shall limit any ability which the Fund may otherwise have to purchase
or otherwise acquire any Preferred Shares at any price so long as, at the time
of any such purchase, there is no arrearage in the payment of dividends on any
Preferred Shares and the Rating Agency Required Asset Coverage and 1940 Act
Asset Coverage are met, after giving effect to such purchase or acquisition, on
the date thereof. Not later than the close of business on the date of such
acquisition, the Fund shall deliver to the Paying Agent a Certificate of Rating
Agency Required Asset Coverage demonstrating compliance with this paragraph
3(e), with the mathematical accuracy of any calculations set forth in such
Certificate of Rating Agency Required Asset Coverage confirmed in writing by the
Fund's independent certified public accountants.
(f) Status of Redeemed or Purchased Preferred Shares. Any Preferred
Shares at any time purchased, redeemed or otherwise acquired by the Fund shall
become treasury shares and may be reissued by the Fund.
4. Voting Rights.
(a) General. (i) In addition to any voting rights granted to the
Preferred Shares pursuant to the 1940 Act, Owners of the Preferred Shares shall
be entitled to one vote for each Preferred Share held on each matter submitted
to a vote of shareholders of the Fund and, except as otherwise provided in the
Agreement and Declaration or by law, the holders of Preferred Shares, including
any other preferred shares of beneficial interest of the Fund, and of Common
Shares shall vote together as a single class; provided that (A) at any meeting
of the shareholders of the Fund held for the election of trustees the holders of
a plurality of the outstanding Preferred Shares and any other preferred shares
of beneficial interest of the Fund, represented in person or by proxy at said
meeting shall be entitled as a class, to the exclusion of the holders of all
other securities and classes of beneficial interests of the Fund, to elect two
trustees of the Fund, each Preferred Share and any other preferred shares of
beneficial interest of the Fund entitling the holder thereof to one vote, (B) at
any meeting of the shareholders of the Fund held for the purpose of increasing
or decreasing the number of Preferred Shares of a previously designated series
authorized to be issued, the holders of Preferred Shares of the series affected
by such increase or decrease, represented in person or by proxy at such meeting,
shall be entitled as a class, to the exclusion of the holders of all other
Preferred Shares and other shares of beneficial interest of the Fund, to vote
with respect to such increase or decrease, each Preferred Share of such series
entitling the holder thereof to one vote, (C) at any meeting of the shareholders
of the Fund held to amend, alter or repeal any of the preferences, rights or
powers
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<PAGE> 19
of the Preferred Shares, or any series thereof, the holders of the Preferred
Shares, or series of shares, as the case may be, represented in person or by
proxy at said meeting shall be entitled as a class, to the exclusion of the
holders of all other shares of beneficial interest of the Fund, to vote on such
preferences, rights or powers of the Preferred Shares or series thereof (D) at
any meeting of the shareholders of the Fund held to approve any plan of
reorganization affecting the Preferred Shares or any action requiring a vote of
security holders under Section 13(a) of the 1940 Act, the holders of the
Preferred Shares and any other preferred shares of beneficial interest of the
Fund represented in person or by proxy at said meeting shall be entitled, as a
class, to the exclusion of the holders of all other securities and classes of
beneficial interest of the Fund to vote on such plan of reorganization or action
requiring a vote of security holders under Section 13(a) of the 1940 Act, and
(E) except as otherwise provided in the Agreement and Declaration or by law, the
holders of Preferred Shares of each individual series, as a separate series,
shall vote, to the exclusion of the holders of all other series of Preferred
Shares, as a single 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.
Nothing in this section shall be interpreted to restrict the ability of the
Trustees, without shareholder approval, to establish and designate additional
series of preferred shares, consistent with the terms of the Agreement and
Declaration and applicable law provided however, that for so long as any
Preferred Shares are outstanding and Moody's or Standard & Poor's, or both, are
rating such shares, the Fund will not issue any additional shares of any class
or series of preferred shares ranking on a parity with the Preferred Shares with
respect to the payments of dividends and the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Fund, unless it has
received written confirmation from Moody's or Standard & Poor's, or both, as
appropriate, that any such action would not impair the ratings then assigned by
such rating agency to the Preferred Shares. If neither Moody's nor Standard &
Poor's is rating the Preferred Shares, the Fund will not issue any additional
shares of any class or series of preferred shares ranking on a parity with the
Preferred Shares with respect to the payment of dividends and the distribution
of assets upon dissolution, liquidation or winding up of the affairs of the
Fund, if the aggregate liquidation preference of all Preferred Shares of the
Fund outstanding after any such issuance, exclusive of accumulated and unpaid
dividends, exceeds $265,000,000. Subject to paragraph 4(b) hereof, the holders
of a plurality of the outstanding Common Shares and Preferred Shares and any
other preferred shares of beneficial interest of the Fund, voting together as a
single class, shall elect the balance of the trustees.
(ii) So long as any Preferred Shares are outstanding, the Fund may
not, without the affirmative vote of the holders of at least 66 2/3% of the
Preferred Shares outstanding at the time, 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.
(b) Right to Elect Majority of Board of Trustees. During any period in
which any one or more of the conditions described below shall exist (such period
being referred to herein as a "Voting Period"), the number of trustees
constituting the Board shall be automatically increased by the smallest number
that, when added to the two trustees elected exclusively by the
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<PAGE> 20
holders of Preferred Shares and any other preferred shares of beneficial
interest of the Fund, would constitute a majority of the Board as so increased
by such smallest number; and the holders of Preferred Shares and any other
preferred shares of beneficial interest of the Fund, shall be entitled, voting
as a class on a one-vote-per-share basis (to the exclusion of the holders of all
other securities and classes of beneficial interest of the Fund), to elect such
additional trustees, together with the two trustees that such holders are in any
event entitled to elect. A Voting Period shall commence:
(i) If at the close of business on any Dividend Payment Date
accumulated dividends (whether or not earned or declared, and whether or not
funds are then available in an amount sufficient therefor) on any of the
outstanding Preferred Shares equal to at least two full years' dividends shall
be due and unpaid and sufficient cash or specified securities shall not have
been deposited with the Paying Agent for the payment of such accumulated
dividends; or
(ii) If at any time holders of any other preferred shares of
beneficial interest of the Fund are entitled to elect a majority of the trustees
of the Trust.
Upon the termination of a Voting Period, which, in the case of
paragraph 4(b)(i), shall be the date on which all dividends in arrears shall
have been paid or deposited with the Paying Agent the voting rights described in
this paragraph 4(b) shall cease subject always, however, to the revesting of
such voting rights in the Owners upon the further occurrence of any of the
events described in this paragraph 4(b).
(c) Voting Procedures. (i) As soon as practicable after the accrual of
any right of the Owners of Preferred Shares to elect additional trustees as
described in paragraph 4(b) above, the Fund shall notify the Paying Agent and
the Paying Agent shall distribute the call of a special meeting of the Owners,
by mailing a notice of such special meeting to such Owners; such meeting to be
held not less than 10 nor more than 20 days after the date of mailing of such
notice. If the Fund fails to send such notice to the Paying Agent or if the
Paying Agent does not distribute such call of the special meeting, it may be
called by the Owners of 25% of the Preferred Shares and any other preferred
shares of beneficial interest of the Fund entitled to vote on the matter on like
notice. The record date for determining the Owners entitled to notice of and to
vote at such special meeting shall be the close of business on the fifth
Business Day preceding the day on which such notice is mailed. At any such
special meeting and at each meeting held during a Voting Period, such Owners and
the holders of any other preferred shares of beneficial interest of the Fund,
voting together as a class (to the exclusion of the holders of all other
securities and classes of beneficial interests of the Fund), shall be entitled
to elect the number of trustees prescribed in paragraph 4(b) above on a
one-vote-per-share basis. At any such meeting or adjournment thereof in the
absence of a quorum, a majority of such Owners and the holders of any other
preferred shares of beneficial interest of the Fund, present in person or by any
proxy shall have the power to adjourn the meeting without notices, other than an
announcement at the meeting, until a quorum is present.
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<PAGE> 21
(i) For purposes of determining any rights of the Owners to vote
on any matter, whether such right is created by this resolution, by any other
provisions of the Agreement and Declaration, by the 1940 Act or another statute
or otherwise, no Owner shall be entitled to vote and no Preferred Share shall be
deemed to be "outstanding" for the purpose of voting or determining the number
of Preferred Shares required to constitute a quorum if, prior to or concurrently
with the time of determination of Preferred Shares entitled to vote or Preferred
Shares deemed outstanding for quorum purposes, as the case may be sufficient
funds for the redemption of such Preferred Shares have been deposited in trust
with the Paying Agent for that purpose and the requisite notice of redemption
with respect to such Preferred Shares shall have been given as provided in
paragraph 3(d)(i). No Preferred Share held by the Fund shall have any voting
rights or be deemed to be outstanding for voting purposes.
(ii) The terms of office of all persons who are trustees of the
Fund at the time of a Special Meeting of Owners and holders of other preferred
shares of beneficial interest of the Fund to elect trustees shall continue,
notwithstanding the election at such meeting by the Owners and such other
holders of the number of trustees that they are entitled to elect, and the
persons so elected by such Owners and such other holders, together with the two
incumbent trustees elected by the Owners and such other holders of preferred
shares of beneficial interest of the Fund and the remaining incumbent trustees
elected by the holders of the Common Shares and the Preferred Shares and other
preferred shares of beneficial interest of the Fund, shall constitute the duly
elected trustees of the Fund.
(iii) Simultaneously with the expiration of a Voting Period, the
terms of office of the additional trustees elected by the Owners and holders of
other preferred shares of beneficial interest of the Fund pursuant to paragraph
4(b) above shall terminate, the remaining trustees shall constitute the trustees
of the Fund and the voting rights of the Owners and such other holders to elect
additional trustees pursuant to paragraph 4(b) above shall cease.
(d) Exclusive Remedy. Unless otherwise required by law, the Owners
shall not have any relative rights or preferences or other special rights other
than those specifically set forth herein. The Owners of Preferred Shares shall
have no preemptive rights or rights to cumulative voting. In the event that the
Fund fails to pay any dividends on the Preferred Shares, the exclusive remedy of
the Owners shall be the right to vote for trustees pursuant to the provisions of
this paragraph 4. In no event shall the Owners have any right to sue for, or
bring a proceeding with respect to, such dividends or redemptions or damages for
the failure to receive the same.
5. Asset Coverage and Dividend Coverage.
(a) The Fund shall maintain, as of the last Business Day of each month
in which any Preferred Share is outstanding, assets at least equal to the 1940
Act Asset Coverage.
(b) On each Valuation Date on which any Preferred share is
outstanding, the Fund shall maintain assets with a Value (as calculated under
paragraph 6(c)) at least equal to the Rating Agency Required Asset Coverage.
- 21 -
<PAGE> 22
(c) On each Valuation Date, the Fund shall calculate and determine
pursuant to the procedures set forth herein: (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 shall be set forth in a "Certificate
of Rating Agency Required Asset Coverage", which must be delivered to Standard &
Poor's on or before 5:00 New York City time on the first Business Day following
the Date of Original Issue and to the Paying Agent following any request by
Standard & Poor's. The ''Certificate of Rating Agency Required Asset Coverage''
must also be delivered to Standard & Poor's and the Paying Agent not later than
the close of business on the third Business Day following (A) any Valuation Date
on which the Rating Agency Required Asset Coverage is not met, (B) any time the
Fund's Standard & Poor's Adjusted Value fails to exceed the Rating Agency
Required Asset Coverage by 5% or more, (C) the first Valuation Date succeeding
any Valuation Date referred to in clause (A) above on which the Rating Agency
Required Asset Coverage is met, (D) the last Valuation Date of each month, and
(E) any redemption by the Fund of its Common Shares. So long as Standard &
Poor's or Moody's is rating the Preferred Shares, a Certificate of Rating Agency
Required Asset Coverage shall be delivered to Standard & Poor's (if Standard &
Poor's 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 the third Business Day following an
Valuation Date specified in (A) or (B) 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 of and methods of calculation of "Market Value,"
"Adjusted Value," "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 Standard & Poor's and Moody's, or if both such Rating Agencies
are not then rating the Preferred Shares, the one which is, that any such change
would not impair the ratings then assigned to the Preferred Shares. To the
extent these definitions and methods of calculation are changed by Moody's or
Standard & Poor's in a manner that would impair the ratings then assigned to the
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
necessary to comply with such revised definitions and methods of calculation so
as to maintain the then current rating on the Preferred Shares or will redeem
the then outstanding Preferred Shares.
(d) In connection with the Certificates of Rating Agency Required
Asset Coverage to be given with respect to (A) the Date of Original Issue, (B)
the last Valuation Date of each fiscal quarter of the Fund, and (C) a randomly
selected date within each fiscal quarter, the Fund's independent public
accountants will deliver to the Paying Agent and to Standard & Poor's (if
Standard & Poor's is rating the Preferred Shares) and Moody's (if Moody's is
rating the Preferred Shares) a written communication ("Ratings Agency
Accountant's Confirmation") confirming (i) the mathematical accuracy of the
calculations reflected in such Certificate, (ii) that
- 22 -
<PAGE> 23
the method used by the Fund in determining whether or not the Rating Agency
Required Asset Coverage was met is in accordance with the applicable
requirements of the Certificate of Designation for Preferred Shares, (iii) that
the price quotations used 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 herein. The Fund
will cause the Rating Agency Accountants' Confirmation to be delivered to the
Paying Agent and Standard & Poor's by the close of business on the fifth
Business Day following the Date of Original Issue and by the close of business
on the tenth Business Day following each such Valuation Date of each fiscal
quarter of the Fund. If any Rating Agency Accountants' Confirmation differs from
the Fund's Certificate of Rating Agency Required Asset Coverage, the Rating
Agency Accountants' Confirmation will control and the Fund will notify Standard
& Poor's (if Standard & Poor's is rating the Preferred Shares) and Moody's (if
Moody's is rating the Preferred Shares) of such difference.
(e) 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 Preferred Shares, or effect any combination of these
transactions, so that the Rating Agency Required Asset Coverage will be met.
(f) If a Rating Agency Accountants' 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 shall cause a Rating Agency
Accountants' 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 and Standard & Poor's by the tenth Business Day following such next
Valuation Date.
(g) The Fund may use cash or proceeds generated from sales of assets
owned by the Fund to purchase or redeem Preferred Shares.
6. Calculations of Coverage.
(a) Calculation I. (i) Each Eligible Security's Market Value shall be
calculated on each Valuation Date and the Date of original Issue. (ii) The
Market Value of each Rating Agency Required Asset other than Eligible Securities
shall 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 shall be valued at face amount plus accrued
interest, if any, to the date of valuation; and
- 23 -
<PAGE> 24
(C) the Market Value of any Other Securities constituting Rating
Agency Required Assets shall be calculated on each Valuation Date
The calculation of Market Value may be made on bases other than those set forth
herein determined 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) if Moody's and Standard & Poor's have advised or, if both of such
Rating Agencies are not then rating the Preferred Shares, the one which is, has
advised the Fund in writing that the alternative calculation of Market Value
would not, or that a failure to use the alternative calculation would, adversely
affect their respective then-current ratings of the Preferred Shares.
(b) Calculation II. The Adjusted Value of Eligible Securities shall be
the lesser of the Standard & Poor's Adjusted Value and the Moody's Adjusted
Value, determined as follows.
(i) Standard & Poor's "AAA" Rating Guidelines ("Standard & Poor's
Adjusted Value"). The Standard & Poor's Adjusted Value of a Standard and Poor's
Eligible Security (a security eligible for consideration under Standard & Poor's
guidelines in effect as of the date of this Certificate of Designation), shall
be the Market Value of such Standard & Poor's Eligible Security divided by 155%
for an "AAA" rated Standard & Poor's Eligible Security, 160% for an "AA" rated
Standard & Poor's Eligible Security, 175% for an "A" rated Standard & Poor's
Eligible Security, 215% for a "BBB" rated Standard & Poor's Eligible
Security and 220% for an unrated Standard & Poor's Eligible Security ("Standard
& Poor's Security Discount Factors").
Notwithstanding the foregoing, the Standard & Poor's Security
Discount Factor for short-term Standard & Poor's Eligible Securities
shall be 115%, so long as such Standard & Poor's Eligible Securities are
rated "A-l+" or "SP-l+" by Standard & Poor's and mature or have a demand
feature exercisable in 30 days or less, or 120% so long as such Standard
& Poor's Eligible Securities are rated "A-1" or "SP-1" by Standard Poor's
and mature or have a demand feature exercisable in 30 days or less, or
125% if such Standard & Poor's Securities are not rated by Standard &
Poor's but are rated "VMIG-l", "P-1" or "MIG-1" by Moody's; provided,
however, that if such Standard & Poor's Eligible Securities are backed by
any letter of credit, liquidity facility or guarantee from a bank or
other financial institution, such bank or institution must have a
short-term rating of at least "A-l" from Standard & Poor's; and further
provided that such Moody's-rated short-term Standard & Poor's Eligible
Securities may comprise no more than 50% of short-term Standard & Poor's
Eligible Securities.
For purposes of determining "Standard & Poor's Eligible
Securities," the Standard & Poor's guidelines impose certain minimum
issue size, issuer, geographical diversification and other requirements
(other than short-term Standard & Poor's Eligible Securities):
- 24 -
<PAGE> 25
(a) In order to be considered Standard & Poor's Eligible
Securities, 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 Standard & Poor's or, if
not rated by Standard & Poor's 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 Standard & Poor's 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 Standard & Poor's
Eligible Securities. For purposes of determining the Standard & Poor's
Security Discount Factors applicable to such NRSRO rated securities,
any such security will be deemed to have a Standard & Poor's rating
which is one full rating category lower than its NRSRO rating;
(4) Not have been issued in a private placement (excluding
Escrowed Bonds and 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.
(b) Municipal securities, as that term is used in the Fund's
registration statement on Form N-2 on file with the Securities and
Exchange Commission, as such registration statement may be amended
from time to time, of any one issuer or guarantor (excluding bond
insurers) shall be considered Standard & Poor's Eligible Securities
only to the extent the Market Value of such securities does not exceed
10% of the aggregate Market Value of the Standard & Poor's Eligible
Securities (excluding short-term Standard & Poor's Eligible
Securities), provided that 2% is added to the applicable Standard &
Poor's Security Discount Factor for every 1% by which the Market Value
of such securities exceed 5% of the aggregate Market Value of the
Standard & Poor's Eligible Securities (excluding short-term Standard &
Poor's Eligible Securities). In the case of unrated Standard & Poor's
Eligible Securities, any one issuer or guarantor (excluding bond
insurers) shall be considered Standard & Poor's Eligible Securities
only to the extent the Market Value of such securities does not exceed
5% of the aggregate market value of the Standard & Poor's Eligible
Securities (excluding short-term - Standard & Poor's Eligible
Securities). The percentage limits stated above do not apply to
Escrowed Bonds.
- 25 -
<PAGE> 26
(c) Municipal securities issued by issuers in any one state or
territory shall be considered Standard & Poor's Eligible Securities
only to the extent the Market Value of such municipal securities does
not exceed 25% of the aggregate Market Value of the Standard & Poor's
Eligible Securities (excluding short-term Standard & Poor's Eligible
Securities). The percentage limits stated above do not apply to
Escrowed Bonds.
(d) Certain securities involved in hedging transactions as
described in subparagraph (d) of this paragraph 6 shall be considered
Standard & Poor's Eligible Securities.
(e) Inverse Floaters, as defined herein, shall be considered
Standard & Poor's 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 an "Aaa" rated Moody's Eligible Security,
159% for an "Aa" rated Moody's Eligible 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 Standard & Poor's, and 225%
for a municipal security not rated by Moody's or by Standard & Poor's ("Moody's
Security Discount Factors").
Notwithstanding the foregoing, the Moody's Security Discount
Factor for short-term Moody's Eligible Securities shall 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 Standard & Poor's and mature or have a
demand feature at par exercisable in 30 days or less.
The following limitations shall determine the maximum portion
of the Fund's Eligible Securities which may be Moody's Eligible Securities:
<TABLE>
<CAPTION>
Maximum % Maximum %
Eligible with Any One Issued by or
Securities with Underlying within Any One
Rating of: Obligor State or Territory
---------- ------- ------------------
<S> <C> <C>
Aaa........................................... 100 100
Aa............................................ 20 60
A............................................. 10 40
Baa........................................... 6 20
Other*........................................ 4 12
</TABLE>
- -------------------
*Securities not rated by Moody's but rated "BBB-" or higher by Standard &
Poor's.
- 26 -
<PAGE> 27
Securities constituting Moody's Eligible Securities shall
pay interest in cash, shall be publicly rated "Baa" or higher by Moody's or, if
not rated by Moody's but rated by Standard & Poor's, shall be rated at least
"BBB-" by Standard & Poor's, shall 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 Security Discount Factors applicable to such Standard &
Poor's rated Moody's Eligible Securities, any such municipal security (excluding
short-term municipal securities) shall be deemed to have a Moody's rating which
is one full rating category lower than its Standard & Poor's rating.
(iii) Aggregate Adjusted Value. The total of the Adjusted Values
of all Eligible Securities and other Rating Agency Required Assets is the
aggregate Adjusted Value of the Rating Agency Required Assets.
In accordance with procedures established by the Board (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
Standard & Poor's have advised or, if both of such Rating Agencies are not then
rating the Preferred Shares, the one which is rating the Preferred Shares 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 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 Standard & Poor's if the Preferred Shares are then
rated by both such Rating Agencies, or, if not rated by both, to the one, if
any, such Rating Agency then rating the Preferred Shares.
(c) Calculation III. For the purpose of determining whether the Rating
Agency Required Asset Coverage is met in accordance with paragraph 5(b), the
Value of the Rating Agency Required Assets shall 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
(unless any such liability is included in subparagraph (C) below) and the amount
of operating expenses projected by the Fund to be incurred by the Fund during
the succeeding 90 days, (B) so long as the Preferred Shares are rated by
Standard & Poor's, the amount described in paragraph 7(a)(i) below, (C) the
aggregate liquidation preference of all Preferred Shares calculated for each
series of the Preferred Shares, as of the Valuation Date, 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
- 27 -
<PAGE> 28
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 for such series on such Valuation
Date for such series multiplied by the Volatility Factor and (D) the amount of
any Gross-up Payment in respect of any Preferred Shares as of such Valuation
Date, 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 any Fund assets
irrevocably deposited by the Fund for the payment of any of (i)(A) through
(i)(C) above.
7. Rating Agency Restrictions
(a) Hedging Transactions. (i) For so long as any shares of Preferred
Shares are rated by Standard & Poor's, the Fund will not purchase or sell
futures contracts, write, purchase or sell options on futures contracts or write
put options (except covered put options) or call options (except covered call
options) on portfolio securities unless it receives written confirmation from
Standard & Poor's that engaging in such transactions will not impair the ratings
then assigned to the Preferred Shares by Standard & Poor's, 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, "Standard & Poor's Hedging Transactions"), subject to
the following limitations.
(A) the Fund will not engage in any Standard & Poor's 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
(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;
(B) the Fund will not engage in any Standard & Poor's 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;
- 28 -
<PAGE> 29
(C) 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 Standard & Poor's Eligible Assets with an aggregate Discounted Value equal
to or grater 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;
(D) 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
(E) when the Fund writes a futures contract or option
thereon, it will either maintain an amount of cash, cash equivalents or high
grade (rated "A" or better by Standard & Poor's), 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 Standard & Poor's
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 Standard & Poor's 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.
(ii) 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:
(A) 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 Standard &
Poor's to comprise no
- 29 -
<PAGE> 30
more than 50% of short-term municipal securities that qualify as Standard &
Poor's Eligible Securities;
(B) the Moody's Security Discount Factor Moody's 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 Moody's Security Discount
Factor applicable to the municipal securities sold; and
(C) no Moody's 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 Moody's 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 Moody's, 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.
(b) When-Issued and Forward Delivery Purchases. 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 the purchase
would have it were owned by the Trust.
(c) Borrowings. So long as any Preferred Shares are outstanding and
Moody's or Standard & Poor's, or both, are rating the Preferred Shares, the Fund
will not borrow money unless it has received written confirmation from Moody's
or Standard & Poor's, 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 purposes" means that the
borrowing is to be repaid within sixty days and is not to be extended or
renewed.
8. Conversion. The Preferred Shares, by their terms shall not be
convertible into or exchangeable for, shares of another series or class.
- 30 -
<PAGE> 31
9. Certification. No certificate representing Preferred Shares shall be
issued for less than a Unit.
10. Liquidation Rights
(a) Payment Upon Liquidation. In the event of a liquidation,
dissolution or winding up of the Fund, whether voluntary or involuntary, the
owners of the Preferred Shares, in preference to the owners of the Common Shares
but not in preference to any other series or class of preferred shares of
beneficial interests of the Fund, shall be entitled to 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 all accumulated dividends (whether or not declared but without interest) to
the date payment of such distribution shall be made in full or a sum sufficient
for the payment thereof shall be set apart with the Paying Agent. After payment
of the full amount of such liquidation distribution, the Owners of the Preferred
Shares shall not be entitled to any further participation in any distribution of
assets of the Fund.
(b) Insufficient Assets. If, upon the liquidation, dissolution or
winding up of the Fund whether voluntary or involuntary, the assets of the Fund
or the proceeds thereof available for distribution to shareholders after
satisfaction of claims of creditors of the Fund shall be insufficient to pay in
full the liquidation distribution to which the Owners of the Preferred Shares or
the holders of other preferred shares of beneficial interest of the Fund are
entitled, such assets or the proceeds thereof shall be distributed among the
Owners of the Preferred Shares and the owners of other preferred shares of
beneficial interest ratably, so that the amount of the distribution to be made
to each Owner and owner of the other preferred shares of beneficial interest
will bear the same ratio to the aggregate amount of the distribution to be made
to all Owners and owners of the other preferred shares of beneficial interest as
the aggregate amount of the liquidation distribution owed to such Owner and
owner of the other preferred shares of beneficial interest will bear to the
aggregate amount of the liquidation distribution owed to all Owners and owners
of the other preferred shares of beneficial interest.
So long as any Preferred Shares shall remain outstanding, the Fund,
in the event of any liquidation, dissolution or winding up of the Fund, whether
voluntary or involuntary, shall not (i) make any payment or other distribution
to the holders of the Common Shares or (ii) purchase, redeem or otherwise
acquire for any consideration any of the Common Shares, until payment in full
shall have been made to the holders of the Preferred Shares of the liquidation
distribution to which they shall be entitled. Neither the sale, lease or
exchange (for cash, securities or other consideration) of all or substantially
all of the property and assets of the Fund nor the consolidation or merger of
the Fund with or into any other corporation or corporations shall be deemed to
be a liquidation, dissolution or winding up of the Fund, whether voluntary or
involuntary, within the meaning of this paragraph 10; provided that such sale,
lease, exchange, consolidation or merger, by its terms, would not adversely
affect the voting powers, preferences and relative, participating, optional or
other special rights of the holders of the Preferred Shares.
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<PAGE> 32
11. Remarketing: Tender for Remarketing
(a) The Remarketing Agent. The Fund shall take all reasonable action
necessary so that, at all times, an investment bank, broker, dealer or other
organization qualified to remarket the Preferred Shares and to establish
Dividend Periods and Dividend Rates as herein provided shall act as Remarketing
Agent for the Preferred Shares. On the first day of each Dividend Period for
each Preferred Share of a series tendered for remarketing on such day, the
Remarketing Agent shall use its best efforts to remarket for the beneficial
owners thereof, without charge to such beneficial owners, such Preferred Shares,
in transactions of at least a Unit, at a price of $5,000 per share; provided,
however, such Remarketing Agent shall not be obligated to remarket such
Preferred Shares if there shall be a material misstatement or omission in any
disclosure document used in connection with the remarketing of such Preferred
Shares or at any time the Remarketing Agent shall have determined that it is not
advisable to remarket such Preferred Shares by reason of any 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) an amendment of this resolution, the Agreement
and Declaration or the By-Laws of the Fund which materially and adversely
changes the nature of the Preferred Shares or the remarketing procedures
therefor, (vi) a downgrading or withdrawal of the rating on the Preferred
Shares, (vii) an imposition of material restrictions on the Preferred Shares or
any other preferred shares of beneficial interest of the Fund or (viii) a
failure by the Fund, on any Dividend Payment Date for any Preferred Share, to
have paid, or set apart with the Paying Agent funds for the payment of, the
dividend payable on such Preferred Share on such date. Should the Remarketing
Agent not succeed in so remarketing all Preferred Shares of a series tendered
for remarketing on any date, the Remarketing Agent shall select the Preferred
Shares of such series to be sold from those tendered pro rata or in such other
manner as it shall deem appropriate so that no beneficial owner of such tendered
Preferred Shares shall own less than a Unit of such tendered Preferred Shares;
provided, however, that the Remarketing Agent may own less than a Unit if it
shall elect to purchase Preferred Shares tendered for remarketing which it shall
not have succeeded in remarketing. 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.
(b) Notice of Preferred Shares to be Retained. Each Preferred Share
shall be deemed to have been tendered to the Fund (or such agent as the Fund may
appoint) for sale by remarketing on the day following the last day of each
Dividend Period, unless the beneficial owner thereof shall have given
irrevocable notice to the contrary to the Remarketing Agent (or such other agent
as the Fund may appoint). Any such notice shall be irrevocable when given. Such
notice, which may be telephonic or written, must be delivered to the Remarketing
Agent prior to 3:00 p.m., New York City time, on the last Business Day of the
Dividend Period. The notice from such beneficial owner of an election to retain
Preferred Shares shall state (i) the number of Preferred Shares not to be deemed
to have been so tendered and (ii) the number of such Preferred Shares which
shall be deemed not to have been so tendered, which number may not be less than
a Unit and may not result in such beneficial owner retaining less than a Unit of
such Preferred Shares.
- 32 -
<PAGE> 33
(c) Preferred Shares Deemed to have been Tendered. The failure to
give notice with respect to any Preferred Share as provided in clause (b) of
this paragraph 11 shall constitute the irrevocable tender for remarketing of
such Preferred Share. Thereupon, such Preferred Shares shall cease to accrue
dividends payable to the former beneficial owners thereof, which shall have no
further rights with respect to such Preferred Shares, except the right to
receive any previously declared but unpaid dividends thereon and the proceeds of
the remarketing thereof.
(d) Funds for Purchase of Preferred Shares. Preferred Shares tendered
for remarketing as provided in this paragraph 11 shall be purchased solely from
the proceeds received from the purchasers of such Preferred Shares in a
remarketing. Neither the Fund nor the Remarketing Agent (nor any other agent
which the Fund may appoint) shall be obligated to provide funds to make payment
to the beneficial owners of Preferred Shares so tendered.
12. Restrictions on the Common Shares. So long as any Preferred Shares
shall be outstanding, the Fund shall not declare, pay or set aside for payment
any dividend or other distribution (other than a dividend or distribution paid
in shares of, or options, warrants or rights to subscribe for or purchase Common
Shares) in respect of any Common Share, or call for redemption, redeem purchase
or otherwise acquire for consideration any Common Shares, unless:
(a) such transaction is on a Valuation Date;
(b) immediately thereafter the 1940 Act Coverage and the Rating
Agency Required Asset Coverage would be met as of such Valuation Date;
(c) full cumulative dividends on the Preferred Shares and any other
preferred shares of beneficial interest of the Fund for all past Dividend
Periods ended on or prior to the Valuation Date shall have been declared and
paid (or declared and a sum sufficient for the payment of such dividends shall
have been set apart with the Paying Agent for payment); and
(d) the Fund has redeemed the full number of Preferred Shares
required to be redeemed by any provision for mandatory redemption contained in
paragraph 4(b) above.
13. Other Securities. While the Preferred Shares are outstanding, the
Fund will not issue any other series or class of securities which, if issued,
would violate the provisions of Section 18 of the 1940 Acts.
14. Other Rights. Except as provided by law, the Preferred Shares shall
not have any designation preference, or relative, participating, optional or
other special rights, or qualifications, limitations or restrictions, other than
as set forth in this resolution.
15. Limitation on Liability. A copy of the Agreement and Declaration is
on file with the Secretary of the Commonwealth of Massachusetts, and is hereby
agreed that this instrument is executed on behalf of the Board of Trustees of
the Fund as trustees and not individually and
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<PAGE> 34
that the obligations of this instrument are not binding upon any of the
trustees, officers or holders of Common or Preferred Shares of the Fund
individually but are binding only upon the assets and property of the Fund.
16. Board of Trustees Interpretation. To the extent permitted by
applicable law, the Board of Trustees may interpret or adjust the provisions of
this Certificate of Designation to resolve any inconsistency or ambiguity or to
remedy any formal defect, and may amend this Certificate of Designation with
respect to any series of Preferred Shares prior to the issuance of shares of
such series.
17. No Fractional Shares. No fractional Preferred Shares shall be issued.
18. Status of Preferred Shares Redeemed, Exchanged or Otherwise Acquired
by the Fund. Preferred Shares which are redeemed, exchanged or otherwise
acquired by the Fund shall return to the status of authorized and unissued
Preferred Shares without designation as to series.
19. Headings Not Determinative. The headings contained in this
Certificate of Designation are for convenience of reference only and shall not
affect the meaning or interpretation of this Certificate of Designation.
20. Notices. All notices or communications, unless otherwise specified in
the By-laws of the Fund or this Certificate of Designation, shall be
sufficiently given if in writing and delivered in person or mailed by
first-class mail, postage prepaid.
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<PAGE> 35
CERTIFICATE OF SECRETARY
I, ______________, do hereby certify that I am the Secretary of Kemper Municipal
Income Trust (the "Trust"), and further certify that the foregoing resolutions
were adopted by the Board of Trustees of the Trust on May 19, 1999, by the
shareholders of preferred shares Series A - D, voting separately as a class at a
shareholder meeting held on September 15, 1999 and adjourned to September 22,
1999, and by the Pricing Committee of the Board of Trustees on _________, 1999;
and that such resolutions are in effect as of the date hereof, have not been
rescinded, amended, or modified, and are in full force and effect.
IN WITNESS WHEREOF, I have hereunto set my hand on this __th day of _______,
1999.
By: ___________________________________
Secretary
THE COMMONWEALTH OF MASSACHUSETTS)
) ss:
THE COUNTY OF SUFFOLK )
Subscribed and sworn to before me, a Notary Public,
this __th day of _______, 1999.
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<PAGE> 1
EXHIBIT 2(d)
SHARE CERTIFICATE CUSIP No. __________
NUMBER 1
KEMPER MUNICIPAL INCOME TRUST
Organized Under the Laws of the Commonwealth of Massachusetts
Preferred Shares of Beneficial Interest, Series E
$.01 Par Value Per Share
$5,000 Liquidation Preference Per Share
SHARE CERTIFICATE
This certifies that Cede & Co. is the owner of ten thousand
(10,000) fully paid and non-assessable Preferred Shares of beneficial interest,
Series E, $.01 par value per share, $5,000 liquidation preference per share, of
Kemper Municipal Income Trust (the "Trust"), the said shares being issued,
received and held under and subject to the terms and provisions of the Amended
and Restated Agreement and Declaration of Trust dated as of October 7, 1988, and
all amendments thereto, and to the terms and provisions of the Amended and
Restated Certificate of Designation of the Preferred Shares of the Trust, copies
of which are on file with the Secretary of the Commonwealth of Massachusetts.
The said owner by accepting this certificate agrees to and is bound by all of
the said terms and provisions. The shares represented hereby are only
transferable in writing by the owner thereof in person or by attorney upon
surrender of this certificate to the Trustees properly endorsed for transfer.
This certificate is executed on behalf of the Trustees of the Trust as Trustees
and not individually and the obligations hereof are not binding upon any of the
Trustees, officers or shareholders of the Trust individually but are binding
only upon the assets and property of the Trust. This certificate is not valid
until countersigned and registered by the Transfer Agent and Registrar.
IN WITNESS WHEREOF, the Trust has caused this Certificate to
be signed by its duly authorized officers and its Seal to be hereunto affixed
this ____ day of November, 1999.
DEUTSCHE BANK KEMPER MUNICIPAL INCOME TRUST
As Transfer Agent and Registrar
By: _______________________________
By: __________________________ Name:
Name: Title:
Title:
Attest:____________________________
<PAGE> 1
EXHIBIT 2(h)
Municipal Income Preferred Shares
KEMPER MUNICIPAL INCOME TRUST
10,000 Shares, Series E
Liquidation Preference $5,000 Per Share
UNDERWRITING AGREEMENT
, 1999
SALOMON SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Kemper Municipal Income Trust, a Massachusetts business trust
(the "Trust"), proposes, upon the terms and conditions set forth herein, to
issue and sell an aggregate of 10,000 shares of its Municipal Income Preferred
Shares, Series E (the "Shares"), each with a liquidation preference of $5,000
per share. The Shares will be authorized by, and subject to the terms and
conditions of, the Amended and Restated Certificate of Designation for Preferred
Shares of the Trust (the "Certificate") in the form filed as an exhibit to the
Registration Statement referred to in Section 1 of this agreement. The Trust and
its investment adviser, Scudder Kemper Investments, Inc. (the "Adviser"), wish
to confirm as follows their agreement with Salomon Smith Barney Inc. (the
"Underwriter") in connection with the purchase of the Shares by the Underwriter.
The Trust's Municipal Income Preferred Shares, Series A,
Series B, Series C and Series D are hereinafter referred to as the "Series A-D
Preferred." Collectively, the Investment Management Agreement dated as of
September 7, 1998 between the Trust and the Adviser, the Custodian Agreement
dated as of March 15, 1999 between the Trust and State Street Bank and Trust
Company, the Amended and Restated Agency Agreement dated as of ______, 1999
between the Trust and Deutsche Bank and the Remarketing Agreement dated as of
______, 1999 between the Trust and Salomon Smith Barney Inc. are hereinafter
referred to as the "Trust Agreements." This Underwriting Agreement is
hereinafter referred to as the "Agreement."
<PAGE> 2
1. Registration Statement and Prospectus. The Trust has
prepared in conformity with the provisions of the Securities Act of 1933, as
amended (the "1933 Act"), the Investment Company Act of 1940, as amended (the
"1940 Act"), and the rules and regulations of the Securities and Exchange
Commission (the "Commission") promulgated under the 1933 Act (the "1933 Act
Rules and Regulations") and the 1940 Act (the "1940 Act Rules and Regulations"
and, together with the 1933 Act Rules and Regulations, the "Rules and
Regulations"), a registration statement on Form N-2, as amended by ______ (File
Nos. 333-____ and 811-____), under the 1933 Act and the 1940 Act (the
"registration statement"), including a prospectus relating to the Shares, and
has filed the registration statement and prospectus in accordance with the 1933
Act and the 1940 Act. The Trust also has filed a notification of registration of
the Trust as an investment company under the 1940 Act on Form N-8A (the "1940
Act Notification"). The term "Registration Statement" as used in this Agreement
means the registration statement (including all financial schedules and
exhibits), as amended at the time it becomes effective under the 1933 Act or, if
the registration statement became effective under the 1933 Act prior to the
execution of this Agreement, as amended or supplemented at the time it became
effective prior to the execution of this Agreement, and includes any information
deemed to be included by Rule 430A under the 1933 Act Rules and Regulations. If
it is contemplated, at the time this Agreement is executed, that a
post-effective amendment to the registration statement will be filed under the
1933 Act and must be declared effective before the offering of the Shares may
commence, the term "Registration Statement" as used in this Agreement means the
registration statement as amended by said post-effective amendment. If the Trust
has filed an abbreviated registration statement to register an additional amount
of Shares pursuant to Rule 462(b) under the 1933 Act (the "Rule 462 Registration
Statement"), then any reference herein to the term "Registration Statement"
shall include such Rule 462 Registration Statement. The term "Prospectus" as
used in this Agreement means the prospectus and statement of additional
information in the forms included in the Registration Statement or any amendment
or supplement thereto. Specifically, if the prospectus and statement of
additional information included in the Registration Statement omit information
in reliance on Rule 430A under the 1933 Act Rules and Regulations and such
information is included in a prospectus and statement of additional information
filed with the Commission pursuant to Rule 497(h) under the 1933 Act, the term
"Prospectus" as used in this Agreement means the prospectus and statement of
additional information in the forms included in the Registration Statement as
supplemented by the addition of the information contained in the prospectus
filed with the Commission pursuant to Rule 497(h). The term "Prepricing
Prospectus" as used in this Agreement means the prospectus and statement of
additional information subject to completion in the forms included in the
registration statement at the time of filing of amendment no. 1 to the
registration statement with the Commission on ______, 1999, and as such
prospectus and statement of additional information shall have been amended from
time to time prior to the date of the Prospectus, together with any other
prospectus and statement of additional information relating to the Trust other
than the Prospectus approved in writing by or directly or indirectly prepared by
the Trust or the Adviser; it being understood that the definition of Prepricing
Prospectus above shall not include any Prepricing Prospectus prepared by the
Underwriter unless approved in writing by the Trust or Adviser. The terms
"Registration
2
<PAGE> 3
Statement," "Prospectus" and "Prepricing Prospectus" shall also include any
financial statements and other information incorporated by reference therein.
The Trust has furnished the Underwriter with copies of such
registration statement, each amendment to such registration statement filed with
the Commission and each Prepricing Prospectus.
2. Agreements to Sell and Purchase. The Trust hereby agrees,
subject to all the terms and conditions set forth herein, to issue and sell to
the Underwriter and, upon the basis of the representations, warranties and
agreements of the Trust and the Adviser herein contained and subject to all the
terms and conditions set forth herein, the Underwriter agrees to purchase from
the Trust, at a purchase price of $______ per Share, the number of Shares set
forth opposite the name of the Underwriter in Schedule I hereto.
3. Terms of Public Offering. The Trust and the Adviser have
been advised by the Underwriter that the Underwriter proposes to make a public
offering of the Shares as soon after the Registration Statement and this
Agreement have become effective as in the Underwriter's judgment is advisable
and initially to offer the Shares upon the terms set forth in the Prospectus.
4. Delivery of the Shares and Payment Therefor. Delivery to
the Underwriter of and payment for the Shares shall be made at the office of
Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, NY 10017, or through
the facilities of The Depository Trust Company or another mutually agreeable
facility, at 9:30 A.M., New York City time, on _____, 1999 (the "Closing Date").
The place of closing for the Shares and the Closing Date may be varied by
agreement between the Underwriter and the Trust.
Certificates for the Shares shall be registered in such names
and in such denominations as the Underwriter shall request prior to 9:30 A.M.,
New York City time, on the second business day preceding the Closing Date. Such
certificates shall be made available to the Underwriter in New York City for
inspection not later than 9:30 A.M., New York City time, on the business day
next preceding the Closing Date. The certificates evidencing the Shares shall be
delivered to the Underwriter on the Closing Date, through the facilities of The
Depository Trust Company, against payment of the purchase price therefor in
immediately available funds.
5. Agreements of the Trust and the Adviser. The Trust and the
Adviser, jointly and severally, agree with the Underwriter as follows:
(a) If, at the time this Agreement is executed and delivered,
it is necessary for the Registration Statement or a post-effective amendment
thereto to be declared effective under the 1933 Act before the offering of the
Shares may commence, the Trust will endeavor to cause the Registration Statement
or such post-effective amendment to become effective under the 1933 Act as soon
as possible and will advise the Underwriter promptly and, if requested by the
3
<PAGE> 4
Underwriter, will confirm such advice in writing when the Registration Statement
or such post-effective amendment has become effective.
(b) The Trust will advise the Underwriter promptly and, if
requested by the Underwriter, will confirm such advice in writing: (i) of any
request made by the Commission for amendment of or a supplement to the
Registration Statement, any Prepricing Prospectus or the Prospectus (or any
amendment or supplement to any of the foregoing) or for additional information,
(ii) of the issuance by the Commission, the National Association of Securities
Dealers, Inc. (the "NASD"), any state securities commission, any national
securities exchange, any arbitrator, any court or any other governmental,
regulatory, self-regulatory or administrative agency or any official of any
order suspending the effectiveness of the Registration Statement, prohibiting or
suspending the use of the Prospectus or any Prepricing Prospectus, or any sales
material (as hereinafter defined), of any notice pursuant to Section 8(e) of the
1940 Act, of the suspension of qualification of the Shares for offering or sale
in any jurisdiction, or the initiation of any proceeding for any such purposes,
(iii) of receipt by the Trust, the Adviser, any affiliate of the Trust or the
Adviser or any representative or attorney of the Trust or the Adviser of any
other material communication from the Commission, the NASD, any state securities
commission, any national securities exchange, any arbitrator, any court or any
other governmental, regulatory, self-regulatory or administrative agency or any
official relating to the Trust (if such communication relating to the Trust is
received by such person within three years after the date of this Agreement),
the Registration Statement, the 1940 Act Notification, the Prospectus, any
Prepricing Prospectus, any sales material (as herein defined) (or any amendment
or supplement to any of the foregoing) or this Agreement or any of the Trust
Agreements and (iv) within the period of time referred to in paragraph (f)
below, of any material adverse change in the financial condition, business,
properties, net assets or results of operations of the Trust or the Adviser or
of the happening of any other event which makes any statement of a material fact
made in the Registration Statement or the Prospectus, or any Prepricing
Prospectus or any sales materials (as herein defined) (or any amendment or
supplement to any of the foregoing) untrue or which requires the making of any
additions to or changes in the Registration Statement or the Prospectus, or any
Prepricing Prospectus or any sales materials (as herein defined) (or any
amendment or supplement to any of the foregoing) in order to state a material
fact required by the 1933 Act, the 1940 Act or the Rules and Regulations to be
stated therein or necessary in order to make the statements therein (in the case
of a prospectus, in light of the circumstances under which they were made) not
misleading or of the necessity to amend or supplement the Registration
Statement, the Prospectus, or any Prepricing Prospectus or any sales material
(as herein defined) (or any amendment or supplement to any of the foregoing) to
comply with the 1933 Act, the 1940 Act, the Rules and Regulations or any other
law or order of any court or regulatory body. If at any time the Commission, the
NASD, any state securities commission, any national securities exchange, any
arbitrator, any court or any other governmental, regulatory, self-regulatory or
administrative agency or any official shall issue any order suspending the
effectiveness of the Registration Statement, prohibiting or suspending the use
of the Prospectus or any sales material (as herein defined) (or any amendment or
supplement to any of the foregoing) or suspending the
4
<PAGE> 5
qualification of the Shares for offering or sale in any jurisdiction, the Trust
will make every reasonable effort to obtain the withdrawal of such order at the
earliest possible time.
(c) The Trust will furnish to the Underwriter, without charge,
three signed copies of the Registration Statement as originally filed with the
Commission and of each amendment thereto, including financial statements and all
exhibits thereto, and will also furnish to the Underwriter, without charge, such
number of conformed copies of the Registration Statement as originally filed and
of each amendment thereto, but without exhibits, as the Underwriter may request.
(d) The Trust will not (i) file any amendment to the
Registration Statement or make any amendment or supplement to the Prospectus, or
any sales material (as herein defined), of which the Underwriter shall not
previously have been advised or to which the Underwriter shall reasonably object
after being so advised or (ii) so long as, in the opinion of counsel for the
Underwriter, a Prospectus is required by the 1933 Act to be delivered in
connection with sales by the Underwriter or any dealer, file any information,
documents or reports pursuant to the Securities Exchange Act of 1934, as amended
(the "1934 Act"), without delivering a copy of such information, documents or
reports to the Underwriter prior to or concurrently with such filing.
(e) Prior to the execution and delivery of this Agreement, the
Trust has delivered to the Underwriter, without charge, in such quantities as
the Underwriter has requested, copies of each form of the Prepricing Prospectus.
The Trust consents to the use, in accordance with the provisions of the 1933 Act
and with the state securities or blue sky laws of the jurisdictions in which the
Shares are offered by the Underwriter and by dealers, prior to the date of the
Prospectus, of each Prepricing Prospectus so furnished by the Trust.
(f) As soon after the execution and delivery of this Agreement
as possible and thereafter from time to time for such period as in the opinion
of counsel for the Underwriter a prospectus is required by the 1933 Act to be
delivered in connection with sales by the Underwriter or any dealer, the Trust
will expeditiously deliver to the Underwriter and each dealer, without charge,
as many copies of the Prospectus as the Underwriter may request. The Trust
consents to the use of the Prospectus in accordance with the provisions of the
1933 Act and with the state securities or blue sky laws of the jurisdictions in
which the Shares are offered by the Underwriter and by all dealers to whom
Shares may be sold, both in connection with the offering and sale of the Shares
and for such period of time thereafter as the Prospectus is required by the 1933
Act to be delivered in connection with sales by the Underwriter or any dealer.
If during such period of time any event shall occur that in the judgment of the
Trust or in the opinion of counsel for the Underwriter is required to be set
forth in the Registration Statement or the Prospectus (as then amended or
supplemented) or should be set forth therein in order to make the statements
therein (in the case of the Prospectus, in light of the circumstances under
which they were made) not misleading, or if it is necessary to supplement or
amend the Registration Statement or the Prospectus to comply with the 1933 Act,
the 1940 Act, the Rules and
5
<PAGE> 6
Regulations or any other federal law, rule or regulation, or any state
securities or blue sky disclosure laws, rules or regulations, the Trust will
forthwith prepare and, subject to the provisions of paragraph (d) above,
promptly file with the Commission an appropriate supplement or amendment
thereto, and will expeditiously furnish to the Underwriter and dealers, without
charge, a reasonable number of copies thereof. In the event that the Trust and
the Underwriter agree that the Registration Statement or the Prospectus should
be amended or supplemented, the Trust, if requested by the Underwriter, will
promptly issue a press release announcing or disclosing the matters to be
covered by the proposed amendment or supplement.
(g) The Trust will make generally available to its security
holders an earnings statement, which need not be audited, covering a
twelve-month period ending not later than 15 months after the effective date of
the Registration Statement as soon as practicable after the end of such period,
which earnings statement shall satisfy the provisions of Section 11(a) of the
1933 Act and Rule 158 of the 1933 Act Rules and Regulations.
(h) During the period of five years hereafter, the Trust will
furnish to the Underwriter (i) as soon as available, a copy of each report of
the Trust mailed to stockholders or filed with the Commission or furnished to
the New York Stock Exchange (the "NYSE") other than reports on Form N-SAR, and
(ii) from time to time such other information concerning the Trust as the
Underwriter may reasonably request.
(i) If this Agreement shall terminate or shall be terminated
after execution pursuant to any provisions hereof (otherwise than by notice
given by the Underwriter terminating this Agreement pursuant to Section 12
hereof) or if this Agreement shall be terminated by the Underwriter because of
any failure or refusal on the part of the Trust or the Adviser to comply with
the terms or fulfill any of the conditions of this Agreement, the Trust and the
Adviser, jointly and severally, agree to reimburse the Underwriter for all
out-of-pocket expenses (including reasonable fees and expenses of counsel for
the Underwriter) incurred by the Underwriter in connection herewith.
(j) The Trust will apply the net proceeds from the sale of the
Shares in accordance with the description set forth in the Prospectus and in
such a manner as to comply with the investment objectives, policies and
restrictions of the Trust as described in the Prospectus.
(k) The Trust will timely file the Prospectus with the
Commission pursuant to Rule 497(c) or Rule 497(h) of the 1933 Act Rules and
Regulations, whichever is applicable or, if applicable, will timely file the
certification permitted by Rule 497(j) of the 1933 Act Rules and Regulations and
will advise the Underwriter of the time and manner of such filing.
(l) Except as provided in this Agreement, or as described in
the Prospectus, the Trust will not sell, contract to sell, or otherwise dispose
of any senior securities (as defined in
6
<PAGE> 7
the 1940 Act) of the Trust, or grant any options or warrants to purchase senior
securities of the Trust, for a period of 180 days after the date of the
Prospectus, without the prior written consent of the Underwriter.
(m) Except as stated in this Agreement and in the Prepricing
Prospectus and Prospectus, neither the Trust nor the Adviser has taken, nor will
it take, directly or indirectly, any action designed to or that might reasonably
be expected to cause or result in stabilization or manipulation of the price of
any securities issued by the Trust to facilitate the sale or resale of the
Shares.
(n) The Trust will use its best efforts to cause the Shares,
prior to the Closing Date, to be assigned a rating of 'aaa' by Moody's Investors
Service, Inc. ("Moody's") and AAA by Standard & Poor's Rating Group ("S&P" and,
together with Moody's, the "Rating Agencies").
(o) The Trust and the Adviser will use their best efforts to
perform all of the agreements required of them and discharge all conditions to
closing as set forth in this Agreement.
6. Representations and Warranties of the Trust and the Adviser
with respect to the Trust.
(i) The Trust represents and warrants to the Underwriter that:
(a) Each Prepricing Prospectus included as part of the
registration statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 497 of the 1933 Act Rules and
Regulations, complied when so filed in all material respects with the provisions
of the 1933 Act, the 1940 Act and the Rules and Regulations. The Commission has
not issued any order preventing or suspending the use of any Prepricing
Prospectus or the Prospectus.
(b) The registration statement in the form in which it became
or becomes effective and also in such form as it may be when any post-effective
amendment thereto shall become effective and the Prospectus and any supplement
or amendment thereto when filed with the Commission under Rule 497 of the 1933
Act Rules and Regulations and the 1940 Act Notification when originally filed
with the Commission and any amendment or supplement thereto when filed with the
Commission, complied or will comply in all material respects with the
requirements of the 1933 Act, the 1940 Act and the Rules and Regulations and did
not or will not at any such times contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein (in the case of the Prospectus, in light of the
circumstances under which they were made) not misleading, except that this
representation and warranty does not apply to statements in or omissions from
the registration statement or the Prospectus made in reliance upon and in
conformity with information
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<PAGE> 8
relating to the Underwriter furnished to the Trust in writing by or on behalf of
the Underwriter expressly for use therein.
(c) All the outstanding common shares of the Trust and all the
outstanding shares of Series A-D Preferred of the Trust have been duly
authorized and validly issued, are fully paid and nonassessable by the Trust and
are free of any preemptive or similar rights; the Shares have been duly
authorized and, when issued and delivered to the Underwriter against payment
therefor in accordance with the terms hereof, will be validly issued, fully paid
and nonassessable by the Trust and free of any preemptive or similar rights that
entitle or will entitle any person to acquire any Shares upon the issuance
thereof by the Trust, and will conform to the description thereof in the
Registration Statement and the Prospectus; and the capitalization of the Trust
conforms to the description thereof in the Registration Statement and the
Prospectus.
(d) Except as described in the Prospectus, there are no
outstanding options, warrants or other rights calling for the issuance of, or
any commitment, plan or arrangement to issue, any shares of beneficial interest
of the Trust or any security convertible into or exchangeable or exercisable for
shares of beneficial interest of the Trust.
(e) The Trust is a business trust duly organized and validly
existing under the laws of the Commonwealth of Massachusetts with full business
trust power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus, and is duly registered and qualified to conduct its business in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
to so register or qualify does not have a material adverse effect on the
financial condition, business, properties, net assets or results of operations
of the Trust; and the Trust has no subsidiaries.
(f) There are no legal or governmental proceedings pending or,
to the knowledge of the Trust, threatened, against the Trust, or to which the
Trust or any of its properties is subject, that are required to be described in
the Registration Statement or the Prospectus but are not described as required,
and there are no agreements, contracts, indentures, leases or other instruments
that are required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement that are
not described or filed as required by the 1933 Act, the 1940 Act or the Rules
and Regulations.
(g) The Trust is not in violation of its Agreement and
Declaration of Trust (the "Declaration"), including the Certificate, or bylaws
(the "Bylaws"), or other organizational documents or of any law, ordinance,
administrative or governmental rule or regulation applicable to the Trust or of
any decree of the Commission, the NASD, any state securities commission, any
national securities exchange, any arbitrator, any court or governmental agency,
body or official having jurisdiction over the Trust, or in default in the
performance of any material obligation, agreement or condition contained in any
bond, debenture, note or any other evidence of
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<PAGE> 9
indebtedness or in any material agreement, indenture, lease or other instrument
to which the Trust is a party or by which it or any of its properties may be
bound.
(h) Neither the issuance and sale of the Shares, the
execution, delivery or performance of this Agreement or any of the Trust
Agreements by the Trust, nor the consummation by the Trust of the transactions
contemplated hereby or thereby (A) requires any consent, approval, authorization
or other order of, or registration or filing with, the Commission, the NASD, any
state securities commission, any national securities exchange, any arbitrator,
any court, regulatory body, administrative agency or other governmental body,
agency or official (except such as may have been obtained prior to the date
hereof and such as may be required for compliance with the state securities or
blue sky laws of various jurisdictions which have been or will be effected in
accordance with this Agreement) or conflicts or will conflict with or
constitutes or will constitute a breach of, or a default under, the Declaration,
including the Certificate, the Bylaws or other organizational documents of the
Trust or (B) conflicts or will conflict with or constitutes or will constitute a
breach of, or a default under, any agreement, indenture, lease or other
instrument to which the Trust is a party or by which it or any of its properties
may be bound, or violates or will violate any statute, law, regulation or
judgment, injunction, order or decree applicable to the Trust or any of its
properties, or will result in the creation or imposition of any material lien,
charge or encumbrance upon any property or assets of the Trust pursuant to the
terms of any agreement or instrument to which it is a party or by which it may
be bound or to which any of its properties or assets is subject. The Trust is
not subject to any order of any court or of any arbitrator, governmental
authority or administrative agency.
(i) The financial statements, together with related schedules
and notes, included or incorporated by reference in the Registration Statement
and the Prospectus, present fairly the financial position, results of operations
and changes in financial position of the Trust on the basis stated or
incorporated by reference in the Registration Statement at the respective dates
or for the respective periods to which they apply; such statements and related
schedules and notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved,
except as disclosed therein; and the other financial and statistical information
and data included in the Registration Statement and the Prospectus are
accurately presented and prepared on a basis consistent with such financial
statements and the books and records of the Trust.
(j) The execution and delivery of, and the performance by the
Trust of its obligations under, this Agreement and the Trust Agreements have
been duly and validly authorized by the Trust, and this Agreement and the Trust
Agreements have been duly executed and delivered by the Trust and each
constitutes the valid and legally binding agreement of the Trust, enforceable
against the Trust in accordance with its terms, except as rights to indemnity
and contribution hereunder and thereunder may be limited by federal or state
securities laws and subject to the qualification that the enforceability of the
Trust's obligations hereunder and thereunder may be limited by bankruptcy,
fraudulent conveyance, insolvency, reorganization,
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<PAGE> 10
moratorium, and other laws relating to or affecting creditors' rights generally
and by general equitable principles.
(k) Except as disclosed in the Registration Statement and the
Prospectus, subsequent to the respective dates as of which such information is
given in the Registration Statement and the Prospectus (or any amendment or
supplement to either of them), the Trust has not incurred any liability or
obligation, direct or contingent, or entered into any transaction, not in the
ordinary course of business, that is material to the Trust, and there has not
been any change in the capitalization, or material increase in the short-term
debt or long-term debt, of the Trust, or any material adverse change, or any
development involving or which may reasonably be expected to involve, a
prospective material adverse change, in the financial condition, business,
properties, net assets or results of operations of the Trust, whether or not
arising in the ordinary course of business.
(l) The Trust has not distributed and, prior to the later to
occur of (i) the Closing Date and (ii) completion of the distribution of the
Shares, will not distribute any offering material in connection with the
offering and sale of the Shares other than the Registration Statement, the
Prepricing Prospectus, the Prospectus or other materials, if any, permitted by
the 1933 Act, the 1940 Act or the Rules and Regulations.
(m) The Trust has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits") as are
necessary to own its properties and to conduct its business in the manner
described in the Prospectus, subject to such qualifications as may be set forth
in the Prospectus; the Trust has fulfilled and performed all its material
obligations with respect to such permits and no event has occurred which allows,
or after notice or lapse of time would allow, revocation or termination thereof
or results in any other material impairment of the rights of the Trust under any
such permit, subject in each case to such qualification as may be set forth in
the Prospectus; and, except as described in the Prospectus, none of such permits
contains any restriction that is materially burdensome to the Trust.
(n) The Trust maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization and
with the applicable requirements of the 1940 Act, the 1940 Act Rules and
Regulations and the Internal Revenue Code of 1986, as amended (the "Code"); (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets and to maintain compliance with the books and
records requirements under the 1940 Act and the 1940 Act Rules and Regulations;
(iii) access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
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<PAGE> 11
(o) The Trust has filed all tax returns required to be filed,
which returns are complete and correct in all material respects, and the Trust
is not in material default in the payment of any taxes which were payable
pursuant to said returns or any assessments with respect thereto.
(p) No holder of any security of the Trust has any right to
require registration of shares of beneficial interest, shares of Series A-D
Preferred, the Shares or any other security of the Trust because of the filing
of the registration statement or consummation of the transactions contemplated
by this Agreement.
(q) The Trust, subject to the registration statement having
been declared effective and the filing of the Prospectus under Rule 497 under
the 1933 Act Rules and Regulations, has taken all required action under the 1933
Act, the 1940 Act and the Rules and Regulations to make the public offering and
consummate the sale of the Shares as contemplated by this Agreement.
(r) The Trust is registered under the 1940 Act and the 1940
Act Rules and Regulations as a closed-end, diversified management investment
company and the 1940 Act Notification has been duly filed with the Commission
and, at the time of filing thereof and any amendment or supplement thereto,
conformed in all material respects with all applicable provisions of the 1940
Act and the 1940 Act Rules and Regulations; no order of suspension or revocation
of such registration under the 1940 Act and the 1940 Act Rules and Regulations
has been issued or proceedings therefor initiated or threatened by the
Commission. The provisions of the Declaration, including the Certificate, and
Bylaws, and the investment policies and restrictions described in the
Registration Statement and the Prospectus under the captions "Prospectus
Summary," "Investment Objective and Policies," "Additional Information About
Investments and Investment Techniques" and "Investment Restrictions" (in the
prospectus and the statement of additional information) comply in all material
respects with the requirements of the 1940 Act and the 1940 Act Rules and
Regulations. The Trust is, and at all times through the completion of the
transactions contemplated hereby, will be, in compliance in all material
respects with the terms and conditions of the 1933 Act and the 1940 Act. No
person is serving or acting as an officer, director or investment adviser of the
Trust except in accordance with the provisions of the 1940 Act and the 1940 Act
Rules and Regulations and the Investment Advisers Act of 1940, as amended (the
"Advisers Act"), and the rules and regulations of the Commission promulgated
under the Advisers Act (the "Advisers Act Rules and Regulations").
(s) Except as stated in this Agreement and in the Prospectus,
the Trust has not taken, nor will it take, directly or indirectly, any action
designed to or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any securities issued by the Trust
to facilitate the sale or resale of the Shares, and the Trust is not aware of
any such action taken or to be taken by any affiliates of the Trust.
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<PAGE> 12
(t) The Trust has filed in a timely manner each document or
report required to be filed by it pursuant to the 1934 Act and the rules and
regulations of the Commission promulgated thereunder (the "1934 Act Rules and
Regulations"); each such document or report at the time it was filed conformed
to the requirements of the 1934 Act and the 1934 Act Rules and Regulations; and
none of such documents or reports contained an untrue statement of any material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
(u) All advertising, sales literature or other promotional
material (including "prospectus wrappers," "broker kits," "road show slides" and
"road show scripts") authorized in writing by or prepared by the Trust or the
Adviser for use in connection with the offering and sale of the Shares
(collectively, "sales material") complied and comply in all material respects
with the applicable requirements of the 1933 Act, the 1940 Act, the Rules and
Regulations and the rules and interpretations of the NASD and no such sales
material contained or contains an untrue statement of a material fact or omitted
or omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
(v) Each of the Trust Agreements complies in all material
respects with all applicable provisions of the 1933 Act, the 1940 Act, the Rules
and Regulations, the Advisers Act and the Advisers Act Rules and Regulations.
(w) As required by Subchapter M of the Code, the Trust is
currently in compliance with the requirements to qualify as a regulated
investment company under the Code.
(x) Except as disclosed in the Registration Statement and the
Prospectus, no trustee of the Trust is an "interested person" (as defined in the
1940 Act) of the Trust or an "affiliated person" (as defined in the 1940 Act) of
the Underwriter.
(y) The Trust's common shares are duly listed on the NYSE.
(z) The Trust is in compliance with the Commission's Release
No. 33-7558 dated July 29, 1998 related to Year 2000 compliance.
(ii) The Adviser represents and warrants to the Underwriter
that, with respect to the Trust:
(a) Each Prepricing Prospectus included as part of the
registration statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 497 of the 1933 Act Rules and
Regulations, complied when so filed in all material respects with the provisions
of the 1933 Act, the 1940 Act and the Rules and Regulations. The Commission has
12
<PAGE> 13
not issued any order preventing or suspending the use of any Prepricing
Prospectus or the Prospectus.
(b) The registration statement in the form in which it became
or becomes effective and also in such form as it may be when any post-effective
amendment thereto shall become effective and the Prospectus and any supplement
or amendment thereto when filed with the Commission under Rule 497 of the 1933
Act Rules and Regulations and the 1940 Act Notification when originally filed
with the Commission and any amendment or supplement thereto when filed with the
Commission, complied or will comply in all material respects with the
requirements of the 1933 Act, the 1940 Act and the Rules and Regulations and did
not or will not at any such times contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein (in the case of the Prospectus, in light of the
circumstances under which they were made) not misleading, except that this
representation and warranty does not apply to statements in or omissions from
the registration statement or the Prospectus made in reliance upon and in
conformity with information relating to the Underwriter furnished to the Trust
in writing by or on behalf of the Underwriter expressly for use therein.
(c) To the best knowledge of the Adviser, after reasonable
inquiry, there are no legal or governmental proceedings pending or, to the
knowledge of the Adviser, threatened, against the Trust, or to which the Trust
or any of its properties is subject, that are required to be described in the
Registration Statement or the Prospectus but are not described as required, and
there are no agreements, contracts, indentures, leases or other instruments that
are required to be described in the Registration Statement or the Prospectus or
to be filed as an exhibit to the Registration Statement that are not described
or filed as required by the 1933 Act, the 1940 Act or the Rules and Regulations.
(d) To the best knowledge of the Adviser, after reasonable
inquiry, the Trust is not in violation of the Declaration, including the
Certificate, or Bylaws, or other organizational documents or of any law,
ordinance, administrative or governmental rule or regulation applicable to the
Trust or of any decree of the Commission, the NASD, any state securities
commission, any national securities exchange, any arbitrator, any court or
governmental agency, body or official having jurisdiction over the Trust, or in
default in the performance of any material obligation, agreement or condition
contained in any bond, debenture, note or any other evidence of indebtedness or
in any material agreement, indenture, lease or other instrument to which the
Trust is a party or by which it or any of its properties may be bound.
(e) Except as disclosed in the Registration Statement and the
Prospectus, subsequent to the respective dates as of which such information is
given in the Registration Statement and the Prospectus, the Trust has not
incurred any liability or obligation, direct or contingent, or entered into any
transaction, not in the ordinary course of business, that is material to the
Trust, and there has not been any change in the capitalization, or material
increase in the
13
<PAGE> 14
short-term debt or long-term debt, of the Trust, or any material adverse change,
or any development involving or which may reasonably be expected to involve, a
prospective material adverse change, in the financial condition, business,
properties, net assets or results of operations of the Trust, whether or not
arising in the ordinary course of business.
(f) The Trust maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization and
with the applicable requirements of the 1940 Act, the 1940 Act Rules and
Regulations and the Code; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets and to maintain
compliance with the books and records requirements under the 1940 Act and the
1940 Act Rules and Regulations; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(g) The Trust has filed all tax returns required to be filed,
which returns are complete and correct in all material respects, and the Trust
is not in material default in the payment of any taxes which were payable
pursuant to said returns or any assessments with respect thereto.
(h) The Trust, subject to the registration statement having
been declared effective and the filing of the Prospectus under Rule 497 under
the 1933 Act Rules and Regulations, has taken all required action under the 1933
Act, the 1940 Act and the Rules and Regulations to make the public offering and
consummate the sale of the Shares as contemplated by this Agreement.
(i) The Trust has not distributed and, prior to the later to
occur of (i) the Closing Date and (ii) completion of the distribution of the
Shares, will not distribute any offering material in connection with the
offering and sale of the Shares other than the Registration Statement, the
Prepricing Prospectus, the Prospectus or other materials, if any, permitted by
the 1933 Act, the 1940 Act or the Rules and Regulations.
(j) Except as stated in this Agreement and in the Prospectus,
the Trust has not taken, nor will it take, directly or indirectly, any action
designed to or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any securities issued by the Trust
to facilitate the sale or resale of the Shares to the extent such action is
within the control of the Adviser, and the Adviser is not aware of any such
action taken or to be taken by any affiliates of the Trust.
(k) To the best knowledge of the Adviser, after reasonable
inquiry, the Trust has filed in a timely manner each document or report required
to be filed by it pursuant to the
14
<PAGE> 15
1934 Act and the 1934 Act Rules and Regulations; to the extent the Adviser has
participated in the preparation of such documents or reports, each such document
or report at the time it was filed conformed to the requirements of the 1934 Act
and the 1934 Act Rules and Regulations; and to the extent the Adviser has
participated in the preparation of such documents or reports, none of such
documents or reports contained an untrue statement of any material fact or
omitted to state any material fact required to be stated therein or necessary to
make the statements therein not misleading.
(l) Each of the Trust Agreements complies in all material
respects with all applicable provisions of the 1933 Act, the 1940 Act, the Rules
and Regulations, the Advisers Act and the Advisers Act Rules and Regulations.
(m) To the best knowledge of the Adviser, after reasonable
inquiry, except as disclosed in the Registration Statement and the Prospectus,
no trustee of the Trust is an "interested person" (as defined in the 1940 Act)
of the Trust or an "affiliated person" (as defined in the 1940 Act) of the
Underwriter.
(n) To the best knowledge of the Adviser, after reasonable
inquiry, the Trust is in compliance with the Commission's Release No. 33-7558,
dated July 29, 1998 related to Year 2000 compliance.
7. Representations and Warranties of the Adviser. The Adviser
represents and warrants to the Underwriter that:
(a) The Adviser is a corporation duly incorporated and validly
existing in good standing under the laws of the State of Delaware, with full
corporate power and authority to conduct its business as described in the
Registration Statement and the Prospectus, and is duly registered and qualified
to conduct its business and is in good standing in each jurisdiction or place
where the nature of its properties or the conduct of its business requires such
registration or qualification, except where the failure to so register or to
qualify does not have a material adverse effect on the financial condition,
business, properties, net assets or results of operations of the Adviser or on
the ability of the Adviser to perform its obligations under this Agreement and
the Investment Management Agreement.
(b) The Adviser is duly registered with the Commission as an
investment adviser under the Advisers Act and is not prohibited by the Advisers
Act, the Advisers Act Rules and Regulations, the 1940 Act or the 1940 Act Rules
and Regulations from acting under the Investment Management Agreement for the
Trust as contemplated by the Prospectus. To the best knowledge of the Adviser,
after reasonable inquiry, there does not exist any proceeding or any facts or
circumstances the existence of which could lead to any proceeding which might
adversely affect the registration of the Adviser with the Commission.
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<PAGE> 16
(c) To the best knowledge of the Adviser, after reasonable
inquiry, there are no legal or governmental proceedings pending or, to the
knowledge of the Adviser, threatened against the Adviser, or to which the
Adviser or any of its properties is subject, that are required to be described
in the Registration Statement or the Prospectus but are not described as
required or that may reasonably be expected to involve a prospective material
adverse change, in the financial condition, business, properties, net assets or
results of operations of the Adviser or on the ability of the Adviser to perform
its obligations under this Agreement and the Investment Management Agreement.
(d) To the best knowledge of the Adviser after reasonable
inquiry, neither the execution, delivery or performance of this Agreement or the
Investment Management Agreement by the Adviser, nor the consummation by the
Adviser of the transactions contemplated hereby or thereby (A) requires the
Adviser to obtain any consent, approval, authorization or other order of, or
registration or filing with, the Commission, the NASD, any state securities
commission, any national securities exchange, any arbitrator, any court,
regulatory body, administrative agency or other governmental body, agency or
official or conflicts or will conflict with or constitutes or will constitute a
breach of or a default under, the certificate of incorporation or bylaws, or
other organizational documents, of the Adviser, except where the failure to
obtain such consent, approval, authorization or other order of, or make such
registration or filing, or such conflict, breach or default, would not have a
material adverse effect on the financial condition, business, properties, net
assets or results of operations of the Adviser or on the ability of the Adviser
to perform its obligations under this Agreement and the Investment Management
Agreement or (B) conflicts or will conflict with or constitutes or will
constitute a breach of or a default under, any agreement, indenture, lease or
other instrument to which the Adviser is a party or by which it or any of its
properties may be bound, or violates or will violate any statute, law,
regulation or judgment, injunction, order or decree applicable to the Adviser or
any of its properties or will result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Adviser pursuant to the
terms of any agreement or instrument to which it is a party or by which it may
be bound or to which any of the property or assets of the Adviser is subject,
except where such conflict, breach, default or violation would not have a
material adverse effect on the financial condition, business, properties, net
assets or results of operations of the Adviser or on the ability of the Adviser
to perform its obligations under this Agreement and the Investment Management
Agreement. The Adviser is not subject to any order of any court or of any
arbitrator, governmental authority or administrative agency, except such orders
which do not have a material adverse effect on the financial condition,
business, properties, net assets or results of operations of the Adviser or on
the ability of the Adviser to perform its obligations under this Agreement and
the Investment Management Agreement.
(e) The execution and delivery of, and the performance by the
Adviser of its obligations under, this Agreement and the Investment Management
Agreement have been duly and validly authorized by the Adviser, and this
Agreement and the Investment Management Agreement have been duly executed and
delivered by the Adviser and each constitutes the valid
16
<PAGE> 17
and legally binding agreement of the Adviser, enforceable against the Adviser in
accordance with its terms, except as rights to indemnity and contribution
hereunder may be limited by federal or state securities laws.
(f) The description of the Adviser in the Registration
Statement and the Prospectus complied and comply in all material respects with
the provisions of the 1933 Act, the 1940 Act, the Advisers Act, the Rules and
Regulations and the Advisers Act Rules and Regulations and did not and will not
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
(g) Except as disclosed in the Registration Statement and the
Prospectus, subsequent to the respective dates as of which such information is
given in the Registration Statement and the Prospectus, the Adviser has not
incurred any liability or obligation, direct or contingent, or entered into any
transaction, not in the ordinary course of business, that is material to the
Adviser or the Trust, and there has not been any material adverse change, or any
development involving or which may reasonably be expected to involve, a
prospective material adverse change, in the financial condition, business,
properties, net assets or results of operations of the Adviser, whether or not
arising in the ordinary course of business, or which, in each case, could have a
material adverse effect on the ability of the Adviser to perform its obligations
under this Agreement and the Investment Management Agreement.
(h) The Adviser has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits") as are
necessary to own its properties and to conduct its business in the manner
described in the Prospectus, except such permits the lack of which would not
have a material adverse effect on the financial condition, business, properties,
net assets or results of operations of the Adviser or on the ability of the
Adviser to perform its obligations under this Agreement and the Investment
Management Agreement; the Adviser has fulfilled and performed all its material
obligations with respect to such permits and no event has occurred which allows,
or after notice or lapse of time would allow, revocation or termination thereof
or results in any other material impairment of the rights of the Adviser under
any such permit; and, except as described in the Prospectus, none of such
permits contains any restriction that is materially burdensome to the Adviser.
(i) Except as stated in this Agreement and in the Prospectus,
the Adviser has not taken, nor will it take, directly or indirectly, any action
designed to or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any securities issued by the Trust
to facilitate the sale or resale of the Shares, and the Adviser is not aware of
any such action taken or to be taken by any affiliates of the Adviser.
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<PAGE> 18
8 Indemnification and Contribution.
(a)(i) The Trust agrees to indemnify and hold harmless each
of the Underwriter and each person, if any, who controls the Underwriter within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act from and
against any and all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation), joint or several, arising out of or based
upon any untrue statement or alleged untrue statement of a material fact
contained in any Prepricing Prospectus or in the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or arising out of or based
upon any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities or expenses arise
out of or are based upon any untrue statement or omission or alleged untrue
statement or omission which has been made therein or omitted therefrom in
reliance upon and in conformity with the information relating to the Underwriter
furnished in writing to the Trust by or on behalf of the Underwriter expressly
for use in connection therewith; provided, however, that the indemnification
contained in this paragraph (a)(i) with respect to any Prepricing Prospectus
shall not inure to the benefit of the Underwriter (or to the benefit of any
person controlling the Underwriter) on account of any such loss, claim, damage,
liability or expense arising from the sale of the Shares by the Underwriter to
any person if a copy of the Prospectus shall not have been delivered or sent to
such person within the time required by the 1933 Act and the 1933 Act Rules and
Regulations, and the untrue statement or alleged untrue statement or omission or
alleged omission of a material fact contained in such Prepricing Prospectus was
corrected in the Prospectus, provided that the Trust has delivered the
Prospectus to the Underwriter in requisite quantity on a timely basis to permit
such delivery or sending. The foregoing indemnity agreement shall be in addition
to any liability which the Trust may otherwise have.
(ii) The Adviser agrees to indemnify and hold harmless each of
the Underwriter and each person, if any, who controls the Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act from and
against any and all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation), joint or several, arising out of or based
upon any untrue statement or alleged untrue statement of a material fact
contained in any Prepricing Prospectus or in the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or arising out of or based
upon any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities or expenses arise
out of or are based upon any untrue statement or omission or alleged untrue
statement or omission which has been made therein or omitted therefrom in
reliance upon and in conformity with the information relating to the Underwriter
furnished in writing to the Trust by or on behalf of the Underwriter expressly
for use in connection therewith; provided, however, that the indemnification
contained in this paragraph (a)(ii) with respect to any Prepricing Prospectus
shall not inure to the benefit of the Underwriter (or to the benefit of any
person controlling the Underwriter) on account of any such loss, claim, damage,
liability or expense arising from the sale
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<PAGE> 19
of the Shares by the Underwriter to any person if a copy of the Prospectus shall
not have been delivered or sent to such person within the time required by the
1933 Act and the 1933 Act Rules and Regulations, and the untrue statement or
alleged untrue statement or omission or alleged omission of a material fact
contained in such Prepricing Prospectus was corrected in the Prospectus,
provided that the Trust has delivered the Prospectus to the Underwriter in
requisite quantity on a timely basis to permit such delivery or sending; and
provided further, that (i) the Adviser will not be liable to any such
indemnified party in any such case except to the extent that the Trust has
failed to indemnify and hold harmless such indemnified party pursuant to
paragraph (a)(i) in respect of any such loss, claim, damage, liability or
expense after such indemnified party has made a claim of the Trust as required
below; and (ii) the amount of the Adviser's liability hereunder shall be limited
to the amount of the net proceeds from the sale of the Shares. This indemnity
agreement shall be in addition to any liability which the Adviser may otherwise
have.
(b) If any action, suit or proceeding shall be brought against
the Underwriter or any person controlling the Underwriter in respect of which
indemnity may be sought against the Trust or the Adviser, the Underwriter or
such controlling person shall promptly notify the Trust or the Adviser, and the
Trust or the Adviser shall assume the defense thereof, including the employment
of counsel and payment of all fees and expenses. The Underwriter or any such
controlling person shall have the right to employ separate counsel in any such
action, suit or proceeding and to participate in the defense thereof, but the
fees and expenses of such counsel shall be at the expense of the Underwriter or
such controlling person unless (i) the Trust or the Adviser has agreed in
writing to pay such fees and expenses, (ii) the Trust and the Adviser have
failed to assume the defense and employ counsel, or (iii) the named parties to
any such action, suit or proceeding (including any impleaded parties) include
both the Underwriter or such controlling person and the Trust or the Adviser and
the Underwriter or such controlling person shall have been advised by its
counsel that representation of such indemnified party and the Trust or the
Adviser by the same counsel would be inappropriate under applicable standards of
professional conduct (whether or not such representation by the same counsel has
been proposed) due to actual or potential differing interests between them (in
which case the Trust and the Adviser shall not have the right to assume the
defense of such action, suit or proceeding on behalf of the Underwriter or such
controlling person). It is understood, however, that the Trust and the Adviser
shall, in connection with any one such action, suit or proceeding or separate
but substantially similar or related actions, suits or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of only one separate firm of
attorneys (in addition to any local counsel) at any time for the Underwriter and
controlling persons not having actual or potential differing interests with you
or among themselves, which firm shall be designated in writing by the
Underwriter, and that all such fees and expenses shall be reimbursed as they are
incurred. The Trust and the Adviser shall not be liable for any settlement of
any such action, suit or proceeding effected without their written consent, but
if settled with such written consent, or if there be a final judgment for the
plaintiff in any such action, suit or proceeding, the Trust and the Adviser
agree to indemnify and hold harmless the Underwriter, to the extent provided in
the preceding paragraph, and any such
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<PAGE> 20
controlling person from and against any loss, claim, damage, liability or
expense by reason of such settlement or judgment.
(c) The Underwriter agrees to indemnify and hold harmless the
Trust and the Adviser, their directors and trustees, any officers who sign the
Registration Statement, and any person who controls the Trust or the Adviser
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act,
to the same extent as the foregoing indemnity from the Trust and the Adviser to
the Underwriter, but only with respect to information relating to the
Underwriter furnished in writing by or on behalf of the Underwriter expressly
for use in the Registration Statement, the Prospectus or any Prepricing
Prospectus, or any amendment or supplement thereto. If any action, suit or
proceeding shall be brought against the Trust or the Adviser, any of their
directors or trustees, any such officer, or any such controlling person based on
the Registration Statement, the Prospectus or any Prepricing Prospectus, or any
amendment or supplement thereto, and in respect of which indemnity may be sought
against the Underwriter pursuant to this paragraph (c), the Underwriter shall
have the rights and duties given to the Trust and the Adviser by paragraph (b)
above (except that if the Trust or the Adviser shall have assumed the defense
thereof the Underwriter shall not be required to do so, but may employ separate
counsel therein and participate in the defense thereof, but the fees and
expenses of such counsel shall be at the Underwriter's expense), and the Trust
and the Adviser, their directors and trustees, any such officer, and any such
controlling person shall have the rights and duties given to the Underwriter by
paragraph (b) above. The foregoing indemnity agreement shall be in addition to
any liability which the Underwriter may otherwise have.
(d) If the indemnification provided for in this Section 8 is
unavailable to an indemnified party under paragraphs (a) or (c) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Trust and the Adviser on the one hand (treated jointly for this purpose as one
person) and the Underwriter on the other hand from the offering of the Shares,
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Trust and the Adviser on the one hand (treated jointly for this purpose as
one person) and the Underwriter on the other in connection with the statements
or omissions that resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Trust and the Adviser on the one hand (treated jointly
for this purpose as one person) and the Underwriter on the other shall be
deemed to be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Trust bear to the total underwriting
discounts and commissions received by the Underwriter, in each case as set forth
in the table on the cover page of the Prospectus. The relative fault of the
Trust and the Adviser on the one hand (treated jointly for this purpose as one
person) and the Underwriter on the other hand shall be
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<PAGE> 21
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Trust and the Adviser on
the one hand (treated jointly for this purpose as one person) or by the
Underwriter on the other hand and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
(e) The Trust, the Adviser and the Underwriter agree that it
would not be just and equitable if contribution pursuant to this Section 8 were
determined by a pro rata allocation or by any other method of allocation that
does not take account of the equitable considerations referred to in paragraph
(d) above. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities and expenses referred to in paragraph (d)
above shall be deemed to include, subject to the limitations set forth above,
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating any claim or defending any such action, suit or
proceeding. Notwithstanding the provisions of this Section 8, the Underwriter
shall not be required to contribute any amount in excess of the amount by which
the total price of the Shares underwritten by it and distributed to the public
exceeds the amount of any damages which the Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation.
(f) No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity could have been sought hereunder by
such indemnified party, unless such settlement includes an unconditional release
of such indemnified party from all liability on claims that are the subject
matter of such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution under
this Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Trust and the Adviser set forth in this
Agreement shall remain operative and in full force and effect, regardless of (i)
any investigation made by or on behalf of the Underwriter or any person
controlling the Underwriter, the Trust, the Adviser, their directors, trustees
or officers, or any person controlling the Trust or the Adviser, (ii) acceptance
of any Shares and payment therefor hereunder, and (iii) any termination of this
Agreement. A successor to the Underwriter or any person controlling the
Underwriter, or to the Trust, the Adviser, their directors, trustees or
officers, or any person controlling the Trust or the Adviser, shall be entitled
to the benefits of the indemnity, contribution, and reimbursement agreements
contained in this Section 8.
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9 Conditions of Underwriter's Obligations. The obligation of
the Underwriter to purchase the Shares hereunder are subject to the following
conditions:
(a) If, at the time this Agreement is executed and delivered,
it is necessary for the registration statement or a post-effective amendment
thereto to be declared effective before the offering of the Shares may commence,
the registration statement or such post-effective amendment shall have become
effective not later than 5:30 P.M., New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by the
Underwriter, and all filings, if any, required by Rules 497 and 430A under the
1933 Act and the 1933 Act Rules and Regulations shall have been timely made; no
stop order suspending the effectiveness of the Registration Statement or order
pursuant to Section 8(e) of the 1940 Act shall have been issued and no
proceeding for those purposes shall have been instituted or, to the knowledge of
the Trust, the Adviser or the Underwriter, threatened by the Commission, and any
request of the Commission for additional information (to be included in the
registration statement or the prospectus or otherwise) shall have been complied
with to the Underwriter's satisfaction.
(b) Subsequent to the effective date of this Agreement, there
shall not have occurred (i) any change or any development involving a
prospective change in or affecting the financial condition, business,
properties, net assets, or results of operations of the Trust or the Adviser not
contemplated by the Prospectus, which in the Underwriter's opinion would
materially, adversely affect the market for the Shares, or (ii) any event or
development relating to or involving the Trust or the Adviser or any officer or
director of the Trust or the Adviser which makes any statement made in the
Prospectus untrue or which, in the opinion of the Trust and its counsel or the
Underwriter and its counsel, requires the making of any addition to or change in
the Prospectus in order to state a material fact required by the 1933 Act, the
1940 Act or the Rules and Regulations or any other law to be stated therein or
necessary in order to make the statements therein not misleading, if amending or
supplementing the Prospectus to reflect such event or development would, in the
Underwriter's opinion, materially adversely affect the market for the Shares.
(c) The Trust shall have furnished to you a report showing
compliance with the asset coverage requirements of the 1940 Act and a
Certificate of Rating Agency Required Asset Coverage (as defined in the
Certificate), each dated the Closing Date and in form and substance satisfactory
to you. Each such report may use portfolio holdings and valuations as of the
close of business of any day not more than six business days preceding the
Closing Date, provided, however, that the Trust represents in such report that
its total net assets as of the Closing Date have not declined by 5% or more from
such valuation date.
(d) The Underwriter shall have received on the Closing Date an
opinion of Dechert Price & Rhoads, special counsel for the Trust, dated the
Closing Date and addressed to the Underwriter, in form and substance
satisfactory to the Underwriter and to the effect that:
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(i) The Trust is a business trust duly organized and validly
existing under the laws of the Commonwealth of Massachusetts with full business
trust power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus, and is duly registered and qualified to conduct its business in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
to so register or qualify does not have a material adverse effect on the
financial condition, business, properties, net assets or results of operations
of the Trust;
(ii) The Trust has no subsidiaries;
(iii) The authorized and outstanding capitalization of the
Trust is as set forth under the caption "Capitalization" in the Prospectus; and
the authorized capitalization of the Trust conforms in all material respects as
to legal matters to the description thereof contained in the Prospectus under
the caption "Description of Capital Structure";
(iv) All the shares of beneficial interest of the Trust
outstanding prior to the issuance of the Shares have been duly authorized and
validly issued, and are fully paid and nonassessable;
(v) The Shares have been duly authorized and, when issued and
delivered to the Underwriter against payment therefor in accordance with the
terms hereof, will be validly issued, fully paid and nonassessable and free of
any preemptive, or to the best knowledge of such counsel after reasonable
inquiry, similar rights that entitle or will entitle any person to acquire any
Shares upon the issuance thereof by the Trust, and will conform to the
description thereof contained in the Prospectus under the caption "Description
of Series E Preferred Shares";
(vi) The form of certificates for the Shares conforms to the
requirements of Massachusetts law;
(vii) The Registration Statement and all post-effective
amendments, if any, have become effective under the 1933 Act and the 1933 Act
Rules and Regulations and, to the best knowledge of such counsel after
reasonable inquiry, no stop order suspending the effectiveness of the
Registration Statement or order pursuant to Section 8(e) of the 1940 Act has
been issued and no proceedings for that purpose are pending before or
contemplated by the Commission; and any required filing of the Prospectus
pursuant to Rule 497 of the 1933 Act Rules and Regulations has been made in
accordance with Rule 497;
(viii) The Trust has business trust power and authority to
enter into this Agreement and each of the Trust Agreements and to issue, sell
and deliver the Shares to the Underwriter as provided herein, and this Agreement
and each of the Trust Agreements have been duly authorized, executed and
delivered by the Trust and, assuming due authorization, execution and delivery
by the other parties thereto, each is a valid and legally binding agreement of
the Trust,
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enforceable against the Trust in accordance with its terms, except as rights to
indemnity and contribution hereunder and thereunder may be limited by federal or
state securities laws or principles of public policy and subject to the
qualification that the enforceability of the Trust's obligations hereunder and
thereunder may be limited by bankruptcy, fraudulent conveyance, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights generally and by general equitable principles;
(ix) To the best knowledge of such counsel, after reasonable
inquiry, the Trust is not in violation of the Declaration, including the
Certificate, or Bylaws, or other organizational documents, and is not in default
in the performance of any material obligation, agreement or condition contained
in any bond, debenture, note or other evidence of indebtedness, or in any
material agreement, indenture, lease or other instrument to which the Trust is a
party or by which it or any of its properties may be bound, except as may be
disclosed in the Prospectus;
(x) Neither the offer, sale or delivery of the Shares, the
execution, delivery or performance of this Agreement and the Trust Agreements by
the Trust, nor the consummation by the Trust of the transactions contemplated
hereby and thereby conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the Declaration, including the
Certificate, or Bylaws, or other organizational documents, of the Trust or any
agreement, indenture, lease or other instrument to which the Trust is a party or
by which it or any of its properties is bound, nor will any such action result
in any violation of any statute, law, regulation or judgement (assuming
compliance with all applicable state securities or blue sky laws), injunction,
order or decree applicable to the Trust or any of its properties;
(xi) No consent, approval, authorization or other order of, or
registration or filing with, the Commission, the NASD, or, to the best of such
counsel's knowledge after reasonable inquiry, any state securities commission,
any arbitrator, any court, regulatory body, administrative agency or other
governmental body, agency, or official is required on the part of the Trust
(except such as may have been obtained prior to the date hereof and such as may
be required by the New York Stock Exchange, or for compliance with the state
securities or blue sky laws of various jurisdictions) for the valid issuance and
sale of the Shares to the Underwriter as contemplated by this Agreement, the
execution, delivery and performance by the Trust of this Agreement and the Trust
Agreements or the consummation of the transactions contemplated hereby and
thereby;
(xii) The 1940 Act Notification, the Registration Statement,
the Prospectus and any supplements or amendments thereto (except for the
financial statements and the notes thereto and the schedules and other financial
and statistical data included therein, as to which such counsel need not express
any opinion) comply in all material respects with the requirements of the 1933
Act, the 1940 Act and the Rules and Regulations;
(xiii) To the best knowledge of such counsel after reasonable
inquiry, (A) other than as described in the Registration Statement or
Prospectus, there are no legal or governmental
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proceedings pending or threatened against the Trust, or to which the Trust or
any of its properties is subject, which are required to be described in the
Registration Statement or Prospectus and (B) there are no agreements, contracts,
indentures, leases or other instruments that are required to be described in the
Registration Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement that are not described or filed as required, as the case
may be;
(xiv) To the best knowledge of such counsel after reasonable
inquiry, the Trust is not in violation of any law, ordinance, administrative or
governmental rule or regulation applicable to the Trust or of any decree of the
Commission, the NASD, any state securities commission, any national securities
exchange, any arbitrator, any court or governmental agency, body or official
having jurisdiction over the Trust;
(xv) The statements in the Registration Statement and
Prospectus, insofar as they are descriptions of contracts, agreements or other
legal documents, or refer to statements of law or legal conclusions, are
accurate and present fairly the information required to be shown;
(xvi) Each of this Agreement and the Trust Agreements complies
in all material respects with all applicable provisions of the 1933 Act, the
1940 Act, the Advisers Act, the Rules and Regulations and the Advisers Act Rules
and Regulations;
(xvii) The Trust is duly registered with the Commission under
the 1940 Act and the 1940 Act Rules and Regulations as a closed-end, diversified
management investment company and, to the best knowledge of such counsel after
reasonable inquiry, no order of suspension or revocation of such registration
under the 1940 Act and the 1940 Act Rules and Regulations has been issued or
proceedings therefor initiated or threatened by the Commission; and the Trust
has taken all required action under the 1933 Act and the 1940 Act and the Rules
and Regulations to make the public offering and consummate the sale of the
Shares as contemplated by this Agreement;
(xviii) Except as described in the Prospectus, there are no
outstanding options, warrants or other rights calling for the issuance of, and
such counsel does not know of any commitment, plan or arrangement to issue, any
shares of beneficial interest of the Trust or any security convertible into or
exchangeable or exercisable for shares of beneficial interest of the Trust; and
no holder of any security of the Trust has any right to require registration of
shares of beneficial interest, shares of Series A-D Preferred, the Shares or any
other security of the Trust because of the filing of the registration statement
or consummation of the transactions contemplated by this Agreement; and
(xix) Such counsel shall also state that, while they have not
themselves checked the accuracy and completeness of or otherwise verified, and
are not passing upon and assume no responsibility for the accuracy or
completeness of, the statements contained in the Registration Statement or the
Prospectus, except to the limited extent stated in paragraphs (iii) and (xv)
above, in the course of their review and discussion of the contents of the
Registration Statement and
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Prospectus with certain officers and employees of the Trust and its independent
accountants, no facts have come to their attention which cause them to believe
that the Registration Statement or any amendment or supplement thereto (except
as to any financial statements or other financial data included in the
Registration Statement as to which they express no belief), as of its effective
date, contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
contained therein not misleading or that the Prospectus (except as to any
financial statements or other financial data included in the Prospectus, as to
which they express no belief), as of its issue date and as of the Closing Date,
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements contained
therein, in light of the circumstances under which they were made, not
misleading.
(e) The Underwriter shall have received on the Closing Date an
opinion of Debevoise & Plimpton, counsel for the Adviser, dated the Closing Date
and addressed to the Underwriter to the effect that:
(i) The Adviser is a corporation duly incorporated and
validly existing in good standing under the laws of the State of
Delaware with full corporate power and authority to conduct its
business as described in the Registration Statement and the
Prospectus, and is duly registered and qualified to conduct its
business and is in good standing in each of the States of Illinois
and New York;
(ii) The Adviser is duly registered with the Commission as an
investment adviser under the Advisers Act and is not prohibited by
the Advisers Act, the Advisers Act Rules and Regulations, the 1940
Act or the 1940 Act Rules and Regulations from acting under the
Investment Management Agreement for the Trust as contemplated by the
Prospectus (or any amendment or supplement thereto); and, to the best
knowledge of such counsel after reasonable inquiry, there does not
exist any proceeding or any facts or circumstances the existence of
which could lead to any proceeding which might adversely affect the
registration of the Adviser with the Commission;
(iii) The Adviser has corporate power and authority to enter
into this Agreement and the Investment Management Agreement, and this
Agreement and the Investment Management Agreement have been duly
authorized, executed and delivered by the Adviser and assuming due
authorization, execution and delivery by the other parties thereto,
each is a valid and legally binding agreement of the Adviser,
enforceable against the Adviser in accordance with its terms except
as rights to indemnity and contribution hereunder and thereunder may
be limited by federal or state securities laws or principles of
public policy and subject to the qualification that the
enforceability of the Adviser's obligations hereunder and thereunder
may be limited by bankruptcy, fraudulent conveyance, insolvency,
reorganization, moratorium, and other laws relating to or affecting
creditors' rights generally and by general equitable principles;
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(iv) To the best knowledge of such counsel after reasonable
inquiry, neither the execution, delivery or performance of this
Agreement or the Investment Management Agreement by the Adviser nor
the consummation by the Adviser of the transactions contemplated
hereby and thereby violates or will violate, or constitutes or will
constitute a breach of or default under, the certificate of
incorporation or bylaws of the Adviser or any material agreement,
indenture, lease or other instrument to which the Adviser is a party
or by which it or any of its material properties is bound, or will
result in the creation or imposition of any material lien, charge or
encumbrance upon any property or assets of the Adviser, nor will any
such action result in any violation of any existing New York or
federal statute, law, regulation or judgment, injunction, order or
decree applicable to the Adviser or any of its properties;
(v) To the best knowledge of such counsel after reasonable
inquiry, there are no legal or governmental proceedings pending or
threatened against the Adviser or to which the Adviser or any of its
properties is subject, which are required to be described in the
Registration Statement or the Prospectus but are not described as
required; and
(vi) The obligations of the Adviser under this Agreement and
the Investment Management Agreement comply in all material respects
with all applicable provisions of the 1940 Act, the 1940 Act Rules
and Regulations, the Advisers Act and the Advisers Act Rules and
Regulations.
(f) The Underwriter shall have received on the Closing Date an
opinion of Simpson Thacher & Bartlett, counsel for the Underwriter, dated the
Closing Date and addressed to the Underwriter, with respect to such matters as
the Underwriter may reasonably request.
(g) The Underwriter shall have received letters addressed to
the Underwriter and dated the date hereof and the Closing Date from Ernst &
Young LLP, independent certified public accountants, substantially in the forms
heretofore approved by the Underwriter. The Underwriter shall also have received
a certification, in form satisfactory to the Underwriter, of Ernst & Young LLP's
status as independent certified public accountants.
(h)(i) No order suspending the effectiveness of the
registration statement or the Registration Statement or prohibiting or
suspending the use of the Prospectus (or any amendment or supplement thereto) or
any Prepricing Prospectus or any sales material shall have been issued and no
proceedings for such purpose or for the purpose of commencing an enforcement
action against the Trust, the Adviser or, with respect to the transactions
contemplated by the Prospectus (or any amendment or supplement thereto) and this
Agreement, the Underwriter, may be pending before or, to the knowledge of the
Trust, the Adviser or the Underwriter or in the reasonable view of counsel to
the Underwriter, shall be threatened or contemplated by the Commission at or
prior to the Closing Date and that any request for additional information on the
part of the Commission
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<PAGE> 28
(to be included in the Registration Statement, the Prospectus or otherwise) be
complied with to the satisfaction of the Underwriter; (ii) there shall not have
been any change in the capital stock of the Trust nor any material increase in
the short-term or long-term debt of the Trust (other than in the ordinary course
of business) from that set forth or contemplated in the Registration Statement
or the Prospectus (or any amendment or supplement thereto); (iii) there shall
not have been, subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus (or any amendment or
supplement thereto), except as may otherwise be stated in the Registration
Statement and Prospectus (or any amendment or supplement thereto), any material
adverse change in the financial condition, business, properties, net assets or
results of operations of the Trust or the Adviser; (iv) the Trust shall not have
any liabilities or obligations, direct or contingent (whether or not in the
ordinary course of business), that are material to the Trust, other than those
reflected in the Registration Statement or the Prospectus (or any amendment or
supplement to either of them); and (v) all the representations and warranties of
the Trust and the Adviser contained in this Agreement shall be true and correct
on and as of the date hereof and on and as of the Closing Date as if made on and
as of the Closing Date, and the Underwriter shall have received a certificate of
the Trust and the Adviser, dated the Closing Date and signed by the chief
executive officer and the chief financial officer of each of the Trust and the
Adviser (or such other officers as are acceptable to the Underwriter), to the
effect set forth in this Section 9(h) and in Section 9(i) hereof.
(i) That neither the Trust nor the Adviser shall have failed
at or prior to the Closing Date to have performed or complied in all material
respects with any of its agreements herein contained and required to be
performed or complied with by it hereunder at or prior to the Closing Date.
(j) The Trust shall have delivered and the Underwriter shall
have received evidence satisfactory to the Underwriter that the Shares are rated
'aaa' by Moody's and AAA by S&P as of the Closing Date, and there shall not have
been given any notice of any intended or potential downgrading, or of any review
for a potential downgrading, in the rating accorded to the Shares or any shares
of Series A-D Preferred by any Rating Agency.
(k) The Trust shall have furnished, in form satisfactory to
the Underwriter, certification that the Trust maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization and with the applicable requirements of the 1940 Act, the 1940 Act
Rules and Regulations and the Code; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets and to
maintain compliance with the books and records requirements under the 1940 Act
and the 1940 Act Rules and Regulations; (iii) access to assets is permitted only
in accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
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(l) The Trust shall have furnished, in form satisfactory to
the Underwriter, certification that, as of the Closing Date, the Trust is in
compliance with the requirements to qualify as a regulated investment company
under Subchapter M of the Code.
(m) The Trust and the Adviser shall have furnished or caused
to be furnished to the Underwriter such further certificates and documents as
the Underwriter shall have reasonably requested.
All such opinions, certificates, letters and other documents
will be in compliance with the provisions hereof only if they are satisfactory
in form and substance to the Underwriter and the Underwriter's counsel.
Any certificate or document signed by any officer of the Trust
or the Adviser and delivered to the Underwriter, or to counsel for the
Underwriter, shall be deemed a representation and warranty by the Trust or the
Adviser to the Underwriter as to the statements made therein.
10 Expenses. The Trust agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by it of
its obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the 1940 Act
Notification, the Prospectus and each amendment or supplement to any of them
(including, without limitation, the filing fees prescribed by the 1933 Act, the
1940 Act and the Rules and Regulations); (ii) the printing (or reproduction) and
delivery (including postage, air freight charges and charges for counting and
packaging) of such copies of the Registration Statement, each Prepricing
Prospectus, the Prospectus, any sales material and all amendments or supplements
to any of them as may be reasonably requested for use in connection with the
offering and sale of the Shares; (iii) the preparation, printing,
authentication, issuance and delivery of certificates for the Shares, including
any stamp taxes in connection with the original issuance and sale of the Shares;
(iv) the reproduction and delivery of this Agreement, any dealer agreements, the
preliminary blue sky memorandum and all other agreements or documents reproduced
and delivered in connection with the offering of the Shares; (v) the reasonable
fees, expenses and disbursements of counsel for the Underwriter relating to the
preparation, reproduction, and delivery of the preliminary blue sky memorandum;
(vi) fees paid to the Rating Agencies; (vii) the transportation and other
expenses incurred by or on behalf of Trust representatives in connection with
presentations to prospective purchasers of the Shares; and (viii) the fees and
expenses of the Trust's accountants and the fees and expenses of counsel
(including local and special counsel) for the Trust and of the transfer agent.
11 Effective Date of Agreement. This Agreement shall become
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the registration statement or a post-effective
29
<PAGE> 30
amendment thereto to be declared effective before the offering of the Shares may
commence, when notification of the effectiveness of the registration statement
or such post-effective amendment has been released by the Commission. Until such
time as this Agreement shall have become effective, it may be terminated by the
Trust, by notifying the Underwriter, or by the Underwriter, by notifying the
Trust. Any notice under this Section 11 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
12 Termination of Agreement. This Agreement shall be subject
to termination in the Underwriter's absolute discretion, without liability on
the part of the Underwriter to the Trust or the Adviser, by notice to the Trust
or the Adviser, if prior to the Closing Date (i) trading in securities generally
on the New York Stock Exchange, the American Stock Exchange or the Nasdaq
National Market shall have been suspended or materially limited, (ii) a general
moratorium on commercial banking activities in New York shall have been declared
by either federal or state authorities, or (iii) there shall have occurred any
outbreak or escalation of hostilities or other international or domestic
calamity, crisis or change in political, financial or economic conditions, the
effect of which on the financial markets of the United States is to make it, in
the Underwriter's judgment, impracticable or inadvisable to commence or continue
the offering of the Shares at the offering price to the public set forth on the
cover page of the Prospectus or to enforce contracts for the resale of the
Shares by the Underwriter. Notice of such termination may be given to the Trust
by telegram, telecopy or telephone and shall be subsequently confirmed by
letter.
13 Information Furnished by the Underwriter. The statements
set forth in the ___ paragraph on the cover page, and the statements in _____
under the caption "Underwriting" in any Prepricing Prospectus and in the
Prospectus, constitute the only information furnished by or on behalf of the
Underwriter as such information is referred to in Sections 6(i)(b), 6(ii)(b) and
8 hereof.
14 Miscellaneous. Except as otherwise provided in Sections 5,
11 and 12 hereof, notice given pursuant to any provision of this Agreement shall
be in writing and shall be delivered (i) if to the Trust or the Adviser, at the
office of the Adviser at 222 South Riverside Plaza, Chicago, Illinois 60606,
Attention: Philip J. Collora; or (ii) if to the Underwriter, to Salomon Smith
Barney Inc., 388 Greenwich Street, New York, New York 10013, Attention: Manager,
Investment Banking Division.
This Agreement has been and is made solely for the benefit of
the Underwriter, the Trust, the Adviser, their directors and officers, and the
other controlling persons referred to in Section 8 hereof and their respective
successors and assigns, to the extent provided herein, and no other person shall
acquire or have any right under or by virtue of this Agreement. Neither the term
"successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from the Underwriter of any of the Shares in his
status as such purchaser.
30
<PAGE> 31
Consistent with the Trust's Declaration, notice is hereby
given and the parties hereto acknowledge and agree that this Agreement is
executed on behalf of the Trustees of the Trust as Trustees and not individually
and that obligations of this Agreement are not binding upon any of the Trustees
or shareholders of the Trust individually but are binding only against the
assets and property of the Trust.
15 Applicable Law; Counterparts. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York.
This Agreement may be signed in various counterparts which
together constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
Please confirm that the foregoing correctly sets forth the
agreement among the Trust, the Adviser and the Underwriter.
Very truly yours,
KEMPER MUNICIPAL INCOME TRUST
By:
-----------------------------
SCUDDER KEMPER INVESTMENTS, INC.
By:
-----------------------------
Confirmed as of the date first
above mentioned.
SALOMON SMITH BARNEY INC.
By:
----------------------
31
<PAGE> 32
SCHEDULE I
KEMPER MUNICIPAL INCOME TRUST
<TABLE>
<CAPTION>
Underwriter Number of Series E Shares
----------- -------------------------
<S> <C>
Salomon Smith Barney Inc. ......................
------------------
Total........................................... 10,000
</TABLE>
i
<PAGE> 1
EXHIBIT 2(k)(1)
REMARKETING AGREEMENT
THIS REMARKETING AGREEMENT (the "Agreement"), dated as of
November __, 1999, is made by and between Kemper Municipal Income Trust, a
Massachusetts business trust (the "Company"), and Salomon Smith Barney Inc. (the
"Remarketing Agent").
The Company has issued and sold 10,000 shares of its
Preferred Shares, Series E (the "Preferred Shares"). Intending to be legally
bound, the parties hereto agree as follows:
1. Definitions. Capitalized terms used and not defined in
this Agreement shall have the meanings assigned to them in the Company's Amended
and Restated Certificate of Designation For Preferred Shares (the "Certificate
of Designation"), a copy of which is being delivered herewith.
2. Acceptance of Duties. The Remarketing Agent agrees as
follows:
(a) It will perform the duties and obligations of
Remarketing Agent for the Preferred Shares as specified in the Certificate of
Designation and in this Agreement in compliance with the provisions of
applicable laws.
(b) The remarketing process will be conducted on the
following schedule and in the following manner (all times are New York City
time):
<PAGE> 2
Last Business Day of a Dividend Period:
<TABLE>
<S> <C>
Beginning Not Later Than The Remarketing Agent will
1:00 p.m.: determine and, upon request,
make 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 Preferred Shares will
be deemed to have tendered
shares for sale by 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 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 Preferred
Shares at $5,000 per share.
--------------------------------------
First Day of Next Dividend Period:
Opening of Business: The Remarketing Agent will
continue, if necessary,
remarketing Preferred 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>
3. Fees and Expenses. (a) The Company agrees to pay to the
Remarketing Agent, as compensation for its services hereunder, such fees as may
be agreed upon by the parties from time to time. Initially, the fee will be
equal to .25% of the Company's assets attributable to the
2
<PAGE> 3
Preferred Shares.
(b) The Company shall reimburse the Remarketing Agent for
its reasonable out-of-pocket expenses incurred by it in connection with the
performance of its services hereunder, including counsel fees.
4. Broker-Dealer Participation. The Remarketing Agent
may enter into broker-dealer agreements with broker-dealers ("Broker-Dealers")
which provide for Broker-Dealer participation in the remarketing process. The
Company shall not be responsible for the fees and out-of-pocket expenses of such
Broker-Dealers or for ensuring compliance by such Broker-Dealers with the terms
of this Agreement.
5. Disclosure Document and Other Information. (a) If the
Remarketing Agent determines that it is necessary or desirable to use a
disclosure document in connection with the remarketing of the Preferred Shares,
the Remarketing Agent will notify the Company and the Company will provide to
the Remarketing Agent a disclosure document or documents (which may include the
Prospectus distributed in connection with the initial sale of the Preferred
Shares, as amended or supplemented by the Company) satisfactory to the
Remarketing Agent and its counsel in respect of the Preferred Shares (the
"Disclosure Documents"). The Company will supply the Remarketing Agent with such
number of copies of the Disclosure Documents as the Remarketing Agent reasonably
requests from time to time. The Company will supplement and amend the Disclosure
Documents so that at all times the Disclosure Documents (as so amended or
supplemented) will not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
(b) The Company agrees to furnish to the Remarketing Agent
(i) as soon as
3
<PAGE> 4
available all regular and periodic reports, if any, which the Company files with
the Securities and Exchange Commission under the Investment Company Act of 1940,
as amended, or the Securities Exchange Act of 1934, as amended, and all reports
which the Company provides generally to holders of its publicly held securities
and (ii) from time to time, such other information concerning the Company as the
Remarketing Agent may reasonably request.
6. Indemnification. (a) The Company and Scudder Kemper
Investments, Inc. ("SKI") jointly and severally agree to indemnify and hold
harmless the Remarketing Agent (and each person, if any, controlling the
Remarketing Agent) against any and all losses, claims, damages, liabilities or
expenses (including reasonable costs of investigation) arising out of or based
upon its agency under this Agreement. This indemnity agreement is in addition to
any liability which the Company or SKI may otherwise have.
(b) If any action or claim shall be brought or asserted
against the Remarketing Agent or any person controlling the Remarketing Agent in
respect of which indemnity may be sought from the Company or SKI, the
Remarketing Agent or any such controlling person shall promptly notify the
Company in writing, and the Company or SKI shall assume the defense thereof,
including the employment of counsel and the payment of all expenses. The
Remarketing Agent or such controlling person shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall be borne by the Remarketing
Agent or such controlling person unless (i) the employment thereof has been
specifically authorized by the Company or SKI in writing, (ii) the Company or
SKI has failed to assume the defense and employ counsel or (iii) the named
parties to any such action (including any impleaded parties) include both the
Remarketing Agent or such controlling person and the Company or SKI and the
Remarketing Agent or such controlling person shall have been advised
4
<PAGE> 5
by counsel that representation of such indemnified party and the indemnifying
party by the same counsel would be inappropriate (whether or not such
representation by the same counsel has been proposed) under applicable standards
of professional conduct due to actual or potential differing interests between
them (in which case neither the Company nor SKI shall have the right to assume
the defense of such action on behalf of the Remarketing Agent or such
controlling person, it being understood, however, that the Company and SKI
shall, in connection with any one such action or separate but substantially
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of only one separate firm of attorneys (in addition to any local
counsel) at any time for the Remarketing Agent or such controlling person, which
firm (or firms) shall be designated in writing by the Remarketing Agent and
reasonably satisfactory to the Company or SKI). Neither the Company nor SKI
shall be liable for any settlement of any such action effected without its
written consent, but if settled with such written consent, or if there should be
a final judgment for the plaintiff in any such action, the Company and SKI
jointly and severally agree to indemnify and hold harmless the Remarketing Agent
or such controlling person from and against any loss or liability by reason of
such settlement or judgment.
(c) The Remarketing Agent agrees to indemnify and hold
harmless the Company (and each person, if any, controlling the Company), to
the same extent as the foregoing indemnity from the Company to the Remarketing
Agent, but only with respect to information relating to the Remarketing Agent
furnished in writing by it expressly for use in connection with a Disclosure
Document. This indemnity agreement is in addition to any liability which the
Remarketing Agent may otherwise have. In case any action or claim shall be
brought or asserted against the Company or any such controlling person, in
respect of which indemnity may be sought against the
5
<PAGE> 6
Remarketing Agent, the Remarketing Agent shall have the rights and duties given
to the Company, and the Company and any such controlling person shall have the
rights and duties given to the Remarketing Agent, by the preceding paragraphs.
(d) If the indemnification provided herein is unavailable
to the Remarketing Agent or any person controlling the Remarketing Agent in
respect of any losses, claims, damages, liabilities or expenses referred to
herein, then the indemnifying party, in lieu of indemnifying the Remarketing
Agent or such controlling person, shall contribute to the amount paid or payable
by the Remarketing Agent or such controlling person as a result of such losses,
claims, damages, liabilities or expenses (i) in such proportion as is
appropriate to reflect the relative benefits received and expected by the
Company on the one hand and by the Remarketing Agent on the other hand from the
remarketing of the Preferred Shares or (ii) if the allocation provided by clause
(i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and of the
Remarketing Agent on the other in connection with the acts or omissions which
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations.
(e) The Company, SKI and the Remarketing Agent agree that
it would not be just and equitable if contribution pursuant hereto were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in the
preceding paragraph. The amount paid or payable by the Remarketing Agent or any
person controlling the Remarketing Agent as a result of the losses, claims,
damages, liabilities and expenses referred to in the preceding paragraph shall
be deemed to include, subject to the limitations set forth above, any legal or
other expenses reasonably incurred by the Remarketing
6
<PAGE> 7
Agent or such controlling person in connection with defending any such action or
claim.
7. Remarketing Agent's Liabilities. The Remarketing Agent
shall incur no liability to the Company for its actions taken as Remarketing
Agent pursuant to the terms hereof and of the Certificate of Designation without
gross negligence or in the absence of willful misconduct. The Remarketing Agent
will not be liable to the Company on account of the failure of any person to
whom the Remarketing Agent has sold any Preferred Shares to pay for it or to
deliver any document in respect of such sale. The undertaking of the Remarketing
Agent to remarket any Preferred Shares shall be on a "best efforts" basis.
8. Termination. This Agreement may be terminated, at any
time by the Company, by giving at least 30 days notice to the Remarketing Agent,
and at any time by the Remarketing Agent, by giving at least 30 days notice to
the Company. The Remarketing Agent will not be obligated to remarket the
Preferred Shares, or to determine Dividend Rates therefor, if there is a
material misstatement or omission in any Disclosure Document or if at any time
it shall determine for any reason that it is not advisable to remarket the
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 Company,
(iii) a banking moratorium, (iv) domestic or international hostilities, (v) a
downgrading or withdrawal of one or more of the ratings of the Preferred Shares,
(vi) an imposition of material restrictions on the Preferred Shares or similar
obligations, (vii) an amendment of the Agreement and Declaration of Trust of the
Company, the Certificate of Designation or the By-Laws of the Company which, in
the opinion of the Remarketing Agent, materially and adversely changes the
nature of the Preferred Shares or the remarketing procedures therefor, (viii)
the existence of a Non-Payment Period, or (ix) a material misstatement or
omission in any Disclosure Document. Notwithstanding the provisions of the first
sentence of this Section
7
<PAGE> 8
8, the Remarketing Agent may terminate this Agreement with immediate effect, by
giving notice to the Company, upon the occurrence of any of the conditions
described in the second sentence of this Section 8. The provisions of Section 6
hereof will continue in effect as to actions prior to the date of termination,
and the Company and SKI will pay to the Remarketing Agent or any person
controlling the Remarketing Agent any amounts owing at the time of termination.
9. Dealing In Securities by Remarketing Agent. The
Remarketing Agent, either as principal or agent, may buy, sell, own, hold and
deal in the Preferred Shares, and may join in any action which any Owner of the
Preferred Shares may be entitled to take with like effect as if it did not act
in any capacity hereunder. The Remarketing Agent agrees that the purchase of
Preferred Shares for its own account or the account of its affiliates will be
upon terms no more favorable to it than those pertaining to the Preferred Shares
in the market in general at the time of such purchase and that neither it nor
its affiliates will elect to retain Preferred Shares at the time of a tender
pursuant to the Certificate of Designation if the Preferred Shares could be
remarketed pursuant to the Certificate of Designation on terms more favorable to
the Company than the terms upon which the Remarketing Agent or such affiliates
would continue to hold it. The Remarketing Agent will remarket all tendered
Preferred Shares on behalf of other Owners before remarketing any Preferred
Shares owned by it. The Remarketing Agent, either as principal or agent, may
also engage in or be interested in any financial or other transaction with the
Company and may act as depository, trustee, or agent for any committee or body
of owners of the Preferred Shares or other obligations of the Company as freely
as if it had no obligations hereunder or under the Certificate of Designation.
10. Records. The Remarketing Agent agrees to keep books
and records relating to its activities as Remarketing Agent in accordance with
standard industry practice and make
8
<PAGE> 9
such books and records available to the Company upon reasonable request.
11. Notices. Unless otherwise provided herein, all
notices, requests, demands and formal actions hereunder shall be in writing and
mailed, telegraphed or sent by facsimile transmission or delivered, as follows:
If to the Company:
Kemper Municipal Income Trust
222 South Riverside Plaza
Chicago, Illinois 60606
Telephone: (312) 781-1121
If to the Remarketing Agent:
Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Attention: Short-Term Preferred Sales and Trading
Telephone No.: (212) 816-
Telecopier No.: (212) 816-
Each of the above parties may, by written notice given
hereunder to the others, designate any further or different addresses to which
subsequent notices, certificates, requests or other communications shall be
sent. In addition, the parties hereto may agree to any other means by which
subsequent notices, certificates, requests or other communications may be sent.
12. Successors. Any successor of the Remarketing Agent,
any director or officer, or any person controlling the Remarketing Agent, as the
case may be, shall be entitled to the benefits of the agreements contained
herein.
13. Governing Law. This Agreement will be governed by and
construed in accordance with the laws of the State of New York.
9
<PAGE> 10
14. Amendment. This Agreement may not be modified or
amended except by a written instrument signed by each of the parties.
10
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the day and year first above written.
KEMPER MUNICIPAL INCOME TRUST
By:
----------------------------------------
Title:
SALOMON SMITH BARNEY INC.
By:
----------------------------------------
Title:
Agreed to and accepted by:
SCUDDER KEMPER INVESTMENTS, INC.
By:
-----------------------------
Title:
11
<PAGE> 1
EXHIBIT 2(k)(2)
AMENDED AND RESTATED AGENCY AGREEMENT
AMENDED AND RESTATED AGENCY AGREEMENT dated as of
November __, 1999 between KEMPER MUNICIPAL INCOME TRUST, a Massachusetts
business trust (the "Company"), and DEUTSCHE BANK a New York banking corporation
(the "Agent").
The Company has issued 43,000 shares, designated as
Series A - D, and proposes to issue 10,000 shares, designated as Series E, of
preferred shares, pursuant to its Declaration of Trust (as defined below) and
Certificate of Designation (as defined below). The Company desires that the
Agent perform certain duties in connection with the Shares (as defined below)
upon the terms and conditions of this Agreement, and hereby appoints the Agent
to act in the capacities set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and
the mutual covenants contained herein, the Company and the Agent
agree as follows:
1. Purpose; Definitions and Rules of Construction.
1.1. Purpose.
The Board of Trustees of the Company has adopted a
resolution appointing the Agent as transfer agent, registrar, paying agent and
agent for certain notifications for the Company in connection with the Shares.
The Agent accepts such appointment and agrees to act in accordance with its
standard procedures as Agent with respect to the Shares as set forth in this
Agreement.
1.2. Terms Defined by Reference
to Certificate of Designation.
Capitalized terms not defined herein shall have the
respective meanings specified in the Certificate of Designation.
1.3. Terms Defined Herein.
As used herein, the following terms shall have the
following meanings, unless the context otherwise requires:
(a) "Agent Member" of any Person shall mean such person's
agent member of the Securities Depository.
(b) "Authorized Officer" shall mean each Vice President
(whether or not designated by a number or word or words added before
or after the title "Vice President"), the Secretary, the Treasurer,
each Assistant Secretary, each Assistant Treasurer, and every other
officer or employee of the Agent designated as an "Authorized
Officer" for purposes hereof in a notice to the Company.
<PAGE> 2
(c) "Beneficial Owner" shall mean a person who is listed as
a beneficial owner of Shares in the records of the Agent.
(d) "Certificate of Designation" shall mean the Company's
Amended and Restated Certificate of Designation For Preferred Shares,
a copy of which is attached hereto as Exhibit B.
(e) "Company Officer" shall mean the Chairman of the Board
of Trustees, the President, each Vice President (whether or not
designated by a number or word or words added before or after the
title "Vice President"), the Secretary, the Treasurer, each Assistant
Secretary, each Assistant Treasurer, and every other officer or
employee of the Company designated as a "Company Officer" for
purposes hereof in a notice to the Agent.
(f) "Declaration of Trust" shall mean the Company's Amended
and Restated Agreement and Declaration of Trust, a copy of which is
attached hereto as Exhibit A.
(g) "Holder" shall mean the holder of Shares as its name
appears on the stock transfer books or record books of the Company,
which, except as set forth in Section 4.3 hereof, is the Securities
Depository.
(h) "Shares" shall mean the Company's preferred shares,
designated as Series A, B, C, D and E.
1.4. Rules of Construction.
Unless the context or use indicates another or different
meaning or intent, the following rules shall apply to the construction of this
Agreement:
(a) Words importing the singular number shall include the
plural number and vice versa.
(b) The captions and headings herein are solely for
convenience of reference and shall not constitute a part of this
Agreement nor shall they affect its meaning, construction or effect.
(c) The words "hereof", "herein", "hereto" and other words
of similar import refer to this Agreement as a whole.
(d) All references herein to a particular time of day shall
be to New York City time.
-2-
<PAGE> 3
2. Redemption of Shares.
2.1. Notice of Redemption; Other
Redemption Procedures.
(a) The Company will give to the Agent written notice (a
"Notice of Redemption") of any full or partial redemption no later
than 12:00 noon on the Business Day immediately preceding the tenth
calendar day preceding the redemption date.
(b) The Agent shall provide telephonic notice to the
Securities Depository and the Remarketing Agent by the close of
business on the day on which the Agent receives any Notice of
Redemption pursuant to clause (a) above and, in the event of a
partial redemption of Shares, the Agent shall provide a
hand-delivered copy of such Notice of Redemption to the Securities
Depository marked "TIME CRITICAL" and shall include a copy addressed
to Vice President, Reorganization Department. Such notice shall
specify the aggregate number of Shares to be redeemed and the number
of Shares from each series, identified by CUSIP number. The Agent
shall request in such Notice of Redemption a copy of the results of
the lottery to be held in accordance with subsection (f) hereof.
(c) In the case of any partial redemption of Shares, the
Agent will use its reasonable efforts to provide telephonic notice to
the Remarketing Agent not later than the close of business on the day
on which the Agent receives the notice of the results of the lottery
conducted by the Securities Depository pursuant to clause (f) below.
The Agent will use its reasonable efforts to provide telephonic
notice to each Beneficial Owner of Shares (whose telephone number has
been provided to the Agent by the Remarketing Agent or the
broker-dealers) selected for redemption not later than the close of
business on the Business Day following the day on which such
telephonic notice is given to the Remarketing Agent as provided in
the immediately preceding sentence. Such telephonic notice shall be
confirmed in writing by a Notice of Redemption sent by the Agent to
the Remarketing Agent, the Securities Depository and each Beneficial
Owner of Shares called for redemption not later than the close of
business on such date.
(d) In the case of a redemption in whole of Shares, the
Agent will use its reasonable efforts to provide telephonic notice to
each Beneficial Owner of Shares not later than the close of business
on the Business Day immediately following the day on which the Agent
receives a Notice of Redemption pursuant to clause (a)(ii) above.
Such telephonic notice shall be confirmed in writing by sending a
photocopy of the Notice of Redemption sent by the Company to the
Agent to each of the Securities Depository, the Remarketing Agent and
each Beneficial Owner not later than the close of business on such
date.
(e) Every Notice of Redemption sent by the Company to the
Agent and by the Agent to Beneficial Owners, whether mandatory or
optional and whether partial or in whole, shall state: (i) the
redemption date; (ii) the number of Shares to be redeemed;
-3-
<PAGE> 4
(iii) the redemption price; (iv) the place or places where the Shares
are to be redeemed; (v) that dividends on the Shares to be redeemed
will cease to accrue on such redemption date; (vi) the provision of
the Certificate of Designation under which the redemption is to be
made and (vii) the date Such Notice of Redemption is to be mailed to
Shareholders or published.
(f) If fewer than all the outstanding Shares are to be
redeemed pursuant to the Certificate of Designation, the number of
Shares and series of such Shares to be redeemed shall be determined
by the Company and the Company shall notify the Agent by telephone
and in writing. Upon receipt of the Notice of Redemption, the Agent
shall notify the Securities Depository of such redemption, as
provided in clause (b) above, which notice shall include, with
respect to the Shares, the aggregate number of Shares to be redeemed
and the number of such Shares to be redeemed from each series. The
Securities Depository will determine by lot the number of Shares from
each series to be redeemed from the account of each Agent Member and
will notify the Agent of the results of such lottery by 10:00 a.m. on
the second Business Day following the date on which the Securities
Depository receives the notice referred to in the immediately
preceding sentence. Upon receipt of such notice from the Securities
Depository, the Agent shall in turn select by lot the number of
Shares from each series to be redeemed from the accounts of the
Beneficial Owners of the Shares whose Agent Members have been
selected.
3. The Agent as Paying Agent and
Agent for Certain Notifications.
3.1. Dividend Rates.
The Company shall deliver to the Agent a copy of each
Certificate of Determination. The Agent will, in turn, notify the Securities
Depository of the applicable Dividend Rate as soon thereafter as practicable.
3.2. The Agent as Paying Agent.
The Agent will pay (i) to the Holder on the Dividend
Payment Date for each Share (or, in the case of dividends in arrears, at any
time as may be fixed by the Company), dividends on such Share, (ii) to the
Holder, on any date fixed for redemption of any Shares, the redemption price of
the Shares, inclusive of an amount equal to accumulated and unpaid dividends on
Shares called for redemption upon presentation and surrender of the certificate
or certificates evidencing such Shares held by such Holder and called for
redemption, in each case after receipt of the necessary funds from the Company
with which to pay such dividends or redemption price. The Company shall cause to
be delivered to the Agent sufficient next-day funds to pay any such dividends or
redemption price not later than noon on the Business Day immediately preceding
such Dividend Payment Date or date fixed for redemption. The Agent shall have no
duty to determine the redemption price or dividend rate of Shares and may rely
on the amount thereof set forth in the Notice of Redemption or Certificate of
Determination, as the
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<PAGE> 5
case may be. On the Business Day immediately succeeding each Dividend
Payment Date and date fixed for redemption of Shares, the Agent shall promptly
transmit to the Company, after the Dividend Payment Date, or date fixed for
redemption of Shares, any cash held by the Agent in excess of the aggregate
amount of dividends or redemption price of the Shares called for redemption on
such date, paid on such date.
3.3. Certificated Shares.
In the event the Company determines that Beneficial
Owners of Shares shall be able to obtain certificated Shares, the Company shall
notify the Agent and the Agent shall notify the Securities Depository of the
availability of share certificates. The Company or the Agent shall then issue,
transfer and exchange Share certificates as required by the Securities
Depository in appropriate amounts.
4. The Agent as Transfer Agent and Registrar.
4.1. Original Issue of Stock Certificates.
On the Date of Original Issue for each series of Shares, definitive
certificates which together represent 53,000 Shares, were issued, for Series
A-D, and will be issued, for Series E, issued by the Company. All Shares, at the
request of the Company, have been or shall be registered in the name of Cede &
Co. and countersigned by the Agent.
4.2. Maintenance of Registry of Beneficial
Owners; Allocation of Shares.
(a) The Agent shall maintain a registry including the
names, addresses and respective ownership interests of the Beneficial
Owners of the Shares for purposes of Remarketings. By 10:30 a.m. on
the last Business Day of each Dividend Period, the Agent shall
deliver a copy of such registry to the Remarketing Agent. The Company
shall cause the Remarketing Agent to provide the Agent with a list of
the initial Beneficial Owners of the Shares. The Agent may rely upon,
as evidence of the identities of the Beneficial Owners, such list;
the results of Remarketings reported to the Agent by the Remarketing
Agent; and notice from the Remarketing Agent or a broker-dealer with
respect to such Beneficial Owner's transfer of Shares to another
Person other than through a Remarketing. The Agent and the Company
shall keep confidential any such information provided by or obtained
from the Remarketing Agent or a broker-dealer and, unless otherwise
required by law, shall not disclose any such information so provided
or obtained to any Person other than the Company, the Agent and, with
respect to the information provided by the Remarketing Agent or a
broker-dealer, the Remarketing Agent or such broker-dealer, as the
case may be.
(b) The Agent shall register a transfer of Shares from a
Beneficial Owner to another person only if the Agent has been
notified by the Remarketing Agent that such
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<PAGE> 6
transfer is pursuant to a Remarketing or the Agent has been notified
in writing by the Remarketing Agent or a broker-dealer of such
transfer outside of a Remarketing.
4.3. Registration of Transfer of Shares.
Except as set forth in this Section 4.3, Shares shall
be registered solely in the name of the Securities Depository or its nominee. If
the Securities Depository shall give notice of its intention to resign as such,
and if the Company shall not have selected a substitute Securities Depository
reasonably acceptable to the Agent prior to such resignation, then upon such
resignation, the Shares shall be registered for transfer or exchange, and new
certificates shall be issued, in the name of the designated transferee or
transferees, upon surrender of the old certificates in form deemed by the Agent
properly endorsed for transfer with (a) all necessary endorsers' signatures
guaranteed in such manner and form as the Agent may require by a guarantor
reasonably believed by the Agent to be reasonable, (b) such assurances as the
Agent shall deem necessary or appropriate to evidence the genuineness and
effectiveness of each necessary endorsement and (c) satisfactory evidence of
compliance with all applicable laws relating to the collection of taxes or funds
necessary for the payment of such taxes.
4.4. Removal of Legend.
All requests for removal of legends indicating
restrictions on transfer from certificates evidencing Shares shall be
accompanied by an opinion of counsel stating that such legends may be removed
and such shares freely transferred, said opinion to be delivered under cover of
a letter from a Company Officer authorizing the Agent to remove the legend on
the basis of said opinion.
4.5. Lost Stock Certificates.
The Agent shall issue and register replacement
certificates for certificates represented to have been lost, stolen or
destroyed, upon the fulfillment of such requirements as shall be deemed
appropriate by the Company and the Agent, subject at all times to provisions of
law, the Bylaws of the Company governing such matters and resolutions adopted by
the Company with respect to lost securities. The Agent may issue new
certificates in exchange for and upon the cancellation of mutilated
certificates. Any request by the Company to the Agent to issue a replacement or
new certificate pursuant to this Section 4.5 shall be deemed to be a
representation and warranty by the Company to the Agent that such issuance will
comply with such provisions of law and Bylaws and resolutions of the Company.
4.6. Disposition of Cancelled Stock Certificates; Record
Retention.
The Agent shall retain stock certificates that have
been cancelled in transfer or in exchange and accompanying documentation in
accordance with applicable rules and regulations of the Securities and Exchange
Commission for two calendar years from the date of such cancellation. The Agent
shall afford to the Company, its agents and counsel access at reasonable times
during the normal business hours of the Agent to review and make extracts or
copies of
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<PAGE> 7
such certificates and accompanying documentation. Upon the expiration of this
two-year period, the Agent shall deliver to the Company the cancelled
certificates and accompanying documentation. The Company shall, at its expense,
retain such records for a minimum additional period of four calendar years from
the date of delivery of the records to the Company and shall make such records
available during this period at any time, or from time to time, for reasonable
periodic, special or other examinations by the Agent or its representatives,
representatives of the Securities and Exchange Commission and the Board of
Governors of the Federal Reserve System. The Company shall also undertake to
furnish to the Securities and Exchange Commission and to the Board of Governors
of the Federal Reserve System, upon demand, at either the principal office or at
any regional office, complete, correct and current hard copies of any and all
such records. Thereafter such records shall not be destroyed by the Company
without concurrence of the Agent, which shall not be unreasonably withheld, but
will be safely stored for possible future reference.
4.7. Transfer Books.
The Agent shall maintain the transfer books listing
the Holders of the Shares. In case of any written request or demand for the
inspection of the transfer books of the Company or any other books in the
possession of the Agent, the Agent will notify the Company and secure
instructions as to permitting or refusing such inspection. The Agent reserves
the right, however, to exhibit the transfer books or other books to any person
if it is advised by its counsel that its failure to do so would be unlawful.
4.8. Return of Funds.
Any funds (including any interest earned thereon)
deposited with the Agent by the Company for any reason under this Agreement,
including for the payment of dividends or the redemption of Shares, that remain
with the Agent 30 calendar days from the date of such deposit shall promptly be
repaid to the Company by the Agent, provided that no amounts due under the terms
of this Agreement are outstanding.
5. Representations and Warranties.
(a) The Company represents and warrants as follows:
(i) The Company is a Massachusetts business trust
duly organized and validly existing in good standing under
the laws of the Commonwealth of Massachusetts and has the
power to execute and deliver this Agreement and to carry
out its obligations hereunder.
(ii) This Agreement has been duly authorized,
executed and delivered by the Company and constitutes a
legal, valid and binding obligation of the Company.
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<PAGE> 8
(iii) The Shares have been duly authorized and
validly issued and are fully paid and non-assessable.
(iv) The execution and delivery of this
Agreement, and the fulfillment of and compliance with the
terms and provisions hereof, do not and will not conflict
with, violate or result in a breach of, the terms,
conditions or provisions of, or constitute a default under,
or result in the creation of any lien upon any of the
properties or assets of the Company pursuant to, the
Declaration of Trust, the Certificate of Designation or the
Bylaws of the Company.
(b) The Agent represents and warrants to the Company that
the Agent is duly organized and is validly existing as a banking
corporation in good standing under the laws of the State of New York,
the Agent has the corporate power to enter into and perform its
obligations under this Agreement, and this Agreement has been duly
authorized, executed and delivered by the Agent and constitutes a
legal, valid and binding obligation of the Agent.
6. The Agent.
6.1. Duties and Responsibilities.
(a) The Agent is not a trustee and is acting solely as
agent for the Company hereunder and owes no fiduciary duties to any
other person by reason of this Agreement.
(b) The Agent undertakes to perform such duties and only
such duties as are specifically set forth in this Agreement, and no
implied covenants or obligations shall be read into this Agreement
against the Agent.
(c) In the absence of negligence or willful misconduct on
its part, the Agent shall not be liable for any action taken,
suffered or omitted or for any error of judgment made by it in the
performance of its duties under this Agreement. The Agent shall not
be liable for any error of judgment made in good faith unless the
Agent shall have been negligent in ascertaining or failing to
ascertain the pertinent facts.
6.2. Rights of the Agent.
(a) The Agent may rely and shall be protected in acting or
refraining from acting upon any communication authorized hereby and
upon any written instruction, notice, request, direction, consent,
report, certificate, shares certificate or other instrument, paper or
document believed by it in good faith to be genuine. The Agent shall
not be liable for acting upon any telephone communication authorized
hereby which the Agent believes in good faith to have been given by
the Company, a Holder, an Agent Member or the Remarketing Agent. The
Agent may record telephone communications with the Company and the
Remarketing Agent.
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<PAGE> 9
(b) The Agent may consult with counsel, and the advice of
such counsel shall be full and complete authorization and protection
in respect of any action taken, suffered or omitted by it hereunder
in good faith and in reliance thereon.
(c) The Agent shall not be required to advance, expend or
risk its own funds or otherwise incur or become exposed to financial
liability in the performance of its duties hereunder.
(d) The Agent may perform its duties and exercise its
rights hereunder either directly or by or through agents or
attorneys.
6.3. Agent's Disclaimer.
The Agent makes no representation as to the validity
or adequacy of the Shares.
6.4. Compensation, Expenses, and Indemnification.
(a) The Company shall pay to the Agent from time to time
compensation to be mutually agreed upon for all services rendered by
the Agent under this Agreement.
(b) The Company shall reimburse the Agent upon the Agent's
request for all reasonable expenses, disbursements and advances
incurred or made by the Agent in accordance with any provision of
this Agreement (including the reasonable compensation and the
expenses and disbursements of its agents and counsel), except any
expense or disbursement attributable to its negligence or willful
misconduct.
(c) The Company shall indemnify the Agent for and hold the
Agent harmless against any loss, liability or expense incurred
without negligence or willful misconduct on the Agent's part, arising
out of or in connection with its agency under this Agreement,
including the costs and expenses, including reasonable attorneys'
fees, of defending itself against any claim or liability in
connection with its exercise or performance of any of its duties
hereunder.
7. Miscellaneous.
7.1. Term of Agreement.
(a) The term of this Agreement is unlimited unless it shall
be terminated as provided in this Section 7.1. The Company may
terminate this Agreement at any time by so notifying the Agent and
the Remarketing Agent, provided that, so long as any Shares are
outstanding, the Company shall have entered into an agreement with a
successor Agent. The Agent may terminate this Agreement upon notice
to the Company and the Remarketing Agent on the date specified in
such notice, which shall be no earlier than 30 days after the date of
delivery of such notice.
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<PAGE> 10
(b) Except as otherwise provided in this paragraph (b), the
respective rights and duties of the Company and the Agent under this
Agreement shall cease upon termination of this Agreement. The
Company's representations, warranties, covenants and obligations to
the Agent under Sections 5(a) and 6.4 hereof shall survive the
termination hereof but only with respect to events which occur prior
to the effective date of the termination. Upon termination of this
Agreement, the Agent shall (i) promptly deliver to the Company copies
of all books and records maintained by it in connection with its
duties hereunder and (ii) at the request of the Company, promptly
transfer to the Company or any successor Agent any funds held for the
Company which have not previously been distributed by the Agent in
accordance with this Agreement.
7.2. Communications.
Except for communications authorized to be by
telephone pursuant to this Agreement, all notices, requests and other
communications to any party hereunder shall be in writing (including telecopy or
similar writing) given to such person at its address or telecopy number set
forth below:
<TABLE>
<S> <C>
If to the Company,
addressed: KEMPER MUNICIPAL INCOME FUND
222 South Riverside Plaza
Chicago, Illinois 60606
Attention: Mutual Fund Accounting
Telephone No.: (312) 781-1121
If to the Agent,
addressed: DEUTSCHE BANK
4 Albany Street
New York, New York 10016
Attention: Auction Rate -
Remarketed Securities
Telephone No.: (212) 250-_____
Telecopier No.: (212) 250-_____
If to the Remarketing Agent,
addressed: Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Attention: Short-Term Preferred-
Sales and Trading -
Telephone No.: (212) 698-_____
Telecopier No.: (212) 262-_____
(212) 247-_____
</TABLE>
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<PAGE> 11
<TABLE>
<S> <C>
If to the Securities
Depository, addressed: The Depository Trust Company
55 Water Street
In connection New York, New York 10041
with dividends: Attention: Manager, Cash Receipts Section
Dividend Department
Telephone No.: (212) 855-_____
In connection Telecopier No.: (212) 855-_____
with redemption Attention: Manager, Reorganization
Department
Telephone No.: (212) 855-_____
Telecopier No.: (212) 855-_____
</TABLE>
or to such other address as the party to whom the communication is addressed
shall have previously communicated to the other party. Communications shall be
effective when received at the proper address.
7.3. Entire Agreement.
This Agreement contains the entire agreement between the
parties relating to the subject matter hereof, and there are no other
representations, endorsements, promises, agreements or understandings, oral,
written or inferred, between the parties.
7.4. Benefits.
Nothing herein, express or implied, shall give to any
Person, other than the Company, the Agent and their respective successors and
assigns, any benefit of any legal or equitable right, remedy or claim hereunder.
7.5. Amendment; Waiver.
(a) This Agreement shall not be deemed or construed to be
modified, amended, rescinded, cancelled or waived, in whole or in
part, except by a written instrument signed by a duly authorized
representative of each party.
(b) Failure of either party hereto to exercise any right or
remedy hereunder in the event of a breach hereof by the other party
shall not constitute a waiver of any such rights or remedies with
respect to any subsequent breach.
7.6. Successors and Assigns.
This Agreement shall be binding upon, inure to the
benefit of, and be enforceable by, the respective successors and assigns of each
of the Company and the Agent. Without the
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<PAGE> 12
prior written consent of the Company, such consent not to be unreasonably
withheld, the Agent may not assign this Agreement, either directly or by
operation of law.
7.7. Severability.
If any clause, provision or section hereof shall be
ruled invalid or unenforceable by any court of competent jurisdiction, the
invalidity or unenforceability of such clause, provision or section shall not
affect any of the remaining clauses, provisions or sections hereof.
7.8. Execution in Counterparts.
This Agreement may be executed in several
counterparts, each of which shall be an original and all of which shall
constitute but one and the same instrument.
7.9. Governing Law.
This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
7.10. Limitation of Liability.
A copy of the Declaration of Trust of the Company is
on file with the Secretary of the Commonwealth of Massachusetts, and it is
hereby agreed that this Agreement is executed on behalf of the trustees of the
Company as trustees and not individually and that the obligations of this
Agreement are not binding upon any of the trustees, officers or shareholders of
the Company individually but are binding only upon the assets and property of
the Company.
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<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be duly executed and delivered by their proper and duly
authorized officers as of the date first above written.
KEMPER MUNICIPAL INCOME TRUST
By:
-------------------------------
Name:
Title:
DEUTSCHE BANK
By:
-------------------------------
Name:
Title:
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<PAGE> 1
EXHIBIT 2.L
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 20006-2401
November 17, 1999
Kemper Municipal Income Trust
222 South Riverside Plaza
Chicago, IL 60606
Ladies and Gentlemen:
We have acted as counsel to Kemper Municipal Income Trust (the "Fund")
in connection with the Registration Statement of the Fund on Form N-2 (File Nos.
333-88637 and 811-05655) (the "Registration Statement"), under the Securities
Act of 1933, as amended (the "Act"), and the Investment Company Act of 1940, as
amended, relating to the proposed issuance of 10,000 Series E Preferred Shares
of the Fund (the "Series E Preferred Shares"). The Series E Preferred Shares are
to be sold pursuant to an underwriting agreement to be entered into by the Fund
and Salomon Smith Barney Inc., as principal underwriter (the "Underwriting
Agreement").
We have examined the Fund's Amended and Restated Agreement and
Declaration of Trust and Amended and Restated Certificate of Designation with
respect to the Series E Preferred Shares, and are familiar with the actions
taken by the Fund's Trustees in connection with the issuance and the sale of the
Series E Preferred Shares. We have also examined the form of underwriting
agreement filed as an exhibit to the Registration Statement and such other
documents and records as we have deemed necessary for the purpose of this
opinion.
For purposes of this opinion, we have assumed that the Underwriting
Agreement in the form filed as an exhibit to the Registration Statement will
have been duly executed and delivered by and on behalf of each of the parties
thereto, and that the Fund or its agent receives consideration for the Series E
Preferred Shares as set forth in the Registration Statement.
<PAGE> 2
Kemper Municipal Income Trust
November 17, 1999
Page 2
Based on the foregoing, we are of the opinion that the issuance and the
sale of the Series E Preferred Shares have been duly authorized and that when
issued in accordance with the Underwriting Agreement, the Series E Preferred
Shares will be validly issued and fully paid and nonassessable by the Fund.
We consent to the filing of this opinion with and as part of the
Registration Statement and to the use of our name in such Registration Statement
and in the related Prospectus under the caption "Legal Matters."
Very truly yours,
/s/ Dechert Price & Rhoads
<PAGE> 1
EXHIBIT 2.N.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Independent
Auditors", "Financial Statements" and "Financial Highlights" and to the use of
our report dated January 19, 1999 in the Registration Statement (Form N-2) of
Kemper Municipal Income Trust and in the related Prospectus and Statement of
Additional Information filed with the Securities and Exchange Commission in this
Pre-Effective Amendment No. 1 to the Registration Statement under the Securities
Act of 1933 (File No. 333-88637) and in this Amendment No. 11 to the
Registration Statement under the Investment Company Act of 1940 (File No.
811-5655).
ERNST & YOUNG LLP
Chicago, Illinois
November 17, 1999
