<PAGE> 1
AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON AUGUST 23, 1999
SECURITIES ACT FILE NO. 333-81129
INVESTMENT COMPANY ACT FILE NO. 811-05754
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. 2 [X]
-----------
Post-Effective Amendment No. [ ]
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 9 [X]
---------------
COLONIAL HIGH INCOME MUNICIPAL TRUST
(Exact Name of Registrant as Specified in Charter)
One Financial Center, Boston, Massachusetts 02111
(Address of Principal Executive Offices)
(617) 426-3750
(Registrant's Telephone Number, including Area Code)
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Name and Address of
Agent for Service Copies to
<S> <C> <C>
William J. Ballou, Esq. John M. Loder, Esq. Gary Schpero, Esq.
Colonial Management Associates, Inc. Ropes & Gray Simpson Thacher & Bartlett
One Financial Center One International Place 425 Lexington Avenue
Boston, Massachusetts 02111-2621 Boston, Massachusetts 02110-2624 New York, New York 10017-3954
</TABLE>
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [ ]
It is proposed that this filing will become effective (check appropriate box):
[ ] when declared effective pursuant to Section 8(c)
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED (1) UNIT (1) PRICE (1) REGISTRATION FEE (2)
- ---------------------- -------------------- --------------------- --------------------- --------------------
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Municipal Auction 4,800 $25,000 $120,000,000 $33,360
Rate Cumulative
Preferred Shares
No Par Value
Per Share
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Previously paid.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> 2
COLONIAL HIGH INCOME MUNICIPAL TRUST
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
CROSS REFERENCE SHEET
ITEMS REQUIRED BY FORM N-2
PART A
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ITEM NO. ITEM CAPTION PROSPECTUS CAPTION
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1 Outside Front Cover Front Cover Page
2 Inside Front and Outside Front and Back Cover Page
Back Cover Page
3 Fee Table and Synopsis Not Applicable
4 Financial Highlights Financial Highlights
5 Plan of Distribution Underwriting
6 Selling Shareholders Not Applicable
7 Use of Proceeds Use of Proceeds
8 General Description of the Prospectus Summary; The
Trust; Management of the
Trust; Investment
Objectives and Policies;
Risk Factors and Special
Considerations
9 Management Management of the Trust;
Custodian, Transfer Agent,
Dividend Disbursing Agent
and Registrar
10 Capital Stock, Long-Term Debt, Capitalization at June 30,
Other Securities 1999; and Description
of Municipal Preferred;
Description of Common
Shares; Certain Provisions
in the Agreement and
Declaration of Trust
</TABLE>
<PAGE> 3
<TABLE>
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11 Defaults and Arrears on Senior Not Applicable
Securities
12 Legal Proceedings Not Applicable
13 Table of Contents of the Table of Contents of the
Statement of Additional Statement of Additional
Information Information
</TABLE>
PART B
<TABLE>
<CAPTION>
STATEMENT OF ADDITIONAL
ITEM NO. ITEM CAPTION INFORMATION CAPTION
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<S> <C> <C>
14 Cover Page Cover Page
15 Table of Contents Table of Contents
16 General Information and History Not Applicable
17 Investment Objective and Investment Objectives and
Policies Policies; Miscellaneous
Investment Practices
18 Management Management of the Trust
19 Control Persons and Principal Management of the Trust
Holders of Securities
20 Investment Advisory and Other Management of the Trust
Services
21 Brokerage Allocation and Other Portfolio Transactions
Practices
22 Tax Status Tax Matters
23 Financial Statements Financial Statements
</TABLE>
-2-
<PAGE> 4
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 AUGUST 23, 1999
PROSPECTUS
$120,000,000
COLONIAL HIGH INCOME MUNICIPAL TRUST
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED ("MUNICIPAL PREFERRED") SHARES
2,400 SHARES, SERIES T
2,400 SHARES, SERIES W
LIQUIDATION PREFERENCE $25,000 PER SHARE
------------------
Colonial High Income Municipal Trust is selling 2,400 Series T Municipal
Auction Rate Cumulative Preferred Shares and 2,400 Series W Municipal Auction
Rate Cumulative Preferred Shares. The Trust is a diversified, closed-end
management investment company that seeks, as its primary investment objective,
to provide high current income generally exempt from federal income tax. The
Trust's secondary investment objective is to seek total return. The bonds and
notes purchased by the Trust generally are issued by or on behalf of state and
local governmental units, whose interest is exempt from federal income tax.
Under normal circumstances, the Trust will invest at least 80% of its assets in
debt securities that are consistent with its objectives of high current income
and total return. Typically, these investments include tax-exempt bonds that are
rated to be of medium and lower quality or, if unrated, are considered by the
Trust's investment advisor to be of comparable quality. The Trust's investments
in medium and lower quality bonds and notes involve special risks. No assurance
can be given that the Trust's investment objectives will be achieved. An
investment in the Trust is not appropriate for all investors.
Investors in Municipal Preferred shares of each series will be entitled to
receive cash dividends at an annual rate that may vary for the successive
dividend periods for such series. The dividend rate on the Series T Municipal
Preferred shares for the period from and including the date of issue to but
excluding , 1999 will be % per year. The dividend rate on the
Series W Municipal Preferred shares for the period from and including the date
of issue to but excluding , 1999 will be % per year. For each
subsequent period for a series of Municipal Preferred, the auction agent will
determine the dividend rate for a particular period by an auction conducted on
the business day prior to that period. Investors in shares of Municipal
Preferred of each series may participate in auctions through their
broker-dealers in accordance with the procedures specified herein. The Trust may
redeem shares of Municipal Preferred as described under "Description of
Municipal Preferred -- Redemption."
This Prospectus sets forth concisely the information you should know before
investing, including information about risks. You should read this Prospectus
before you invest and keep it for future reference. The Trust's Statement of
Additional Information, dated , 1999, contains additional
information about the Trust and is incorporated by reference into (which means
it is considered to be a part of) this Prospectus. You may obtain a free copy by
calling Colonial Management Associates, Inc. at 1-800-426-3750. See page 43 of
this Prospectus for a table of contents of the Statement of Additional
Information.
------------------
INVESTING IN THE SHARES OF MUNICIPAL PREFERRED INVOLVES RISKS. SEE THE "RISK
FACTORS AND SPECIAL CONSIDERATIONS" SECTION BEGINNING ON PAGE 6 OF THIS
PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------
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PER SHARE TOTAL
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Public Price................................ $25,000 $120,000,000
Sales Load..................................
Proceeds to Trust (before expenses).........
</TABLE>
The public offering price per share will be increased by the amount of
dividends, if any, that have accumulated from the date the shares of Municipal
Preferred are first issued.
------------------
The underwriter is offering the shares of Municipal Preferred subject to
various conditions. The underwriter expects to deliver the shares to purchasers,
in book-entry form through The Depository Trust Company, on or about
, 1999.
------------------
Salomon Smith Barney
, 1999
<PAGE> 5
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. THE TRUST HAS NOT, AND THE UNDERWRITER HAS NOT,
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON
IT. THE TRUST IS NOT, AND THE UNDERWRITER IS NOT, MAKING AN OFFER TO SELL THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU
SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS PROSPECTUS IS ACCURATE AS
OF THE DATE ON THE FRONT COVER OF THIS PROSPECTUS ONLY. THE TRUST'S BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE
THAT DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
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PAGE
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PROSPECTUS SUMMARY.......................................... 1
RISK FACTORS AND SPECIAL CONSIDERATIONS..................... 6
FINANCIAL HIGHLIGHTS........................................ 9
THE TRUST................................................... 10
USE OF PROCEEDS............................................. 10
CAPITALIZATION AT JUNE 30, 1999............................. 11
PORTFOLIO COMPOSITION....................................... 11
INVESTMENT OBJECTIVES AND POLICIES.......................... 12
MANAGEMENT OF THE TRUST..................................... 21
THE AUCTION................................................. 23
DETERMINATION OF NET ASSET VALUE............................ 26
DESCRIPTION OF MUNICIPAL PREFERRED.......................... 27
RATING AGENCY GUIDELINES.................................... 34
DESCRIPTION OF COMMON SHARES................................ 36
CERTAIN PROVISIONS IN THE AGREEMENT AND DECLARATION OF
TRUST..................................................... 36
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND.... 37
TAX MATTERS................................................. 38
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND
REGISTRAR................................................. 41
UNDERWRITING................................................ 41
LEGAL OPINIONS.............................................. 42
REPORTS TO SHAREHOLDERS..................................... 42
EXPERTS..................................................... 42
FURTHER INFORMATION......................................... 42
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION.... 43
</TABLE>
<PAGE> 6
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 Municipal 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 Statement of Additional Information.
THE OFFERING.................. Colonial High Income Municipal Trust (the
"Trust") is offering a total of 2,400 shares of
Series T Municipal Preferred and 2,400 shares
of Series W Municipal Preferred, each at a
purchase price of $25,000 per share plus
dividends, if any, that have accumulated from
the date the Trust first issues the shares.
Except as described in this Prospectus, the two
series have the same rights and preferences and
are offered on the same terms. The two
offerings, however, are independent of each
other, and one offering is not contingent upon
the closing of the other offering. Certain
information presented in this Prospectus
assumes that each offering is made and effected
as contemplated, but there can be no assurance
that this will be the case. Salomon Smith
Barney Inc. is offering the shares of both
series as underwriter.
The Municipal Preferred shares of each series
will be preferred shares of the Trust that
entitle their holders to receive cash dividends
at an annual rate that may vary for the
successive dividend periods for that series. In
general, except as described under
"-- Dividends and Dividend Periods" and
"Description of Municipal
Preferred -- Dividends and Dividend Periods,"
each dividend period for each series will be
seven days. An auction agent will determine the
dividend rate for each series for a particular
period by an auction conducted on the business
day immediately prior to the start of the
dividend period for that series.
Investors and potential investors in the
Municipal Preferred shares of each series may
participate in auctions for the Municipal
Preferred shares through their broker-dealers.
Generally, investors in Municipal Preferred
shares will not receive certificates
representing ownership of their shares. The
securities depository (The Depository Trust
Company or any successor) or its nominee for
the account of the investor's agent member
(generally the investor's broker-dealer) will
maintain ownership of the shares of each series
of Municipal Preferred in book-entry form. An
investor's agent member, in turn, will maintain
records of that investor's beneficial ownership
of shares of each series of Municipal
Preferred.
THE TRUST..................... Colonial High Income Municipal Trust has
operated as a diversified, closed-end
management investment company since 1989. See
"The Trust." The Trust was organized as a
Massachusetts business trust on January 9, 1989
and has registered under the Investment Company
Act of 1940. The Trust's common shares of
beneficial interest are traded on the New York
Stock Exchange under the symbol "CXE."
1
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DIVIDENDS AND DIVIDEND
PERIODS....................... Dividends on each series of Municipal Preferred
shares are cumulative from the date the shares
are first issued. The Trust will pay dividends
on the shares of Municipal Preferred, out of
legally available funds and when declared by
the Board of Trustees, beginning on
, 1999 in the case of Series T Municipal
Preferred and , 1999 in the case of
Series W Municipal Preferred.
After the initial dividend period, each
dividend period for each series of Municipal
Preferred will generally consist of seven days;
provided, however, that before any auction for
a series, the Trust may decide, subject to
limitations and only if it gives the required
notices, to declare a special dividend period
of up to five years. Accordingly, in the case
of dividend periods that are not special
dividend periods, dividends generally will be
payable on each succeeding Wednesday in the
case of Series T Municipal Preferred and on
each succeeding Thursday in the case of Series
W Municipal Preferred. The Trust may specify
different dividend payment dates for special
dividend periods.
The Trust will pay dividends through the
securities depository (The Depository Trust
Company) on each dividend payment date for each
series.
The dividend rate on the shares of Series T
Municipal Preferred for the period from and
including the date of issue to but excluding
, 1999 will be % per year. The
dividend rate on the shares of Series W
Municipal Preferred for the period from and
including the date of issue to but excluding
, 1999 will be % per year. For
each subsequent dividend period for a series of
Municipal Preferred, the auction agent (Bankers
Trust Company) will determine the dividend rate
on the shares of that series of Municipal
Preferred through an auction.
MAXIMUM DIVIDEND RATE......... Generally, the rate at which the Trust pays
dividends on shares of a series of Municipal
Preferred may not exceed the maximum dividend
rate. The maximum dividend rate may vary for
different dividend periods. The maximum
dividend rate is based upon the current credit
rating assigned to the shares of a series of
Municipal Preferred and an independent
reference rate that may vary over time.
If the number of shares of a series of
Municipal Preferred available during an auction
exceeds the total number of shares of such
series subject to bids for that auction at less
than or equal to the maximum dividend rate for
such series, then the dividend rate for that
series for the subsequent dividend period will
be the maximum dividend rate. In addition, if
the Trust fails to pay a dividend on shares of
a series of Municipal Preferred, or if the
Trust fails to pay the full redemption price
for shares of a series of Municipal Preferred
when due, then the dividend rate for that
series for the subsequent dividend period will
be the maximum
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2
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dividend rate. If, however, the Trust cures its
failure to pay a dividend or to pay the full
redemption price, then the maximum dividend
rate will not automatically apply.
ASSET MAINTENANCE............. Under the Trust's Amended and Restated By-Laws,
which establish and fix the rights and
preferences of the shares of Municipal
Preferred, the Trust must maintain
- asset coverage of the Municipal
Preferred shares as required by the
rating agency or agencies rating the
Municipal Preferred shares, and
- asset coverage of the Municipal
Preferred shares of at least 200% as
required by the Investment Company Act
of 1940.
Based on the composition of the Trust's
portfolio and market conditions as of June 30,
1999, the asset coverage of the Municipal
Preferred shares as measured pursuant to the
Investment Company Act of 1940 would be
approximately 310% if the Trust were to issue
all Municipal Preferred shares of both series
offered in this Prospectus, representing
approximately 32% of the Trust's capital.
MANDATORY REDEMPTION.......... If the Trust does not maintain its required
asset coverage, it must redeem shares of each
series of Municipal Preferred at $25,000 per
share plus any dividends that accumulate and
remain unpaid up to the date fixed for
redemption. The Trust will limit redemption to
the number of Municipal Preferred shares,
together with all other preferred shares of the
Trust, if any, necessary to restore the
required asset coverage. As of the date of this
offering, there are no other preferred shares
outstanding. The Trust may avoid mandatory
redemption by restoring its required asset
coverage pursuant to rating agency guidelines.
The provisions of the Investment Company Act of
1940 may restrict the Trust's ability to make a
mandatory redemption in connection with a
failure to comply with the rating agencies'
asset coverage requirements.
OPTIONAL REDEMPTION........... The Trust, at its option and subject to various
conditions, may choose to redeem all or a
portion of the Municipal Preferred shares of
each series generally on the second business
day preceding any dividend payment date for
that series at the price of $25,000 per share
plus accumulated but unpaid dividends, if any,
whether or not earned or declared to (but not
including) the date fixed for redemption, and,
during some special dividend rate periods, any
applicable premium.
LIQUIDATION PREFERENCE........ The liquidation preference (that is, the amount
the Trust must pay to Municipal Preferred
shareholders if the Trust is liquidated) for
each series of Municipal Preferred shares will
be $25,000 per share plus accumulated but
unpaid dividends, if any, whether or not earned
or declared.
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3
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VOTING RIGHTS................. The Investment Company Act of 1940 requires
that the holders of both series of Municipal
Preferred shares, and the holders of any other
preferred shares of the Trust, voting as a
separate class, have the right to
- elect at least two trustees at all
times, and
- elect a majority of the trustees at any
time when dividends on either series of
Municipal Preferred shares, or any other
preferred shares of the Trust, are
unpaid for two full years.
In each case, the holders of common shares,
both series of Municipal Preferred shares, and
any other preferred shares of the Trust, voting
together as a single class, will elect the
remaining trustees. The holders of each series
of Municipal Preferred shares, and the holders
of any other preferred shares of the Trust,
will vote as a separate class or classes on
other matters as required under the Trust's
Agreement and Declaration of Trust, the
Investment Company Act of 1940, and
Massachusetts law. In some circumstances, the
shareholders of one series of Municipal
Preferred will vote separately from shares of
the other series. Each common share, each
Municipal Preferred share, and each share of
any other class of preferred shares of the
Trust is entitled to one vote per share.
TAXATION...................... Dividends on shares of each series of Municipal
Preferred will be exempt from regular federal
income tax in the hands of owners of such
shares to the extent such dividends are payable
from net tax-exempt income earned on the
Trust's investments. All or a portion of the
Trust's dividends may be subject to the federal
alternative minimum tax. The Trust is currently
required to allocate net capital gain and other
income taxable for federal income tax purposes,
if any, proportionately among common shares of
beneficial interest and shares of each series
of Municipal Preferred. The Trust shall, in the
case of a seven-day dividend period or a
special dividend period of 28 days or fewer for
a series of Municipal Preferred, and may, in
the case of any other special dividend period
for such series, give notice of the amount of
any income taxable for federal income tax
purposes to be included in a dividend on shares
of such series of Municipal Preferred in
advance of the related auction. The amount of
taxable income allocable to shares of such
series of Municipal Preferred will depend upon
the amount of such income realized by the
Trust, but is not generally expected to be
significant.
INVESTMENT OBJECTIVES......... The Trust's primary investment objective is to
provide high current income generally exempt
from federal income tax. The Trust's secondary
objective is to seek total return.
INVESTMENT STRATEGIES......... The interest on the instruments in which the
Trust primarily invests is exempt from federal
income tax (other than the possible incidence
of any alternative minimum tax).
Under normal circumstances, the Trust will
invest at least 80% of its assets in debt
securities that are consistent with its
objectives of seeking high current income and
total return.
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Typically, the Trust's investments include
municipal obligations rated Baa through C by
Moody's Investors Service, Inc. ("Moody's") or
BBB through D by Standard & Poor's Ratings
Services, a division of The McGraw-Hill
Companies, Inc. ("Standard & Poor's"), or
comparably rated by any other national bond
rating service, or which are unrated but
considered by the Trust's investment advisor,
Colonial Management Associates, Inc., to be of
comparable quality.
The Trust may invest in bonds in the lowest
rating categories (bonds rated C by Moody's or
D by Standard & Poor's), but will do so only
when the Trust's investment advisor believes
the true quality of the credit of the issuer of
such bonds is stronger than the rating
indicates. The Trust may invest in bonds on
which the issuer has defaulted or failed to pay
principal or interest when due.
The Trust may also invest in higher quality
issues, particularly when the difference in
returns between quality classifications is very
narrow or when the investment advisor expects
interest rates to change.
In addition to investing in municipal
obligations, the Trust may hedge against
changes in interest rates by engaging in the
following:
- interest rate futures contracts,
- index futures, and
- options on interest rate futures
contracts, tax-exempt indices, and index
futures.
INVESTMENT ADVISOR............ Colonial Management Associates, Inc., an
investment advisor registered under the
Investment Advisers Act of 1940, has served as
the Trust's investment advisor since the
Trust's inception. The investment advisor is a
wholly owned subsidiary of Liberty Funds Group
LLC, which is an indirect majority-owned
subsidiary of Liberty Mutual Insurance Company.
RATINGS....................... The Trust will not issue shares of a series of
Municipal Preferred unless such shares have a
rating of aaa from Moody's and AAA from
Standard & Poor's.
SECONDARY MARKET TRADING...... Broker-dealers may, but are not obligated to,
maintain a secondary market in shares of each
series of Municipal Preferred outside of
auctions. There can be no assurance that a
secondary market will develop or, if it does
develop, that it will provide owners with
liquidity of investment. Shares of each series
of Municipal Preferred may be transferred
outside of auctions only to a broker-dealer or
such other persons who may be permitted by the
Trust.
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5
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RISK FACTORS AND SPECIAL CONSIDERATIONS
You should consider the following risk factors and other special
considerations in deciding whether to invest in shares of a series of Municipal
Preferred:
LOWER-RATED SECURITIES. The market value of the portfolio securities of
Colonial High Income Municipal Trust (the "Trust") will generally vary inversely
with changes in prevailing interest rates. Municipal obligations offering the
high current income sought by the Trust are ordinarily in the medium and lower
rating categories of recognized rating agencies or are unrated obligations of
comparable quality and, therefore, generally are characterized by a greater
volatility of price and risk of nonpayment of principal and interest than
securities in higher rating categories. The possibility of defaults by or
bankruptcies of issuers of these securities creates, in part, this risk of
principal and interest and may result in nonpayment of principal or interest or
restructuring of debt obligations and, possibly, a reduction in the Trust's
distributions to shareholders and net asset value. The medium and lower quality
tax-exempt securities in which the Trust will invest are speculative to varying
degrees. While these securities may have some quality and protective
characteristics, large uncertainties or major risk exposures to adverse
conditions are expected to outweigh such characteristics. Municipal obligations
in the lower rating categories, and comparable unrated bonds, are regarded as
predominantly speculative in character. With respect to unrated tax-exempt
securities, the Trust will rely more on the judgment, analysis and experience of
the Trust's investment advisor, Colonial Management Associates, Inc. (the
"Advisor"), than for rated securities.
In evaluating the creditworthiness of an issue, whether rated or unrated,
the Advisor may consider, among other things, the following factors:
- the issuer's financial resources;
- the issuer's sensitivity to economic conditions and trends;
- any operating history of and the community support for the facility
financed by the issuer;
- the ability of the issuer's management; and
- regulatory matters.
The Trust may not invest in bonds in the lowest rating categories (for
example, bonds rated C by Moody's Investors Service, Inc. ("Moody's"), which
Moody's regards as having extremely poor prospects of ever attaining any real
investment standing, or bonds rated D by Standard & Poor's Ratings Services
("Standard & Poor's")), and in unrated municipal obligations that are deemed by
the Advisor to be of comparable quality to bonds rated in the lowest rating
categories, if after an investment in such bonds, the bonds would exceed 5% of
the Trust's total assets. The Trust has no current intention of investing in
such bonds. The Trust expects that the issuers of some of the municipal
obligations it purchases will default in the payment of principal or interest,
or both. Because of the costs to the Trust of enforcing its rights as a holder
of such defaulted bonds and notes, the Trust's operating expenses may be higher
than those of other investment companies that invest primarily in securities
with a lower risk of default. In some cases, the Trust may, in the exercise of
its rights as a holder of defaulted bonds or notes that are secured by real
estate, operating facilities or other assets, take possession of such assets.
Taking possession of such assets may pose a number of risks to the Trust,
including the risks that:
- the Trust would not be able to sell such assets at a fair price;
- the Trust's management, which has no prior experience in the management
of such assets, would be unable to manage or operate such assets in a
manner that will produce a desirable level of economic return to the
Trust; and
- the Trust, as owner or operator of such assets, would be subjected to
tort or other liabilities in amounts exceeding the value of such assets.
6
<PAGE> 12
The Trust's taking possession of assets securing defaulted municipal obligations
may adversely affect the net asset value of the Trust. Any income derived from
the Trust's ownership or operation of such assets will not be tax-exempt. In
addition, the Trust's intention to qualify as a "regulated investment company"
under the Internal Revenue Code of 1986 may limit the extent to which the Trust
may exercise its rights by taking possession of such assets, because as a
regulated investment company, the Trust is subject to certain limitations on the
sources of its income. See "Tax Matters -- Federal Income Tax Matters -- Federal
Taxation of the Trust" in the Statement of Additional Information.
The Advisor may attempt to reduce the risks of investing in medium or lower
rated or unrated municipal obligations and the risks of adverse changes in the
value of the Trust's assets resulting from changes in general market levels of
interest rates through the use of credit analysis and hedging transactions.
In addition, medium and lower rated or unrated municipal obligations are
frequently traded only in markets where the number of potential purchasers and
sellers, if any, is very limited. This may limit the Trust's ability to buy and
sell such securities at their fair value.
The Trust may invest a substantial portion of its assets in small issues of
medium and lower quality tax-exempt bonds and notes, and issues with aggregate
outstanding principal amounts of $5,000,000 or less. The Trust may own the
entire amount, or a very large proportion of, the small issue securities it
purchases. Subject to any rating agency restrictions in effect, there is no
limit on the portion of its assets that the Trust may invest in small issues.
The Trust expects that the number of potential purchasers of small issue
securities, should the Trust wish to sell the securities from its portfolio,
will in most cases be extremely limited. There can be no assurance that the
Trust will be able to dispose of small issue securities at a fair price. Some
small issue securities may be considered to be "illiquid." Subject to any rating
agency restrictions in effect, there is no limit on the portion of the Trust's
assets which may be invested in illiquid securities.
ZERO COUPON SECURITIES. The Trust may invest in zero coupon tax-exempt
bonds. Such bonds are debt obligations that do not entitle the holder to any
periodic payments of interest either for the entire life of the obligation or
for an initial period after the issuance of the obligation. See "Investment
Objective and Policies -- Description of Municipal Obligations." Zero coupon
bonds are issued and traded at a discount from their face amounts. The amount of
the discount varies depending on, among other things, the following factors:
- the time remaining until maturity of the bonds;
- prevailing interest rates;
- the liquidity of the security; and
- the perceived credit quality of the issuer.
The market prices of zero coupon bonds generally are more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do non-zero coupon
bonds having similar maturities and credit quality. In order to satisfy a
requirement for qualification as a "regulated investment company" under the
Internal Revenue Code, the Trust must distribute each year at least 90% of its
net investment income, including the original issue discount accrued on zero
coupon bonds. See "Tax Matters -- Federal Income Tax Matters -- Federal Taxation
of the Trust" in the Statement of Additional Information. Because the Trust will
not on a current basis receive cash payments from the issuer of a zero coupon
bond in respect of accrued original issue discount, in some years the Trust may
have to distribute cash obtained from other sources in order to satisfy the 90%
distribution requirement under the Internal Revenue Code. Such cash might be
obtained from selling other portfolio holdings of the Trust. In some
circumstances, such sales might be necessary in order to satisfy cash
distribution requirements even though investment considerations might otherwise
make it undesirable for the Trust to sell such securities at such time.
7
<PAGE> 13
PRIVATE ACTIVITY BONDS. The Trust may invest in tax-exempt securities
classified as "private activity bonds." These bonds may subject some investors
in the Trust to the alternative minimum tax. The Trust may invest all or any
part of its assets in such private activity bonds.
OPTIONS AND FUTURES TRANSACTIONS. The Trust may seek to hedge its
portfolio against changes in interest rates by using options, index options and
futures and financial futures contracts. The Trust's hedging transactions are
designed to reduce volatility but come at some cost. The Trust must pay for the
option, and the price of the security may not in fact drop. In large part, the
success of the Trust's hedging activities depends on its ability to forecast
movements in securities prices and interest rates. The Trust does not, however,
intend to enter into options and futures transactions for speculative purposes.
The Trust is not required to hedge its portfolio.
ANTITAKEOVER PROVISIONS. The Trust's Agreement and Declaration of Trust
includes provisions that could limit the ability of other entities or persons to
acquire control of the Trust or to change the composition of its Board of
Trustees. Such provisions could discourage a third party from seeking to obtain
control of the Trust.
INVESTMENT CONSIDERATIONS. Investors in shares of a series of Municipal
Preferred should consider the following factors:
- The credit ratings of the shares of Municipal Preferred could be reduced
while an investor holds such shares.
- Neither broker-dealers nor the Trust are obligated to purchase shares of
Municipal Preferred in an auction or otherwise nor is the Trust required
to redeem shares of Municipal Preferred in the event of a failed auction.
- If sufficient bids do not exist in an auction, the applicable dividend
rate will be the maximum applicable dividend rate, and in such event,
owners of the shares of Municipal Preferred wishing to sell will not be
able to sell all, and may not be able to sell any, of such shares in the
auction. As a result, investors may not have liquidity of investment.
SECONDARY MARKET. The broker-dealers intend to maintain a secondary
trading market in the shares of each series of Municipal Preferred outside of
auctions; however, they have no obligation to do so and there can be no
assurance that a secondary market for either series of shares of Municipal
Preferred will develop or, if it does develop, that it will provide holders with
a liquid trading market. The shares of each series of Municipal Preferred will
not be registered on any stock exchange or on any automated quotation system. An
increase in the level of interest rates likely will have an adverse effect on
the secondary market price of the shares of Municipal Preferred, and a selling
shareholder may have to sell shares of Municipal Preferred between auctions at a
price per share of less than $25,000. You may transfer shares of Municipal
Preferred outside of auctions only to broker-dealers or such other persons as
may be permitted by the Trust.
YEAR 2000 COMPLIANCE. Like other investment companies, financial and
business organizations and individuals around the world, the Trust could be
adversely affected if the computer systems used by the Advisor, other service
providers and the issuers in which the Trust invests do not properly process and
calculate date-related information and data from and after January 1, 2000. This
is commonly known as the "Year 2000 Problem." The Advisor is taking steps that
it believes are reasonably designed to address the Year 2000 Problem, including
communicating with vendors who provide services, software and systems to the
Trust to provide that date-related information and data can be properly
processed and calculated on and after January 1, 2000. Many Trust service
providers and vendors, including the Advisor, are in the process of making Year
2000 modifications to their services, software and systems and believe that such
modifications will be completed on a timely basis prior to January 1, 2000. In
addition, Year 2000 readiness information, if available, is one of the factors
considered by the Advisor in its assessment of the issuers in which the Trust
invests. There can be no assurance that these steps will be sufficient to avoid
any adverse impact on the Trust.
8
<PAGE> 14
FINANCIAL HIGHLIGHTS
The table below sets forth specified information for a common share of
beneficial interest of the Trust outstanding throughout each period presented.
The financial highlights for each period presented have been audited by
PricewaterhouseCoopers LLP, the Trust's independent accountants, whose
unqualified report on the periods from 1994 through 1998 is included in the
Trust's December 31, 1998 Annual Report and in "Report of Independent
Accountants" in the "Financial Statements" section of the Statement of
Additional Information. The financial highlights should be read in conjunction
with the financial statements and notes thereto included in "Financial
Statements" in the Statement of Additional Information.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value -- beginning of period............... $ 8.560 $ 8.340 $ 8.550 $ 7.960 $ 8.670 $ 8.780
-------- -------- -------- -------- -------- --------
Net investment income................................ 0.519 0.552 0.566 0.597 0.616 0.671
Net realized and unrealized gain (loss).............. (0.066) 0.214 (0.193) 0.583 (0.716) (0.106)
-------- -------- -------- -------- -------- --------
Total from investment operations............. 0.453 0.766 0.373 1.180 (0.100) 0.565
-------- -------- -------- -------- -------- --------
Distributions:
From net investment income......................... (0.523) (0.546) (0.583) (0.590) (0.610) (0.675)
From net realized gains............................ -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total distributions.......................... (0.523) (0.546) (0.583) (0.590) (0.610) (0.675)
Expenses incurred from initial public offering....... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Net asset value -- end of period..................... $ 8.490 $ 8.560 $ 8.340 $ 8.550 $ 7.960 $ 8.670
======== ======== ======== ======== ======== ========
Per share market value:
End of Period...................................... $ 8.312 $ 8.630 $ 8.250 $ 7.380 $ 6.880 $ 8.250
======== ======== ======== ======== ======== ========
Total return based on net asset value(c)............. 5.45% 9.57% 4.71% 15.70% (0.75)% 6.57%
======== ======== ======== ======== ======== ========
Total return based on market value(d)................ 2.47% 11.60% 20.09% 15.65% (9.83)% 7.96%
======== ======== ======== ======== ======== ========
Ratio of operating expenses to average net
assets(f).......................................... 0.93% 0.96% 1.00% 1.06% 1.03% 0.97%
Ratio of net investment income to average net
assets(f).......................................... 6.02% 6.54% 6.74% 7.15% 7.44% 7.58%
Portfolio turnover rate.............................. 29% 17% 15% 23% 20% 29%
Net assets at end of period (000).................... $263,705 $265,190 $257,768 $264,467 $245,967 $268,130
<CAPTION>
FOR THE FISCAL YEAR ENDED DECEMBER 31,
-------------------------------------------
1992 1991 1990 1989(A)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value -- beginning of period............... $ 8.910 $ 9.000 $ 9.350 $ 9.300
-------- -------- -------- --------
Net investment income................................ 0.694 0.742 0.784 0.624
Net realized and unrealized gain (loss).............. (0.140) (0.074) (0.276) 0.012
-------- -------- -------- --------
Total from investment operations............. 0.554 0.668 0.508 0.636
-------- -------- -------- --------
Distributions:
From net investment income......................... (0.684) (0.758) (0.827) (0.565)
From net realized gains............................ -- -- (0.031) --
-------- -------- -------- --------
Total distributions.......................... (0.684) (0.758) (0.858) (0.565)
Expenses incurred from initial public offering....... -- -- -- (0.021)
-------- -------- -------- --------
Net asset value -- end of period..................... $ 8.780 $ 8.910 $ 9.000 $ 9.350
======== ======== ======== ========
Per share market value:
End of Period...................................... $ 8.250 $ 8.625 (b) (b)
======== ========
Total return based on net asset value(c)............. 6.61% 7.71% 5.65% (c)
======== ======== ========
Total return based on market value(d)................ 3.51% 5.76% 3.90% (0.45)%(e)
======== ======== ======== ========
Ratio of operating expenses to average net
assets(f).......................................... 0.96% 0.97% 0.96% 0.90%(g)
Ratio of net investment income to average net
assets(f).......................................... 7.86% 8.30% 8.56% 7.71%(g)
Portfolio turnover rate.............................. 15% 17% 23% 58%(g)
Net assets at end of period (000).................... $269,848 $273,207 $273,864 $282,016
</TABLE>
- ---------------
(a) The Trust commenced investment operations on February 16, 1989.
(b) Per share market value: End of Period for the Trust was not included in the
audited financial statements for periods prior to 1991.
(c) Total return at net asset value assuming all distributions reinvested. Total
return at net asset value for the Trust was not included in the audited
financial statements for periods prior to 1990.
(d) Total return at market value assuming all distributions reinvested and
excluding brokerage commissions.
(e) Not annualized.
(f) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Ratios for periods prior to 1995 are net of
benefits received, if any.
(g) Annualized.
9
<PAGE> 15
THE TRUST
The Trust is a closed-end, diversified management investment company. The
Trust's primary investment objective is to provide high current income,
generally exempt from federal income tax. The Trust's secondary investment
objective is to seek total return. The bonds and notes purchased by the Trust
generally are issued by or on behalf of state and local governmental units, and
the interest on such bonds and notes is exempt from federal income tax (other
than the possible incidence of any alternative minimum tax) ("Municipal
Obligations"). See "Investment Objectives and Policies." No assurance can be
given that the Trust's investment objectives will be achieved. All or a portion
of the Trust's dividends may be subject to the federal alternative minimum tax.
The Trust was organized as a Massachusetts business trust under the laws of the
Commonwealth of Massachusetts on January 9, 1989, and is registered under the
Investment Company Act of 1940. In February 1989, the Trust issued 27,000,000
shares of beneficial interest, no par value (the "Common Shares"), pursuant to
the initial public offering thereof and commenced operations. The Trust's Common
Shares are traded on the New York Stock Exchange under the symbol "CXE." The
Trust's principal office is located at One Financial Center, Boston, MA 02111,
and its telephone number is (617) 426-3750.
USE OF PROCEEDS
The net proceeds of this offering will be approximately $ , after
payment of the sales load to Salomon Smith Barney Inc. (the "Underwriter") and
estimated offering costs.
The net proceeds of the offering will be invested in accordance with the
Trust's investment objectives and policies. It is presently anticipated that the
Trust will be able to invest substantially all of the net proceeds in Municipal
Obligations that meet the Trust's investment objectives at or shortly (within
six to eight weeks) after the completion of the offering. To the extent that all
of the proceeds cannot be so invested, pending such investment, the Trust will
invest such proceeds initially in high-quality, short-term tax-exempt money
market securities, the income on which will be exempt from federal income taxes
(other than the possible incidence of any alternative minimum tax), or in
high-quality Municipal Obligations with relatively low volatility (such as
prerefunded and intermediate-term securities), to the extent such securities are
available. If necessary to invest fully the net proceeds of the offerings
immediately, the Trust may also purchase, as temporary investments, short-term
taxable investments of the type described under "Investment Objectives and
Policies -- Temporary and Defensive Investments," the income on which is subject
to federal income taxes.
10
<PAGE> 16
CAPITALIZATION
AT JUNE 30, 1999
The following table sets forth the unaudited capitalization of the Trust at
June 30, 1999 and as adjusted to give effect to the issuance of the shares of
Series T Municipal Preferred and the shares of Series W Municipal Preferred
offered hereby (including estimated offering expenses and sales loads of
$1,730,860).
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Shareholders' Equity:
Preferred Shares, no par value per share; 4,800 shares
authorized (no shares issued; 2,400 shares of Series T
and 2,400 shares of Series W Municipal Auction Rate
Cumulative Preferred Shares issued, as adjusted, at
$25,000 per share liquidation preference).............. $ -- $120,000,000
Common Shares, no par value per share; unlimited shares
authorized; 31,068,823 shares outstanding *............ 287,856,448 286,125,588
Undistributed (overdistributed) net investment income..... (569,938) (569,938)
Net realized gain (loss) from investment transactions..... (34,080,969) (34,080,969)
Net unrealized appreciation of investments................ 23,887 23,887
------------ ------------
Net Assets............................................. $253,229,428 $371,498,568
============ ============
</TABLE>
- ---------------
* None of these outstanding shares are held by or for the account of the Trust.
PORTFOLIO COMPOSITION
As of June 30, 1999, approximately 99.4% of the market value of the Trust's
portfolio was invested in long- and intermediate-term Municipal Obligations and
approximately 0.6% of the market value of the Trust's portfolio was invested in
short-term securities. For purposes of the foregoing sentence, futures in which
the Trust has invested are not included as long- and intermediate-term Municipal
Obligations or as short-term securities and are not included in the market
valuation of the Trust's portfolio. The following table sets forth information
with respect to the composition of the Trust's investment portfolio (excluding
short-term securities) as of June 30, 1999.
<TABLE>
<CAPTION>
STANDARD & NUMBER OF MARKET NUMBER OF MARKET
POOR'S* ISSUES VALUE PERCENT MOODY'S* ISSUES VALUE PERCENT
- ---------- --------- --------------- ------- -------- --------- --------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
AAA 16 $ 25,294,460.75 10.23% Aaa 12 $ 19,610,511.95 7.93%
AA 1 5,076,200.00 2.05 Aa 2 5,470,058.75 2.21
A 8 12,445,011.80 5.03 A 3 3,629,534.00 1.47
BBB 41 50,507,026.60 20.42 Baa 32 44,395,165.95 17.95
BB 6 6,748,393.76 2.73 Ba 7 7,721,375.01 3.12
B 1 735,000.00 0.30 B 1 735,000.00 0.30
NR** 131 146,570,826.56 59.24 NR** 147 165,815,273.81 67.02
--- --------------- ------ ---- --- --------------- ------
Total 204 $247,376,919.47 100.00% Total 204 $247,376,919.47 100.00%
=== =============== ====== ==== === =============== ======
</TABLE>
- ---------------
* Standard & Poor's rating categories may be modified further by a plus (+) or
minus (-) in AA, A, BBB, BB, B and C ratings. Moody's rating categories may
be modified further by a 1, 2 or 3 in Aa, A, Baa, Ba and B ratings.
** Many bonds are rated by only one rating agency, which results in a higher
percentage of bonds in this category. The total market value of bonds that do
not carry a rating from any rating service is $129,841,965, which represents
52.5% of the Trust.
11
<PAGE> 17
INVESTMENT OBJECTIVES AND POLICIES
The Trust's primary investment objective is to provide high current income
generally exempt from federal income tax. The Trust's secondary objective is to
seek total return. The bonds and notes purchased by the Trust generally are
issued by or on behalf of state and local governmental units, and the interest
on such bonds and notes is exempt from federal income tax (other than the
possible incidence of any alternative minimum tax).
Under normal circumstances, the Trust will invest at least 80% of its
assets in debt securities that are consistent with its objectives of seeking
high current income and total return. Typically, the Trust's investments include
Municipal Obligations rated Baa through C by Moody's or BBB through D by
Standard & Poor's or comparably rated by any other national bond rating service,
or which are unrated but considered by the Advisor to be of comparable quality.
The high yields the Trust seeks are generally available from such securities.
The Trust may invest without limit in Municipal Obligations that are unrated,
and it is expected that a very substantial portion of the Trust's assets will
ordinarily be invested in such unrated securities that are considered by the
Advisor to be comparable in quality to Municipal Obligations with medium or
lower quality investment ratings. Bonds in the lower rating categories, and
comparable unrated bonds, are considered to be speculative to varying degrees.
For example, bonds rated Ba or BB are regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. For a more complete description of
bond ratings, see Appendix A to the Statement of Additional Information. As
noted above under "Risk Factors and Special Considerations," the Trust may not
invest in Municipal Obligations in the lowest rating categories (bonds rated C
by Moody's or D by Standard & Poor's), and in unrated Municipal Obligations that
are deemed by the Advisor to be of comparable quality to bonds rated in such
lowest rating categories, if after giving effect to such purchase such bonds
would exceed 5% of the Trust's total assets. The Trust has no current intention
of investing in such bonds. It is expected that the issuers of some of the
Municipal Obligations purchased by the Trust will default in the payment of
principal or interest, or both. Because of the costs to the Trust of enforcing
its rights as a holder of such defaulted bonds and notes, the Trust's operating
expenses may be higher than those of other investment companies that invest
primarily in securities with a lower risk of default. In some cases, the Trust
may, in the exercise of its rights as a holder of defaulted bonds or notes that
are secured by real estate, operating facilities or other assets, take
possession of such assets. Taking possession of such assets may pose a number of
risks to the Trust, including (1) the risk that the Trust would not be able to
sell such assets at a fair price, (2) the risk that the Trust's management,
which has no prior experience in the management of such assets, would be unable
to manage or operate such assets in a manner that will produce a desirable level
of economic return to the Trust, and (3) the risk that the Trust, as owner or
operator of such assets, would be subjected to tort or other liabilities in
amounts exceeding the value of such assets. As a result, the net asset value of
the Trust might be adversely affected by the Trust's taking possession of assets
securing defaulted Municipal Obligations. Any income derived from the Trust's
ownership or operation of such assets will not be tax-exempt. In addition, the
Trust's intention to qualify as a "regulated investment company" under the
Internal Revenue Code may limit the extent to which the Trust may exercise its
rights by taking possession of such assets, because as a regulated investment
company, the Trust is subject to certain limitations on the sources of its
income. See "Tax Matters" in the Statement of Additional Information.
In addition to its investments in medium and lower quality Municipal
Obligations, the Trust may also invest in higher quality issues, particularly
when the difference in returns between quality classifications is very narrow or
when management expects interest rates to change. These investments may lessen
the risk of decline in net asset value due to credit deterioration but may also
affect the amount of current income, since yields on high quality securities are
usually lower than yields on medium and lower quality securities.
The medium and lower rated or unrated tax-exempt bonds that the Trust
intends to purchase are frequently traded only in markets where the number of
potential purchasers and sellers, if any, is very limited. This characteristic
may limit the availability of such securities for the Trust to purchase and may
also limit the ability of the Trust to sell such securities at their fair value
in response to changes in the
12
<PAGE> 18
economy or the financial markets. In addition, a substantial portion of the
Trust's assets may be invested in small issues of medium and lower quality
Municipal Obligations (issues with aggregate outstanding principal amounts of
$5,000,000 or less) the entire amount of which (or a very large proportion of
which) will be owned by the Trust. The Advisor expects that, in some cases, the
Trust's intention to purchase all or a substantial portion of an issue may give
the Trust some influence over the terms of the issue. Subject to any rating
agency restrictions in effect, there is no limit on the portion of the Trust's
assets which may be invested in such small issues. The Trust expects that the
number of potential purchasers of such small issues, should the Trust wish to
sell such an issue from its portfolio, will in most cases be extremely limited,
and there can be no assurance that the Trust would be able to dispose of such
securities at a fair price. Some of such securities may be considered to be
"illiquid." Subject to any rating agency restrictions in effect, there is no
limit on the portion of the Trust's assets which may be invested in illiquid
securities.
The Trust may invest in a relatively high percentage of Municipal
Obligations issued by entities having similar characteristics. The issuers may
be located in the same geographic area or may pay their interest obligations
from revenues of similar projects. This may make the Trust more susceptible to
similar economic, political or regulatory occurrences. As the similarity in
issuers increases, the potential for fluctuation of the net asset value of the
Trust's securities also increases.
The Trust's policy is not to concentrate in any industry but the Trust may
invest up to 25% of its assets in industrial development revenue bonds or
private activity revenue bonds that are based, directly or indirectly, on the
credit of private entities in any one industry, or in securities of private
issuers in any one industry (governmental issuers are not considered to be part
of any "industry"). See "Investment Objectives and Policies -- Fundamental
Investment Policies" and "Investment Objectives and Policies -- Other Investment
Policies" in the Statement of Additional Information.
It is a fundamental policy of the Trust, which may not be changed without
approval of holders of a majority of the Trust's outstanding voting securities
(as defined in "Investment Objectives and Policies -- Fundamental Investment
Policies" and "Investment Objectives and Policies -- Other Investment Policies"
in the Statement of Additional Information), to invest, under normal
circumstances, at least 80% of its assets in tax-exempt bonds and tax-exempt
notes. Except for this policy and the investment policies listed in the
Statement of Additional Information under "Investment Objectives and
Policies -- Fundamental Investment Policies," the Trust's investment policies
and its investment objectives may be changed without shareholder approval.
In addition to investing in Municipal Obligations, the Trust may seek to
achieve its objectives by engaging in hedging transactions. As a hedge against
changes in interest rates, the Trust may engage in transactions involving
interest rate futures contracts ("financial futures"), index futures and options
on financial futures, tax-exempt indices and index futures. See "Investment
Objectives and Policies -- Hedging Activities." The costs of and possible losses
incurred from such transactions may reduce the Trust's current return.
The Trust may also purchase securities on a "when-issued" basis, enter into
repurchase agreements and invest in other taxable instruments, subject to
limitations. See "Investment Objectives and Policies -- Forward Commitments,"
"Investment Objectives and Policies -- Repurchase Agreements" and "Investment
Objectives and Policies -- Temporary and Defensive Investments."
DESCRIPTION OF MUNICIPAL OBLIGATIONS
As used in this Prospectus, the term "Municipal Obligations" refers to debt
obligations the interest on which was at the time of issuance, in the opinion of
bond counsel to the issuer, exempt from federal income tax (other than the
possible incidence of any alternative minimum tax). (For a description of the
federal alternative minimum tax, see "Tax Matters -- Federal Taxation of
Shareholders.") Municipal Obligations include debt obligations issued by a state
(including the District of Columbia), a territory or a possession of the United
States, or any political subdivision thereof, to obtain funds for various public
purposes, including the construction of a wide range of public facilities such
as airports, bridges, highways, housing, mass transportation, roads, schools and
water and sewer works or for other public purposes.
13
<PAGE> 19
Interest on industrial development bonds used to fund the construction,
equipment, repair or improvement of privately operated industrial or commercial
facilities may also be exempt from federal income tax, but the size of such
issues is limited under current federal tax law. The Trust may not be a
desirable investment for "substantial users" of facilities financed by
industrial development bonds or private activity bonds or for "related persons"
of substantial users. See "Tax Matters" in this Prospectus and "Tax Matters" in
the Statement of Additional Information. The Trust has no present intention of
investing in Municipal Obligations the interest on which is not exempt from
federal income tax (other than the possible incidence of any alternative minimum
tax).
The two principal classifications of Municipal Obligations are general
obligation bonds and limited obligation (or revenue) bonds. General obligation
bonds are obligations involving the credit of an issuer possessing taxing power
and are payable from the issuer's general unrestricted revenues and not from any
particular fund or source. The characteristics and method of enforcement of
general obligation bonds vary according to the law applicable to the particular
issuer, and payment may be dependent upon appropriation by the issuer's
legislative body. Limited obligation bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source.
Tax-exempt industrial development bonds and private activity bonds also
generally are revenue bonds and thus not payable from the unrestricted revenues
of the issuer. The credit quality of industrial development bonds and private
activity bonds is usually directly related to the credit of the corporate user
of the facilities. Payment of principal of and interest on industrial
development bonds and private activity bonds is the responsibility of the
corporate user (and any guarantor).
Prices and yields on Municipal Obligations are dependent on a variety of
factors, including general money market conditions, the financial condition of
the issuer, general conditions in the tax-exempt bond market, the size of a
particular offering, the maturity of the obligation and the ratings of
particular issues, and are subject to change from time to time. Information
about the financial condition of an issuer of Municipal Obligations may not be
as extensive as that which is made available by corporations whose securities
are publicly traded.
The ratings of Moody's, Standard & Poor's and other national bond rating
services represent their opinions and are not absolute standards of quality.
Municipal Obligations with the same maturity, interest rate and rating may have
different yields while Municipal Obligations of the same maturity and interest
rate with different ratings may have the same yield.
Obligations of issuers of Municipal Obligations are subject to the
provisions of bankruptcy, insolvency and other laws, such as the Federal
Bankruptcy Reform Act of 1978, affecting the rights and remedies of creditors.
Congress or state legislatures may seek to extend the time for payment of
principal or interest, or both, or to impose other constraints upon enforcement
of such obligations. There is also the possibility that, as a result of
litigation or other conditions, the power or ability of issuers to meet their
obligations to pay interest on and principal of their Municipal Obligations may
be materially impaired or their obligations may be found to be invalid or
unenforceable. Such litigation or conditions may from time to time have the
effect of introducing uncertainties in the market for Municipal Obligations or
certain segments thereof, or materially affecting the credit risk with respect
to particular bonds. Adverse economic, business, legal or political developments
might affect all or a substantial portion of the Trust's Municipal Obligations
in the same manner.
The Trust may invest up to 15% of its net assets in inverse floating rate
municipal bonds (which are bonds whose interest rates bear an inverse
relationship to the interest rate on another security or the value of an
index)("inverse floaters"). An investment in inverse floaters may involve
greater risk than an investment in a fixed rate bond. Because changes in the
interest rate on the other security or index inversely affect the residual
interest paid on the inverse floater, the value of an inverse floater is
generally more volatile than that of a fixed rate bond. Inverse floaters have
interest rate adjustment formulas which generally reduce or, in the extreme,
eliminate the interest paid to the Trust when short-term interest rates rise,
and increase the interest paid to the Trust when short-term interest rates fall.
Inverse floaters have varying degrees of liquidity, and the market for these
securities is volatile. These securities tend to
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underperform the market for fixed rate bonds in a rising interest rate
environment, but tend to outperform the market for the fixed rate bonds when
interest rates decline. Although volatile, inverse floaters typically offer the
potential for yields exceeding the yields available on fixed rate bonds with
comparable credit quality, coupon, call provisions and maturity. These
securities usually permit the investor to convert the floating rate to a fixed
rate (normally adjusted downward), and this optional conversion feature may
provide a partial hedge against rising rates if exercised at an opportune time.
Investment in inverse floaters may amplify the effects of the Trust's use of
leverage. Should short-term interest rates rise, the combination of the Trust's
investment in inverse floaters and its use of leverage likely will adversely
affect the Trust's income and distributions to shareholders.
HEDGING ACTIVITIES
Hedging is a means of transferring risk that an investor does not desire to
assume in an uncertain interest rate environment. The Advisor believes it is
possible to reduce or enhance the effects of interest rate fluctuations through
the use of futures contracts and options on financial instruments. However, so
long as either Standard & Poor's or Moody's is rating the shares of Municipal
Preferred, the Trust will only engage in futures or options transactions in
accordance with guidelines of such rating agencies and, to the extent
transactions would not be permitted by such guidelines, only after it has
received written confirmation from Standard & Poor's or Moody's, as appropriate,
that such transactions would not impair the ratings then assigned by such rating
agency to shares of Municipal Preferred. Thus, the ability of the Trust to
engage in hedging activities may be limited by such rating agency restrictions.
The Trust may purchase and sell financial futures and tax-exempt bond index
futures contracts ("index futures") to hedge against changes, caused by changing
interest rates, in the market value of Municipal Obligations in its portfolio or
that it intends to acquire. In order to hedge, the Trust may also purchase and
write put and call options on financial futures, tax-exempt bond indices and
index futures. The costs of and possible losses incurred from these transactions
may reduce the Trust's current return.
Income earned by the Trust from its hedging activities will be treated as
capital gain and, if not offset by net realized capital loss, will be
distributed to shareholders in taxable distributions. See "Tax
Matters -- Federal Taxation of Shareholders."
The Trust will not engage in transactions in futures contracts or related
options for speculative purposes but only as a hedge against changes resulting
from market conditions in the values of securities in its portfolio or that it
intends to acquire. In addition, the Trust will not purchase or sell futures
contracts or purchase or sell related options if immediately thereafter the sum
of the amount of its initial margin deposits on its existing futures and related
options positions and premiums paid for related options would exceed 5% of its
total assets (taken at current value). In instances involving the purchase or
sale of futures contracts or call options thereon or the writing of call or put
options thereon by the Trust, an amount of cash or liquid high-grade securities,
equal to the underlying commodity value of the futures contracts and options
(less any related margin deposits) will be deposited in a segregated account
with the Trust's custodian to collateralize the position and thereby ensure that
the use of such futures contracts and options is unleveraged.
FINANCIAL FUTURES. In connection with its hedging activities, the Trust
may engage in transactions involving financial futures. A financial future is a
contract that obligates the seller to deliver and the purchaser to take delivery
of a specified type of financial instrument at a specified future time and at a
specified price. Although financial futures contracts by their terms require
actual delivery and acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract purchase or sale is effected by
entering into an offsetting transaction. Financial futures trade on boards of
trade that have been designated "contracts markets" by the Commodity Futures
Trading Commission. Financial futures trade on these markets in a manner that is
similar to the way a stock trades on a stock exchange. The boards of trade,
through their clearing corporations, guarantee performance of the contracts.
Currently, there are financial futures based on long-term U.S. Treasury bonds,
U.S. Treasury notes, Government National Mortgage Association
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("GNMA") certificates, three-month U.S. Treasury bills and three-month domestic
bank certificates of deposit. The Trust expects other financial futures to be
developed and traded. The Trust expects to engage in transactions involving
financial futures if, in the opinion of the Advisor, they are appropriate
hedging instruments for the Trust.
The sale of financial futures by the Trust is for the purpose of hedging
the Trust's holdings of long-term debt securities. In the event of a rise in
interest rates, the value of the Trust's short position in financial futures
would increase at approximately the same rate as the value of the long-term
bonds in its portfolio would decline, thereby keeping the net asset value of the
Trust from declining as much as it otherwise would have.
If, on the other hand, the Trust held cash reserves and interest rates were
expected to decline, the Trust might purchase futures contracts and thus take
advantage of the anticipated rise in the value of long-term securities without
actually buying them. In such an event, the futures contracts could be
liquidated and the Trust's cash reserves could then be used to buy long-term
securities in the cash market.
Unlike when the Trust purchases or sells a security, no price is paid or
received by the Trust upon the sale or purchase of a financial future. The Trust
will initially be required to deposit with the Trust's custodian an amount of
"initial margin" of cash or U.S. Treasury bills equal to a small percentage of
the contract amount. The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that initial margin
on financial futures does not involve the borrowing of funds by the customer to
finance the transactions. Rather, the initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned to the
Trust upon termination of the financial future, assuming all contractual
obligations have been satisfied. Subsequent payments, called maintenance margin,
to and from the broker, will be made on a daily basis as the price of the
underlying debt security fluctuates, making the long and short positions in the
financial future more or less valuable, a process known as "marking to market."
For example, when the Trust has sold a financial future and the price of the
underlying debt security has declined, that position will have increased in
value and the Trust will receive from the broker a maintenance margin payment
equal to that increase. Conversely, where the Trust has sold a financial future
and the price of the underlying debt security has increased, the position would
be less valuable, and the Trust would be required to make a maintenance margin
payment to the broker. At any time prior to expiration of the financial future,
the Trust may elect to close the position by taking an opposite position in the
financial future. A final determination of maintenance margin is then made,
additional cash is required to be paid by or released to the Trust, and the
Trust realizes a loss or a gain. While financial futures based on debt
securities do provide for the delivery and acceptance of securities, such
deliveries and acceptances are very seldom made. Generally, the financial future
is terminated by entering into an offsetting transaction. An offsetting
transaction for a financial future sale is effected by the Trust entering into a
financial future purchase for the same aggregate amount of the specific type of
financial instrument and same delivery date. If the price in the sale exceeds
the price in the offsetting purchase, the Trust immediately is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Trust pays the difference and realizes a loss.
There are several risks in connection with the use of financial futures by
the Trust as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the financial future and movements
in the price of the debt securities that are the subject of the hedge. Financial
futures based on U.S. Government securities and GNMA certificates historically
have reacted to an increase or decrease in interest rates in a similar fashion
to the underlying U.S. Government securities and GNMA certificates. To the
extent, however, that the Trust enters into financial futures on other than
Municipal Obligations, which together with futures on municipal indices are the
only financial futures currently available, there is a possibility that the
value of such financial futures would not vary in direct proportion to the value
of the Trust's holdings of Municipal Obligations.
Another result of the imperfect correlation between movements in the prices
of the financial future and of the debt securities being hedged is that the
price of the financial future may move more or less than the price of the debt
securities being hedged. If the price of the financial future moves less than
the
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price of the securities that are the subject of the hedge, the hedge will not be
fully effective, but if the price of the securities being hedged has moved in an
unfavorable direction, the Trust would be in a better position than if it had
not hedged at all. If the price of the securities being hedged has moved in a
favorable direction, the advantage will be partially offset by the futures
contract. If the price of the financial future moves more than the price of the
security, the Trust will experience either a loss or a gain on the future which
will not be completely offset by movements in the prices of the debt securities
which are the subject of the hedge. To compensate for the imperfect correlation
of movements in the price of debt securities being hedged and movements in the
price of related financial futures, the Trust may sell financial futures in a
greater or lesser dollar amount than the dollar amount of the securities being
hedged.
The market prices of financial futures may be affected by several factors
other than interest rates. First, all participants in the futures market are
subject to margin deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors may close financial futures
through offsetting transactions, which could distort the normal relationship
between the debt securities and futures markets. Second, from the point of view
of speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause temporary
price distortions. Due to the possibility of price distortions in the futures
market and the imperfect correlation between movements in the prices of debt
securities and movements in the prices of related financial futures, a correct
forecast of interest rate trends by the Advisor may still not result in a
successful hedging transaction.
Positions in futures contracts may be closed out only on an exchange or
board of trade that provides a secondary market for such futures. Although the
Trust intends to engage in futures transactions only on exchanges or boards of
trade where there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange or board of trade will
exist for any particular contract or at any particular time. If there is not a
liquid secondary market at a particular time, it may not be possible to close a
futures position at such time, and in the event of adverse price movements, the
Trust would continue to be required to make daily cash payments of maintenance
margin. However, in the event financial futures are used to hedge portfolio
securities, such securities will not be sold until the financial futures can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the financial futures.
OPTIONS ON FINANCIAL FUTURES. The Trust may also purchase put and call
options on financial futures which are traded on a U.S. exchange or board of
trade and enter into closing transactions with respect to such options to
terminate an existing position. The purchase of put options on financial futures
is analogous to the sale of futures so as to hedge the Trust's portfolio of debt
securities against the risk of rising interest rates. The purchase of call
options on financial futures is analogous to the purchase of futures contracts
and represents a means of obtaining temporary exposure to market appreciation at
limited risk. Such options may be used to protect against a market advance when
the Trust is not fully invested.
The Trust may write call options on futures contracts, which constitutes a
partial hedge against any declining price of long-term debt securities. If the
futures price at expiration is below the exercise price, the Trust will retain
the full amount of the option premium, which provides a partial hedge against
any decline that may have occurred in the Trust's holdings of debt securities.
If the futures price at expiration exceeds the exercise price, the Trust will
ordinarily realize a loss equal to the amount of such excess.
The Trust may write put options on futures contracts, which constitutes a
partial hedge against an increase in the price of long-term debt securities when
the Trust is not fully invested. If the futures price at expiration is above the
exercise price, the Trust will retain the full amount of the option premium,
which provides a partial hedge against any increase in the market price of
long-term debt securities. If the futures price at expiration is less than the
exercise price, the Trust will ordinarily realize a loss equal to the difference
between the futures price and the exercise price.
An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option. Upon
exercise of
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the option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account which represents the amount by
which the market price of the futures contract, at exercise, exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract. If an option is exercised on the last trading
day prior to the expiration date of the option, the settlement will be made
entirely in cash in an amount equal to the difference between the exercise price
of the option and the closing price of the futures contract on the expiration
date. Currently options can be purchased or written with respect to futures
contracts on U.S. Treasury bonds on the Chicago Board of Trade. The holder or
writer of an option may terminate his position by selling or purchasing an
option of the same series. There is no guarantee that such closing transactions
can be effected.
Several special risks relate to transactions in options on futures. The
ability to establish and close out positions on such options will be subject to
the maintenance of a liquid secondary market. Compared to the sale of financial
futures, the purchase of put options on financial futures involves less
potential risk to the Trust because the maximum amount at risk is the premium
paid for the options (plus transaction costs). However, there may be
circumstances when the purchase of a put option on a financial future would
result in a loss to the Trust when the sale of a financial future would not,
such as when there is no movement in the price of debt securities.
An option position may be closed out only on an exchange or board of trade
that provides a secondary market for an option of the same series. Although the
Trust generally will purchase only those options for which there appears to be
an active secondary market, there is no assurance that a liquid secondary market
on an exchange or board of trade will exist for any particular option, or at any
particular time, and for some options, no secondary market on an exchange or
board of trade may exist. In such event, it might not be possible to effect
closing transactions in particular options, with the result that the Trust would
have to exercise its options in order to realize any profit and would incur
transaction costs upon closing out the futures positions acquired pursuant to
the exercise of such option.
Reasons for the absence of a liquid secondary market on an exchange or
board of trade include the following:
- there may be insufficient trading interest in certain options;
- restrictions may be imposed by an exchange or board of trade on opening
transactions or closing transactions or both;
- trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options;
- unusual or unforeseen circumstances may interrupt normal operations on an
exchange or board of trade;
- the facilities of an exchange or board of trade or the Options Clearing
Corporation (the "Clearing Corporation") may not at all times be adequate
to handle current trading volume; or
- one or more exchanges or boards of trade could, for economic or other
reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which
event the secondary market on that exchange or board of trade (or in that
class or series of options) would cease to exist, although outstanding
options on that exchange or board of trade which had been issued by the
Clearing Corporation as a result of trades on that exchange or board of
trade could continue to be exercisable in accordance with their terms.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Clearing Corporation inadequate, and thereby result in the institution by an
exchange or board of trade of special procedures that may interfere with the
timely execution of customers' orders.
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TAX-EXEMPT BOND INDEX TRANSACTIONS. The Trust anticipates utilizing
tax-exempt bond index futures as a hedge against changes in the market value of
the Municipal Obligations in its portfolio or which it intends to acquire. A
tax-exempt bond index assigns relative values to the Municipal Obligations
included in the index. A tax-exempt bond index fluctuates with changes in the
market values of the Municipal Obligations included in the index. An index
future is a bilateral agreement pursuant to which two parties agree to receive
or deliver at settlement an amount of cash equal to a specified dollar amount
multiplied by the difference between the value of the index at the close of the
last trading day of the contract and the price at which the future was
originally written. An index future has similar characteristics to financial
futures discussed above except that settlement is made through delivery of cash
rather than the underlying securities.
The Trust's strategies in employing index futures will be similar to the
strategies involved in financial futures transactions. Tax-exempt bond index
futures transactions also will be subject to risks similar to those described
above with respect to financial futures, except that the correlation between
movements in the price of a futures contract and movements in the price of the
Trust's portfolio securities is likely to be higher for index futures than for
financial futures.
The Trust may also purchase and write put and call options on tax-exempt
bond indices and on tax-exempt bond index futures and enter into closing
transactions with respect to such options. An option on an index gives the
holder the right to receive cash upon exercise of the option in an amount equal
to a specified multiple times the amount by which the fixed exercise price of
the option exceeds, in the case of a put, or is less than, in the case of a
call, the closing value of the underlying index on the date of exercise. An
option on an index future gives the purchaser the right, in return for the
premium paid, to assume a position in an index contract rather than to sell (in
the case of a put option) or buy (in the case of a call option) a debt
instrument at a specified exercise price at any time during the period of the
option. Upon exercise of the put option, the delivery of the futures position by
the holder of the option to the writer of the option will be accompanied by
delivery of the accumulated balance of the writer's futures margin account,
which represents the amount by which the market price of the index futures
contract, at exercise, is less than the exercise price of the put option on the
index future.
FORWARD COMMITMENTS
New issues of Municipal Obligations are often purchased on a "when-issued"
or delayed delivery basis. The payment obligations and the interest rate that
will be received on the securities are fixed at the time the buyer enters into
the commitment. The Trust will not begin earning interest on such securities,
however, until the securities are scheduled for settlement. The Trust may enter
into such "forward commitments" if it holds and maintains until the settlement
date, in a segregated account, cash or liquid securities which are "marked to
market" daily in an amount sufficient to meet the purchase price. Forward
commitments involve a risk of loss if the value of the Municipal Obligation to
be purchased declines prior to the settlement date. Such a decline in value
could result from, among other things, changes in the level of interest rates or
other market factors. This risk is in addition to the risk of decline in the
value of the Trust's other assets. Although the Trust generally will enter into
forward commitments with the intention of acquiring Municipal Obligations for
its portfolio, the Trust may dispose of a commitment prior to settlement if the
Advisor deems it appropriate to do so. The Trust may realize capital gain or
loss upon the sale of forward commitments. Any such gains, if not offset by net
realized capital losses, will be distributed to shareholders in taxable
distributions.
REPURCHASE AGREEMENTS
The Trust may purchase U.S. Government securities and concurrently enter
into so-called "repurchase agreements" with the seller, usually a bank or
broker-dealer, whereby the seller agrees to repurchase such securities at the
Trust's cost plus interest within a specified time (normally one day). While
repurchase agreements involve risks not associated with direct investments in
U.S. Government securities, the Trust will follow procedures designed to
minimize such risks. These procedures include effecting repurchase transactions
only with the member banks of the Federal Reserve System and
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registered broker-dealers having creditworthiness substantially equivalent to
that of the issuers of investment grade debt securities. In addition, the
Trust's repurchase agreements will always be at least equal to the repurchase
price, including any accrued interest earned on the repurchase agreement. In the
event of a default or bankruptcy by a seller, the Trust will seek to liquidate
such collateral. However, the exercise of the Trust's right to liquidate such
collateral could involve costs or delays and, to the extent that proceeds from
any sale upon a default of the obligation to repurchase were less than the
repurchase price, the Trust could suffer a loss.
ZERO COUPON SECURITIES (ZEROS)
The Trust may invest in zero coupon securities, which are securities issued
at a significant discount from face value and pay interest only at maturity
rather than at intervals during the life of the security and in certificates
representing undivided interests in the interest or principal of mortgage-backed
securities (interest only/principal only), which tend to be more volatile than
other types of securities. The Trust will accrue and distribute income from zero
coupon and stripped securities and certificates on a current basis and may have
to sell securities to generate cash for distributions.
TEMPORARY AND DEFENSIVE INVESTMENTS
A portion of the Trust's assets will be held in cash or invested in
short-term securities for day-to-day operating purposes. It is the intention of
the Trust that short-term investments will also be in tax-exempt securities.
However, if suitable short-term tax-exempt securities are not available or if
short-term tax-exempt securities are available only on a when-issued basis, the
Trust may invest up to 20% of its assets in short-term obligations of the U.S.
Government or in repurchase agreements, or short-term notes and obligations
rated A-1+, of banks that have or whose parent holding companies have long-term
debt ratings of AAA or of corporations with long-term debt ratings of AAA, the
interest on all of which is not exempt from federal income taxes.
Notwithstanding the foregoing, the Trust may temporarily invest more than 20% of
its assets in such taxable obligations for defensive purposes. The ability of
the Trust to invest in securities other than tax-exempt securities (as well as
its ability to enter into repurchase agreements) is limited, however, by a
requirement of the Internal Revenue Code that at least 50% of its total assets
be invested in tax-exempt securities at the end of each quarter in order to pass
through to shareholders the federal income tax exemption for dividends derived
from net investment income on tax-exempt securities. See "Tax Matters -- Federal
Taxation of Shareholders."
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MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Board of Trustees is responsible for the general supervision of the
Trust, including general supervision of the duties performed by the Advisor
under its Management Agreement with the Trust. There are 13 trustees of the
Trust, five of whom are "interested persons" (as defined in the Investment
Company Act of 1940) of the Trust, the Advisor or the Underwriter. The names and
addresses of the trustees and officers of the Trust and their principal
occupations and other affiliations during the past five years are set forth
under "Management of the Trust" in the Statement of Additional Information.
THE ADVISOR
The Advisor is Colonial Management Associates, Inc., a Massachusetts
corporation having its principal offices at One Financial Center, Boston,
Massachusetts 02111. The Advisor is a wholly owned subsidiary of Liberty Funds
Group LLC ("Liberty Funds Group") and both Liberty Funds Group and the Advisor
are indirect, majority-owned subsidiaries of Liberty Mutual Insurance Company
("Liberty"), an underwriter of workers' compensation insurance and a property
and casualty insurer in the United States. The Advisor has been an investment
advisor since 1931. As of the date of this Prospectus, the Advisor serves as
investment advisor or sub-advisor for 35 open-end and 5 closed-end management
investment companies and manages over $16 billion in assets.
The Advisor's investment advisory business is managed together with the
mutual funds and institutional investment advisory businesses of its affiliate,
Stein Roe & Farnham Incorporated ("Stein Roe"), by a combined management team of
employees from both companies. Stein Roe also shares personnel, facilities and
systems with the Advisor that may be used in providing administrative services
to the Trust. Both the Advisor and Stein Roe are subsidiaries of Liberty
Financial Companies, Inc.
Maureen G. Newman, a Senior Vice President of the Advisor, has managed the
Trust since July 1998. Ms. Newman joined the Advisor in May 1996 as Director of
Municipal Research and Portfolio Manager and has managed various other
tax-exempt funds for the Advisor since that time. Prior to joining the Advisor,
Ms. Newman was a portfolio manager and bond analyst with Fidelity Investments
from May 1985 to May 1996.
MANAGEMENT AGREEMENT
The Management Agreement between the Advisor and the Trust (the "Management
Agreement") provides that, subject to the direction of the Board of Trustees of
the Trust and the applicable provisions of the Investment Company Act of 1940,
the Advisor is responsible for the actual management of the Trust's portfolio.
The responsibility for making decisions to buy, sell or hold a particular
investment rests with the Advisor, subject to review by the Board of Trustees of
the Trust and compliance with the applicable provisions of the Investment
Company Act of 1940.
The Advisor provides the Trust with accounting, bookkeeping and pricing
services and other services and office facilities (the expenses of which are
borne by the Trust as specified below), except to the extent these services are
provided by an administrator or an accounting firm hired by the Trust.
Under the Management Agreement with the Trust, the Advisor receives a
monthly advisory fee at the annual rate of 0.65% of the average weekly net
assets of the Trust. Since the Advisor's fee is based on the average weekly net
assets of the Trust, the Advisor will benefit from the increase in the Trust's
net assets resulting from the offering of the shares of Municipal Preferred. It
is not possible to state precisely the amount of additional compensation the
Advisor will receive as a result of the offering because the proceeds of the
offering will be invested in additional portfolio securities which will
fluctuate in value. However, based on the estimated proceeds from the offering,
assuming all the shares of Municipal Preferred offered hereby are purchased, the
Advisor would receive additional annual advisory fees of approximately
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$768,749 as a result of the increase in average weekly net assets under
management over the Trust's current net assets under management, assuming no
fluctuations in the value of Trust portfolio securities.
The Advisor places all orders for the purchase and sale of portfolio
securities. In selecting broker-dealers, the Advisor may consider research and
brokerage services furnished by such broker-dealers to the Advisor and its
affiliates. In recognition of the research and brokerage services provided, the
Advisor may cause the Trust to pay the selected broker-dealer a higher
commission than would have been charged by another broker-dealer not providing
such services. Subject to seeking best execution, the Advisor may consider sales
of shares of certain other funds distributed by affiliates of Liberty in
selecting broker-dealers for portfolio security transactions.
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THE AUCTION
SUMMARY OF AUCTION PROCEDURES
The following is a brief summary of the auction procedures. They are
described in more detail in the Statement of Additional Information. The auction
procedures are complicated, and there are exceptions to these procedures. Many
of the terms in this section have a special meaning. Any terms in this section
not defined have the meaning assigned to them in the Statement of Additional
Information. See the Statement of Additional Information for a full description
of the auction procedures. The auction determines the Applicable Rate (the
dividend rate) for shares of each series of Municipal Preferred, but the
Applicable Rate for such series will not be higher than the Maximum Rate for
such series. See "Description of Municipal Preferred -- Dividends and Dividend
Periods." You also may buy or sell shares of each series of Municipal Preferred
in the auction for that series.
If you own shares of a series of Municipal Preferred, you may instruct,
orally or in writing, a Broker-Dealer or a broker-dealer that has entered into
an agreement with a Broker-Dealer, to enter an order in the auction. For
purposes of this discussion regarding the auction procedures, a "Broker-Dealer"
is any broker-dealer, commercial bank or other entity permitted by law to
perform the functions required of a Broker-Dealer that is a member of, or a
participant in, The Depository Trust Company or is an affiliate of such member
or participant, has been selected by the Trust and has entered into an agreement
with the Trust and the auction agent to follow the auction procedures. Existing
shareholders of a series of Municipal Preferred can enter three kinds of orders
regarding their Municipal Preferred shares: sell, bid, and hold.
- If you enter a sell order, you indicate that you want to sell shares of
such series of Municipal Preferred at $25,000 per share, no matter what
the next rate period's Applicable Rate will be.
- If you enter a bid (or "hold at a rate") order, you indicate that you
want to sell shares of such series of Municipal Preferred only if the
next rate period's Applicable Rate is less than the rate you specify.
- If you enter a hold order, you indicate that you want to continue to own
shares of such series of Municipal Preferred, no matter what the next
rate period's Applicable Rate will be.
You may enter different types of orders for your shares of a series of
Municipal Preferred, as well as orders for additional shares of a series of
Municipal Preferred. All orders must be for whole shares. All orders you submit
are irrevocable. There are a fixed number of shares of a series of Municipal
Preferred, and the Applicable Rate for a series of Municipal Preferred likely
will vary from auction to auction depending on the number of bidders, the number
of shares the bidders seek to buy, and general economic conditions including
current interest rates. If you own shares of a series of Municipal Preferred and
submit a bid higher than the Maximum Rate for shares of such series, your bid
will be treated as a sell order. If you do not enter an order, the Broker-Dealer
will assume that you want to continue to hold shares of a series of Municipal
Preferred, but if you fail to submit an order and the rate period for such
series is longer than 28 days, the Broker-Dealer will treat your failure to
submit a bid as a sell order.
If you do not currently own shares of a series of Municipal Preferred, or
want to buy more shares, you may instruct a Broker-Dealer, or a broker-dealer
that has entered into an agreement with a Broker-Dealer, to enter a bid order to
buy shares of such series in an auction at $25,000 per share at or above a
specified dividend rate. If your bid specifies a rate higher than the Maximum
Rate for such series, your order will not be accepted.
Broker-Dealers will submit orders from existing and potential shareholders
to the auction agent. Neither the Trust nor the auction agent will be
responsible for a Broker-Dealer's failure to submit orders from existing
shareholders and potential shareholders. A Broker-Dealer's failure to submit
orders for Municipal Preferred shares held by it or its customers will be
treated in the same manner as a shareholder's failure to submit an order to the
Broker-Dealer. A Broker-Dealer may submit orders to the auction agent for its
own account provided it is not an affiliate of the Trust.
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<PAGE> 29
The auction agent after each auction for shares of a series of Municipal
Preferred will pay to each Broker-Dealer, from funds provided by the Trust, a
service charge at the annual rate of 1/4 of 1% in the case of any auction
immediately preceding a rate period of less than one year, or a percentage
agreed to by the Trust and the Broker-Dealers, in the case of any auction
immediately preceding a rate period of one year or longer, of the purchase price
of shares of such series of Municipal Preferred placed by the Broker-Dealers at
the auction.
If the number of shares of a series of Municipal Preferred subject to bid
orders with a dividend rate equal to or lower than the Maximum Rate for such
series of Municipal Preferred is at least equal to the number of shares of such
series of Municipal Preferred subject to sell orders, then the Applicable Rate
for such series for the next rate period will be the lowest rate submitted
which, taking into account that rate and all lower rates submitted in order from
existing and potential shareholders, would result in existing and potential
shareholders owning all the shares of such series of Municipal Preferred
available for purchase in the auction.
If the number of shares of a series of Municipal Preferred subject to bid
orders with a dividend rate equal to or lower than the Maximum Rate for such
series of Municipal Preferred is less than the number of shares of such series
of Municipal Preferred subject to sell orders, then the auction is considered to
be a failed auction, and the dividend rate will be the Maximum Rate for such
series. In that event, existing shareholders that have submitted sell orders (or
are treated as having submitted sell orders) may not be able to sell any or all
of the shares of such series for which they submitted sell orders.
The auction agent will not accept a bid above the Maximum Rate for a series
of Municipal Preferred. The purpose of the Maximum Rate is to place an upper
limit on Municipal Preferred dividends and in so doing to help protect the
earnings available to pay common share dividends, and to serve as the Applicable
Rate in the event of a failed auction (that is, an auction where there are more
shares of a series of Municipal Preferred offered for sale than there are buyers
for those shares).
If Broker-Dealers submit or are deemed to submit hold orders for all
outstanding shares of a series of Municipal Preferred, that is considered an
"all hold" auction and the Applicable Rate for such series for the next rate
period will be the All Hold Order Rate. The All Hold Order Rate for such series
is the lesser of the Standard & Poor's Kenny 30-day High Grade Index (if the
rate period is less than 183 days) or the product of:
(1)(a) the "AA" Composite Commercial Paper Rate on the auction date
for that rate period if the rate period is less than 183 days, (b) the
Treasury Bill Rate on the auction date for that rate period if the rate
period is greater than 182 days but less than 365 days, or (c) the Treasury
Note Rate on the auction date for that rate period if the rate period is
greater than 364 days; and
(2) 1 minus the greater of the maximum marginal regular federal
individual income tax rate applicable to ordinary income or the maximum
marginal regular federal corporate income tax rate.
However, if the Trust has notified the auction agent that it intends to allocate
any net capital gains or other federally taxable income to shares of a series of
Municipal Preferred for that rate period, the All Hold Order Rate for such
series may be adjusted as set forth in the Statement of Additional Information.
The auction procedures include a pro rata allocation of shares for purchase
and sale. This allocation process may result in an existing shareholder
continuing to hold or selling, or a potential shareholder buying, fewer shares
than the number of shares in its order. If this happens, Broker-Dealers will be
required to make appropriate pro rata allocations among their customers.
Settlement of purchases and sales will be made on the next business day
(which also is a dividend payment date) after the auction date through The
Depository Trust Company. Purchasers will pay for their shares through
Broker-Dealers in same-day funds to The Depository Trust Company against
delivery to the Broker-Dealers. The Depository Trust Company will make payment
to the sellers' Broker-Dealers in accordance with its normal procedures, which
require Broker-Dealers to make payment against delivery in same-day funds.
Throughout this Prospectus, a business day is a day on which the New York Stock
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<PAGE> 30
Exchange is open for trading, and which is neither a Saturday, Sunday nor any
other day on which banks in New York, New York are authorized by law to close.
If the Trust plans to include any net capital gains or other federal
taxable income in a Municipal Preferred dividend, it generally will notify the
auction agent of the amount to be included, at least a week before the next
dividend payment date for a series of Municipal Preferred for the rate period in
which taxable income will be included in the dividend. The auction agent will
notify Broker-Dealers, who in turn will notify their customers.
The first auction for shares of Series T Municipal Preferred will be held
on Tuesday, , 1999, and the first auction for shares of Series
W Municipal Preferred will be held on Wednesday, , 1999, in
each case the business day preceding the dividend payment date for the initial
rate period for such series. Thereafter, except during special rate periods,
auctions will normally be held every Tuesday for shares of Series T Municipal
Preferred and every Wednesday for shares of Series W Municipal Preferred, and
each subsequent rate period for shares of such series will normally begin on the
following Wednesday and Thursday, respectively.
The following is a simplified example of how a typical auction works.
Assume that the Trust has 1,000 outstanding shares of a series of Municipal
Preferred, and three current shareholders. The three current shareholders and
three potential shareholders submit orders through Broker-Dealers at the auction
for such series:
<TABLE>
<S> <C> <C>
Current Shareholder A Owns 500 shares, wants to sell Bid order of 3.5% rate for all
all 500 shares if auction rate 500 shares
is less than 3.5%
Current Shareholder B Owns 300 shares, wants to hold Hold order -- will take the
auction rate
Current Shareholder C Owns 200 shares, wants to sell Bid order of 3.3% rate for all
all 200 shares if auction rate 200 shares
is less than 3.3%
Potential Shareholder D Wants to buy 200 shares Places order to buy at or
above 3.4%
Potential Shareholder E Wants to buy 300 shares Places order to buy at or
above 3.3%
Potential Shareholder F Wants to buy 200 shares Places order to buy at or
above 3.5%
</TABLE>
The lowest dividend rate that will result in all 1,000 shares of that
series of Municipal Preferred continuing to be held is 3.4% (the offer by D).
Therefore, the Applicable Rate for that series will be 3.4%. Current
shareholders B and C will continue to own their shares. Current shareholder A
will sell its shares because A's dividend rate bid was higher than the
Applicable Rate. Potential shareholder D will buy 200 shares and Potential
shareholder E will buy 300 shares, both because their bid rates were at or below
the Applicable Rate. Potential shareholder F will not buy any shares because its
bid rate was above the Applicable Rate.
SECONDARY MARKET TRADING AND TRANSFER OF MUNICIPAL PREFERRED
The Broker-Dealers (including the Underwriter) expect, but are not
obligated, to maintain a secondary trading market in shares of each series of
Municipal Preferred outside of auctions. There can be no assurance that a
secondary trading market for shares of either series of Municipal Preferred will
develop or, if it does develop, that it will provide owners with liquidity of
investment. Neither the shares of Series T Municipal Preferred nor the shares of
Series W Municipal Preferred will be registered on any stock exchange or on the
National Association of Securities Dealers Automated Quotation System. Investors
who purchase shares of either series of Municipal Preferred in an auction for a
special rate period should note that because the dividend rate on such shares
will be fixed for the length of that rate period, the value of such shares may
fluctuate in response to changes in interest rates, and may be more or
25
<PAGE> 31
less than their original cost if sold on the open market in advance of the next
auction thereof, depending on market conditions.
An existing shareholder may sell, transfer, or otherwise dispose of shares
of either series of Municipal Preferred only in whole shares and only (1)
pursuant to a bid or sell order placed with the auction agent in accordance with
the auction procedures, (2) to a Broker-Dealer or (3) to such other persons as
may be permitted by the Trust; provided, however, that (a) a sale, transfer or
other disposition of shares of either series of Municipal Preferred from a
customer of a Broker-Dealer who is listed on the records of that Broker-Dealer
as the holder of such shares to that Broker-Dealer or another customer of that
Broker-Dealer shall not be deemed to be a sale, transfer or other disposition
for purposes of the foregoing if such Broker-Dealer remains the existing
shareholder of the shares so sold, transferred or disposed of immediately after
such sale, transfer or disposition and (b) in the case of all transfers other
than pursuant to auctions, the Broker-Dealer (or other person, if permitted by
the Trust) to whom such transfer is made shall advise the auction agent of such
transfer.
DETERMINATION OF NET ASSET VALUE
Net asset value of the Trust will be determined no less frequently than as
of the close of regular trading on the New York Stock Exchange (generally 4:00
p.m. Eastern time) on the last business day of each week (generally Friday), and
at such other times as the Trust may authorize. The net asset value of the Trust
equals the value of the Trust's assets less the Trust's liabilities. Portfolio
securities for which market quotations are readily available are valued at
current market value. Short-term investments maturing in 60 days or less are
valued at amortized cost when the Advisor determines, pursuant to procedures
adopted by the Board of Trustees, that such cost approximates current market
value. All other securities and assets are valued at their fair value following
procedures adopted by the Board of Trustees.
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<PAGE> 32
DESCRIPTION OF MUNICIPAL PREFERRED
GENERAL
The following is a brief description of the terms of the shares of
Municipal Preferred. For the complete terms of the shares of Municipal
Preferred, you may refer to the Trust's Amended and Restated By-Laws (the
"By-Laws") filed as an Exhibit to the Trust's registration statement on Form
N-2. The Agreement and Declaration of Trust of the Trust (the "Declaration")
provides that the Trust may authorize separate classes of shares of beneficial
interest. The By-Laws of the Trust will, at the time they are amended and
restated, authorize the issuance of 4,800 preferred shares of beneficial
interest, no par value per share, which may be issued from time to time in such
series and with such designations, preferences and other rights, qualifications,
limitations and restrictions as are determined in a resolution of the Board of
Trustees ("Preferred Shares"). The By-Laws authorize the issuance of up to 2,400
shares of Series T Municipal Preferred and up to 2,400 shares of Series W
Municipal Preferred. Shares of each series of Municipal Preferred carry one vote
per share. Shares of each series of Municipal Preferred will, when issued, be
fully paid and, subject to matters discussed in "Shareholder Liability" in the
Statement of Additional Information, nonassessable, and will have no pre-emptive
or conversion rights or rights to cumulative voting.
DIVIDENDS AND DIVIDEND PERIODS
GENERAL. The following is a general description of dividends and rate
periods. The calculation of dividends and rate periods is complex and subject to
special rules. See the Statement of Additional Information for a description of
the terms used in this section and a more detailed discussion of this topic.
The dividend rate for the initial rate period for shares of a series of
Municipal Preferred will be the rate set out on the cover of the Prospectus. For
subsequent rate periods, shares of a series of Municipal Preferred will pay
dividends based on a rate set at the auction for that series, normally held
weekly, but the rate set at the auction will not exceed the Maximum Rate for
such series. Rate periods for a series of Municipal Preferred generally will be
seven days, and a rate period will begin on the first business day after the
auction for such series. In most instances, dividends are also paid weekly, on
the day following the end of the rate period for such series. The Trust, subject
to some limitations, may change the length of rate periods for a series of
Municipal Preferred, designating them as "special rate periods." See
"Description of Municipal Preferred -- Designation of Special Rate Periods."
DIVIDEND PAYMENTS. Dividends on shares of each series of Municipal
Preferred shall generally be payable on shares of (a) Series T Municipal
Preferred on Wednesday, , 1999, and thereafter on each Wednesday;
and (b) Series W Municipal Preferred on Thursday, , 1999, and
thereafter on each Thursday; provided, however, that (i) if the Wednesday for
Series T Municipal Preferred or the Thursday for Series W Municipal Preferred on
which dividends would otherwise be payable as set forth above is not a business
day, then such dividends shall be payable on such shares on the first business
day that falls prior to such Wednesday or Thursday, as the case may be; and (ii)
the Trust may specify different dividend payment dates in respect of any special
rate period of more than 28 rate period days. See "Description of Municipal
Preferred -- Designation of Special Rate Periods" for a discussion of payment
dates for a special rate period.
Dividends on each series of Municipal Preferred shares will be paid on the
dividend payment date for such series to holders of record as their names appear
on the Trust's record books, on the business day next preceding the dividend
payment date for such series. If dividends are in arrears, they may be declared
and paid at any time, to holders of record as their names appear on the Trust's
record books, on that date, not more than 15 days before the payment date, as
the Trust's Board of Trustees may fix.
The Depository Trust Company, in accordance with its current procedures, is
expected to credit on each dividend payment date for a series of Municipal
Preferred shares dividends received from the Trust to the accounts of its agent
members, in next-day funds. "Agent members" are Broker-Dealers or broker-
dealers that are members of or participants in The Depository Trust Company who
act on behalf of
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<PAGE> 33
Municipal Preferred shareholders. Agent members, in turn, are expected to
distribute these dividend payments to the person for whom they are acting as
agents. The initial Broker-Dealer, Salomon Smith Barney Inc., however, has
indicated to the Trust that it or the agent member it designates will make these
dividend payments available in same-day funds, rather than next-day funds, on
each dividend payment date for a series of Municipal Preferred shares to
customers that use that Broker-Dealer or its designee as its agent member. A
Municipal Preferred shareholder that does not use an initial Broker-Dealer, or
one of its affiliates, should contact his or her Broker-Dealer or another
broker-dealer that is an agent member of The Depository Trust Company to
determine whether it will make dividend payments available to the shareholder in
same-day or next-day funds. If a Broker-Dealer or a broker-dealer that is an
agent member of The Depository Trust Company does not make dividends available
to Municipal Preferred shareholders in same-day funds, these shareholders will
not have funds available until the next business day.
DIVIDEND RATE SET AT AUCTION. Shares of a series of Municipal Preferred
pay dividends based on a rate set at auction. The auction usually is held
weekly, but may be held less frequently. The auction sets the dividend rate, and
shares of a series of Municipal Preferred may be bought and sold at the auction.
Bankers Trust Company, the auction agent, reviews orders from Broker-Dealers on
behalf of existing shareholders that wish to sell, hold at the auction rate, or
hold only at a specified rate, and on behalf of potential shareholders that wish
to buy shares of a series of Municipal Preferred. The auction agent then
determines the lowest dividend rate that will result in all of the outstanding
shares of a series of Municipal Preferred continuing to be held. The shares of
each series of Municipal Preferred in this offering will trade at auction
starting in the week following this offering. See "The Auction."
DETERMINATION OF DIVIDEND RATES. The Trust computes the dividends per
share of a series of Municipal Preferred by multiplying the dividend rate
determined at the auction for such series by a fraction, the numerator of which
normally is seven and the denominator of which normally is 365. If the Trust has
designated a special rate period for a series of Municipal Preferred, then the
numerator is the number of days in the rate period, and the denominator is 360.
In either case, this rate is then multiplied by $25,000 to arrive at the
dividend per share for such series. The numerator may be different if the rate
period includes a holiday.
If an auction for any subsequent rate period for shares of a series of
Municipal Preferred is not held for any reason other than as described below,
the dividend rate on those shares for a series of Municipal Preferred will be
the Maximum Rate on the auction date for that subsequent rate period.
MAXIMUM RATE. The dividend rate that results from an auction for shares of
a series of Municipal Preferred will not be greater than the Maximum Rate for
shares of such series, which is:
(a) for any auction date which is not the auction date immediately
prior to the first day of any proposed special rate period, the product of
(i) the Reference Rate on that auction date for the next rate period for
shares of a series of Municipal Preferred and (ii) the Rate Multiple on
that auction date, unless shares of such series have or had a special rate
period (other than a special rate period of 28 rate period days or fewer)
and an auction at which sufficient clearing bids existed has not yet
occurred after that special rate period for a minimum rate period (seven
days) for shares of such series, in which case the Maximum Rate will be the
higher of:
(A) the dividend rate on shares of such series for the then-ending
rate period; and
(B) the product of (x) the higher of (I) the Reference Rate on that
auction date for a rate period equal in length to the then-ending rate
period for shares of such series, if the then-ending rate period was 364
rate period days or fewer, or the Treasury Note Rate on that auction
date for a rate period equal in length to the then-ending rate period
for shares of such series, if the then-ending rate period was more than
364 rate period days, and (II) the Reference Rate on that auction date
for a rate period equal in length to that special rate period for shares
of such series, if that special rate period was 364 rate period days or
fewer, or the Treasury Note Rate on that auction date for a rate period
equal in length to that special rate period for shares of such series,
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<PAGE> 34
if that special rate period was more than 364 rate period days and (y)
the Rate Multiple on that auction date; or
(b) for any auction date that is the auction date immediately prior to
the first day of any proposed special rate period, the product of (i) the
highest of (x) the Reference Rate on that auction date for a rate period
equal in length to the then-ending rate period for shares of such series,
if the then-ending rate period was 364 rate period days or fewer, or the
Treasury Note Rate on that auction date for a rate period equal in length
to the then-ending rate period for shares of such series, if the
then-ending rate period was more than 364 rate period days, (y) the
Reference Rate on that auction date for the special rate period for shares
of such series for which the auction is being held if that special rate
period is 364 rate period days or fewer or the Treasury Note Rate on that
auction date for the special rate period for shares of such series for
which the auction is being held if that special rate period is more than
364 rate period days, and (z) the Reference Rate on that auction date for
minimum rate periods for shares of such series and (ii) the Rate Multiple
on that auction date.
The Reference Rate for each series is (i) the higher of the Taxable
Equivalent of the Short-Term Municipal Bond Rate and the "AA" Composite
Commercial Paper Rate in the case of minimum rate periods and special rate
periods of 28 rate period days or fewer; (ii) the "AA" Composite Commercial
Paper Rate in the case of special rate periods of more than 28 rate period days
but fewer than 183 rate period days; and (iii) the Treasury Bill Rate in the
case of special rate periods of more than 182 rate period days but fewer than
365 rate period days.
The Taxable Equivalent of the Short-Term Municipal Bond Rate, "AA"
Composite Commercial Paper Rate, Treasury Bill Rate and Treasury Note Rate will
be the rates announced on the auction date for the business day immediately
before the auction date for a series of Municipal Preferred. See the Statement
of Additional Information for the definitions of these rates. The "Rate
Multiple" for shares of a series of Municipal Preferred will be a percentage,
determined as set out below, based on the prevailing rating of shares of such
series in effect at the close of business on the business day immediately before
the auction date. See the Statement of Additional Information for a description
of "prevailing rating."
<TABLE>
<CAPTION>
PREVAILING RATING PERCENTAGE
- ----------------- ----------
<S> <C>
"aa3"/AA- or higher......................................... 110%
"a3"/A-..................................................... 125%
"baa3"/BBB-................................................. 150%
"ba3"/BB-................................................... 200%
Below "ba3"/BB-............................................. 250%
</TABLE>
If the Trust has notified the auction agent that it intends to allocate
federal taxable income to shares of a series of Municipal Preferred before the
auction establishing the Applicable Rate for that series, the applicable
percentage in the table above will be divided by the quantity 1 minus the
greater of the maximum marginal regular federal individual income tax rate
applicable to ordinary income or the maximum marginal regular federal corporate
income tax rate. If the ratings for shares of a series of Municipal Preferred
are split between two of the foregoing categories, the lower rating will
determine the prevailing rating. If only one rating agency is rating shares of a
series of Municipal Preferred, that agency's rating will be the prevailing
rating.
The Trust may only pay dividends on shares of a series of Municipal
Preferred when and if the Trust's Board of Trustees declares dividends out of
monies legally available for this purpose, at the applicable rate per year for
this purpose and no more (except as described under "Description of Municipal
Preferred -- Dividends and Dividend Periods -- Gross-Up Payments"), payable on
the dates determined as described below. If the Trust does not pay a dividend
when the Board declares it, then that dividend will be added to dividends
payable on those shares of a series of Municipal Preferred in the future.
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<PAGE> 35
EFFECT OF FAILURE TO PAY DIVIDENDS IN A TIMELY MANNER. If the Trust fails
to pay, in a timely manner, the auction agent the full amount of any dividend on
or the redemption price of any shares of any series of Municipal Preferred
during any rate period (other than any special rate period of more than 364 rate
period days or any rate period succeeding any special rate period of more than
364 rate period days during which a failure occurred that has not been cured),
but the Trust cures the failure and pays any late charge before 12:00 noon
Eastern time on the third business day following the date the failure occurred,
no auction will be held for shares of such series of Municipal Preferred for the
first subsequent rate period thereafter, and the dividend rate for shares of
such series of Municipal Preferred for that subsequent rate period will be the
Maximum Rate on the auction date for that subsequent rate period.
If the Trust fails to pay, in a timely manner, the auction agent the full
amount of any dividend on, or the redemption price of, any shares of a series of
Municipal Preferred during any rate period thereof (other than any special rate
period of more than 364 rate period days or any rate period succeeding any
special rate period of more than 364 rate period days during which a failure
occurred that has not been cured), and the Trust does not cure the failure and
pay any late charge before 12:00 noon Eastern time on the third business day
next succeeding the date on which the failure occurred, no auction will be held
for shares of such series of Municipal Preferred for the first subsequent rate
period for such series thereafter (or for any rate period thereafter, to and
including the rate period during which the failure is cured and the late charge
is paid) (the late charge is to be paid only in the event Moody's is rating the
shares at the time the Trust cures the failure), and the dividend rate for
shares of that series for each such subsequent rate period will be an annual
rate equal to the Maximum Rate for shares of such series on the auction date for
that subsequent rate period (but with the prevailing rating for shares of such
series of Municipal Preferred, for purposes of determining the Maximum Rate,
being "Below 'ba3'/BB-").
If the Trust fails to pay, in a timely manner, the auction agent the full
amount of any dividend on, or the redemption price of, any shares of a series of
Municipal Preferred during a special rate period of more than 364 rate period
days, or during any rate period succeeding any special rate period of more than
364 rate period days during which a failure occurred that has not been cured,
and the Trust does not cure the failure and pay a late charge, no auction will
be held for shares of such series of Municipal Preferred for that subsequent
rate period for such series (or for any rate period thereafter, to and including
the rate period during which the failure is cured and the late charge paid) (the
late charge is to be paid only in the event Moody's is rating shares of such
series of Municipal Preferred at the time the Trust cures the failure), and the
dividend rate for shares of such series of Municipal Preferred for each such
subsequent rate period will be an annual rate equal to the Maximum Rate for such
series on the auction date for each such subsequent rate period (but with the
prevailing rating for shares of such series of Municipal Preferred, for purposes
of determining the Maximum Rate, being "Below 'ba3'/BB-").
The Trust cures a failure to pay dividends on shares of a series of
Municipal Preferred for any rate period, within the respective time periods
described in the By-Laws, by paying the auction agent all accumulated and unpaid
dividends on the shares of such series of Municipal Preferred.
GROSS-UP PAYMENTS. Holders of shares of a series of Municipal Preferred
shall be entitled to receive, when, as and if declared by the Board of Trustees,
out of funds legally available therefor in accordance with the Declaration, the
By-Laws and applicable law, dividends in an amount equal to the aggregate
Gross-up Payment in accordance with the following:
If, in the case of any minimum rate period or any special rate period of 28
rate period days or fewer with respect to shares of a series of Municipal
Preferred, the Trust allocates any net capital gain or other income taxable for
federal income tax purposes to a dividend paid on shares of such series of
Municipal Preferred without having given advance notice thereof to the auction
agent as described above under "The Auction -- Auction Procedures" (a "Taxable
Allocation") solely by reason of the fact that such allocation is made
retroactively as a result of the redemption of all or a portion of the
outstanding shares of such series of Municipal Preferred or the liquidation of
the Trust, the Trust will, prior to the end of the calendar year in which such
dividend was paid, provide notice thereof to the auction agent and direct the
Trust's dividend disbursing agent to send such notice with a Gross-up Payment to
each holder of shares of
30
<PAGE> 36
such series (initially Cede & Co., as nominee of The Depository Trust Company)
that was entitled to such dividend payment with respect to such series of
Municipal Preferred during such calendar year at such holder's address as the
same appears or last appeared on the record books of the Trust.
If, in the case of any special rate period of more than 28 rate period days
with respect to a series of Municipal Preferred, the Trust makes a Taxable
Allocation to a dividend paid on shares of such series of Municipal Preferred,
the Trust shall, prior to the end of the calendar year in which such dividend
was paid, provide notice thereof to the auction agent and direct the Trust's
dividend disbursing agent to send such notice with a Gross-up Payment to each
holder of shares of such series that was entitled to such dividend payment with
respect to such series during such calendar year at such holder's address as the
same appears or last appeared on the record books of the Trust.
The Trust shall not be required to make Gross-up Payments with respect to
any net capital gain or other taxable income determined by the Internal Revenue
Service to be allocable in a manner different from that allocated by the Trust.
A "Gross-up Payment" in respect of any dividend means payment to a holder
of shares of a series of Municipal Preferred of an amount which, giving effect
to the Taxable Allocations made with respect to such dividend, would cause such
holder's after-tax returns (taking into account both the Taxable Allocations and
the Gross-up Payment) to be equal to the after-tax return the holder would have
received if no such Taxable Allocations had occurred. Such Gross-up Payment
shall be calculated: (i) without consideration being given to the time value of
money; (ii) assuming that no holder of shares of a series of Municipal Preferred
is subject to the federal alternative minimum tax with respect to dividends
received from the Trust; and (iii) assuming that each holder of shares of a
series of Municipal Preferred is taxable at the maximum marginal regular federal
individual income tax rate applicable to ordinary income or net capital gain, as
applicable, or the maximum marginal regular federal corporate income tax rate
applicable to ordinary income or net capital gain, as applicable, whichever is
greater, in effect at the time such Gross-up Payment is made.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS. When the Trust has any
shares of a series of Municipal Preferred outstanding, the Trust may not pay any
dividend or distribution (other than a dividend or distribution paid in shares
of a series of, or in options, warrants or rights to subscribe for or purchase,
Common Shares) in respect of Common Shares or call for redemption, redeem,
purchase or otherwise acquire for consideration any Common Shares (except by
conversion into or exchange for shares of the Trust ranking junior to the shares
of Municipal Preferred as to the payment of dividends and the distribution of
assets upon liquidation), unless (1) it has paid all cumulative dividends on
shares of each series of Municipal Preferred; (2) it has redeemed any shares of
any series of Municipal Preferred that it has called for mandatory redemption;
and (3) after paying the dividend, the Trust meets Moody's and Standard & Poor's
asset coverage requirements described under "Rating Agency Guidelines."
Except as set forth in the next sentence, no dividends shall be declared or
paid or set apart for payment on any class or series of shares of beneficial
interest of the Trust ranking, as to the payment of dividends, on a parity with
shares of Municipal Preferred for any period unless full cumulative dividends
have been or contemporaneously are declared and paid on the shares of each
series of Municipal Preferred through their most recent dividend payment date.
When dividends are not paid in full upon the shares of a series of Municipal
Preferred through their most recent dividend payment date or upon any other
class or series of shares ranking on a parity as to the payment of dividends
with shares of such series of Municipal Preferred through their most recent
respective dividend payment dates, all dividends declared upon shares of each
series of Municipal Preferred and any other such class or series of shares
ranking on a parity as to the payment of dividends with shares of each series of
Municipal Preferred shall be declared pro rata so that the amount of dividends
declared per share on shares of each series of Municipal Preferred and such
other class or series of shares shall in all cases bear to each other the same
ratio that accumulated dividends per share on the shares of each series of
Municipal Preferred and such other class or series of shares bear to each other.
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<PAGE> 37
DESIGNATION OF SPECIAL RATE PERIODS
The Trust may instruct the auction agent to hold auctions and pay dividends
on shares of either series of Municipal Preferred less frequently than weekly.
The Trust may do this if, for example, the Trust expects that short-term rates
might increase or market conditions otherwise change, in an effort to optimize
the effect of the Trust's leverage on common shareholders. If the Trust decides
to use a special rate period for a series of Municipal Preferred, the special
rate period will consist of a number of days evenly divisible by seven and not
more than 1,820 days (approximately five years), subject to adjustments. The
Trust does not currently expect to hold auctions and pay dividends less
frequently than weekly in the near future. If the Trust designates a special
rate period for a series of Municipal Preferred, changes in interest rates could
affect the price you would receive if you sold your shares in the secondary
market.
Before the Trust designates a special rate period for a series of Municipal
Preferred: (1) at least 20 (or such lesser number of days as may be agreed to
from time to time by the auction agent) and not more than 30 days before the
first day of the proposed special rate period, the Trust must publish a notice
of its intention to designate a special rate period in a newspaper circulated to
the financial community in New York, and must mail a notice to shareholders of
such series of Municipal Preferred of its intent to designate a special rate
period; (2) the Trust must inform the auction agent by 11:00 a.m. Eastern time
on the second business day before the first day of the proposed special rate
period; (3) an auction must have been held in the rate period before the special
rate period for such series, and in that auction sufficient clearing bids
existed; and (4) the Trust must deposit the redemption price with the auction
agent for any shares of such series it has decided to redeem.
If the Trust has designated a special rate period of 14, 21, or 28 days for
a series of Municipal Preferred, then dividends generally will be paid on the
same day of the week on which dividends are paid in a seven-day rate period for
such series, but will be the second, third, or fourth such day of the week,
respectively, after the first day of the special rate period. Thus, the dividend
payment date applicable to Series T Municipal Preferred for a special rate
period of 14, 21, or 28 days generally will be the second, third, or fourth
Wednesday, respectively, after the first day of the special rate period, and the
dividend payment date applicable to Series W Municipal Preferred for a special
rate period of 14, 21, or 28 days generally will be the second, third, or fourth
Thursday, respectively, after the first day of the special rate period. The
dividend payment date applicable to a series of Municipal Preferred for a
special rate period of more than 28 days will be set out in the notice
designating a special rate period. The dividend payment date will be a business
day, and the last dividend payment date for any special rate period for such
series will be the business day immediately following the last day of the
special rate period for such series. After any special rate period for a series
of Municipal Preferred, the rate periods normally will be seven days, and
dividends on shares of a series of Municipal Preferred will be payable, except
as described elsewhere in this Prospectus or the Statement of Additional
Information, on each succeeding regular dividend payment date, but the Trust may
further designate any subsequent rate period as a special rate period.
VOTING RIGHTS
In addition to voting rights described below under "Certain Provisions in
the Agreement and Declaration of Trust" and in the Statement of Additional
Information under "Investment Objectives and Policies -- Fundamental Investment
Policies," holders of shares of Municipal Preferred, voting as a separate class,
are entitled to elect (1) two trustees of the Trust at all times and (2) a
majority of the trustees if at any time dividends on shares of a series of
Municipal Preferred shall be unpaid in an amount equal to two years' dividends
thereon, and to continue to be so represented until all dividends in arrears
shall have been paid or otherwise provided for. In all other cases, trustees
shall be elected by holders of Common Shares and Preferred Shares (including
shares of Municipal Preferred), voting together as a single class.
Subject to the voting rights described above and except as otherwise
specified under "Certain Provisions in the Agreement and Declaration of Trust,"
the Trust may not, among other things, without the approval of the holders of a
"majority of the outstanding" shares of Municipal Preferred, voting as a
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<PAGE> 38
separate class, approve any plan of reorganization adversely affecting shares of
Municipal Preferred. In addition, the Trust may not, without the affirmative
vote of the holders of at least a majority of the shares of Municipal Preferred
outstanding at the time, voting as a separate class: (a) authorize, create or
issue additional shares of Municipal Preferred or classes or series of Preferred
Shares ranking prior to or on a parity with shares of Municipal Preferred with
respect to the payment of dividends or the distribution of assets upon
liquidation or (b) amend, alter or repeal the provisions of the Declaration or
the By-Laws, whether by merger, consolidation or otherwise, so as to materially
affect any preference, right or power of shares of any series of Municipal
Preferred or the holders thereof; provided, however, that a division of a share
of Municipal Preferred shall be deemed to materially affect any such preference,
right or power only if the terms of such division adversely affect the holders
of shares of Municipal Preferred. The Trust may not, without the affirmative
vote of the holders of at least 66 2/3% of the shares of Municipal Preferred
outstanding at the time, voting as a separate class, file a voluntary
application for relief under federal bankruptcy law or any similar application
under state law for so long as the Trust is solvent and does not foresee
becoming insolvent. Notwithstanding the second sentence of this paragraph, the
Trust may, without the vote of the holders of shares of Municipal Preferred,
authorize, create or issue additional shares of Municipal Preferred or classes
or series of Preferred Shares ranking on a parity with shares of each series of
Municipal Preferred with respect to the payment of dividends and the
distribution of assets upon liquidation if the Trust obtains written
confirmation from Moody's (if Moody's is then rating the shares of Municipal
Preferred) and Standard & Poor's (if Standard & Poor's is then rating the shares
of Municipal Preferred) that the issuance of any such additional shares or class
or series of shares would not impair the rating then assigned by such rating
agency to shares of each series of Municipal Preferred; provided, however, that
if Moody's or Standard & Poor's is not then rating the shares of Municipal
Preferred, the aggregate liquidation preference of all Preferred Shares of the
Trust outstanding after any such issuance, exclusive of accumulated and unpaid
dividends, may not exceed $120,000,000.
To the extent permitted by the Investment Company Act of 1940, if any
action set forth in the preceding paragraph would adversely affect the rights of
one or more series (the "Affected Series") of Municipal Preferred in a manner
different from any other series of Municipal Preferred, the Trust will not
approve any such action without the affirmative vote of the holders of at least
a majority of the shares of each such Affected Series outstanding at the time
(each such Affected Series voting as a separate class).
REDEMPTION
MANDATORY REDEMPTION. In the event the Trust does not timely cure a
failure to maintain (1) a Discounted Value of its portfolio equal to the
Municipal Preferred Basic Maintenance Amount or (2) the 1940 Act Municipal
Preferred Asset Coverage, in each case in accordance with the requirements of
the rating agency or agencies then rating the shares of each series of Municipal
Preferred, shares of each series of Municipal Preferred will be subject to
mandatory redemption on a date specified by the Board of Trustees, out of funds
legally available therefor in accordance with the Declaration, the By-Laws and
applicable law, at the redemption price of $25,000 per share plus an amount
equal to accumulated but unpaid dividends thereon (whether or not earned or
declared) to (but not including) the date fixed for redemption. Any such
redemption will be limited to the number of shares of Municipal Preferred
necessary to restore the required Discounted Value or the 1940 Act Municipal
Preferred Asset Coverage, as the case may be.
In determining the number of shares of a series of Municipal Preferred
required to be redeemed in accordance with the foregoing, the Trust will
allocate the number of shares required to be redeemed to satisfy the Municipal
Preferred Basic Maintenance Amount or the 1940 Act Municipal Preferred Asset
Coverage, as the case may be, pro rata among shares of a series of Municipal
Preferred and other Preferred Shares of the Trust, (and, then, pro rata among
each series of Municipal Preferred) subject to redemption or retirement.
OPTIONAL REDEMPTION. Shares of a series of Municipal Preferred are
redeemable, at the option of the Trust:
(i) in whole or in part, on the second business day preceding any
dividend payment date for such series of shares, out of funds legally
available therefor in accordance with the Declaration, the
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<PAGE> 39
By-Laws and applicable law, at the redemption price of $25,000 per share
plus an amount equal to accumulated but unpaid dividends thereon (whether
or not earned or declared) to (but not including) the date fixed for
redemption; provided, however, that (1) shares of a series of Municipal
Preferred may not be redeemed in part if after such partial redemption
fewer than 500 shares of such series remain outstanding and (2) the notice
establishing a special rate period of shares of such series of Municipal
Preferred, as delivered to the auction agent and filed with the Secretary
of the Trust, may provide that such shares shall not be redeemable during
the whole or any part of such special rate period with respect to such
series (except as provided in (ii) below) or shall be redeemable during the
whole or any part of such special rate period only upon payment of such
redemption premium or premiums as shall be specified therein; and
(ii) as a whole but not in part, out of funds legally available
therefor in accordance with the Declaration, the By-Laws and applicable
law, on the first day following any dividend period with respect to a
series of Municipal Preferred included in a rate period of more than 364
rate period days if, on the date of determination of the Applicable Rate
for such series for such rate period, such Applicable Rate equaled or
exceeded on such date of determination the Treasury Note Rate for such rate
period, at a redemption price of $25,000 per share plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or
declared) to (but not including) the date fixed for redemption.
Notwithstanding the foregoing, if any dividends on shares of a series of
Municipal Preferred (whether or not earned or declared) are in arrears, no
shares of such series of Municipal Preferred shall be redeemed unless all
outstanding shares of such series of Municipal Preferred are simultaneously
redeemed, and the Trust shall not purchase or otherwise acquire any shares of
any such series of Municipal Preferred; provided, however, that the foregoing
shall not prevent the purchase or acquisition of all outstanding shares of such
series of Municipal Preferred pursuant to the successful completion of an
otherwise lawful purchase or exchange offer made on the same terms to, and
accepted by, holders of all outstanding shares of such series of Municipal
Preferred.
LIQUIDATION
Subject to the rights of holders of any series or class or classes of
shares ranking on a parity with shares of Municipal Preferred with respect to
the distribution of assets upon liquidation of the Trust, upon a liquidation of
the Trust, whether voluntary or involuntary, the holders of shares of a series
of Municipal Preferred then outstanding will be entitled to receive and to be
paid out of the assets of the Trust available for distribution to its
shareholders, before any payment or distribution shall be made on the Common
Shares, an amount equal to the liquidation preference with respect to such
shares ($25,000 per share), plus an amount equal to all dividends thereon
(whether or not earned or declared) accumulated but unpaid to (but not
including) the date of final distribution in same-day funds, together with any
applicable Gross-up Payments in connection with the liquidation of the Trust.
After the payment to the holders of the shares of Municipal Preferred of the
full liquidation preference amounts provided for as described herein, the
holders of Municipal Preferred as such shall have no right or claim to any of
the remaining assets of the Trust.
Neither the sale of all or substantially all the property or business of
the Trust, nor the merger or consolidation of the Trust into or with any
Massachusetts business trust or corporation nor the merger or consolidation of
any Massachusetts business trust or corporation into or with the Trust shall be
a liquidation, whether voluntary or involuntary, for the purposes of the
foregoing paragraph.
RATING AGENCY GUIDELINES
The Trust is required under Moody's and Standard & Poor's guidelines to
maintain assets having in the aggregate a Discounted Value at least equal to the
Municipal Preferred Basic Maintenance Amount. Moody's and Standard & Poor's have
each established separate guidelines for determining Discounted Value. To the
extent any particular portfolio holding does not satisfy the applicable rating
agency's
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<PAGE> 40
guidelines, all or a portion of such holding's value will not be included in the
calculation of Discounted Value (as defined by such rating agency). The Moody's
and Standard & Poor's guidelines do not impose any limitations on the percentage
of Trust assets that may be invested in holdings not eligible for inclusion in
the calculation of the Discounted Value of the Trust's portfolio. The amount of
such assets included in the portfolio at any time may vary depending upon the
rating, diversification and other characteristics of the eligible assets
included in the portfolio. The Municipal Preferred Basic Maintenance Amount
includes the sum of (i) the aggregate liquidation preference of shares of
Municipal Preferred then outstanding and (ii) accrued and projected payment
obligations of the Trust.
The Trust is also required under rating agency guidelines to maintain, with
respect to the shares of Municipal Preferred, as of the last business day of
each month in which any shares of any series of Municipal Preferred are
outstanding, asset coverage of at least 200% with respect to senior securities
which are shares, including shares of any series of Municipal Preferred (or such
other asset coverage as may in the future be specified in or under the
Investment Company Act of 1940 as the minimum asset coverage for senior
securities which are shares of a closed-end investment company as a condition of
declaring dividends on its common shares) ("1940 Act Municipal Preferred Asset
Coverage"). Based on the composition of the Trust's portfolio and market
conditions as of June 30, 1999, the 1940 Act Municipal Preferred Asset Coverage
with respect to shares of Municipal Preferred, assuming the issuance on the date
hereof of all shares of each series of Municipal Preferred offered hereby and
after giving effect to the deduction of the sales load and offering costs
relating thereto estimated at $1,730,860, would be computed as follows:
<TABLE>
<S> <C> <C> <C> <C>
Value of Trust assets less liabilities not constituting $371,498,568
senior securities
= = 310%
- ---------------------------------------------------------- ------------ ---
Senior securities representing indebtedness plus $120,000,000
liquidation value of the shares of Municipal Preferred
</TABLE>
In the event the Trust does not timely cure a failure to maintain (1) a
Discounted Value of its portfolio equal to the Municipal Preferred Basic
Maintenance Amount or (2) the 1940 Act Municipal Preferred Asset Coverage, in
each case in accordance with the requirements of the rating agency or agencies
then rating the shares of each series of Municipal Preferred, the Trust will be
required to redeem shares of Municipal Preferred as described above under
"Description of Municipal Preferred -- Redemption."
The Trust may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by Moody's or Standard & Poor's.
Failure to adopt any such modifications, however, may result in a change in the
ratings described above or a withdrawal of ratings altogether. In addition, any
rating agency providing a rating for the shares of a series of Municipal
Preferred may, at any time, change or withdraw any such rating. The Board of
Trustees may, without shareholder approval, amend, alter or repeal any or all of
the definitions and related provisions which have been adopted by the Trust
pursuant to the rating agency guidelines in the event the Trust receives written
confirmation from Moody's or Standard & Poor's, or both, as appropriate, that
any such change would not impair the ratings then assigned by Moody's and
Standard & Poor's to shares of a series of Municipal Preferred.
As described by Moody's and Standard & Poor's, a preferred share rating is
an assessment of the capacity and willingness of an issuer to pay preferred
share obligations. The ratings on the shares of each series of Municipal
Preferred are not recommendations to purchase, hold or sell such shares of
Municipal Preferred, inasmuch as the ratings do not comment as to market price
or suitability for a particular investor. The rating agency guidelines described
above also do not address the likelihood that an owner of shares of a series of
Municipal Preferred will be able to sell such shares in an auction or otherwise.
The ratings are based on current information furnished to Moody's and Standard &
Poor's by the Trust and the Advisor, and information obtained from other
sources. The ratings may be changed, suspended or withdrawn as a result of
changes in, or the unavailability of, such information.
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<PAGE> 41
A rating agency's guidelines will apply to shares of a series of Municipal
Preferred only so long as such rating agency is rating such shares. The Trust
will pay fees to Moody's or Standard & Poor's, or both, for rating shares of
Municipal Preferred.
DESCRIPTION OF COMMON SHARES
In addition to the shares of Municipal Preferred, the Declaration
authorizes the issuance of an unlimited number of Common Shares, no par value.
All Common Shares have equal noncumulative voting rights and equal rights with
respect to dividends, assets and liquidation. Common Shares are fully paid and
nonassessable when issued and have no preemptive, conversion or exchange rights.
So long as any shares of any series of Municipal Preferred are outstanding, the
Trust is not permitted to declare dividends on, make any distributions with
respect to, or purchase its Common Shares unless, at the time of such
declaration, distribution or purchase, as applicable (and after giving effect
thereto), all accumulated dividends on any preferred shares of the Trust have
been paid.
In the past, the Trust's Common Shares have traded at various times at
either a premium or a discount in relation to net asset value. Shares of other
closed-end investment companies frequently trade at a discount from net asset
value.
CERTAIN PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST
The Board of Trustees is divided into three classes, each having a term of
three years. Each year the term of one class expires. This may make it more
difficult to change the Trust's management and could have the effect of
depriving shareholders of an opportunity to sell their Common Shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Trust in a tender offer or similar transaction. In
addition, the Declaration provides that the affirmative vote or consent of
two-thirds of the outstanding Common Shares and any Preferred Shares of the
Trust (including shares of Municipal Preferred), voting together as a single
class, and of the Preferred Shares (including shares of Municipal Preferred)
voting together as a single class, would be required to authorize the conversion
of the Trust from a closed-end to an open-end investment company. This
two-thirds vote requirement is higher than the vote required under the
Investment Company Act of 1940.
Reference should be made to the Declaration on file with the Commission for
the full text of these provisions.
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<PAGE> 42
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND
REPURCHASE OF SHARES
Shares of closed-end investment companies frequently trade at a discount
from net asset value. The Board of Trustees regularly monitors the relationship
between the Trust's market price and net asset value. If shares of the Trust
were to trade at a substantial discount to net asset value for an extended
period of time, the Board of Trustees may consider the repurchase of its Common
Shares on the open market or the making of tender offers for such shares. Since
commencement of the Trust's operations, no such open market purchases or tender
offers have been made, and no assurances can be given that such actions will be
taken in the future. Subject to its investment restrictions, the Trust may
borrow money to finance the repurchase of shares, subject to compliance with the
1940 Act Municipal Preferred Asset Coverage, Section 18 of the Investment
Company Act of 1940 and the other limitations described under "Rating Agency
Guidelines." Shares may not be repurchased, however, (i) if applicable asset
coverage requirements under the Investment Company Act of 1940 (i.e., 200% with
respect to any Preferred Shares of the Trust, including shares of Municipal
Preferred) are not met or would not be met following such repurchase or (ii) if
otherwise prohibited by applicable law.
There can be no assurance that repurchases or tenders, if they were to
occur, would result in the shares trading at a price which is equal to their net
asset value. The Trust anticipates that the market price of the shares will
usually vary from net asset value. The market price of the shares will be
determined, among other things, by the relative demand for and supply of the
shares in the market, the Trust's investment performance, the Trust's dividends
and yield and investor perception of the Trust's overall attractiveness as an
investment as compared with other investment alternatives. It should be
recognized that any such acquisitions of shares would decrease the total assets
of the Trust and therefore have the effect of increasing the Trust's expense
ratio. Furthermore, any interest on borrowings to finance share repurchase
transactions would reduce the Trust's net income.
CONVERSION TO OPEN-END STATUS
The Trust's Board of Trustees may from time to time consider submitting to
the holders of the shares of beneficial interest of the Trust at any time a
proposal to convert the Trust to an open-end investment company. In determining
whether to exercise its discretion to submit this issue to shareholders, the
Board of Trustees would consider all factors then relevant, including the
relationship of the market price of the Common Shares to net asset value, the
extent to which the Trust's capital structure is leveraged and the possibility
of re-leveraging, the spread, if any, between yields on lower rated securities
in the Trust's portfolio and interest and dividend charges on senior securities
and general market and economic conditions. In addition to any vote required by
Massachusetts law, conversion of the Trust to an open-end investment company
would require the affirmative vote of two-thirds of the Common Shares and any
Preferred Shares of the Trust (including shares of Municipal Preferred), voting
together as a single class, and of the Preferred Shares (including shares of
Municipal Preferred) voting together as a single class, entitled to be voted on
the matter. This two-thirds vote requirement is higher than the vote required
under the Investment Company Act of 1940. 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 Investment Company Act of
1940) at their net asset value, less such redemption charges, if any, as might
be in effect at the time of redemption. If the Trust converted to an open-end
investment company, it would be required to redeem all shares of Municipal
Preferred then outstanding at the redemption price specified under "Description
of Municipal Preferred -- Redemption -- Optional Redemption." In addition, the
Trust could be required to liquidate portfolio securities to meet required and
requested redemptions, and its Common Shares would no longer be listed on the
New York Stock Exchange. No assurance can be given that the Board of Trustees
will, at any time in the future, decide to submit a proposal to convert to
open-end status to the shareholders of the Trust.
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<PAGE> 43
TAX MATTERS
The following federal tax discussion is based on the advice of Ropes &
Gray, counsel to the Trust, and reflects provisions of the Internal Revenue
Code, existing Treasury regulations, rulings published by the Internal Revenue
Service, and other applicable authority, as of the date of this Prospectus.
These authorities are subject to change by legislative or administrative action.
The following discussion is only a summary of some of the important tax
considerations generally applicable to investments in the Trust. There may be
other tax considerations applicable to particular investors. In addition, income
earned through an investment in the Trust may be subject to foreign, state and
local taxes. Prospective shareholders are therefore urged to consult their tax
advisors with respect to the tax consequences to them of an investment in the
Trust. For more information on federal income tax considerations, see "Tax
Matters" in the Statement of Additional Information.
FEDERAL TAXATION OF THE TRUST
The Trust intends to qualify each year for taxation as a regulated
investment company under Subchapter M of the Internal Revenue Code. If the Trust
so qualifies, the Trust will not be subject to federal income tax on income
distributed in a timely manner to Trust shareholders in the form of dividends or
capital gain distributions. For more information on the requirements the Trust
must satisfy in order to qualify as a regulated investment company, see "Tax
Matters -- Federal Taxation of the Trust" in the Statement of Additional
Information.
The Trust's investments and hedging activities are subject to special
federal tax rules. Internal Revenue Code rules governing the Trust's hedging
transactions (including hedging transactions in futures and options) may alter
the character of distributions to holders of shares of a series of Municipal
Preferred. Income earned as a result of the Trust's hedging transactions will
not be eligible to be treated as "exempt-interest dividends" when distributed to
shareholders. The Trust's investment in securities issued at a discount will
(and investments in securities purchased at a discount may) require the Trust to
accrue and distribute income not yet received. Therefore, in order to generate
sufficient cash to make the requisite distributions, the Trust may be required
to sell securities in its portfolio that it otherwise would have continued to
hold.
FEDERAL TAXATION OF SHAREHOLDERS
DIVIDENDS AND OTHER DISTRIBUTIONS. Assuming that the Trust qualifies for
taxation as a regulated investment company under Subchapter M of the Internal
Revenue Code and that, at the close of each quarter of the Trust's taxable year,
at least 50% of the value of the Trust's total assets consists of obligations
the interest on which is exempt from federal income tax under Internal Revenue
Code section 103(a), the Trust will qualify to pay "exempt-interest dividends"
to its shareholders to the extent of its tax exempt interest income (less
applicable expenses). Distributions of net tax-exempt interest income that the
Trust properly designates as exempt-interest dividends are treated by
shareholders as interest excludable from their gross income for federal income
tax purposes but may be taxable for federal alternative minimum tax purposes
(discussed below) and for foreign, state and local tax purposes.
Under the Internal Revenue Code, the interest on certain "private activity
bonds" issued after August 7, 1986 is treated as a preference item and is (after
reduction by applicable expenses) included in the federal alternative minimum
taxable income of both individuals and corporations. The Trust will furnish to
shareholders annually a report indicating the percentage of Trust income treated
as a preference item for alternative minimum tax purposes. In addition, for
corporations, alternative minimum taxable income is increased by a percentage of
the amount by which an alternative measure of income that includes interest on
all tax-exempt securities exceeds the amount otherwise determined to be
alternative minimum taxable income. Accordingly, the portion of the Trust's
dividends that would otherwise be tax-exempt to shareholders may cause certain
shareholders to be subject to the federal alternative minimum tax or may
increase the tax liability of a shareholder who is subject to such tax.
Investors should thus consider the possible effect of an investment in the Trust
on their federal alternative minimum tax liability.
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<PAGE> 44
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 Internal Revenue Code, "substantial users" of the facilities financed by
such obligations or bonds or who are "related persons" of such substantial
users.
The receipt of exempt-interest dividends may affect the portion, if any, of
an individual shareholder's Social Security and Railroad Retirement benefits
that will be includable in gross income subject to federal income tax. Up to 85
percent of Social Security and Railroad Retirement benefits may be included in
gross income in cases where the recipient's combined income, consisting of
adjusted gross income (with certain adjustments), tax-exempt interest income and
one-half of any Social Security and Railroad Retirement benefits, exceeds a base
amount ($25,000 for a single individual and $32,000 for individuals filing a
joint return). Individual shareholders receiving Social Security or Railroad
Retirement benefits should consult their tax advisors.
All or a portion of interest on indebtedness incurred or continued by a
shareholder to purchase or carry Trust shares may not be deductible by the
shareholder. See "Tax Matters -- Federal Income Tax Matters -- Federal Taxation
of Shareholders" in the Statement of Additional Information.
Distributions of net investment income that do not qualify as
exempt-interest dividends (including the excess, if any, of net short-term
capital gain over net long-term capital loss), will be taxable to shareholders
as ordinary income, and will not qualify for the corporate dividends-received
deduction. Distributions of net capital gain will be taxable to shareholders as
long-term capital gain, without regard to how long a shareholder has held shares
of the Trust, and will not qualify for the corporate dividends-received
deduction.
Due to certain of the Trust's hedging and other investment activities, the
net investment income calculated for accounting purposes and distributed to
shareholders may in certain circumstances exceed or be less than the Trust's net
tax-exempt and taxable income. Because Trust expenses attributable to earning
tax-exempt income do not reduce the Trust's current earnings and profits, a
portion of any distribution in excess of the Trust's net tax-exempt and taxable
income may be considered paid out of the Trust's earnings and profits and
therefore treated as a taxable dividend (even though that portion economically
represents a return of the Trust's capital). If the Trust distributes amounts in
excess of the Trust's "earnings and profits" (which provides the measure of the
Trust's dividend-paying capacity for tax purposes), such distributions to
shareholders will be treated as a return of capital to the extent of a
shareholder's basis in his or her shares of a series of Municipal Preferred, and
thereafter as gain from the sale or exchange of a capital asset. A return of
capital is not taxable to a shareholder and has the effect of reducing a
shareholder's basis in the relevant shares, which basis reduction would cause
shareholders of a series of Municipal Preferred to realize gain if their shares
of such series of Municipal Preferred were sold for an amount equal to the
liquidation price.
The Internal Revenue Service has taken the position in a published revenue
ruling indicating that the Trust is required to designate distributions paid
with respect to its Common Shares and each series of its Preferred Shares as
consisting of a portion of each type of income distributed by the Trust. The
portion of each type of income deemed received by the holders of each class of
shares will be equal to the portion of total Trust distributions received by
such class. Thus, the Trust will designate dividends paid as exempt-interest
dividends in a manner that allocates such dividends among the holders of the
Common Shares and the holders of shares of Series T Municipal Preferred and
Series W Municipal Preferred, in proportion to the total dividends paid to each
such class during or with respect to the taxable year, or otherwise as required
by applicable law. Long-term capital gain distributions and other income subject
to regular federal income tax will similarly be allocated among the Common
Shares, shares of Series T Municipal Preferred and shares of Series W Municipal
Preferred. The amount of taxable income allocable to shares of a series of
Municipal Preferred will depend on the amount of such income realized by the
Trust, but generally is not expected to be significant. No dividend that the
Trust pays will be increased to compensate for the fact that it may be subject
to foreign, state or local taxes.
If for any reason it is determined after the payment of any dividend that a
portion of that dividend was subject to federal income tax, the Trust will not
be required to pay any additional amount to
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<PAGE> 45
compensate for any tax payable on the dividend (other than Gross-up Payments
payable under the circumstances described in this Prospectus). See "Description
of Municipal Preferred -- Dividends and Dividend Periods -- Gross-up Payments."
The Trust will generally designate Gross-up Payments as exempt-interest
dividends to the extent it determines such designation is consistent with the
allocation principles set forth above. The federal income tax consequences of
Gross-up Payments under existing law are uncertain. For example, existing
authorities, including the revenue ruling discussed in the above paragraph, do
not specifically address whether dividends (including possibly Gross-up
Payments) that are paid following the close of a taxable year, but that are
treated for tax purposes as derived from the income of such prior taxable year,
are treated as dividends "paid" during such prior taxable year for purposes of
determining each class's proportionate share of a particular type of income. The
Trust currently intends to treat such dividends as having been "paid" in the
prior taxable year for purposes of determining each class's proportionate share
of a particular type of income with respect to such prior taxable year. Existing
authorities also do not specifically address the allocation of taxable income
among the dividends paid to holders of a class of shares during or with respect
to a taxable year. It is possible that the Internal Revenue Service could
disagree with the Trust's position concerning the treatment of dividends paid
after the close of a taxable year or with the Trust's method of allocation, in
which case the Internal Revenue Service could attempt to recharacterize a
portion of the dividends paid to the holders of shares of a series of Municipal
Preferred and designated by the Trust as exempt-interest dividends as consisting
instead of capital gain or other taxable income. If the Internal Revenue Service
were to prevail with respect to any such attempted recharacterization, holders
of shares of a series of Municipal Preferred could be subject to tax on amounts
so recharacterized and the Trust could be subject to federal income and excise
tax. In such event, no additional amounts (including Gross-up Payments) would be
paid by the Trust with respect to dividends so recharacterized to compensate for
any additional tax owed by holders of shares of a series of Municipal Preferred.
Gross-up Payments will not include any amount to compensate for the fact that
the Gross-up Payments or the Taxable Allocations (see "Description of Municipal
Preferred -- Dividends and Dividend Periods -- Gross-up Payments") may
themselves be subject to foreign, state or local taxes. No provision will be
made to compensate holders of shares of a series of Municipal Preferred for any
alternative minimum tax liability in respect of distributions on shares of such
series of Municipal Preferred. Ropes & Gray has advised the Trust that, should
the Internal Revenue Service attempt to so recharacterize amounts allocated by
the Trust to shares of a series of Municipal Preferred, the Internal Revenue
Service would be unlikely to prevail. However, such advice represents only Ropes
& Gray's best legal judgment and is not binding on the Internal Revenue Service.
Any dividend paid by the Trust during January of a given year generally is
deemed to have been received by shareholders on December 31 of the preceding
year, provided that the dividend actually was declared by the Trust in October,
November or December of such preceding year and payable to shareholders of
record on a date in such a month.
The Trust will notify shareholders each year of the amount and tax status
of dividends and other distributions, including the amount of any distribution
of net capital gain.
The Internal Revenue Code provides that every shareholder required to file
a tax return must include for information purposes on such return the amount of
exempt-interest dividends received from all sources (including the Trust) during
the taxable year.
SALE OR REDEMPTION OF SHARES. In some circumstances, the sale or exchange
of shares of a series of Municipal Preferred may give rise to gain or loss. In
general, any gain or loss realized upon a taxable disposition of shares of a
series of Municipal Preferred by a shareholder will be treated as long-term
capital gain or loss if the shares have been held for more than twelve months,
and otherwise as short-term capital gain or loss. However, if a shareholder buys
shares of a series of Municipal Preferred and sells them at a loss within six
months, any loss will be disallowed for federal income tax purposes to the
extent of any exempt-interest dividends received on such shares. In addition,
any loss (not already disallowed as provided in the preceding sentence) realized
upon a taxable disposition of shares of a series of Municipal Preferred held for
six months or less will be treated as long-term, rather than short-term, capital
loss to the extent of any net capital gain distributions received by the
shareholder with respect to those shares. All
40
<PAGE> 46
or a portion of any loss realized upon a taxable disposition of shares of a
series of Municipal Preferred will be disallowed if other shares of such series
of Municipal Preferred (and may be disallowed if shares of a different series of
Municipal Preferred) are purchased within 30 days before or after the
disposition. In such a case, the basis of the newly purchased shares of the
series of Municipal Preferred will be adjusted to reflect the disallowed loss.
Gain or loss, if any, resulting from a redemption of shares of a series of
Municipal Preferred generally will be treated as gain or loss from the sale or
exchange of a capital asset under Internal Revenue Code section 302, rather than
as a dividend, but only if the redemption distribution (i) is deemed not to be
essentially equivalent to a dividend, (ii) is in complete redemption of an
owner's interest in the Trust, (iii) is substantially disproportionate with
respect to the owner, or (iv) with respect to non-corporate owners, is in
partial liquidation of the Trust. For purposes of (i), (ii) and (iii) above, an
owner's common share ownership and ownership of shares of the other series of
Municipal Preferred will be taken into account.
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT
AND REGISTRAR
The Trust's securities and cash are held by The Chase Manhattan Bank, whose
principal business address is 270 Park Avenue, New York, New York 10017-2070, as
custodian (the "Custodian") under a custodian contract.
Bankers Trust Company, whose principal business address is Four Albany
Street, New York, New York 10006, serves as auction agent for the Trust in
connection with the shares of Municipal Preferred. BankBoston, N.A. (formerly
The First National Bank of Boston), whose principal business address is 100
Federal Street, Boston, Massachusetts 02110, serves as dividend disbursing
agent, as agent under the Trust's Dividend Reinvestment Plan and as transfer
agent and registrar for the Trust's Common Shares.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreements between
Salomon Smith Barney Inc. (the "Underwriter") and the Trust (the "Underwriting
Agreements") dated the date hereof, the Underwriter has agreed to purchase, and
the Trust has agreed to sell, 2,400 shares of Series T Municipal Preferred and
2,400 shares of Series W Municipal Preferred offered hereby.
The Underwriting Agreements provide that the obligations of the Underwriter
are subject to the approval of certain legal matters by counsel and to certain
conditions precedent, and that the Underwriter is obligated to purchase all of
the shares of Series T Municipal Preferred if any shares of Series T Municipal
Preferred are purchased and all of the shares of Series W Municipal Preferred if
any shares of Series W Municipal Preferred are purchased. In the Underwriting
Agreements, the Trust and the Advisor have agreed to indemnify the Underwriter
with respect to certain liabilities, including liabilities arising under the
Securities Act of 1933, and to contribute in respect thereof.
The Trust has been advised by the Underwriter that it proposes initially to
offer the shares of Series T Municipal Preferred and Series W Municipal
Preferred offered hereby to the public at the price set forth on the cover page
of this Prospectus and to selected dealers at such price less a concession not
to exceed $ per share. The Underwriter may allow, and such dealers may
reallow, a concession not in excess of $ per share on sales to certain other
dealers. The underwriting commission to be paid by the Trust of $ per share
is equal to % of the initial offering price. After the initial public
offering, the public offering price and the concession may be changed by the
Underwriter.
The Trust anticipates that the Underwriter may from time to time act as a
broker or dealer in connection with the execution of its portfolio transactions
after it has ceased to be an Underwriter. The Trust anticipates that the
Underwriter or one of its affiliates may, from time to time, act in auctions as
a Broker-Dealer as set forth under "The Auction -- General" and will receive the
fees described under "The Auction -- Broker-Dealers" in the Statement of
Additional Information in exchange for so acting. The
41
<PAGE> 47
Underwriter is an active underwriter of, and dealer in, securities and acts as a
market maker in a number of such securities and therefore can be expected to
engage in portfolio transactions with the Trust.
The principal business address of Salomon Smith Barney Inc. is 388
Greenwich Street, New York, New York, 10010.
LEGAL OPINIONS
Certain legal matters in connection with the Series T Municipal Preferred
and Series W Municipal Preferred offered hereby will be passed upon for the
Trust by Ropes & Gray, Boston, Massachusetts, and for the Underwriters by
Simpson Thacher & Bartlett, New York, New York. Simpson Thacher & Bartlett will
rely, as to certain matters of Massachusetts law in its opinion, on the opinion
of Ropes & Gray.
REPORTS TO SHAREHOLDERS
The Trust will send unaudited semiannual and audited annual reports to its
shareholders, including, as currently required by regulations of the Securities
and Exchange Commission, a list of investments held.
EXPERTS
The Financial Statements included in the Statement of Additional
Information have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing. The address of
PricewaterhouseCoopers LLP is 160 Federal Street, Boston, Massachusetts 02110.
FURTHER INFORMATION
The Trust has filed with the Securities and Exchange Commission (the
"Commission"), Washington, DC 20549, a Registration Statement under the
Securities Act with respect to the shares of Municipal Preferred offered hereby.
Further information concerning these securities and the Trust may be found in
the Registration Statement, of which this Prospectus constitutes a part, on file
with the Commission. The Registration Statement may be inspected without charge
at the Commission's office in Washington, DC, and copies of all or any part
thereof may be obtained from such office after payment of the fees prescribed by
the Commission.
The Trust is subject to the informational requirements of the Securities
Exchange Act of 1934 and the Investment Company Act of 1940, and in accordance
therewith files reports and other information with the Commission. Such reports,
proxy and information statements and other information can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, DC 20549 and the Commission's regional offices,
including offices at Seven World Trade Center, New York, New York 10048. Call
1-800-SEC-0330 for information about the public reference facilities. Copies of
such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, DC 20549 at prescribed rates.
Such reports and other information concerning the Trust may also be inspected at
the offices of the New York Stock Exchange. The Commission maintains a Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference into this Prospectus and the Statement of
Additional Information, and reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
In addition, reports, proxy and information statements and other information
concerning the Trust can be inspected at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005.
42
<PAGE> 48
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Use of Proceeds............................................. B-2
Investment Objectives and Policies.......................... B-2
Trust Charges and Expenses.................................. B-4
Management of the Trust..................................... B-5
Portfolio Transactions...................................... B-11
Net Asset Value............................................. B-12
The Auction................................................. B-13
Description of Municipal Preferred.......................... B-26
Repurchase of Common Shares................................. B-46
Miscellaneous Investment Practices.......................... B-47
Tax Matters................................................. B-57
Shareholder Liability....................................... B-60
Custodian................................................... B-60
Independent Accountants..................................... B-61
Glossary.................................................... B-62
Financial Statements........................................ F-1
Appendix A -- Ratings of Investments........................ A-1
Appendix B -- Auction Procedures............................ B-1
Appendix C -- Settlement Procedures......................... C-1
Appendix D -- Rating Agency Futures and Options
Restrictions.............................................. D-1
</TABLE>
43
<PAGE> 49
(This page intentionally left blank)
<PAGE> 50
(This page intentionally left blank)
<PAGE> 51
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$120,000,000
COLONIAL HIGH INCOME MUNICIPAL TRUST
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
2,400 SHARES, SERIES T
2,400 SHARES, SERIES W
---------------
PROSPECTUS
, 1999
---------------
SALOMON SMITH BARNEY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 52
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND
IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED AUGUST 23, 1999
COLONIAL HIGH INCOME MUNICIPAL TRUST
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") relating to the Series T
Municipal Auction Rate Cumulative Preferred Shares ("Series T Municipal
Preferred") and the Series W Municipal Auction Rate Cumulative Preferred Shares
("Series W Municipal Preferred," and together, the "Municipal Preferred")
offered by Colonial High Income Municipal Trust (the "Trust") contains
information which may be useful to investors but which is not included in the
Prospectus of the Trust. This SAI is not a prospectus and is authorized for
distribution only when accompanied or preceded by the Prospectus of the Trust
dated , 1999, describing the Municipal Preferred (the "Prospectus").
This SAI should be read together with the Prospectus. Investors may obtain a
free copy of the Prospectus by calling Colonial Management Associates, Inc. at
1-800-426-3750. Capitalized terms used but not defined in this SAI have the
meanings ascribed to them in the Prospectus.
TABLE OF CONTENTS
<TABLE>
<S> <C>
USE OF PROCEEDS............................................. B-2
INVESTMENT OBJECTIVES AND POLICIES.......................... B-2
TRUST CHARGES AND EXPENSES.................................. B-4
MANAGEMENT OF THE TRUST..................................... B-5
PORTFOLIO TRANSACTIONS...................................... B-11
NET ASSET VALUE............................................. B-12
THE AUCTION................................................. B-13
DESCRIPTION OF MUNICIPAL PREFERRED.......................... B-26
REPURCHASE OF COMMON SHARES................................. B-46
MISCELLANEOUS INVESTMENT PRACTICES.......................... B-47
TAX MATTERS................................................. B-57
SHAREHOLDER LIABILITY....................................... B-60
CUSTODIAN................................................... B-60
INDEPENDENT ACCOUNTANTS..................................... B-61
GLOSSARY.................................................... B-62
FINANCIAL STATEMENTS........................................ F-1
APPENDIX A -- Ratings of Investments........................ A-1
APPENDIX B -- Auction Procedures............................ B-1
APPENDIX C -- Settlement Procedures......................... C-1
APPENDIX D -- Rating Agency Futures and Options
Restrictions.............................................. D-1
</TABLE>
The date of this Statement of Additional Information is , 1999.
<PAGE> 53
USE OF PROCEEDS
The net proceeds of the offering of shares of Municipal Preferred will be
approximately $ after payment of the sales load to Salomon Smith
Barney Inc. (the "Underwriter") and estimated offering costs. A portion of the
offering costs has been advanced by the Trust's investment advisor, Colonial
Management Associates, Inc. (the "Advisor").
The net proceeds of the offering will be invested in accordance with the
Trust's investment objectives and policies. It is presently anticipated that the
Trust will be able to invest substantially all of the net proceeds in Municipal
Obligations that meet the Trust's investment objectives at or shortly (within
six to eight weeks) after the completion of the offering. To the extent that all
of the proceeds cannot be so invested, pending such investment, they will be
invested initially in high-quality, short-term tax-exempt money market
securities, the income on which will be exempt from Federal income taxes, or in
high-quality Municipal Obligations with relatively low volatility (such as
pre-refunded and intermediate-term securities), to the extent such securities
are available. If necessary to invest fully the net proceeds of the offerings
immediately, the Trust may also purchase, as temporary investments, short-term
taxable investments of the type described under "Investment Objectives and
Policies--Temporary and Defensive Investments" in the Prospectus, the income on
which is subject to Federal income taxes.
INVESTMENT OBJECTIVES AND POLICIES
The Trust's Prospectus describes its investment objectives and investment
policies. This SAI includes additional information concerning, among other
things, the investment policies of the Trust and information about certain
securities and investment techniques that are described or referred to in the
Prospectus or in which the Trust expects to engage. Except as indicated under
"Fundamental Investment Policies," the Trust's investment policies are not
fundamental and the Trustees may change the policies without shareholder
approval.
FUNDAMENTAL INVESTMENT POLICIES
The following fundamental restrictions are for the protection of the
Trust's shareholders and cannot be changed without the approval of the holders
of a "majority of the outstanding" Common Shares and Preferred Shares, including
shares of Municipal Preferred, voting together as a single class, and of the
holders of a "majority of the outstanding" Preferred Shares, including shares of
Municipal Preferred, voting as a separate class. A "majority of the outstanding"
shares means the lesser of (i) 67% of the shares represented at a meeting at
which more than 50% of the outstanding shares are represented or (ii) more than
50% of the outstanding shares, as defined in the Investment Company Act of 1940,
as amended (the "1940 Act").
The Trust may:
1. Issue senior securities or borrow money to the extent permitted by the
1940 Act;
2. Only own real estate acquired as a result of owning securities;
3. Purchase and sell futures contracts and related options;
4. Underwrite securities issued by others only when disposing of portfolio
securities;
5. Make loans through lending of securities, through the purchase of debt
instruments or similar evidences of indebtedness typically sold to
financial institutions and through repurchase agreements;
6. Not concentrate more than 25% of its total assets in any one industry,
or with respect to 75% of total assets purchase any security (other than
obligations of the U.S. Government and cash items including receivables)
if as a result more than 5% of its total assets would then be invested
in securities of a single issuer or purchase the voting securities of an
issuer if, as a result of such purchase, the Trust would own more than
10% of the outstanding voting shares of such issuer (The Trust will
treat each state and each separate political subdivision, agency,
authority or
B-2
<PAGE> 54
instrumentality of such state, each multistate agency or authority, and
each guarantor, if any, as separate issuers. In the utilities category,
gas, electric, water and telephone companies will be considered as
separate industries.);
7. And will, under normal circumstances, invest at least 80% of its assets
in tax-exempt bonds and tax-exempt notes.
For the purpose of applying the limitation set forth above in subparagraph
(6), an issuer shall be deemed the sole issuer of a security when its assets and
revenues are separate from other governmental entities and its securities are
backed only by its assets and revenues. Similarly, in the case of a non-
governmental issuer, such as an industrial corporation or a privately owned or
operated hospital, if the security is backed only by the assets and revenues of
the non-governmental issuer, then such non-governmental issuer would be deemed
to be the sole issuer. Where a security is also backed by the enforceable
obligation of a superior or unrelated governmental or other entity (other than a
bond insurer), it shall also be included in the computation of securities owned
that are issued by such governmental or other entity. Where a security is
guaranteed by a governmental entity or some other facility, such as a bank
guarantee or letter of credit, such a guarantee or letter of credit would be
considered a separate security and would be treated as an issue of such
government, other entity or bank. When a Municipal Obligation is insured by bond
insurance, it shall not be considered a security that is issued or guaranteed by
the insurer; instead, the issuer of such Municipal Obligation will be determined
in accordance with the principles set forth above. The foregoing restrictions do
not limit the percentage of the Trust's assets that may be invested in Municipal
Obligations insured by any given insurer.
The restrictions and other limitations set forth above will apply only at
the time of purchase of securities and will not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of an
acquisition of securities.
OTHER INVESTMENT POLICIES
As non-fundamental investment policies which may be changed by the Trust
without a shareholder vote, the Trust may not:
1. Purchase securities on margin, but it may receive short-term credit to
clear securities transactions and may make initial or maintenance margin
deposits in connection with futures transactions;
2. Have a short securities position, unless the Trust owns, or owns rights
(exercisable without payment) to acquire, an equal amount of such
securities;
3. Purchase or sell commodities or commodity contracts, except that,
consistent with its investment policies, the Trust may purchase and sell
financial futures contracts and options and may enter into swap
agreements, foreign exchange contracts and other financial transactions
not requiring the delivery of physical commodities;*
4. Own securities of any company if the Trust knows that the officers and
Trustees of the Trust or officers and directors of the Advisor who
individually own more than 0.5% of such securities together own more
than 5% of such securities; and
5. Invest in interests in oil, gas or other mineral exploration or
development programs, including leases.
- ---------------
* The Trust deems the investment policy regarding commodities and commodities
contracts to be a fundamental investment policy of the Trust and will not
change this policy without the vote of the shareholders necessary to change a
fundamental investment policy of the Trust.
Restrictions imposed by Moody's or Standard & Poor's, or both, on engaging
in futures and options transactions as described under "Description of Municipal
Preferred--Asset Maintenance," are not fundamental policies and may be changed
by the Trust from time to time without shareholder approval; provided, however,
that if Moody's or Standard & Poor's, or both, are rating the shares of
Municipal
B-3
<PAGE> 55
Preferred, the Trust must receive written confirmation from Moody's or Standard
& Poor's, or both, as appropriate, that any such change would not impair the
ratings then assigned by Moody's and Standard & Poor's to shares of Municipal
Preferred. See also "Description of Municipal Preferred -- Rating Agency
Guidelines" for a description of other rating agency restrictions, none of which
is a fundamental policy of the Trust and which may be changed by the Trust from
time to time without shareholder approval subject to the foregoing proviso.
TRUST CHARGES AND EXPENSES
Under the Trust's management agreement, the Trust pays the Advisor a
monthly fee based on the average weekly net assets of the Trust, including the
proceeds of the offering of the shares of Municipal Preferred, for such month at
the annual rate of 0.65%.
RECENT FEES PAID TO THE ADVISOR AND THE TRANSFER AGENT (BANKBOSTON, N.A.,
FORMERLY KNOWN AS THE FIRST NATIONAL BANK OF BOSTON)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Management fee.............................................. $2,123 $2,091 $2,066
Bookkeeping fee............................................. 68 67 67
Transfer agent fee.......................................... 45 66 79
</TABLE>
BROKERAGE COMMISSIONS
The Trust did not pay any brokerage commissions for the years ended
December 31, 1998, 1997 and 1996.
B-4
<PAGE> 56
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The names and business addresses of the Trustees and officers of the Trust
and their principal occupations and other affiliations during the past five
years are set forth below.
<TABLE>
<CAPTION>
NAME (AGE) POSITIONS AND PRINCIPAL OCCUPATIONS
AND ADDRESS OFFICES WITH TRUST DURING PAST FIVE YEARS
- ----------- ------------------ ----------------------
<S> <C> <C>
Robert J. Birnbaum (71).............. Trustee Consultant (formerly Special Counsel,
313 Bedford Road Dechert Price & Rhoads (law firm) from
Ridgewood, NJ 07450 September, 1988 to December 1993;
President, New York Stock Exchange from
May, 1985 to June, 1988; President,
American Stock Exchange, Inc. from 1977
to May, 1985).
Tom Bleasdale (69)................... Trustee Retired (formerly Chairman of the Board
502 Woodlands Drive and Chief Executive Officer, Shore Bank &
Linville, NC 07450 Trust Company from 1992 to 1993);
Director of The Empire Company since
June, 1995.
John V. Carberry* (52)............... Trustee Senior Vice President of Liberty
56 Woodcliff Road Financial Companies, Inc. (formerly
Wellesley Hills, MA 02481 Managing Director, Salomon Brothers
(investment banking) from January, 1988
to January, 1998).
Lora S. Collins (63)................. Trustee Attorney (formerly Attorney, Kramer,
1175 Hill Road Levin, Naftalis & Frankel (law firm) from
Southold, NY 11971 September, 1986 to November, 1996).
James E. Grinnell (69)............... Trustee Private Investor since November, 1988.
22 Harbor Avenue
Marblehead, MA 01945
Richard W. Lowry* (63)............... Trustee Private Investor since August, 1987.
Seven Winter Street
Nantucket, MA 02554
Salvatore Macera (67)................ Trustee Private Investor (formerly Executive Vice
26 Little Neck Lane President and Director of Itek
New Seabury, MA 02649 Corporation (electronics) from 1975 to
1981).
William E. Mayer* (59)............... Trustee Partner, Development Capital, LLC
500 Park Avenue, 5th Floor (venture capital) (formerly Dean, College
New York, NY 10022 of Business and Management, University of
Maryland from October, 1992 to November,
1996; Dean, Simon Graduate School of
Business, University of Rochester from
October, 1991 to July, 1992).
James L. Moody, Jr.* (67)............ Trustee Retired (formerly Chairman of the Board,
16 Running Tide Road Hannaford Bros. Co. (food retailer) from
Cape Elizabeth, ME 04107 May, 1984 to May, 1997, and Chief
Executive Officer, Hannaford Bros. Co.
from May, 1973 to May, 1992).
John J. Neuhauser (56)............... Trustee Dean, Boston College School of Management
140 Commonwealth Avenue since September, 1977.
Chestnut Hill, MA 02167
</TABLE>
B-5
<PAGE> 57
<TABLE>
<CAPTION>
NAME (AGE) POSITIONS AND PRINCIPAL OCCUPATIONS
AND ADDRESS OFFICES WITH TRUST DURING PAST FIVE YEARS
- ----------- ------------------ ----------------------
<S> <C> <C>
Thomas E. Stitzel* (63).............. Trustee Professor of Finance, College of
2208 Tawny Woods Place Business, Boise State University (higher
Boise, ID 83706 education); Business consultant and
author.
Robert L. Sullivan* (71)............. Trustee Retired (formerly Partner, KPMG Peat
45 Sankaty Avenue Marwick LLP, from July, 1966 to June,
Siasconset, MA 02564 1985).
Anne-Lee Verville (53)............... Trustee Consultant (formerly General Manager,
359 Stickney Hill Road Global Education Industry from 1994 to
Hopkinton, NH 03229 1997, and President, Applications
Solutions Division from 1991 to 1994, IBM
Corporation (global education and global
applications)).
Stephen E. Gibson (45)............... President President of the Trust and the Liberty
Funds since June, 1998, Chairman of the
Board since July, 1998, and Chief
Executive Officer and President since
December, 1996, and Director since 1996
of the Advisor (formerly Executive Vice
President from July, 1996 to December,
1996); Director, Chief Executive Officer
and President of Liberty Funds Group LLC
(formerly known as COGRA, LLC) ("LFG")
since December, 1998 (formerly Director,
Chief Executive Officer and President of
The Colonial Group, Inc. ("TCG") from
December, 1996 to December, 1998);
Assistant Chairman of Stein Roe & Farnham
Incorporated ("SR&F") since August, 1998
(formerly Managing Director of Marketing
of Putnam Investments from June, 1992 to
July, 1996).
J. Kevin Connaughton (34)............ Controller and Chief Controller and Chief Accounting Officer
Accounting Officer of the Trust and the Liberty Funds,
except Liberty Funds Trust IX, since
February, 1998; Controller, Liberty Funds
Trust IX, since December, 1998; Vice
President of the Advisor since February,
1998 (formerly Senior Tax Manager,
Coopers & Lybrand, LLP from April, 1996
to January, 1998; Vice President, 440
Financial Group/First Data Investor
Services Group from March, 1994 to April,
1996.
</TABLE>
B-6
<PAGE> 58
<TABLE>
<CAPTION>
NAME (AGE) POSITIONS AND PRINCIPAL OCCUPATIONS
AND ADDRESS OFFICES WITH TRUST DURING PAST FIVE YEARS
- ----------- ------------------ ----------------------
<S> <C> <C>
Timothy J. Jacoby (45)............... Treasurer and Chief Treasurer and Chief Financial Officer of
Financial Officer the Trust and the Liberty Funds, except
Liberty Funds Trust IX, since October,
1996 (formerly Controller and Chief
Accounting Officer from October, 1997 to
February, 1998); Treasurer of Liberty
Funds Trust IX since December, 1998;
Senior Vice President of the Advisor
since September, 1996; Vice President,
Chief Financial Officer and Treasurer of
LFG since December, 1998 (formerly Vice
President, Chief Financial Officer and
Treasurer of TCG from July, 1997 to
December, 1998); Senior Vice President of
SR&F since August, 1998 (formerly Senior
Vice President, Fidelity Accounting and
Custody Services from September, 1993 to
September, 1996).
Nancy L. Conlin (45)................. Secretary Secretary of the Trust and the Liberty
Funds, except Liberty Funds Trust IX
since April, 1998 (formerly Assistant
Secretary from July, 1994 to April,
1998); Director, Senior Vice President,
General Counsel, Clerk and Secretary of
the Advisor since April, 1998 (formerly
Vice President, Counsel, Assistant
Secretary and Assistant Clerk from July,
1994 to April, 1998); Vice President,
General Counsel and Secretary of LFG
since December, 1998 (formerly Vice
President, General Counsel and Clerk of
TCG from April, 1998 to December, 1998;
formerly Assistant Clerk from July, 1994
to April, 1998).
</TABLE>
- ---------------
* Denotes those Trustees who are "interested persons" (as defined in the
Investment Company Act of 1940, as amended (the "1940 Act")) of the Trust, the
Advisor or the Underwriter. Mr. Carberry is an "interested person" as defined
in the 1940 Act because of his affiliation with Liberty Financial Companies,
Inc., an indirect parent company of the Advisor. Mr. Mayer is an "interested
person" as defined in the 1940 Act because he is a director of Hambrecht &
Quist Incorporated, a registered broker-dealer. Messrs. Lowry, Moody and
Stitzel are "interested persons" as defined in the 1940 Act because each has a
direct or indirect beneficial interest in, or is designated as trustee,
executor or guardian of a legal interest in, the Underwriter or a controlling
person (as such term is defined in the 1940 Act) of the Underwriter.
The business address of the officers of the Trust is One Financial Center,
Boston, MA 02111.
The Trustees of the Trust are also directors or trustees, as the case may
be, of Liberty Funds Trust I, Liberty Funds Trust II, Liberty Funds Trust III,
Liberty Funds Trust IV, Liberty Funds Trust V, Liberty Funds Trust VI, Liberty
Funds Trust VII, Liberty Funds Trust VIII (formerly known as LFC Utilities
Trust), Liberty Variable Investment Trust ("LVIT"), Colonial Municipal Income
Trust, Colonial Investment Grade Municipal Trust, Colonial Intermediate High
Income Fund, and Colonial Intermarket Income Trust I, (collectively, each trust
or any series thereof termed the "Liberty Funds").
At the next annual meeting of the Trust's shareholders, holders of
outstanding shares of Municipal Preferred, voting together as one separate
class, will elect two trustees, and holders of outstanding
B-7
<PAGE> 59
Common Shares and shares of Municipal Preferred, voting together as a single
class, will elect five trustees. See "Description of Municipal
Preferred -- Voting Rights."
The Trustees serve as trustees of all Liberty Funds for which each Trustee
(except Mr. Carberry) receives an annual retainer of $45,000 and attendance fees
of $8,000 for each regular joint meeting and $1,000 for each special joint
meeting. Committee chairs and the lead Trustee receive an annual retainer of
$5,000, and Committee chairs receive $1,000 for each special meeting attended on
a day other than a regular joint meeting day. Committee members receive an
annual retainer of $1,000 and $1,000 for each special meeting attended on a day
other than a regular joint meeting day. Two-thirds of the Trustee fees are
allocated among the Liberty Funds based on each Liberty Fund's relative net
assets, and one-third of the fees are divided equally among the Liberty Funds.
TRUSTEES AND TRUSTEES' FEES
For the fiscal and calendar year ended December 31, 1998, the Trustees
received the following compensation for serving as Trustees (a):
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM THE
AGGREGATE COMPENSATION FROM FUND COMPLEX PAID TO THE
THE TRUST FOR THE FISCAL YEAR TRUSTEES FOR THE CALENDAR YEAR
TRUSTEE ENDED DECEMBER 31, 1998 Ended December 31, 1998(b)
- ------- ----------------------------- ------------------------------
<S> <C> <C>
Robert J. Birnbaum(c)...................... $1,789 $ 99,429
Tom Bleasdale(c)........................... 2,069(d) 115,000(e)
John V. Carberry(f)(g)..................... N/A N/A
Lora S. Collins(c)......................... 1,754 97,429
James E. Grinnell(c)....................... 1,855(gg) 103,071
William D. Ireland, Jr.(h)................. 780 35,333
Richard W. Lowry(c)........................ 1,767 98,214
Salvatore Macera(i)........................ 0 25,250
William E. Mayer(c)........................ 1,859 99,286
James L. Moody, Jr.(c)..................... 1,903(j) 105,857(k)
John J. Neuhauser(c)....................... 1,894 105,323
George L. Shinn(h)......................... 709 31,334
Thomas E. Stitzel(i)....................... 0 25,250
Robert L. Sullivan(c)...................... 1,883 104,100
Anne-Lee Verville(c)(f).................... 1,516(l) 23,445(m)
Sinclair Weeks, Jr.(h)..................... 763 34,333
</TABLE>
- ---------------
(a) The Trust does not currently provide pension or retirement plan benefits to
the Trustees.
(b) At December 31, 1998, the complex consisted of 56 open-end and 5 closed-end
management investment portfolios in the Liberty Funds (the "Fund Complex").
(c) Elected by the shareholders of LVIT on October 30, 1998.
(d) Includes $909 payable in later years as deferred compensation.
(e) Includes $52,000 payable in later years as deferred compensation.
(f) Elected by the trustees of the closed-end Liberty Funds on June 18, 1998,
and by the shareholders of the open-end Liberty Funds on October 30, 1998.
(g) Does not receive compensation because he is an affiliated Trustee and
employee of Liberty Financial Companies, Inc. ("Liberty Financial").
(gg) Includes $15 payable in later years as deferred compensation.
(h) Retired as a Trustee of the Trust on April 24, 1998.
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<PAGE> 60
(i) Elected by the shareholders of the open-end Liberty Funds on October 30,
1998, and by the trustees of the closed-end Liberty Funds on December 17,
1998.
(j) Total compensation of $1,903 for the fiscal year ended December 31, 1998,
will be payable in later years as deferred compensation.
(k) Total compensation of $105,857 for the calendar year ended December 31,
1998, will be payable in later years as deferred compensation.
(l) Total compensation of $1,516 for the fiscal year ended December 31, 1998,
will be payable in later years as deferred compensation.
(m) Total compensation of $23,445 for the calendar year ended December 31, 1998,
will be payable in later years as deferred compensation.
For the fiscal year ended December 31, 1998, certain of the Trustees received
the following compensation in their capacities as trustees or directors of
Liberty All-Star Equity Fund, Liberty All-Star Growth Fund, Inc. and Liberty
Funds Trust IX (formerly known as LAMCO Trust I) (together, the "Liberty
All-Star Funds")(n):
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM THE LIBERTY
ALL-STAR FUNDS FOR THE CALENDAR YEAR
TRUSTEE Ended December 31, 1998(o)
- ------- ------------------------------------
<S> <C>
Robert J. Birnbaum...................................... $25,000
John V. Carberry(p)..................................... N/A
James E. Grinnell....................................... 25,000
Richard W. Lowry........................................ 25,000
William E. Mayer(q)..................................... 14,000
John J. Neuhauser(r).................................... 25,000
</TABLE>
- ---------------
(n) The Liberty All-Star Funds do not currently provide pension or retirement
plan benefits to the trustees/directors.
(o) The Liberty All-Star Funds are advised by Liberty Asset Management Company
("LAMCO"). LAMCO is an indirect wholly-owned subsidiary of Liberty
Financial (an intermediate parent of the Advisor).
(p) Elected by the trustees/directors of the Liberty All-Star Funds on June 30,
1998. Does not receive compensation because he is an affiliated trustee and
employee of Liberty Financial.
(q) Elected by the shareholders of the Liberty All-Star Equity Fund on April
22, 1998, and by the directors of the Liberty All-Star Growth Fund, Inc. on
December 17, 1998.
(r) Elected by the shareholders of the Liberty All-Star Funds on April 22,
1998.
At August 17, 1999, the Trust's officers and Trustees as a group owned less
than 1% of the outstanding Common Shares.
At July 31, 1999, CEDE & CO. WT FAST, P.O. Box 20, Bowling Green Station,
New York, New York 10274-0020, owned of record 26,447,825 shares, representing
85.1%, of the Trust's outstanding shares.
In addition to the provisions discussed in the Prospectus under "Certain
Provisions in the Agreement and Declaration of Trust," the Declaration provides
that the obligations of the Trust are not binding upon the Trustees of the Trust
individually, but only upon the assets and property of the Trust. The
Declaration also provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust but that
such indemnification will not relieve any officer or Trustee of any liability to
the Trust or its shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of his or her duties. The Trust, at its
expense, provides liability insurance for the benefit of its Trustees and
officers.
B-9
<PAGE> 61
INVESTMENT ADVISOR
Colonial Management Associates, Inc. (the "Advisor"), and/or its affiliate,
Colonial Advisory Services, Inc. ("CASI"), has rendered investment advisory
services to investment company, institutional and other clients since 1931. The
Advisor currently serves as investment advisor, sub-advisor or administrator for
64 open-end and 5 closed-end management investment company portfolios. Trustees
and officers of the Trust, who are also officers of the Advisor or its
affiliates, will benefit from the advisory fees, sales commissions and agency
fees paid or allowed by the Trust. More than 30,000 financial advisors have
recommended the Liberty Funds to over 800,000 clients worldwide, representing
more than $16.3 billion in assets.
The Advisor is a subsidiary of Liberty Funds Group LLC ("LFG"), One
Financial Center, Boston, MA 02111. LFG is an indirect wholly owned subsidiary
of Liberty Financial Companies, Inc. ("Liberty Financial"), which in turn is a
direct majority-owned subsidiary of LFC Management Corporation, which in turn is
a direct wholly owned subsidiary of Liberty Corporate Holdings, Inc., which in
turn is a direct wholly owned subsidiary of LFC Holdings, Inc., which in turn is
a direct wholly owned subsidiary of Liberty Mutual Equity Corporation, which in
turn is a direct wholly owned subsidiary of Liberty Mutual Insurance Company
("Liberty Mutual"). Liberty Mutual is an underwriter of workers' compensation
insurance and a property and casualty insurer in the United States. Liberty
Financial's address is 600 Atlantic Avenue, Boston, MA 02210. Liberty Mutual's
address is 175 Berkeley Street, Boston, MA 02117.
Under a Management Agreement (the "Agreement"), the Advisor has contracted
to furnish the Trust with investment research and recommendations or trust
management, respectively, and accounting and administrative personnel and
services, and with office space, equipment and other facilities. For these
services and facilities, the Trust pays a monthly fee based on the average
weekly net assets of the Trust for such month. Under the Agreement, any
liability of the Advisor to the Trust and/or its shareholders is limited to
situations involving the Advisor's own willful misfeasance, bad faith, gross
negligence or reckless disregard of its duties.
The Agreement may be terminated with respect to the Trust at any time on 60
days' written notice by the Advisor or by the Trustees of the Trust or by a vote
of a majority of the outstanding voting securities of the Trust. The Agreement
will automatically terminate upon any assignment thereof and shall continue in
effect from year to year only so long as such continuance is approved at least
annually (i) by the Trustees of the Trust or by a vote of a majority of the
outstanding voting securities of the Trust and (ii) by vote of a majority of the
Trustees who are not interested persons (as such term is defined in the 1940
Act) of the Advisor or the Trust, cast in person at a meeting called for the
purpose of voting on such approval.
The Advisor pays all salaries of officers of the Trust. The Trust pays all
expenses not assumed by the Advisor, including, but not limited to, auditing,
legal, custodial, investor servicing and shareholder reporting expenses. The
Trust pays the cost of printing and mailing any Prospectuses sent to
shareholders.
The Advisor also provides the Trust with bookkeeping and pricing services,
and for these services, the Trust pays the Advisor a monthly fee of $1,500 for
the first $50 million of Trust assets, plus a monthly percentage fee at the
following annual rates: 0.0233% on the next $950 million; 0.0167% on the next $1
billion; 0.0100% on the next $1 billion; and 0.0007% on the excess over $3
billion of the average net assets of the Trust for such month.
The Advisor also acts as investment advisor to the other Liberty Funds
(described under "Fund Charges and Expenses -- Trustees' Fees"). The Advisor's
affiliate, CASI, advises other institutional, corporate, fiduciary and
individual clients for which CASI performs various services. Various officers
and Trustees of the Trust also serve as officers, directors or trustees of other
Liberty Funds and the other corporate or fiduciary clients of the Advisor. The
other investment companies and clients advised by the Advisor may sometimes
invest in securities and options in which the Trust will also invest. If the
Trust, such other investment companies and such clients desire to buy or sell
the same portfolio securities or
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<PAGE> 62
options at about the same time, the purchases and sales will normally be made as
nearly as practicable on a pro rata basis in proportion to the amounts desired
to be purchased or sold by each. Although in some cases these practices may have
a detrimental effect on the price or volume of the securities or options as far
as the Trust is concerned, in most cases it is believed that these practices
should produce better executions. It is the opinion of the Trustees that the
desirability of retaining the Advisor as investment advisor to the Liberty Funds
outweighs the disadvantages, if any, which might result from these practices.
PORTFOLIO TRANSACTIONS
The Advisor is responsible for decisions to buy and sell securities and
other portfolio holdings for the Trust, the selection of brokers and dealers to
effect the transactions and the negotiation of brokerage commissions, if any.
Fixed-income securities are generally traded on a "net" basis with dealers
acting as principals for their own accounts without a stated commission,
although the price of the security will likely include a profit to the dealer.
In underwritten offerings, securities are usually purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
In placing orders for portfolio securities of the Trust, the Advisor is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Advisor will seek to execute each
transaction at a price and commission, if any, which provides the most favorable
total cost or proceeds reasonably attainable under the circumstances. In seeking
the most favorable price and execution, the Advisor, having in mind the Trust's
best interests, will consider all factors it deems relevant, including, by way
of illustration, price, the size of the transaction, the nature of the market
for the security, the amount of commission, the timing of the transaction taking
into account market prices and trends, the reputation, experience and financial
stability of the broker-dealer involved and the quality of service rendered by
the broker-dealer in other transactions. Though the Advisor generally seeks
reasonably competitive spreads or commissions, the Trust will not necessarily be
paying the lowest spread or commission available. Within the framework of the
policy of obtaining the most favorable price and efficient execution, the
Advisor will consider research and investment services provided by brokers and
dealers who effect or are parties to portfolio transactions with the Trust, the
Advisor or the Advisor's other clients. Such research and investment services
are those which brokerage houses customarily provide to institutional investors
and include statistical and economic data and research reports on particular
issuers and industries. Such services are used by the Advisor in connection with
all of its investment activities, and some of such services obtained in
connection with the execution of transactions for the Trust may be used in
managing other investment accounts. Conversely, brokers furnishing such services
may be selected for the execution of transactions for such other accounts, and
the services furnished by such brokers may be used by the Advisor in providing
investment management for the Trust. Commission rates are established pursuant
to negotiations based on the quality and quantity of execution services provided
by the broker or dealer in light of generally prevailing rates. The management
fee paid by the Trust will not be reduced because the Advisor and/or other
clients receive such services. The allocation of orders and the commission rates
paid by the Trust will be reviewed periodically by the Board of Trustees.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, as
amended (the "1934 Act"), the Advisor may cause the Trust to pay a broker-dealer
which provides "brokerage and research services" (as defined in the 1934 Act) to
the Advisor, an amount of disclosed commission for effecting a securities
transaction for the Trust in excess of the commission which another
broker-dealer would have charged for effecting that transaction.
For the fiscal years ended December 31, 1996, 1997 and 1998, the Trust paid
no brokerage commissions for the execution of portfolio transactions. The rates
of portfolio turnover for each of the fiscal years ended December 31, 1996, 1997
and 1998 were 15%, 17% and 29%, respectively.
B-11
<PAGE> 63
NET ASSET VALUE
Net asset value of the Trust will be determined no less frequently than as
of the close of regular trading on the New York Stock Exchange (the "Exchange")
(generally 4:00 p.m. Eastern time) on the last Business Day of each week
(generally Friday), and at such other times as the Trust may authorize. The net
asset value of the Trust equals the value of the Trust's assets less the Trust's
liabilities. Portfolio securities for which market quotations are readily
available are valued at current market value. Short-term investments maturing in
60 days or less are valued at amortized cost when the Advisor determines,
pursuant to procedures adopted by the Board of Trustees, that such cost
approximates current market value. All other securities and assets are valued at
their fair value following procedures adopted by the Board of Trustees.
In determining net asset value for the Trust, the Trust's custodian
utilizes the valuations of portfolio securities furnished by a pricing service
approved by the Board of Trustees. Securities for which quotations are not
readily available (which will constitute a majority of the securities held by
the Trust) are valued at fair value as determined by the pricing service using
methods which include consideration of the following: yields or prices of
municipal bonds of comparable quality, type of issue, coupon, maturity and
rating; indications as to value from dealers; and general market conditions. The
pricing service may employ electronic data processing techniques or a matrix
system, or both, to determine valuations. The procedures of the pricing service
and its valuations are reviewed by the officers of the Trust under the general
supervision of the Board of Trustees.
B-12
<PAGE> 64
THE AUCTION
GENERAL
The Amended and Restated By-Laws of Colonial High Income Municipal Trust,
adopted by the Board of Trustees (the "By-Laws"), provide that the Applicable
Rate for each Rate Period for each series of Municipal Preferred after the
Initial Rate Period therefor shall be equal to the rate per annum that the
Auction Agent advises has resulted on the Business Day preceding the first day
of such Subsequent Rate Period (an "Auction Date") from implementation of the
auction procedures (the "Auction Procedures") set forth in the By-Laws and
summarized below, in which persons determine to hold or offer to sell or, based
on dividend rates bid by them, offer to purchase or sell such shares. Each
periodic implementation of the Auction Procedures is referred to herein as an
"Auction." The following summary is qualified by reference to the Auction
Procedures set forth in the By-Laws.
As used herein with respect to shares of either series of Municipal
Preferred, (i) "Applicable Rate" means the rate per annum at which dividends are
payable on shares of such series for any Rate Period thereof, (ii) "Beneficial
Owner" means a customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer (or, if applicable, the Auction Agent) as a holder of shares of
such series, (iii) "Business Day" means a day on which the New York Stock
Exchange is open for trading and is not a Saturday, Sunday or other day on which
banks in New York City are authorized by law to close, (iv) "Date of Original
Issue" means the date on which the Trust initially issued shares of such series,
(v) "Dividend Payment Date" means any date on which dividends on shares of such
series are payable as provided under "Description of Municipal
Preferred -- Dividends -- General," (vi) "Dividend Period" means the period from
and including the Date of Original Issue of shares of such series to but
excluding the initial Dividend Payment Date for shares of such series and any
period thereafter from and including one Dividend Payment Date for shares of
such series to but excluding the next succeeding Dividend Payment Date for
shares of such series; provided, however, that the Dividend Periods for each of
Series T Municipal Preferred and Series W Municipal Preferred will never be
co-extensive with the Dividend Period of any other series of Municipal Preferred
unless the Trust has received an opinion of tax counsel that having such
co-extensive periods will not affect the deductibility, for federal income tax
purposes, of dividends paid on the different series of Municipal Preferred,
(vii) "Existing Holder" means a Broker-Dealer (or any such other Person as may
be permitted by the Trust) that is listed on the records of the Auction Agent as
a holder of shares of such series, (viii) "Initial Rate Period" means the period
from and including the Date of Original Issue of shares of such series to but
excluding the initial Dividend Payment Date for shares of such series, (ix)
"Potential Beneficial Owner" means a customer of a Broker-Dealer that is not a
Beneficial Owner of shares of such series that wishes to purchase shares of such
series, or that is a Beneficial Owner that wishes to purchase additional shares
of such series, (x) "Potential Holder" means a Broker-Dealer (or any such other
Person as may be permitted by the Trust) that is not an Existing Holder of
shares of such series or that is an Existing Holder of shares of such series
that wishes to become the Existing Holder of additional shares of such series,
(xi) "Rate Period" means the Initial Rate Period of shares of such series and
any Subsequent Rate Period, including any Special Rate Period, of shares of such
series, (xii) "Subsequent Rate Period" means any period from and including the
first day following the Initial Rate Period of shares of such series to but
excluding the next Dividend Payment Date for shares of such series and any
period thereafter from and including one Dividend Payment Date for shares of
such series to but excluding the next succeeding Dividend Payment Date for
shares of such series; provided, however, that if any Subsequent Rate Period is
also a Special Rate Period, such term shall mean the period commencing on the
first day of such Special Rate Period and ending on the last day of the last
Dividend Period thereof, (xiii) "Minimum Rate Period" means any Rate Period
consisting of 7 Rate Period Days and (xiv) "Special Rate Period" means any
Subsequent Rate Period commencing on the date designated by the Trust, as set
forth under "Description of Municipal Preferred -- Dividends -- Designation of
Special Rate Periods," and ending on the last day of the last Dividend Period
thereof.
AUCTION AGENCY AGREEMENT. The Trust will enter into an agreement (the
"Auction Agency Agreement") with Bankers Trust Company (together with any
successor bank or trust company or other entity entering into a similar
agreement with the Trust, the "Auction Agent") which provides, among other
things, that the Auction Agent will follow the Auction Procedures for purposes
of determining the
B-13
<PAGE> 65
Applicable Rate for shares of a series of Municipal Preferred so long as the
Applicable Rate for shares of such series is to be based on the results of an
Auction.
BROKER-DEALER AGREEMENTS. Each Auction requires the participation of one
or more broker-dealers. The Auction Agent will enter into an agreement with
Salomon Smith Barney Inc., and may enter into similar agreements (collectively,
the "Broker-Dealer Agreements") with one or more additional broker-dealers
(collectively, the "Broker-Dealers") selected by the Trust, which provide for
the participation of Broker-Dealers in Auctions. See "Broker-Dealers" below.
SECURITIES DEPOSITORY. The Depository Trust Company ("DTC," together with
any successor securities depository selected by the Trust, the "Securities
Depository") will act as the Securities Depository for the Agent Members with
respect to shares of each series of Municipal Preferred. One certificate for all
of the shares of each series of Municipal Preferred will be registered in the
name of Cede & Co. ("Cede"), as nominee of the Securities Depository. Such
certificate will bear a legend to the effect that such certificate is issued
subject to the provisions restricting transfers of shares of Municipal Preferred
contained in the By-Laws. The Trust will also issue stop-transfer instructions
to the transfer agent for shares each series of Municipal Preferred. Prior to
the commencement of the right of holders of Preferred Shares to elect a majority
of the Trust's trustees, as described below under "Description of Municipal
Preferred -- Voting Rights," Cede will be the holder of record of all shares of
each series of Municipal Preferred, and owners of shares of Municipal Preferred
will not be entitled to receive certificates representing their ownership
interest in such shares.
DTC, a New York-chartered limited purpose trust company, performs services
for its participants (including the Agent Members), some of whom (and/or their
representatives) own DTC. DTC maintains lists of its participants and will
maintain the positions (ownership interests) held by each such participant (the
"Agent Member") in shares of Municipal Preferred, whether for its own account or
as a nominee for another person.
AUCTION DATES; ADVANCE NOTICE OF ALLOCATION OF TAXABLE INCOME
The first Auction for shares of Series T Municipal Preferred will be held
on Tuesday, , 1999, and the first Auction for shares of Series W
Municipal Preferred will be held on Wednesday, ,
1999, each the Business Day preceding the Dividend Payment Date for the Initial
Rate Period of each respective series of Municipal Preferred. See "Description
of Municipal Preferred -- Dividends." Thereafter, (i) with respect to shares of
Series T Municipal Preferred, Auctions will normally be held every Tuesday, and
each Subsequent Rate Period will normally begin on the following Wednesday, and
(ii) with respect to shares of Series W Municipal Preferred, Auctions will
normally be held every Wednesday, and each Subsequent Rate Period will normally
begin on the following Thursday, unless the then-current Rate Period is a
Special Rate Period or, in certain circumstances, the day that would normally be
the Auction Date or the first day of such Subsequent Rate Period for such series
of Municipal Preferred is not a Business Day. The Auction Date and the first day
of the related Rate Period (also a Dividend Payment Date) must be Business Days
but need not be consecutive days. See "Description of Municipal
Preferred -- Dividends" for information concerning the circumstances under which
the first day of a Rate Period or the Auction Date, or both, may be moved to a
date other than such specified days.
Whenever the Trust intends to include any net capital gain or other income
taxable for Federal income tax purposes in any dividend on shares of a series of
Municipal Preferred, the Trust shall, in the case of Minimum Rate Periods or
Special Rate Periods of 28 Rate Period Days or fewer, and may, in the case of
any other Special Rate Period, notify the Auction Agent of the amount to be so
included not later than the Dividend Payment Date next preceding the Auction
Date for such series on which the Applicable Rate for such dividend is to be
established. Whenever the Auction Agent receives such notice from the Trust, it
will be required in turn to notify each Broker-Dealer, who, on or prior to such
Auction Date, in accordance with its Broker-Dealer Agreement, will be required
to notify its customers who are Beneficial Owners and Potential Beneficial
Owners believed by it to be interested in submitting an Order in the Auction to
be held on such Auction Date. See also "Description of Municipal
Preferred -- Dividends -- Gross-up Payments" below.
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<PAGE> 66
ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS
Prior to the Submission Deadline (as defined under "Submission of Orders by
Broker-Dealers to Auction Agent" below) on each Auction Date for shares of a
series of Municipal Preferred:
(a) each Beneficial Owner of shares of such series may submit to its
Broker-Dealer by telephone or otherwise a:
(i) "Hold Order" -- indicating the number of outstanding shares of
such series of Municipal Preferred, if any, that such Beneficial Owner
desires to continue to hold without regard to the Applicable Rate for
shares of such series for the next succeeding Rate Period;
(ii) "Bid" -- indicating the number of outstanding shares of such
series of Municipal Preferred, if any, that such Beneficial Owner offers
to sell if the Applicable Rate for shares of such series for the next
succeeding Rate Period shall be less than the rate per annum specified
by such Beneficial Owner in such bid; and/or
(iii) "Sell Order" -- indicating the number of outstanding shares
of such series of Municipal Preferred, if any, that such Beneficial
Owner offers to sell without regard to the Applicable Rate for shares of
such series for the next succeeding Rate Period; and
(b) Broker-Dealers shall contact customers who are Potential
Beneficial Owners by telephone or otherwise to determine whether such
customers desire to submit Bids, in which they will indicate the number of
shares of a series of Municipal Preferred that they offer to purchase if
the Applicable Rate for shares of such series for the next succeeding Rate
Period is not less than the rate per annum specified in such Bids.
The communication to a Broker-Dealer of the foregoing information is herein
referred to as an "Order" and collectively as "Orders." A Beneficial Owner or a
Potential Beneficial Owner placing an Order with its Broker-Dealer is herein
referred to as a "Bidder" and collectively as "Bidders." The submission by a
Broker-Dealer of an Order to the Auction Agent shall likewise be referred to
herein as an "Order" and collectively as "Orders," and an Existing Holder or
Potential Holder who places an Order with the Auction Agent or on whose behalf
an Order is placed with the Auction Agent shall likewise be referred to herein
as a "Bidder" and collectively as "Bidders."
A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of a series of Municipal Preferred then
held by such Beneficial Owner. A Bid placed by a Beneficial Owner specifying a
rate higher than the Applicable Rate determined in the Auction shall constitute
an irrevocable offer to sell the shares subject thereto. A Beneficial Owner that
submits a Bid to its Broker-Dealer having a rate higher than the Maximum Rate
for such series on the Auction Date thereof will be treated as having submitted
a Sell Order to its Broker-Dealer. A Beneficial Owner that fails to submit to
its Broker-Dealer prior to the Submission Deadline for shares of a series of
Municipal Preferred an Order or Orders covering all the outstanding shares of
such series of Municipal Preferred held by such Beneficial Owner will be deemed
to have submitted a Hold Order to its Broker-Dealer covering the number of
outstanding shares of such series of Municipal Preferred held by such Beneficial
Owner and not subject to Orders submitted to its Broker-Dealer;
provided,however, that if a Beneficial Owner fails to submit to its
Broker-Dealer prior to the Submission Deadline for shares of a series of
Municipal Preferred an Order or Orders covering all of the outstanding shares of
such series of Municipal Preferred held by such Beneficial Owner for an Auction
relating to a Special Rate Period consisting of more than 28 Rate Period Days,
such Beneficial Owner will be deemed to have submitted a Sell Order to its
Broker-Dealer covering the number of outstanding shares of such series of
Municipal Preferred held by such Beneficial Owner and not subject to Orders
submitted to its Broker-Dealer. A Sell Order shall constitute an irrevocable
offer to sell the shares of the series of Municipal Preferred subject thereto at
a price per share equal to $25,000. A Beneficial Owner of shares of a series of
Municipal Preferred that offers to become the Beneficial Owner of additional
shares of such series of Municipal Preferred is, for purposes of such offer, a
Potential Beneficial Owner.
B-15
<PAGE> 67
A Potential Beneficial Owner of shares of a series of Municipal Preferred
may submit to its Broker-Dealer Bids in which it offers to purchase shares of
such series of Municipal Preferred if the Applicable Rate for the next Rate
Period of such series is not less than the rate specified in such Bid. A Bid
placed by a Potential Beneficial Owner specifying a rate not higher than the
Maximum Rate shall constitute an irrevocable offer to purchase the number of
shares of such series of Municipal Preferred specified in such Bid if the rate
determined in the Auction is equal to or greater than the rate specified in such
Bid.
As described more fully below under "Submission of Orders by Broker-Dealers
to Auction Agent," the Broker-Dealers will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves (unless otherwise permitted by the Trust)
as Existing Holders in respect of shares subject to Orders submitted or deemed
submitted to them by Beneficial Owners and as Potential Holders in respect of
shares subject to Orders submitted to them by Potential Beneficial Owners.
However, neither the Trust nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing. Any Order placed with the
Auction Agent by a Broker-Dealer as or on behalf of an Existing Holder or a
Potential Holder will be treated in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or a Potential Beneficial Owner, as
described in the preceding paragraph. Similarly, any failure by a Broker-Dealer
to submit to the Auction Agent an Order in respect of any shares of a series of
Municipal Preferred held by it or its customers who are Beneficial Owners will
be treated in the same manner as a Beneficial Owner's failure to submit to its
Broker-Dealer an Order in respect of shares of such series of Municipal
Preferred held by it, as described in the second preceding paragraph. For
information concerning the priority given to different types of Orders placed by
Existing Holders, see "Submission of Orders by Broker-Dealers to Auction Agent"
below.
Neither the Trust nor an affiliate may submit an Order in any Auction,
except that any Broker-Dealer that is an affiliate of the Trust may submit
Orders in an Auction, but only if such Orders are not for its own account.
The Auction Procedures include a pro rata allocation of shares for purchase
and sale, which may result in an Existing Holder continuing to hold or selling,
or a Potential Holder purchasing, a number of shares of a series of Municipal
Preferred that is fewer than the number of shares of such series of Municipal
Preferred specified in its Order. See "Acceptance and Rejection of Submitted
Bids and Submitted Sell Orders and Allocation of Shares" below. To the extent
the allocation procedures have that result, Broker-Dealers that have designated
themselves as Existing Holders or Potential Holders in respect of customer
Orders will be required to make appropriate pro rata allocations among their
respective customers. Each purchase or sale shall be made for settlement on the
Business Day next succeeding the Auction Date at a price per share equal to
$25,000. See "Notification of Results; Settlement" below.
As described above, any Bid specifying a rate higher than the Maximum Rate
(as defined below) will (i) be treated as a Sell Order if submitted by a
Beneficial Owner or an Existing Holder and (ii) not be accepted if submitted by
a Potential Beneficial Owner or a Potential Holder. Accordingly, the Auction
Procedures establish the Maximum Rate as a maximum rate per annum that can
result from an Auction. See "Determination of Sufficient Clearing Bids, Winning
Bid Rate and Applicable Rate" and "Acceptance and Rejection of Submitted Bids
and Submitted Sell Orders and Allocation of Shares" below.
As used herein, "Maximum Rate," when used with respect to shares of a
series of Municipal Preferred on an Auction Date, means:
(i) in the case of any Auction Date which is not the Auction Date
immediately prior to the first day of any proposed Special Rate Period, the
product of (1) the Reference Rate on such Auction Date for the next Rate
Period of shares of such series and (2) the Rate Multiple on such Auction
Date, unless the shares of such series have or had a Special Rate Period
(other than a Special Rate Period of 28 Rate Period Days or fewer) and an
Auction at which Sufficient Clearing Bids existed
B-16
<PAGE> 68
has not yet occurred for a Minimum Rate Period of shares of such series
after such Special Rate Period, in which case the higher of:
(A) the dividend rate on the shares of such series for the
then-ending Rate Period; and
(B) the product of (x) the higher of (I) the Reference Rate on such
Auction Date for a Rate Period equal in length to the then-ending Rate
Period of shares of such series, if such then-ending Rate Period was 364
Rate Period Days or fewer, or the Treasury Note Rate on such Auction
Date for a Rate Period equal in length to the then-ending Rate Period of
shares of such series, if such then-ending Rate Period was more than 364
Rate Period Days, and (II) the Reference Rate on such Auction Date for a
Rate Period equal in length to such Special Rate Period of shares of
such series, if such Special Rate Period was 364 Rate Period Days or
fewer, or the Treasury Note Rate on such Auction Date for a Rate Period
equal in length to such Special Rate Period, if such Special Rate Period
was more than 364 Rate Period Days and (y) the Rate Multiple on such
Auction Date; or
(ii) in the case of any Auction Date which is the Auction Date
immediately prior to the first day of any proposed Special Rate Period, the
product of (1) the highest of (x) the Reference Rate on such Auction Date
for a Rate Period equal in length to the then-ending Rate Period of shares
of such series, if such then-ending Rate Period was 364 Rate Period Days or
fewer, or the Treasury Note Rate on such Auction Date for a Rate Period
equal in length to the then-ending Rate Period of shares of such series, if
such then-ending Rate Period was more than 364 Rate Period Days, (y) the
Reference Rate on such Auction Date for the Special Rate Period for which
the Auction is being held if such Special Rate Period is 364 Rate Period
Days or fewer or the Treasury Note Rate on such Auction Date for the
Special Rate Period for which the Auction is being held if such Special
Rate Period is more than 364 Rate Period Days, and (z) the Reference Rate
on such Auction Date for Minimum Rate Periods and (2) the Rate Multiple on
such Auction Date.
As used herein, "Reference Rate" shall mean (i) the higher of the Taxable
Equivalent of the Short-Term Municipal Bond Rate and the "AA" Composite
Commercial Paper Rate in the case of Minimum Rate Periods and Special Rate
Periods of 28 Rate Period Days or fewer; (ii) the "AA" Composite Commercial
Paper Rate in the case of Special Rate Periods of more than 28 Rate Period Days
but fewer than 183 Rate Period Days; and (iii) the Treasury Bill Rate in the
case of Special Rate Periods of more than 182 Rate Period Days but fewer than
365 Rate Period Days.
As used herein, with respect to shares of a series of Municipal Preferred,
"Taxable Equivalent of the Short-Term Municipal Bond Rate," on any date for any
Minimum Rate Period or Special Rate Period of 28 Rate Period Days or fewer,
shall mean 90% of the quotient of (A) the per annum rate expressed on an
interest equivalent basis equal to the Standard & Poor's Kenny 30 day High Grade
Index or any successor index (the "Kenny Index") (provided, however, that any
such successor index must be approved by Moody's (if Moody's is then rating the
shares of such series of Municipal Preferred) and Standard & Poor's (if Standard
& Poor's is then rating the shares of such series of Municipal Preferred)), made
available for the Business Day immediately preceding such date but in any event
not later than 8:30 A.M., Eastern time, on such date by Standard & Poor's J.J.
Kenny Evaluation Services or any successor thereto, based upon 30-day yield
evaluations at par of short-term bonds, the interest on which is excludable for
regular Federal income tax purposes under the Code, of "high grade" component
issuers selected by Standard & Poor's J.J. Kenny Evaluation Services or any such
successor from time to time in its discretion, which component issuers shall
include, without limitation, issuers of general obligation bonds but shall
exclude any bonds the interest on which constitutes an item of tax preference
under Section 57(a)(5) of the Code, or successor provisions, for purposes of the
"alternative minimum tax," divided by (B) 1.00 minus the greater of the maximum
marginal regular Federal individual income tax rate applicable to ordinary
income or the maximum marginal regular Federal corporate income tax rate
applicable to ordinary income (in each case expressed as a decimal); provided,
however, that if the Kenny Index is not made so available by 8:30 A.M., Eastern
time, on such date by Standard & Poor's Kenny Evaluation Services or any
successor, the Taxable Equivalent of the Short-Term Municipal Bond
B-17
<PAGE> 69
Rate shall mean the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the most recent Kenny Index so made available for any
preceding Business Day, divided by (B) 1.00 minus the greater of the maximum
marginal regular Federal individual income tax rate applicable to ordinary
income or the maximum marginal regular Federal corporate income tax rate
applicable to ordinary income (in each case expressed as a decimal).
As used herein, " 'AA' Composite Commercial Paper Rate," on any date for
any Rate Period of shares of a series of Municipal Preferred, means:
(i) (A) in the case of any Minimum Rate Period or any Special Rate
Period of fewer than 49 Rate Period Days, the interest equivalent of the
30-day rate; provided, however, that if such Rate Period is a Minimum Rate
Period and the "AA" Composite Commercial Paper Rate is being used to
determine the Applicable Rate for shares of such series when all of the
outstanding shares of such series of Municipal Preferred are subject to
Submitted Hold Orders, then the interest equivalent of the seven-day rate,
and (B) in the case of any Special Rate Period of (1) 49 or more but fewer
than 70 Rate Period Days, the interest equivalent of the 60-day rate; (2)
70 or more but fewer than 85 Rate Period Days, the arithmetic average of
the interest equivalent of the 60-day and 90-day rates; (3) 85 or more but
fewer than 99 Rate Period Days, the interest equivalent of the 90-day rate;
(4) 99 or more but fewer than 120 Rate Period Days, the arithmetic average
of the interest equivalent of the 90-day and 120-day rates; (5) 120 or more
but fewer than 141 Rate Period Days, the interest equivalent of the 120-day
rate; (6) 141 or more but fewer than 162 Rate Period Days, the arithmetic
average of the 120-day and 180-day rates; and (7) 162 or more but fewer
than 183 Rate Period Days, the interest equivalent of the 180-day rate, in
each case on commercial paper placed on behalf of issuers whose corporate
bonds are rated "AA" by Standard & Poor's or the equivalent of such rating
by Standard & Poor's or another rating agency, as made available on a
discount basis or otherwise by the Federal Reserve Bank of New York for the
Business Day immediately preceding such date; or
(ii) in the event that the Federal Reserve Bank of New York does not
make available any such rate, then the arithmetic average of such rates, as
quoted on a discount basis or otherwise, by the Commercial Paper Dealers to
the Auction Agent for the close of business on the Business Day next
preceding such date.
If any Commercial Paper Dealer does not quote a rate required to determine the
"AA" Composite Commercial Paper Rate, the "AA" Composite Commercial Paper Rate
shall be determined on the basis of the quotation or quotations furnished by the
remaining Commercial Paper Dealer or Commercial Paper Dealers and any Substitute
Commercial Paper Dealer or Substitute Commercial Paper Dealers selected by the
Trust to provide such rate or rates not being supplied by any Commercial Paper
Dealer or Commercial Paper Dealers, as the case may be, or, if the Trust does
not select any such Substitute Commercial Paper Dealer or Substitute Commercial
Paper Dealers, by the remaining Commercial Paper Dealer or Commercial Paper
Dealers. For purposes of this definition, the "interest equivalent" of a rate
stated on a discount basis (a "discount rate") for commercial paper of a given
days' maturity shall be equal to the quotient (rounded upwards to the next
higher one-thousandth (0.001) of 1%) of (A) the discount rate divided by (B) the
difference between (x) 1.00 and (y) a fraction the numerator of which shall be
the product of the discount rate times the number of days in which such
commercial paper matures and the denominator of which shall be 360. As used
herein, "Commercial Paper Dealers" means Lehman Commercial Paper Incorporated,
Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated and
such other commercial paper dealer or dealers as the Trust may from time to time
appoint, or, in lieu of any thereof, their respective affiliates or successors.
As used herein, "Substitute Commercial Paper Dealer" means CS First Boston
Corporation or Morgan Stanley & Co. Incorporated or their respective affiliates
or successors, if such entity is a commercial paper dealer, provided that none
of such entities shall be a Commercial Paper Dealer.
B-18
<PAGE> 70
As used herein, "Treasury Bill Rate," on any date for any Rate Period,
means:
(i) the bond equivalent yield, calculated in accordance with
prevailing industry convention, of the rate on the most recently auctioned
Treasury Bill with a remaining maturity closest to the length of such Rate
Period, as quoted in The Wall Street Journal on such date for the Business
Day next preceding such date; or
(ii) in the event that any such rate is not published in The Wall
Street Journal, then the bond equivalent yield, calculated in accordance
with prevailing industry convention, as calculated by reference to the
arithmetic average of the bid price quotations of the most recently
auctioned Treasury Bill with a remaining maturity closest to the length of
such Rate Period, as determined by bid price quotations as of the close of
business on the Business Day immediately preceding such date obtained from
the U.S. Government Securities Dealers to the Auction Agent.
As used herein, "Treasury Note Rate," on any date for any Rate Period,
means:
(i) the yield on the most recently auctioned Treasury Note with a
remaining maturity closest to the length of such Rate Period, as quoted in
The Wall Street Journal on such date for the Business Day next preceding
such date; or
(ii) in the event that any such rate is not published in The Wall
Street Journal, then the yield as calculated by reference to the arithmetic
average of the bid price quotations of the most recently auctioned Treasury
Note with a remaining maturity closest to the length of such Rate Period,
as determined by bid price quotations as of the close of business on the
Business Day immediately preceding such date obtained from the U.S.
Government Securities Dealers to the Auction Agent.
For purposes of the foregoing, "Treasury Bill" means a direct obligation of
the U.S. government having a maturity at the time of issuance of 364 days or
less, and "Treasury Note" means a direct obligation of the U.S. government
having a maturity at the time of issuance of five years or less but more than
364 days. If any U.S. Government Securities Dealer does not quote a rate
required to determine the Treasury Bill Rate or the Treasury Note Rate, such
rate shall be determined on the basis of the quotation or quotations furnished
by the remaining U.S. Government Securities Dealer or U.S. Government Securities
Dealers and any Substitute U.S. Government Securities Dealers selected by the
Trust to provide such rate or rates not being supplied by any U.S. Government
Securities Dealer or U.S. Government Securities Dealers, as the case may be, or,
if the Trust does not select any such Substitute U.S. Government Securities
Dealer or Substitute U.S. Government Securities Dealers, by the remaining U.S.
Government Securities Dealer or U.S. Government Securities Dealers. As used
herein, "U.S. Government Securities Dealer" means Lehman Government Securities
Incorporated, Goldman, Sachs & Co., Salomon Smith Barney Inc. and Morgan
Guaranty Trust Company of New York or their respective affiliates or successors,
if such entity is a U.S. government securities dealer. As used herein,
"Substitute U.S. Government Securities Dealer" shall mean CS First Boston
Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated or their
respective affiliates or successors, if such entity is a U.S. government
securities dealer, provided that none of such entities shall be a U.S.
Government Securities Dealer.
The applicable "AA" Composite Commercial Paper Rates, Taxable Equivalent of
the Short-Term Municipal Bond Rates, Treasury Bill Rates and Treasury Note Rates
will be the rates announced on such Auction Date for the Business Day
immediately prior to such Auction Date.
The "Rate Multiple" for shares of a series of Municipal Preferred on any
Auction Date for shares of such series will be a percentage, determined as set
forth below, based on the prevailing rating of shares of
B-19
<PAGE> 71
such series of Municipal Preferred in effect at the close of business on the
Business Day next preceding such Auction Date:
<TABLE>
<CAPTION>
PREVAILING RATING PERCENTAGE
- ----------------- ----------
<S> <C>
"aa3"/AA- or higher......................................... 110%
"a3"/A-..................................................... 125%
"baa3"/BBB-................................................. 150%
"ba3"/BB-................................................... 200%
Below "ba3"/BB-............................................. 250%
</TABLE>
provided, however, that in the event the Trust has notified the Auction Agent of
its intent to allocate income taxable for Federal income tax purposes to shares
of such series of Municipal Preferred prior to the Auction establishing the
Applicable Rate for shares of such series, the applicable percentage in the
foregoing table shall be divided by the quantity 1 minus the greater of the
maximum marginal regular Federal individual income tax rate applicable to
ordinary income or the maximum marginal regular Federal corporate income tax
rate applicable to ordinary income. If the shares of such series of Municipal
Preferred are rated by only one rating agency, such rating will be the
prevailing rating.
For purposes of this definition, the "prevailing rating" of shares of a
series of Municipal Preferred shall be (i) "aa3"/AA- or higher if such shares
have a rating of "aa3" or better by Moody's and AA- or better by Standard &
Poor's or the equivalent of such ratings by such agencies or a substitute rating
agency or substitute rating agencies selected as provided below, (ii) if not
"aa3"/AA- or higher, then "a3"/A- if such shares have a rating of "a3" or better
by Moody's and A- or better by Standard & Poor's or the equivalent of such
ratings by such agencies or a substitute rating agency or substitute rating
agencies selected as provided below, (iii) if not "aa3"/AA- or higher or
"a3"/A-, then "baa3"/BBB- if such shares have a rating of "baa3" or better by
Moody's and BBB- or better by Standard & Poor's or the equivalent of such
ratings by such agencies or a substitute rating agency or substitute rating
agencies selected as provided below, (iv) if not "aa3"/AA- or higher, "a3"/A- or
"baa3"/BBB-, then "ba3"/ BB- if such shares have a rating of "ba3" or better by
Moody's and BB- or better by Standard & Poor's or the equivalent of such ratings
by such agencies or a substitute rating agency or substitute rating agencies
selected as provided below, and (v) if not "aa3"/AA- or higher, "a3"/A-,
"baa3"/BBB-, or "ba3"/BB-, then Below "ba3"/BB-; provided, however, that if such
shares are rated by only one rating agency, the prevailing rating shall be
determined without reference to the rating of any other rating agency. The Trust
will take all reasonable action necessary to enable either Standard & Poor's or
Moody's to provide a rating for shares of each series of Municipal Preferred. If
neither Standard & Poor's nor Moody's shall make such a rating available,
Salomon Smith Barney Inc. or its successor shall select at least one nationally
recognized statistical rating organization (as that term is used in the rules
and regulations of the SEC under the Securities Exchange Act of 1934, as
amended) to act as a substitute rating agency in respect of the shares of such
series of Municipal Preferred, and the Trust shall take all reasonable action to
enable such rating agency to provide a rating for such shares.
SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT
Prior to 1:30 P.M., Eastern time, on each Auction Date, or such other time
on the Auction Date specified by the Auction Agent (the "Submission Deadline"),
each Broker-Dealer will submit to the Auction Agent in writing all Orders for
shares of Municipal Preferred of a series subject to an Auction on such Auction
Date obtained by it for the Auction to be conducted on such Auction Date,
designating itself (unless otherwise permitted by the Trust) as the Existing
Holder or Potential Holder, as the case may be, in respect of the shares of
Municipal Preferred subject to such Orders. Any Order submitted by a Beneficial
Owner or a Potential Beneficial Owner to its Broker-Dealer, or by a
Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any
Auction Date, shall be irrevocable.
If any rate specified in any Bid contains more than three figures to the
right of the decimal point, the Auction Agent will round such rate to the next
highest one-thousandth (0.001) of 1%.
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<PAGE> 72
If one or more Orders of an Existing Holder is submitted to the Auction
Agent covering in the aggregate more than the number of outstanding shares of
such series of Municipal Preferred subject to an Auction held by such Existing
Holder, such Orders will be considered valid in the following order of priority:
(a) all Hold Orders for shares of such series will be considered
valid, but only up to and including in the aggregate the number of shares
of Municipal Preferred held by such Existing Holder, and, if the number of
shares of such series subject to such Hold Orders exceeds the number of
shares of such series held by such Existing Holder, the number of shares of
such series subject to each such Hold Order shall be reduced pro rata to
cover the number of shares of such series held by such Existing Holder;
(b) (i) any Bid for shares of such series will be considered valid up
to and including the excess of the number of shares of such series held by
such Existing Holder over the number of shares of such series subject to
any Hold Orders referred to in clause (a) above;
(ii) subject to subclause (i), if more than one Bid of an Existing
Holder for shares of such series is submitted to the Auction Agent with
the same rate and the number of shares of such series subject to such
Bids is greater than such excess, such Bids will be considered valid up
to and including the amount of such excess, and the number of shares of
such series subject to each Bid with the same rate will be reduced pro
rata to cover the number of shares of such series equal to such excess;
(iii) subject to subclauses (i) and (ii), if more than one Bid of
an Existing Holder for shares of such series is submitted to the Auction
Agent with different rates, such Bids shall be considered valid in the
ascending order of their respective rates up to and including the amount
of such excess; and
(iv) in any such event, the number, if any, of shares of such
series subject to any portion of Bids considered not valid in whole or
in part under this clause (b) will be treated as the subject of a Bid
for shares of such series by or on behalf of a Potential Holder at the
rate specified therein; and
(c) all Sell Orders for shares of such series will be considered valid
up to and including the excess of the number of shares of such series held
by such Existing Holder over the sum of shares of such series subject to
valid Hold Orders referred to in clause (a) above and valid Bids referred
to in clause (b) above.
If more than one Bid of a Potential Holder for shares of a series of
Municipal Preferred is submitted to the Auction Agent by or on behalf of any
Potential Holder, each Bid submitted will be a separate Bid with the rate and
number of shares therein specified.
DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE RATE
Not earlier than the Submission Deadline on each Auction Date for shares of
a series of Municipal Preferred, the Auction Agent will assemble all valid
Orders submitted or deemed submitted to it by the Broker-Dealers in respect of
shares of such series (each such Hold Order, Bid or Sell Order as submitted or
deemed submitted by a Broker-Dealer being herein referred to as a "Submitted
Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be,
or as a "Submitted Order" and collectively as "Submitted Hold Orders,"
"Submitted Bids" or "Submitted Sell Orders," as the case may be, or as
"Submitted Orders") and will determine the excess of the number of outstanding
shares of such series of Municipal Preferred over the number of outstanding
shares of such series of Municipal Preferred subject to Submitted Hold Orders
(such excess being herein referred to as the "Available Municipal Preferred" of
such series) and whether Sufficient Clearing Bids have been made in the Auction.
"Sufficient Clearing Bids" will have been made if the number of outstanding
shares of such series of Municipal Preferred that are the subject of Submitted
Bids of Potential Holders specifying rates not higher than the Maximum Rate
equals or exceeds the number of outstanding shares of such series of Municipal
B-21
<PAGE> 73
Preferred that are the subject of Submitted Sell Orders (including the number of
shares of such series of Municipal Preferred subject to Bids of Existing Holders
specifying rates higher than the Maximum Rate).
If Sufficient Clearing Bids for shares of such series have been made, the
Auction Agent will determine the lowest rate specified in the Submitted Bids
(the "Winning Bid Rate") which, taking into account the rates in the Submitted
Bids of Existing Holders, would result in Existing Holders continuing to hold an
aggregate number of outstanding shares of such series of Municipal Preferred
which, when added to the number of outstanding shares of such series of
Municipal Preferred to be purchased by Potential Holders, based on the rates in
their Submitted Bids, would equal not less than the Available Municipal
Preferred. In such event, the Winning Bid Rate will be the Applicable Rate for
the next Rate Period for all shares of such series of Municipal Preferred.
If Sufficient Clearing Bids for shares of such series have not been made
(other than because all of the outstanding shares of such series of Municipal
Preferred are subject to Submitted Hold Orders), the Applicable Rate for the
next Rate Period for all shares of such series of Municipal Preferred will be
equal to the Maximum Rate. If Sufficient Clearing Bids for shares of such series
have not been made, Beneficial Owners that have submitted or that are deemed to
have submitted Sell Orders may not be able to sell in the Auction all shares of
such series of Municipal Preferred subject to such Sell Orders but will continue
to own shares of such series of Municipal Preferred for the next Rate Period,
dividends for which may include income taxable to such Beneficial Owners. See
"The Auction -- Auction Dates; Advance Notice of Allocation of Taxable Income"
above and "Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocation of Shares" below.
If all of the outstanding shares of such series of Municipal Preferred are
subject to Submitted Hold Orders, the Applicable Rate for all shares of such
series for the next Rate Period will be the lesser of the Kenny Index (if such
Rate Period consists of fewer than 183 Rate Period Days) or the product of (i)
(1) the "AA" Composite Commercial Paper Rate on the Auction Date for such Rate
Period, if such Rate Period consists of fewer than 183 Rate Period Days; (2) the
Treasury Bill Rate on such Auction Date for such Rate Period, if such Rate
Period consists of more than 182 but fewer than 365 Rate Period Days; or (3) the
Treasury Note Rate on such Auction Date for such Rate Period, if such Rate
Period is more than 364 Rate Period Days (the rate described in the foregoing
clause (i)(1), (2) or (3) as applicable, being referred to herein as the
"Benchmark Rate") and (ii) 1 minus the maximum marginal regular Federal
individual income tax rate applicable to ordinary income or the maximum marginal
regular Federal corporate income tax rate applicable to ordinary income,
whichever is greater; provided, however, that if the Trust has notified the
Auction Agent of its intent to allocate to shares of such series of Municipal
Preferred in such Rate Period any net capital gain or other income taxable for
Federal income tax purposes ("Taxable Income"), the Applicable Rate for shares
of such series of Municipal Preferred for such Rate Period will be (A) if the
Taxable Yield Rate (as defined below) is greater than the Benchmark Rate, then
the Benchmark Rate, or (B) if the Taxable Yield Rate is less than or equal to
the Benchmark Rate, then the rate equal to the sum of (x) the lesser of the
Kenny Index (if such Rate Period consists of fewer than 183 Rate Period Days) or
the product of the Benchmark Rate multiplied by the factor set forth in the
preceding clause (ii) and (y) the product of the maximum marginal regular
Federal individual income tax rate applicable to ordinary income or the maximum
marginal regular Federal corporate income tax applicable to ordinary income,
whichever is greater, multiplied by the Taxable Yield Rate. For purposes of the
foregoing, "Taxable Yield Rate" means the rate determined by (a) dividing the
amount of Taxable Income available for distribution per share of such series of
Municipal Preferred by the number of days in the Dividend Period in respect of
which such Taxable Income is contemplated to be distributed, (b) multiplying the
amount determined in (a) above by 365 (in the case of a Dividend Period of 7
Rate Period Days) or 360 (in the case of any other Dividend Period), and (c)
dividing the amount determined in (b) above by $25,000. In calculating the "AA"
Composite Commercial Paper Rate, the Treasury Bill Rate and the Treasury Note
Rate for such purpose, the rates used will be the rates or yields specified in
the applicable definitions of "AA" Composite Commercial Paper Rate, Treasury
Bill Rate and Treasury Note Rate set forth under "The Auction -- Orders by
Existing Holders and Potential Holders."
B-22
<PAGE> 74
ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES
Based on the determinations made under "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" above and, subject to the
discretion of the Auction Agent to round and allocate certain shares as
described below, Submitted Bids and Submitted Sell Orders will be accepted or
rejected in the order of priority set forth in the Auction Procedures, with the
result that Existing Holders and Potential Holders of shares of a series of
Municipal Preferred will sell, continue to hold and/or purchase shares of such
series as set forth below. Existing Holders that submitted or were deemed to
have submitted Hold Orders (or on whose behalf Hold Orders were submitted or
deemed to have been submitted) will continue to hold the shares of such series
of Municipal Preferred subject to such Hold Orders.
If Sufficient Clearing Bids have been made:
(a) Each Existing Holder that placed or on whose behalf was placed a
Submitted Sell Order or Submitted Bid specifying any rate higher than the
Winning Bid Rate will sell the outstanding shares of such series of
Municipal Preferred subject to such Submitted Sell Order or Submitted Bid;
(b) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate lower than the Winning Bid Rate will
continue to hold the outstanding shares of such series of Municipal
Preferred subject to such Submitted Bid;
(c) Each Potential Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate lower than the Winning Bid Rate will
purchase the number of outstanding shares of such series of Municipal
Preferred subject to such Submitted Bid;
(d) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to the Winning Bid Rate will continue
to hold the shares of such series of Municipal Preferred subject to such
Submitted Bid, unless the number of outstanding shares of such series of
Municipal Preferred subject to all such Submitted Bids is greater than the
number of shares of such series of Municipal Preferred in excess of the
Available Municipal Preferred over the number of shares of such series of
Municipal Preferred accounted for in clauses (b) and (c) above, in which
event each Existing Holder with such a Submitted Bid will continue to hold
a number of outstanding shares of such series of Municipal Preferred
subject to such Submitted Bid determined on a pro rata basis based on the
number of outstanding shares of such series of Municipal Preferred subject
to all such Submitted Bids of such Existing Holders; and
(e) Each Potential Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to the Winning Bid Rate will purchase
any shares of Available Municipal Preferred not accounted for in clauses
(b) through (d) above on a pro rata basis based on the outstanding shares
of such series of Municipal Preferred subject to all such Submitted Bids.
If Sufficient Clearing Bids have not been made (unless this results because
all outstanding shares of a series of Municipal Preferred are subject to
Submitted Hold Orders):
(a) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to or lower than the Maximum Rate
will continue to hold the outstanding shares of such series of Municipal
Preferred subject to such Submitted Bid;
(b) Each Potential Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to or lower than the Maximum Rate
will purchase the number of outstanding shares of such series of Municipal
Preferred subject to such Submitted Bid; and
(c) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate higher than the Maximum Rate or a Submitted
Sell Order will sell a number of shares of such series of Municipal
Preferred determined on a pro rata basis based on the number of outstanding
shares of such series of Municipal Preferred subject to all such Submitted
Bids and Submitted Sell Orders.
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If, as a result of the pro rata allocation described in clauses (d) or (e)
of the second preceding paragraph or clause (c) of the next preceding paragraph,
any Existing Holder would be entitled or required to sell, or any Potential
Holder would be entitled or required to purchase, a fraction of a share of a
series of Municipal Preferred, the Auction Agent will, in such manner as, in its
sole discretion, it will determine, round up or down to the nearest whole share
the number of shares of such series of Municipal Preferred being sold or
purchased on such Auction Date so that the number of shares sold or purchased by
each Existing Holder or Potential Holder will be whole shares of such series of
Municipal Preferred. If as a result of the pro rata allocation described in
clause (e) of the second preceding paragraph, any Potential Holder would be
entitled or required to purchase less than a whole share of such series of
Municipal Preferred, the Auction Agent will, in such manner as, in its sole
discretion, it will determine, allocate shares of such series of Municipal
Preferred for purchase among Potential Holders so that only whole shares of such
series of Municipal Preferred are purchased by any such Potential Holder, even
if such allocation results in one or more of such Potential Holders not
purchasing shares of Municipal Preferred.
NOTIFICATION OF RESULTS; SETTLEMENT
The Auction Agent will be required to advise each Broker-Dealer that
submitted an Order of the Applicable Rate for the next Rate Period and, if the
Order was a Bid or Sell Order, whether such Bid or Sell Order was accepted or
rejected, in whole or in part, by telephone by approximately 3:00 P.M., Eastern
time, on each Auction Date. Each Broker-Dealer that submitted an Order for the
account of a customer will then be required to advise such customer of the
Applicable Rate for the next Rate Period and, if such Order was a Bid or a Sell
Order, whether such Bid or Sell Order was accepted or rejected, in whole or in
part, will be required to confirm purchases and sales with each customer
purchasing or selling shares of a series of Municipal Preferred as a result of
the Auction and will be required to advise each customer purchasing or selling
shares of such series of Municipal Preferred as a result of the Auction to give
instructions to its Agent Member of the Securities Depository to pay the
purchase price against delivery of such shares or to deliver such shares against
payment therefor, as appropriate. The Auction Agent will be required to record
each transfer of shares of such series of Municipal Preferred on the registry of
Existing Holders to be maintained by the Auction Agent. See "General" above.
In accordance with the Securities Depository's normal procedures, on the
Business Day after the Auction Date, the transactions described above will be
executed through the Securities Depository and the accounts of the respective
Agent Members at the Securities Depository will be debited and credited and
shares delivered as necessary to effect the purchases and sales of shares of a
series of Municipal Preferred as determined in the Auction. Purchasers will make
payment through their Agent Members in same-day funds to the Securities
Depository against delivery through their Agent Members; the Securities
Depository will make payment in accordance with its normal procedures, which now
provide for payment against delivery by their Agent Members in same-day funds.
The settlement procedures to be used with respect to Auctions for shares of each
series of Municipal Preferred are set forth in Appendix C hereto.
If any Existing Holder selling shares of a series of Municipal Preferred in
an Auction fails to deliver such shares, the Broker-Dealer of any person that
was to have purchased shares of such series of Municipal Preferred in such
Auction may deliver to such person a number of whole shares of such series of
Municipal Preferred that is less than the number of shares that otherwise was to
be purchased by such person. In such event, the number of shares of such series
of Municipal Preferred to be so delivered shall be determined by such
Broker-Dealer. Delivery of such lesser number of shares shall constitute good
delivery.
CONCERNING THE AUCTION AGENT
The Auction Agent is acting as agent for the Trust in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered, or omitted or for any
error of judgment made by it in the performance of its duties under the Auction
Agency Agreement and will not be liable for any error of judgment made in good
faith unless the Auction Agent will have been negligent in ascertaining the
pertinent facts.
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The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of shares of each series of Municipal Preferred, a list of
initial owners of shares of each series provided by the Trust, the results of
Auctions, notices from any Broker-Dealer (or other Person, if permitted by the
Trust) with respect to transfers described in the Prospectus under "The
Auction -- Secondary Market Trading and Transfer of Municipal Preferred" and
notices from the Trust. The Auction Agent is not required to accept any such
notice for an Auction unless it is received by the Auction Agent by 3:00 P.M.,
Eastern time, on the Business Day preceding such Auction.
The Auction Agent will be the transfer agent, registrar, dividend
disbursing agent and redemption agent for shares of each series of Municipal
Preferred. The registrar for shares of each series of Municipal Preferred will
send notices to holders of the applicable series of shares of Municipal
Preferred of any special meetings at which holders of such series of Municipal
Preferred have the right to elect trustees of the Trust. See "Description of
Municipal Preferred -- Voting Rights" below.
The Auction Agent may terminate the Auction Agency Agreement upon notice to
the Trust on a date no earlier than 45 days after such notice. If the Auction
Agent should resign, the Trust will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Trust may remove the Auction
Agent provided that prior to such removal the Trust shall have entered into such
an agreement with a successor Auction Agent.
BROKER-DEALERS
The Auction Agent after each Auction for shares of a series of Municipal
Preferred will pay to each Broker-Dealer, from funds provided by the Trust, a
service charge at the annual rate of 1/4 of 1% in the case of any Auction
immediately preceding a Rate Period of less than one year, or a percentage
agreed to by the Trust and the Broker-Dealers in the case of any Auction
immediately preceding a Rate Period of one year or longer, of the purchase price
of shares of such series Municipal Preferred placed by such Broker-Dealer at
such Auction. For the purposes of the preceding sentence, shares of a series of
Municipal Preferred will be placed by a Broker-Dealer if such shares were (i)
the subject of Hold Orders deemed to have been submitted to the Auction Agent by
the Broker-Dealer and were acquired by such Broker-Dealer for its own account or
were acquired by such Broker-Dealer for its customers who are Beneficial Owners
or (ii) the subject of an Order submitted by such Broker-Dealer that is (A) a
Submitted Bid of an Existing Holder that resulted in such Existing Holder
continuing to hold such shares as a result of the Auction or (B) a Submitted Bid
of a Potential Holder that resulted in such Potential Holder purchasing such
shares as a result of the Auction or (C) a valid Hold Order.
The Trust may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
The Broker-Dealer Agreements provide that a Broker-Dealer (other than an
affiliate of the Trust) may submit Orders in Auctions for its own account,
unless the Trust notifies all Broker-Dealers that they may no longer do so, in
which case Broker-Dealers may continue to submit Hold Orders and Sell Orders for
their own accounts. Any Broker-Dealer that is an affiliate of the Trust may
submit Orders in Auctions, but only if such Orders are not for its own account.
If a Broker-Dealer submits an Order for its own account in any Auction, it might
have an advantage over other Bidders because it would have knowledge of all
Orders submitted by it in that Auction; such Broker-Dealer, however, would not
have knowledge of Orders submitted by other Broker-Dealers in that Auction.
The Broker-Dealers expect, but are not obligated, to maintain a secondary
trading market in shares of either series of Municipal Preferred outside of
Auctions. There can be no assurance that a secondary trading market in shares of
either series of Municipal Preferred will develop or, if it does develop, that
it will provide owners with liquidity of investment. Neither the shares of
Series T Municipal Preferred nor the shares of Series W Municipal Preferred will
be registered on any stock exchange or on the National Association of Securities
Dealers Automated Quotation System.
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<PAGE> 77
DESCRIPTION OF MUNICIPAL PREFERRED
The descriptions of the shares of each series of Municipal Preferred
contained in the Prospectus and this Statement of Additional Information do not
purport to be complete and are subject to and qualified in their entireties by
reference to the Declaration and the By-Laws. Copies of the Declaration and the
form of the By-Laws are filed as exhibits to the Registration Statement of which
the Prospectus and this Statement of Additional Information are a part and may
be inspected, and copies thereof may be obtained, as described under "Further
Information" in the Prospectus.
GENERAL
The shares of each series of Municipal Preferred will rank on a parity with
each other, with shares of any other series of Municipal Preferred and with
shares of any other series of Preferred Shares as to the payment of dividends
and the distribution of assets upon dissolution, liquidation or winding up of
the affairs of the Trust.
DIVIDENDS
General. The holders of shares of each series of Municipal Preferred
offered pursuant to the Prospectus will be entitled to receive, when, as and if
declared by the Board of Trustees, out of funds legally available therefor in
accordance with the Declaration, the By-Laws and applicable law, cumulative cash
dividends at the Applicable Rate thereof, determined as set forth below under
"Determination of Dividend Rate," and no more (except as otherwise provided
below under "Gross-up Payments"), payable on the respective dates determined as
set forth below. Holders of shares of Municipal Preferred shall not be entitled
to any dividend, whether payable in cash, property or shares, in excess of full
cumulative dividends on shares of any series of Municipal Preferred. No
interest, or sum of money in lieu of interest, will be payable in respect of any
dividend payment or payments on shares of Municipal Preferred which may be in
arrears, and, except as otherwise provided herein, no additional sum of money
will be payable in respect of any such arrearage.
Dividends on shares of each series of Municipal Preferred shall accumulate
at the Applicable Rate for such series from the Date of Original Issue of such
series and, except as provided below (i) with respect to shares of Series T
Municipal Preferred, shall be payable on Wednesday, , 1999, and
thereafter on each Wednesday, and (ii) with respect to shares of Series W
Municipal Preferred, shall be payable on Thursday, , 1999, and
thereafter on each Thursday; provided, however, that (1) if the Wednesday (for
shares of Series T Municipal Preferred) or Thursday (for shares of Series W
Municipal Preferred) on which dividends would otherwise be payable as set forth
above is not a Business Day, then dividends shall be payable instead on the
first Business Day that falls prior to such Wednesday (for shares of Series T
Municipal Preferred) or Thursday (for shares of Series W Municipal Preferred)
and (2) the Trust in its discretion may establish Dividend Payment Dates in
respect of any Special Rate Period of shares of any series of Municipal
Preferred consisting of more than 28 Rate Period Days that differ from those set
forth above; provided, however, that such dates shall be set forth in the Notice
of Special Rate Period relating to such Special Rate Period, as delivered to the
Auction Agent and filed with the Secretary of the Trust; and further provided
that (1) any such Dividend Payment Date shall be a Business Day and (2) the last
Dividend Payment Date in respect of such Special Rate Period shall be the
Business Day immediately following the last day thereof, as such last day is
determined as set forth below under "Designation of Special Rate Periods."
The amount of dividends per share payable on shares of a series of
Municipal Preferred on any date on which dividends shall be payable on such
shares shall be computed by multiplying the Applicable Rate in effect for such
Dividend Period or Dividend Periods or part thereof for which dividends have not
been paid on such series by a fraction, the numerator of which shall be the
number of days in such Dividend Period or Dividend Periods or part thereof and
the denominator of which shall be 365 if such Dividend Period consists of 7 Rate
Period Days and 360 for all other Dividend Periods, and applying the rate
obtained against $25,000. Any dividend payment made on shares of a series of
Municipal Preferred shall
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<PAGE> 78
first be credited against the earliest accumulated but unpaid dividends due with
respect to shares of such series.
Each dividend on shares of a series of Municipal Preferred will be paid on
the Dividend Payment Date for such series to the holders of record as their
names appear on the record books of the Trust on the Business Day next preceding
such Dividend Payment Date. Dividends in arrears for any past Dividend Period
may be declared and paid at any time, without reference to any regular Dividend
Payment Date, to the holders of record as their names appear on the record books
of the Trust on such date, not exceeding 15 days preceding the payment date
thereof, as may be fixed by the Board of Trustees.
The Securities Depository, in accordance with its current procedures, is
expected to credit on each Dividend Payment Date dividends received from the
Trust to the accounts of the respective Agent Members in next-day funds. Each of
the initial Broker-Dealers, however, has represented to the Trust that such
Broker-Dealer (or if such Broker-Dealer does not act as Agent Member, the Agent
Member designated by such Broker-Dealer) will make such dividend payments
available in same-day funds on each Dividend Payment Date to Beneficial Owners
that use such Broker-Dealer or its designee as Agent Member. A Beneficial Owner
of shares of a series of Municipal Preferred that does not use one of the
initial Broker-Dealers or a designee thereof as its Agent Member should contact
the Agent Member used by such Beneficial Owner to determine whether such Agent
Member will make dividend payments available to such Beneficial Owner in
next-day or same-day funds. If any Agent Member does not make such dividends
available in same-day funds to a Beneficial Owner, such Beneficial Owner who
uses such Agent Member would not have same-day funds available to it until the
next Business Day, which, in the case of a Dividend Payment Date that is a
Wednesday, (for shares of Series T Municipal Preferred) or Thursday (for shares
of Series W Municipal Preferred), would be the following Thursday or Friday,
respectively, if it is a Business Day.
Determination of Dividend Rate. The dividend rates on shares of a series
of Municipal Preferred offered pursuant to the Prospectus during the period from
and after the Date of Original Issue of such series to and including the last
day of the Initial Rate Period for such series will be equal to the rate per
annum set forth with respect to such series on the cover page of the Prospectus.
For each Subsequent Rate Period thereafter, the dividend rate on such series
will be equal to the rate per annum that results from an Auction on the Auction
Date next preceding such Subsequent Rate Period; provided, however, if:
(i) an Auction for any Subsequent Rate Period is not held for any
reason other than as described below, the dividend rate on shares of such
series for such Subsequent Rate Period will be the Maximum Rate on the
Auction Date therefor;
(ii) any Failure to Deposit shall have occurred with respect to shares
of a series of Municipal Preferred during any Rate Period thereof (other
than any Special Rate Period of more than 364 Rate Period Days or any Rate
Period succeeding any Special Rate Period of more than 364 Rate Period Days
during which a Failure to Deposit occurred that has not been cured), but,
prior to 12:00 Noon, Eastern time, on the third Business Day next
succeeding the date on which such Failure to Deposit occurred, such Failure
to Deposit shall have been cured in accordance with the next succeeding
paragraph and the Trust shall have paid to the Auction Agent a late charge
("Late Charge") equal to the sum of (1) if such Failure to Deposit
consisted of the failure timely to pay to the Auction Agent the full amount
of dividends with respect to any Dividend Period of such series, an amount
computed by multiplying (x) 200% of the Reference Rate for the Rate Period
during which such Failure to Deposit occurs on the Dividend Payment Date
for such Dividend Period by (y) a fraction, the numerator of which shall be
the number of days for which such Failure to Deposit has not been cured in
accordance with the next succeeding paragraph (including the day such
Failure to Deposit occurs and excluding the day such Failure to Deposit is
cured) and the denominator of which shall be 360, and applying the rate
obtained against the aggregate Liquidation Preference of the outstanding
shares of such series of Municipal Preferred and (2) if such Failure to
Deposit consisted of the failure timely to pay to the Auction Agent the
Redemption Price of the shares of such series of Municipal Preferred, if
any, for which a Notice of Redemption has been mailed by the Trust, an
amount
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<PAGE> 79
computed by multiplying (x) 200% of the Reference Rate for the Rate Period
during which such Failure to Deposit occurs on the redemption date by (y) a
fraction, the numerator of which shall be the number of days for which such
Failure to Deposit is not cured in accordance with the next succeeding
paragraph (including the day such Failure to Deposit occurs and excluding
the day such Failure to Deposit is cured) and the denominator of which
shall be 360, and applying the rate obtained against the aggregate
Liquidation Preference of the outstanding shares of such series of
Municipal Preferred to be redeemed, no Auction will be held in respect of
shares of such series of Municipal Preferred for the Subsequent Rate Period
thereof and the dividend rate for such Subsequent Rate Period will be the
Maximum Rate on the Auction Date for such Subsequent Rate Period;
(iii) any Failure to Deposit shall have occurred with respect to
shares of a series of Municipal Preferred during any Rate Period thereof
(other than any Special Rate Period of more than 364 Rate Period Days or
any Rate Period succeeding any Special Rate Period of more than 364 Rate
Period Days during which a Failure to Deposit occurred that has not been
cured), and, prior to 12:00 Noon, Eastern time, on the third Business Day
next succeeding the date on which such Failure to Deposit occurred, such
Failure to Deposit shall not have been cured in accordance with the next
succeeding paragraph or the Trust shall not have paid the applicable Late
Charge to the Auction Agent, no Auction will be held in respect of shares
of such series of Municipal Preferred for the first Subsequent Rate Period
thereof thereafter (or for any Rate Period thereafter to and including the
Rate Period during which (1) such Failure to Deposit is cured in accordance
with the next succeeding paragraph and (2) the Trust pays the applicable
Late Charge to the Auction Agent (the condition set forth in this clause
(2) to apply only in the event Moody's is rating such shares at the time
the Trust cures such Failure to Deposit), in each case no later than 12:00
Noon, Eastern time, on the fourth Business Day prior to the end of such
Rate Period), and the dividend rate for shares of such series of Municipal
Preferred for each such Subsequent Rate Period will be a rate per annum
equal to the Maximum Rate on the Auction Date for such Subsequent Rate
Period (but with the prevailing rating for such shares, for purposes of
determining such Maximum Rate, being deemed to be "Below 'ba3'/ BB-"); or
(iv) any Failure to Deposit shall have occurred with respect to shares
of a series of Municipal Preferred during a Special Rate Period thereof of
more than 364 Rate Period Days, or during any Rate Period thereof
succeeding any Special Rate Period of more than 364 Rate Period Days during
which a Failure to Deposit occurred that has not been cured, and, prior to
12:00 Noon, Eastern time, on the fourth Business Day preceding the Auction
Date for the Rate Period subsequent to such Rate Period, such Failure to
Deposit shall not have been cured in accordance with the next succeeding
paragraph or, in the event Moody's is then rating such shares, the Trust
shall not have paid the applicable Late Charge to the Auction Agent (such
Late Charge, for purposes of this subparagraph (iv), to be calculated by
using, as the Reference Rate, the Reference Rate applicable to a Rate
Period (x) consisting of more than 182 Rate Period Days but fewer than 365
Rate Period Days and (y) commencing on the date on which the Rate Period
during which Failure to Deposit occurs commenced), no Auction will be held
in respect of shares of such series of Municipal Preferred for such
Subsequent Rate Period (or for any Rate Period thereafter to and including
the Rate Period during which (1) such Failure to Deposit is cured in
accordance with the next succeeding paragraph and (2) the Trust pays the
applicable Late Charge to the Auction Agent (the condition set forth in
this clause (2) to apply only in the event Moody's is rating such shares at
the time the Trust cures such Failure to Deposit), in each case no later
than 12:00 Noon, Eastern time, on the fourth Business Day prior to the end
of such Rate Period), and the dividend rate for shares of such series of
Municipal Preferred for each such Subsequent Rate Period shall be a rate
per annum equal to the Maximum Rate on the Auction Date for such Subsequent
Rate Period (but with the prevailing rating for such shares, for purposes
of determining such Maximum Rate, being deemed to be "Below 'ba3'/ BB-")
(the rate per annum at which dividends are payable on shares of a series of
Municipal Preferred for any Rate Period being herein referred to as the
"Applicable Rate" for such shares of such series).
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<PAGE> 80
A Failure to Deposit with respect to shares of a series of Municipal
Preferred shall have been cured (if such Failure to Deposit is not solely due to
the willful failure of the Trust to make the required payments to the Auction
Agent) with respect to any Rate Period if, within the respective time periods
described immediately above, the Trust shall have paid to the Auction Agent (i)
all accumulated and unpaid dividends on the shares of such series of Municipal
Preferred and (ii) without duplication, the Redemption Price for the shares of
such series of Municipal Preferred, if any, for which a Notice of Redemption has
been mailed; provided, however, that the foregoing clause (ii) shall not apply
to the Trust's failure to pay the Redemption Price in respect of shares of such
series of Municipal Preferred when the related Notice of Redemption provides
that redemption of such shares is subject to one or more conditions precedent
and any such condition precedent shall not have been satisfied at the time or
times and in the manner specified in such Notice of Redemption.
The Trust shall pay to the Auction Agent, not later than 12:00 noon,
Eastern time, on the Business Day next preceding each Dividend Payment Date for
shares of Municipal Preferred, an aggregate amount of funds available on the
next Business Day in The City of New York, New York, equal to the dividends to
be paid to all Holders of such shares on such Dividend Payment Date. All moneys
paid to the Auction Agent for the payment of dividends (or for payment of any
Late Charge) shall be held in trust for the payment of such dividends (and any
such Late Charge) by the Auction Agent for the benefit of the Holders specified
above. Any moneys paid to the Auction Agent in accordance with the foregoing but
not applied by the Auction Agent to the payment of dividends (and any such Late
Charge) will, to the extent permitted by law, be repaid to the Trust at the end
of 90 days from the date on which such moneys were so to have been applied.
GROSS-UP PAYMENTS. Holders of shares of a series of Municipal Preferred
shall be entitled to receive, when, as and if declared by the Board of Trustees,
out of funds legally available therefor in accordance with the Declaration, the
By-Laws and applicable law, dividends in an amount equal to the aggregate
Gross-up Payment in accordance with the following:
If, in the case of any Minimum Rate Period or any Special Rate Period of 28
Rate Period Days or fewer with respect to a series of Municipal Preferred, the
Trust allocates any net capital gain or other income taxable for Federal income
tax purposes to a dividend paid on shares of such series of Municipal Preferred
without having given advance notice thereof to the Auction Agent as described
above under "The Auction -- Auction Dates; Advance Notice of Allocation of
Taxable Income" (such allocation is referred to herein as a "Taxable
Allocation") solely by reason of the fact that such allocation is made
retroactively as a result of the redemption of all or a portion of the
outstanding shares of such series of Municipal Preferred or the dissolution,
liquidation or winding up of the affairs of the Trust, the Trust will, prior to
the end of the calendar year in which such dividend was paid, provide notice
thereof to the Auction Agent and direct the Trust's dividend disbursing agent to
send such notice with a Gross-up Payment to each holder of shares of such series
(initially Cede & Co., as nominee of the Securities Depository) that was
entitled to such dividend payment with respect to such series of Municipal
Preferred during such calendar year at such holder's address as the same appears
or last appeared on the record books of the Trust.
If, in the case of any Special Rate Period of more than 28 Rate Period Days
with respect to a series of Municipal Preferred, the Trust makes a Taxable
Allocation to a dividend paid on shares of such series of Municipal Preferred,
the Trust shall, prior to the end of the calendar year in which such dividend
was paid, provide notice thereof to the Auction Agent and direct the Trust's
dividend disbursing agent to send such notice with a Gross-up Payment to each
holder of shares of such series that was entitled to such dividend payment with
respect to such series during such calendar year at such holder's address as the
same appears or last appeared on the record books of the Trust.
The Trust shall not be required to make Gross-up Payments with respect to
any net capital gain or other taxable income determined by the Internal Revenue
Service to be allocable in a manner different from that allocated by the Trust.
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A "Gross-up Payment" in respect of any dividend means payment to a holder
of shares of a series of Municipal Preferred of an amount which, giving effect
to the Taxable Allocations made with respect to such dividend, would cause such
holder's after-tax returns (taking into account both the Taxable Allocations and
the Gross-up Payment) to be equal to the after-tax return the holder would have
received if no such Taxable Allocations had occurred. Such Gross-up Payment
shall be calculated: (i) without consideration being given to the time value of
money; (ii) assuming that no holder of shares of such series of Municipal
Preferred is subject to the Federal alternative minimum tax with respect to
dividends received from the Trust; and (iii) assuming that each holder of shares
of such series of Municipal Preferred is taxable at the maximum marginal regular
Federal individual income tax rate applicable to ordinary income or net capital
gain, as applicable, or the maximum marginal regular Federal corporate income
tax rate applicable to ordinary income or net capital gain, as applicable,
whichever is greater, in effect at the time such Gross-up Payment is made.
RESTRICTIONS ON DIVIDENDS AND OTHER PAYMENTS. Under the 1940 Act, the
Board of Trustees may not declare any dividend (except a dividend payable in
Common Shares), or declare any other distribution, upon Common Shares, or
purchase Common Shares, unless in every such case the Preferred Shares,
including the shares of either series of Municipal Preferred, have, at the time
of any such declaration or purchase (and after giving effect thereto), an asset
coverage (as defined in and determined pursuant to the 1940 Act) of at least
200% (or such other percentage as may in the future be required by law).
In addition, for so long as any shares of either series of Municipal
Preferred are outstanding, except as set forth in the following paragraph or
otherwise described herein, (A) the Trust may not declare, pay or set apart for
payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or in options, warrants or rights to subscribe
for or purchase, Common Shares or other shares, if any, ranking junior to the
shares of each series of Municipal Preferred as to the payment of dividends and
the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust) in respect of Common Shares or any other shares of the
Trust ranking junior to or on a parity with the shares of Municipal Preferred as
to the payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Trust, or call for redemption,
redeem, purchase or otherwise acquire for consideration any Common Shares or any
other such junior shares (except by conversion into or exchange for shares of
the Trust ranking junior to the shares of each series of Municipal Preferred as
to the payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Trust), or any such parity
shares (except by conversion into or exchange for shares of each class or series
of the Trust ranking junior to or on a parity with the shares of each series of
Municipal Preferred as to payment of dividends and the distribution of assets
upon dissolution, liquidation or winding up of the affairs of the Trust), unless
(1) full cumulative dividends on shares of Municipal Preferred through their
most recently ended Dividend Period shall have been paid or shall have been
declared and sufficient funds for the payment thereof deposited with the Auction
Agent and (2) the Trust has redeemed the full number of shares of each series of
Municipal Preferred required to be redeemed by any provision for mandatory
redemption pertaining thereto and (B) if either Moody's or Standard & Poor's is
rating the shares of a series of Municipal Preferred, the Trust may not declare,
pay or set apart for payment any dividend or other distribution (other than a
dividend or distribution paid in shares of, or in options, warrants or rights to
subscribe for or purchase, Common Shares or other shares, if any, ranking junior
to shares of each series of Municipal Preferred as to the payment of dividends
and the distribution of assets upon dissolution, liquidation or winding up of
the affairs of the Trust) in respect of Common Shares or any other shares of the
Trust ranking junior to shares of such series of Municipal Preferred as to the
payment of dividends or the distribution of assets upon dissolution, liquidation
or winding up of the affairs of the Trust, or call for redemption, redeem,
purchase or otherwise acquire for consideration any Common Shares or any other
such junior shares (except by conversion into or exchange for shares of the
Trust ranking junior to the shares of each series of Municipal Preferred as to
the payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Trust), unless immediately after
such transaction the Discounted Value of Moody's Eligible Assets or Standard &
Poor's Eligible Assets, or both, as the case may be, would at least equal the
Municipal Preferred Basic
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Maintenance Amount (see "Description of Municipal Preferred -- Rating Agency
Guidelines" and "-- Redemption").
Except as set forth in the next sentence, no dividends shall be declared or
paid or set apart for payment on any class or series of shares of beneficial
interest of the Trust ranking, as to the payment of dividends, on a parity with
shares of Municipal Preferred for any period unless full cumulative dividends
have been or contemporaneously are declared and paid on the shares of each
series of Municipal Preferred through their most recent Dividend Payment Date.
When dividends are not paid in full upon the shares of each series of Municipal
Preferred through their most recent Dividend Payment Date or upon any other
class or series of shares ranking on a parity as to the payment of dividends
with shares of each series of Municipal Preferred through their most recent
respective dividend payment dates, all dividends declared upon shares of
Municipal Preferred and any other such class or series of shares ranking on a
parity as to the payment of dividends with shares of Municipal Preferred shall
be declared pro rata so that the amount of dividends declared per share on
shares of Municipal Preferred and such other class or series of shares shall in
all cases bear to each other the same ratio that accumulated dividends per share
on the shares of Municipal Preferred and such other class or series of shares
bear to each other (for purposes of this sentence, the amount of dividends
declared per share of Municipal Preferred shall be based on the Applicable Rate
for such share for the Dividend Periods during which dividends were not paid in
full).
Under the Code, the Trust must, among other things, distribute at least 90%
of the sum of its net investment income (including the excess, if any, of net
short-term capital gain over net long-term capital loss) and its net tax-exempt
income each year in order to maintain its qualification for tax treatment as a
regulated investment company. The foregoing limitations on dividends,
distributions and purchases may under certain circumstances impair the Trust's
ability to maintain such qualification. See "Tax Matters -- Federal Income Tax
Matters."
DESIGNATION OF SPECIAL RATE PERIODS. The Trust, at its option, may
designate any succeeding Subsequent Rate Period of shares of a series of
Municipal Preferred as a Special Rate Period consisting of a specified number of
Rate Period Days evenly divisible by seven and not more than 1,820
(approximately 5 years), subject to adjustment as described below. A designation
of a Special Rate Period shall be effective only if (i) notice thereof shall
have been given as provided herein, (ii) an Auction for the shares of such
series shall have been held on the Auction Date immediately preceding the first
day of such proposed Special Rate Period and Sufficient Clearing Bids for shares
of such series shall have existed in such Auction and (iii) if the Trust shall
have mailed a Notice of Redemption with respect to any shares of such series of
Municipal Preferred, as described under "Redemption -- Notice of Redemption"
below, the Redemption Price with respect to such shares shall have been
deposited with the Auction Agent. In the event the Trust wishes to designate any
succeeding Subsequent Rate Period for shares of a series of Municipal Preferred
as a Special Rate Period consisting of more than 28 Rate Period Days, the Trust
shall notify Standard & Poor's (if Standard & Poor's is then rating such series)
and Moody's (if Moody's is then rating such series) in advance of the
commencement of such Subsequent Rate Period that the Trust wishes to designate
such Subsequent Rate Period as a Special Rate Period and shall provide Standard
& Poor's (if Standard & Poor's is then rating such series) and Moody's (if
Moody's is then rating such series) with such documents as either may request.
In the event the Trust wishes to designate a Subsequent Rate Period of
shares of a series of Municipal Preferred as a Special Rate Period, but the day
following what would otherwise be the last day of such Special Rate Period is
not, with respect to Series T Municipal Preferred, a Wednesday, or, with respect
to Series W Municipal Preferred, a Thursday, that is a Business Day, then the
Trust shall designate such Subsequent Rate Period as a Special Rate Period
consisting of the period commencing on the first day following the end of the
immediately preceding Rate Period for such series and ending, with respect to
Series T Municipal Preferred, on the first Tuesday that is followed by a
Wednesday that is a Business Day preceding what would otherwise be such last
day, or, with respect to Series W Municipal Preferred, on the first Wednesday
that is followed by a Thursday that is a Business Day preceding what would
otherwise be such last day.
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If the Trust proposes to designate any succeeding Subsequent Rate Period of
shares of a series of Municipal Preferred as a Special Rate Period, not less
than 20 (or such lesser number of days as may be agreed to from time to time by
the Auction Agent) nor more than 30 days prior to the date the Trust proposes to
designate as the first day of such Special Rate Period (which shall be such day
that would otherwise be the first day of a Minimum Rate Period), notice shall be
(i) published or caused to be published by the Trust in a newspaper of general
circulation to the financial community in The City of New York, New York, which
carries financial news, and (ii) mailed by the Trust by first-class mail,
postage prepaid, to the holders of shares of such series of Municipal Preferred.
Each such notice shall state (A) that the Trust may exercise its option to
designate a succeeding Subsequent Rate Period of shares of such series of
Municipal Preferred as a Special Rate Period, specifying the first day thereof
and (B) that the Trust will, by 11:00 A.M., Eastern time, on the second Business
Day next preceding such date (or by such later time or date, or both, as may be
agreed to by the Auction Agent), notify the Auction Agent of either (x) its
determination, subject to certain conditions, to exercise such option, in which
case the Trust shall specify the Special Rate Period designated, or (y) its
determination not to exercise such option.
No later than 11:00 A.M., Eastern time, on the second Business Day next
preceding the first day of any proposed Special Rate Period of shares of a
series of Municipal Preferred as to which notice has been given as set forth in
the preceding paragraph (or such later time or date, or both, as may be agreed
to by the Auction Agent), the Trust shall deliver to the Auction Agent either:
(i) a notice ("Notice of Special Rate Period") stating (A) that the
Trust has determined to designate the next succeeding Rate Period of shares
of such series of Municipal Preferred as a Special Rate Period, specifying
the same and the first day thereof, (B) the Auction Date immediately prior
to the first day of such Special Rate Period, (C) that such Special Rate
Period shall not commence if (1) an Auction for the shares of such series
shall not be held on such Auction Date for any reason or (2) an Auction for
the shares of such series shall be held on such Auction Date but Sufficient
Clearing Bids for the shares of such series shall not exist in such
Auction, (D) the scheduled Dividend Payment Dates for the shares of such
series during such Special Rate Period and (E) the Special Redemption
Provisions, if any, applicable to the shares of such series in respect of
such Special Rate Period; such notice to be accompanied by a Municipal
Preferred Basic Maintenance Report showing that, as of the third Business
Day next preceding such proposed Special Rate Period, Moody's Eligible
Assets (if Moody's is then rating such series) and Standard & Poor's
Eligible Assets (if Standard & Poor's is then rating such series) each have
an aggregate Discounted Value at least equal to the Municipal Preferred
Basic Maintenance Amount as of such Business Day (assuming for purposes of
the foregoing calculation that (a) the Maximum Rate is the Maximum Rate on
such Business Day as if such Business Day were the Auction Date for the
proposed Special Rate Period, and (b) the Moody's Discount Factors
applicable to Moody's Eligible Assets will be determined by reference to
the first Moody's Exposure Period longer than the Moody's Exposure Period
then applicable to the Trust); or
(ii) a notice stating that the Trust has determined not to exercise
its option to designate a Special Rate Period of shares of such series of
Municipal Preferred and that the next succeeding Rate Period shall be a
Minimum Rate Period.
If the Trust fails to deliver either such notice (and, in the case of the
notice described in clause (i) above, a Municipal Preferred Basic Maintenance
Report to the effect set forth in clause (i) (if either Moody's or Standard &
Poor's is then rating the shares of a series of Municipal Preferred)) with
respect to any designation of any proposed Special Rate Period to the Auction
Agent by 11:00 A.M., Eastern time, on the second Business Day next preceding the
first day of such proposed Special Rate Period (or by such later time or date,
or both, as may be agreed to by the Auction Agent), the Trust shall be deemed to
have delivered a notice to the Auction Agent with respect to such Special Rate
Period to the effect set forth in clause (ii) above. In the event the Trust
delivers to the Auction Agent a notice described in clause (i) above, it shall
file a copy of such notice with the Secretary of the Trust, and the contents of
such notice shall be binding on the Trust. In the event the Trust delivers to
the Auction Agent a notice
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described in clause (ii) above, the Trust will provide Moody's (if Moody's is
then rating the shares of such series of Municipal Preferred) and Standard &
Poor's (if Standard & Poor's is then rating the shares of such series of
Municipal Preferred) a copy of such notice.
VOTING RIGHTS
Holders of shares of each series of Municipal Preferred are entitled to
vote on certain matters as described herein under "Investment Objectives and
Policies -- Fundamental Investment Policies" and in the Prospectus under
"Description of Municipal Preferred -- Voting Rights" and "Certain Provisions in
the Agreement and Declaration of Trust."
In connection with the election of the Trust's trustees, holders of
outstanding Preferred Shares, including shares of each series of Municipal
Preferred, voting together as one separate class, shall be entitled to elect two
of the Trust's trustees, and the remaining trustees will be elected by holders
of Common Shares and Preferred Shares, including shares of each series of
Municipal Preferred, voting together as a single class. In addition, if at any
time dividends (whether or not earned or declared) on outstanding Preferred
Shares, including shares of any series of Municipal Preferred, shall be due and
unpaid in an amount equal to two full years' dividends thereon, and sufficient
cash or specified securities shall not have been deposited with the Auction
Agent for the payment of such dividends, then, as the sole remedy of holders of
outstanding Preferred Shares, including shares of each series of Municipal
Preferred, the number of trustees constituting the Board of Trustees shall be
automatically increased by the smallest number that, when added to the two
trustees elected exclusively by the holders of Preferred Shares, including
shares of each series of Municipal Preferred, as described above, would
constitute a majority of the Board of Trustees as so increased by such smallest
number; and at a special meeting of shareholders which will be called and held
as soon as practicable, and at all subsequent meetings at which trustees are to
be elected, the holders of Preferred Shares, including shares of each series of
Municipal Preferred, voting as a separate class, will be entitled to elect the
smallest number of additional trustees that, together with the two trustees
which such holders will be in any event entitled to elect, constitutes a
majority of the total number of trustees of the Trust as so increased. The terms
of office of the persons who are trustees at the time of that election will
continue. If the Trust thereafter shall pay, or declare and set apart for
payment, in full all dividends payable on all outstanding Preferred Shares,
including shares of each series of Municipal Preferred, the voting rights stated
in the preceding sentence shall cease, and the terms of office of all of the
additional trustees elected by the holders of Preferred Shares, including shares
of each series of Municipal Preferred (but not of the trustees with respect to
whose election the holders of Common Shares were entitled to vote or the two
trustees the holders of Preferred Shares have the right to elect in any event),
will terminate automatically.
So long as any shares of Municipal Preferred are outstanding, the Trust may
not, without the affirmative vote of the holders of at least a majority of the
shares of Municipal Preferred outstanding at the time, voting together as one
separate class:
(a) authorize, create or issue additional shares of any series of
Municipal Preferred or classes or series of Preferred Shares ranking prior
to or on a parity with shares of Municipal Preferred with respect to the
payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Trust (except that the
Trust may, without the vote of the holders of shares of Municipal
Preferred, authorize, create or issue additional shares of any series of
Municipal Preferred or classes or series of Preferred Shares ranking on a
parity with shares of each series of Municipal Preferred with respect to
the payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Trust if the Trust obtains
written confirmation from Moody's (if Moody's is then rating the shares of
either series of Municipal Preferred) and Standard & Poor's (if Standard &
Poor's is then rating the shares of either series of Municipal Preferred)
that the issuance of any such additional shares or class or series of
shares would not impair the rating then assigned by such rating agency to
shares of either series of Municipal Preferred; provided, however, that if
Moody's or Standard & Poor's is not then rating the shares of either series
of Municipal Preferred the aggregate liquidation preference of all
Preferred
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Shares of the Trust outstanding after any such issuance, exclusive of
accumulated and unpaid dividends, may not exceed $120,000,000);
(b) amend, alter or repeal the provisions of the Declaration or the
By-Laws, whether by merger, consolidation or otherwise, so as to materially
affect any preference, right or power of the shares of Municipal Preferred
or the holders thereof (provided, however, that a division of a share of a
series of Municipal Preferred shall be deemed to affect any such
preference, right or power only if the terms of such division adversely
affect the holders of any shares of Municipal Preferred);
provided, however, that (i) none of the actions permitted by the exception to
(a) above will be deemed to affect such preferences, rights or powers and (ii)
the authorization, creation and issuance of classes or series of shares ranking
junior to the Municipal Preferred with respect to the payment of dividends and
the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust will be deemed to affect such preferences, rights or powers
only if at least one of Moody's or Standard & Poor's is then rating the shares
of Municipal Preferred and such issuance would, at the time thereof, cause the
Trust not to satisfy the 1940 Act Municipal Preferred Asset Coverage or the
Municipal Preferred Basic Maintenance Amount. So long as any shares of Municipal
Preferred are outstanding, the Trust may not, without the affirmative vote of
the holders of at least 66 2/3% of the shares of Municipal Preferred outstanding
at the time, voting as a separate class, file a voluntary application for relief
under Federal bankruptcy law or any similar application under state law for so
long as the Trust is solvent and does not foresee becoming insolvent. If any
action set forth in this paragraph would adversely affect the rights of one or
more series (the "Affected Series") of Municipal Preferred in a manner different
from any other series of Municipal Preferred, the Trust will not approve any
such action without the affirmative vote of the holders of at least a majority
of the shares of each such Affected Series outstanding at the time (each such
Affected Series voting as a separate class).
Voting provisions will not apply with respect to shares of a series of
Municipal Preferred if, at or prior to the time when a vote is required, such
shares shall have been (i) redeemed or (ii) called for redemption and sufficient
funds shall have been deposited in trust to effect such redemption.
The Board of Trustees may, without shareholder approval, amend, alter or
repeal any or all of the definitions and related provisions required to be
contained in the By-Laws by the rating agencies in the event the Trust receives
written confirmation from Moody's or Standard & Poor's, or both, as appropriate,
that any such amendment, alteration or repeal would not impair the ratings then
assigned by Moody's and Standard & Poor's to shares of Municipal Preferred.
RATING AGENCY GUIDELINES
The Trust intends that, so long as shares of either series of Municipal
Preferred are outstanding, the composition of its portfolio will reflect
guidelines established by at least one of Moody's or Standard & Poor's in
connection with the Trust's receipt on the Date of Original Issue of the shares
of each series of Municipal Preferred of ratings of "aaa" from Moody's or AAA
from Standard & Poor's. Moody's and Standard & Poor's, nationally recognized
independent rating agencies, issue ratings for various securities reflecting
their perceived creditworthiness of such securities. The guidelines described
below have been developed by Moody's and Standard & Poor's in connection with
other issuances of asset-backed and similar securities, including debt
obligations and adjustable rate preferred shares, generally on a case-by-case
basis through discussions with the issuers of those securities. The guidelines
are designed to ensure that assets underlying outstanding debt or preferred
shares will be sufficiently varied and will be of sufficient quality and amount
to justify investment grade ratings. The guidelines do not have the force of
law, but have been adopted by the Trust in order to satisfy current requirements
necessary for Moody's or Standard & Poor's, or both, to issue the
above-described ratings for shares of each series of Municipal Preferred, which
ratings are generally relied upon by investors in purchasing such securities. In
the context of a closed-end investment company such as the Trust, therefore, the
guidelines provide a set of tests for portfolio composition and asset coverage
that supplement (and in some cases are more restrictive than) the applicable
requirements under the 1940 Act. A rating agency's guidelines will apply to
shares of a
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series of Municipal Preferred only so long as such rating agency is rating the
shares of such series. The Board of Trustees may, without shareholder approval,
amend, alter or repeal any or all of the definitions and related provisions
which have been adopted by the Trust pursuant to the rating agency guidelines in
the event the Trust receives written confirmation from Moody's or Standard &
Poor's, or both, as appropriate, that any such change would not impair the
ratings then assigned by Moody's and Standard & Poor's to shares of such series
of Municipal Preferred.
So long as either Standard & Poor's or Moody's, or both, are rating the
shares of a series of Municipal Preferred, the Trust may not, among other
things, (1) buy or sell futures or write put or call options and similar
securities and buy or sell Inverse Floaters, except to the extent set forth in
the By-Laws, which include the restrictions set forth as Appendix D to this
Statement of Additional Information, (2) borrow money, except that the Trust
may, without obtaining the written confirmation described below, borrow money
for the purpose of clearing securities transactions if (a) the Municipal
Preferred Basic Maintenance Amount would continue to be satisfied after giving
effect to such borrowing (which shall mean, for purposes of the calculation of
the Municipal Preferred Basic Maintenance Amount, adding the amount of the
liability for such borrowing to the calculation of the Municipal Preferred Basic
Maintenance Amount) and (b) such borrowing (i) is privately arranged with a bank
or other person and is evidenced by a promissory note or other evidence of
indebtedness that is not intended to be publicly distributed or (ii) is for
"temporary purposes," is evidenced by a promissory note or other evidence of
indebtedness and is an amount not exceeding 5 per centum of the value of the
total assets of the Trust at the time of the borrowing (for purposes of the
foregoing, "temporary purpose" means that the borrowing is to be repaid within
sixty days and is not to be extended or renewed), (3) issue additional shares of
any series of Municipal Preferred or any class or series of shares ranking prior
to or on a parity with the shares of Municipal Preferred with respect to the
payment of dividends or the distribution of assets upon dissolution, liquidation
or winding up of the affairs of the Trust, or reissue any shares of Municipal
Preferred previously purchased or redeemed by the Trust, (4) engage in any short
sales of securities, (5) lend any securities, (6) merge or consolidate into or
with any corporation, (7) change the pricing service (currently the Trust uses
both Muller Data Corporation and Standard & Poor's J.J. Kenny Evaluation
Services) referred to in the definition of Market Value to a pricing service
other than Muller Data Corporation or Standard & Poor's J.J. Kenny Evaluation
Services, or (8) enter into reverse repurchase agreements, unless in each case
(except as described above) it has received written confirmation from Standard &
Poor's or Moody's, or both, as appropriate, that any such action would not
impair the rating then assigned by such rating agency to shares of such series
of Municipal Preferred. While the Trust does not presently intend to borrow, and
while the Trust is restricted under the 1940 Act from borrowing in excess of
33 1/3% of its total assets and is otherwise restricted from borrowing pursuant
to rating agency guidelines, under certain circumstances and notwithstanding
adverse interest rate or market conditions, the Trust is permitted to borrow for
temporary or emergency purposes (e.g., to make required distributions or pay
dividends) or to repurchase shares when such borrowing is deemed to be in the
best interest of the common shareholders. See "Repurchase of Common Shares"
herein and "Repurchase of Common Shares; Conversion to Open-End Fund" in the
Prospectus for the circumstances under which the Trust may purchase Common
Shares and incur indebtedness in connection therewith. Should the Trust borrow,
the Trust would be required to pay when due the interest obligation on any debt
incurred by the Trust before it would be able to pay dividends on shares of
either series of Municipal Preferred, and it is likely that the Trust would be
required to pay the principal amount of any such debt prior to meeting the
liquidation preference of the shares of either series of Municipal Preferred.
Because the interest expense on borrowings by the Trust will reduce the Trust's
net investment earnings available to pay dividends on shares of either series of
Municipal Preferred, borrowing may impair the Trust's ability to pay such
dividends on shares of either series of Municipal Preferred. This risk is
heightened in the event the Trust incurs variable rate debt, the interest rate
on which may increase with increases in prevailing market rates.
ASSET MAINTENANCE
1940 ACT MUNICIPAL PREFERRED ASSET COVERAGE. The Trust will be required
under rating agency guidelines to maintain, as of the last Business Day of each
month on which any shares of Municipal
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Preferred are outstanding, asset coverage of at least 200% with respect to such
shares (or such other asset coverage as may in the future be specified in or
under the 1940 Act as the minimum asset coverage for senior securities which are
shares of a closed-end investment company as a condition of declaring dividends
on its common shares). If the Trust fails to maintain such asset coverage in
accordance with the requirements of the rating agency or agencies then rating
the shares of Municipal Preferred ("1940 Act Municipal Preferred Asset
Coverage") and such failure is not cured as of the last Business Day of the
following month (the "1940 Act Cure Date"), the Trust will be required under
certain circumstances to redeem certain of the shares of Municipal Preferred.
See "Redemption" below.
MUNICIPAL PREFERRED BASIC MAINTENANCE AMOUNT. The Trust will be required
under rating agency guidelines to maintain, as of each Business Day (a
"Valuation Date") on which shares of Municipal Preferred are outstanding, assets
having in the aggregate a Discounted Value at least equal to the Municipal
Preferred Basic Maintenance Amount established by the rating agency or agencies
then rating the shares of Municipal Preferred. If the Trust fails to meet such
requirement on any Valuation Date and such failure is not cured on or before the
second Business Day after such Valuation Date (the "Municipal Preferred Basic
Maintenance Cure Date"), the Trust will be required under certain circumstances
to redeem certain of the shares of Municipal Preferred. See "Redemption" below.
The "Municipal Preferred Basic Maintenance Amount" as of any Valuation Date
is defined as the dollar amount equal to the sum of:
(A) (i) the product of the number of shares of Municipal Preferred
outstanding on such date multiplied by $25,000 (plus the product of the
number of shares of any other series of Preferred Shares outstanding on
such date multiplied by the liquidation preference of such shares), plus
any redemption premium applicable to shares of Municipal Preferred (or
other Preferred Shares) then subject to redemption;
(ii) the aggregate amount of dividends that will have accumulated
at the Applicable Rate (whether or not earned or declared) to (but not
including) the first Dividend Payment Date for each share of Municipal
Preferred outstanding that follows such Valuation Date (plus the
aggregate amount of dividends, whether or not earned or declared, that
will have accumulated in respect of other outstanding Preferred Shares
to, but not including, the first respective dividend payment dates for
such other shares that follow such Valuation Date);
(iii) subject to certain exceptions, the aggregate amount of
dividends that would accumulate on shares of Municipal Preferred
outstanding from such first Dividend Payment Date through the 49th day
after such Valuation Date, at the Maximum Rate (calculated as if such
Valuation Date were the Auction Date for the Rate Period commencing on
such Dividend Payment Date) for a Minimum Rate Period thereof to
commence on such Dividend Payment Date, assuming, solely for purposes of
the foregoing, that if on such Valuation Date the Trust shall have
delivered a Notice of Special Rate Period to the Auction Agent with
respect to such shares, such Maximum Rate shall be the higher of (a) the
Maximum Rate for the Special Rate Period of such shares to commence on
such Dividend Payment Date and (b) the Maximum Rate for a Minimum Rate
Period of such shares to commence on such Dividend Payment Date,
multiplied by the Volatility Factor applicable to a Minimum Rate Period,
or, in the event the Trust shall have delivered a Notice of Special Rate
Period to the Auction Agent with respect to such shares designating a
Special Rate Period consisting of 49 Rate Period Days or more, the
Volatility Factor applicable to a Special Rate Period of that length;
(iv) the amount of anticipated Trust expenses for the 90 days
subsequent to such Valuation Date;
(v) the amount of the Trust's Maximum Potential Gross-up Payment
Liability as of such Valuation Date; and
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(vi) any current liabilities as of such Valuation Date to the
extent not reflected in any of (A)(i) through (A)(v) (including, without
limitation, any payables for Municipal Obligations purchased as of such
Valuation Date and any liabilities incurred for the purpose of clearing
securities transactions) less
(B) the value of any Trust assets irrevocably deposited by the Trust
for the payment of any of (A)(i) through (A)(vi), all as calculated in
accordance with the requirements of the rating agency or agencies then
rating the shares of Municipal Preferred.
For purposes of the foregoing, "Maximum Potential Gross-up Payment Liability,"
as of any Valuation Date, means the aggregate amount of Gross-up Payments that
would be due if the Trust were to make Taxable Allocations, with respect to any
taxable year, estimated based upon dividends paid and the amount of
undistributed realized net capital gain and other taxable income earned by the
Trust, as of the end of the calendar month immediately preceding such Valuation
Date, and assuming such Gross-up Payments are fully taxable.
In managing the Trust's portfolio, the Advisor will not alter the
composition of the Trust's portfolio if, in the reasonable belief of the
Advisor, the effect of any such alteration would be to cause the Trust to have
Eligible Assets with an aggregate Discounted Value, as of the immediately
preceding Valuation Date, less than the Municipal Preferred Basic Maintenance
Amount as of such Valuation Date; provided, however, that in the event that, as
of the immediately preceding Valuation Date, the aggregate Discounted Value of
the Trust's Eligible Assets exceeded the Municipal Preferred Basic Maintenance
Amount by 5% or less, the Advisor will not alter the composition of the Trust's
portfolio in a manner reasonably expected to reduce the aggregate Discounted
Value of the Trust's Eligible Assets unless the Trust shall have confirmed that,
after giving effect to such alteration, the aggregate Discounted Value of the
Trust's Eligible Assets would exceed the Municipal Preferred Basic Maintenance
Amount.
Upon any failure to maintain the required Discounted Value, the Trust will
seek to alter the composition of its portfolio to reattain the Municipal
Preferred Basic Maintenance Amount on or prior to the Municipal Preferred Basic
Maintenance Cure Date, thereby incurring additional transaction costs and
possible losses and/or gains on dispositions of portfolio securities.
On or before the third Business Day after a Valuation Date on which the
Trust fails to meet the Municipal Preferred Basic Maintenance Amount, and on the
third Business Day after the Municipal Preferred Basic Maintenance Cure Date
with respect to such Valuation Date, the Trust is required to deliver to the
Auction Agent (so long as either Moody's or Standard & Poor's is rating the
shares of Municipal Preferred) a report with respect to the calculation of the
Municipal Preferred Basic Maintenance Amount and the value of its portfolio
holdings as of the date of such failure or such cure date, as the case may be (a
"Municipal Preferred Basic Maintenance Report"). The Trust will also deliver, as
required, a Municipal Preferred Basic Maintenance Report as of (i) the fifteenth
day of each month (or, if such day is not a Business Day, the next succeeding
Business Day) and (ii) the last Business Day of each month, in each case on or
before the third Business Day after such day. Within ten Business Days after
delivery of such report relating to the last Business Day of each of February,
May, August and November of each year, commencing , 1999, the Trust
will deliver a letter prepared by the Trust's independent accountants regarding
the accuracy of the calculations made by the Trust in its most recent Municipal
Preferred Basic Maintenance Report. If any such letter prepared by the Trust's
independent accountants shows that an error was made in the most recent
Municipal Preferred Basic Maintenance Report, the calculation or determination
made by the Trust's independent accountants will be conclusive and binding on
the Trust.
The Discount Factors and guidelines for determining the market value of the
Trust's portfolio holdings, described below, have been based by the rating
agencies on criteria such as the sensitivity of the market value of the relevant
asset to changes in interest rates, the liquidity and depth of the market for
the relevant asset, the credit quality of the relevant asset (for example, the
lower the rating of a debt obligation, the higher the related discount factor)
and the frequency with which the relevant asset is
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<PAGE> 89
marked to market. The ratings may be changed, suspended or withdrawn as a result
of changes in, or the unavailability of, such information.
STANDARD & POOR'S AAA RATING GUIDELINES. For purposes of calculating the
Discounted Value of the Trust's portfolio under current Standard & Poor's
guidelines, the fair market value of Municipal Obligations eligible for
consideration under such guidelines ("Standard & Poor's Eligible Assets") must
be discounted by certain discount factors set forth in the table below
("Standard & Poor's Discount Factors"). The Discounted Value of a Municipal
Obligation under Standard & Poor's guidelines is the fair market value thereof
divided by the Standard & Poor's Discount Factor. The Standard & Poor's Discount
Factor used to discount a particular Municipal Obligation will be determined by
reference to the "Standard & Poor's Exposure Period" (currently, three Business
Days) and the Standard & Poor's rating on such Municipal Obligation. Standard &
Poor's Discount Factors for a range of exposure periods are set forth below:
<TABLE>
<CAPTION>
STANDARD & POOR'S DISCOUNT FACTORS
RATING CATEGORY
-----------------------------------------------
EXPOSURE PERIOD AAA AA A BBB UNRATED ZEROS***
- --------------- --- --- --- --- ------- --------
<S> <C> <C> <C> <C> <C> <C>
45 Business Days..................... 190% 195% 210% 250% 220% 572%
25 Business Days..................... 170 175 190 230 220 496
10 Business Days..................... 155 160 175 215 220 426
7 Business Days..................... 150 155 170 210 220 411
3 Business Days..................... 130 135 150 190 220 388
</TABLE>
- ---------------
* Standard & Poor's rating.
** Standard & Poor's eligible assets not rated or rated less than BBB by
Standard & Poor's and not rated at least the equivalent of an "A" rating by
another nationally recognized crediting rating agency.
*** Municipal Obligations rated AAA by S&P which are not interest bearing or do
not pay interest at least semi-annually.
Since the Standard & Poor's Exposure Period currently applicable to the
Trust is three Business Days, the Standard & Poor's Discount Factors currently
applicable to Standard & Poor's Eligible Assets will be determined by reference
to the factors set forth opposite the line entitled "3 Business Days."
Notwithstanding the foregoing, (i) the Standard & Poor's Discount Factor for
short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated A-1+ or SP-1+ by Standard & Poor's and mature or have a
demand feature exercisable within 30 days or less, 120% if such Municipal
Obligations are rated A-1 or SP-1- by Standard & Poor's and mature or have a
demand feature exercisable within 30 days or less, or 125% if such Municipal
Obligations are not rated by Standard & Poor's but are rated VMIG-1, P-1 or
MIG-1 by Moody's; provided, however, that any such Moody's-rated short-term
Municipal Obligations which have demand features exercisable within 30 days or
less must be backed by a letter of credit, liquidity facility or guarantee from
a bank or other financial institution with a short-term rating of at least A-1+
from Standard & Poor's; and further provided that such Moody's-rated short-term
Municipal Obligations may comprise no more than 50% of short-term Municipal
Obligations that qualify as Standard & Poor's Eligible Assets; (ii) no Standard
& Poor's Discount Factor will be applied to cash options and similar instruments
or to Receivables for Municipal Obligations Sold; and (iii) except as set forth
in clause (i) above, in the case of any Municipal Obligation that is not rated
by Standard & Poor's but qualifies as a Standard & Poor's Eligible Asset
pursuant to clause (1)(c) of the following paragraph, such Municipal Obligation
will be deemed to have a Standard & Poor's rating one full rating category lower
than the Standard & Poor's rating category that is the equivalent of the rating
category in which such Municipal Obligation is placed by another nationally
recognized credit rating agency. For purposes of the foregoing, Anticipation
Notes rated SP-1+ or, if not rated by Standard & Poor's, rated MIG-1 or VMIG-1
by Moody's, which do not mature or have a demand feature at par exercisable in
30 days and which do not have a long-term rating, will be considered to be
short-term Municipal Obligations. "Receivables for Municipal Obligations Sold,"
for purposes of calculating Standard
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<PAGE> 90
& Poor's Eligible Assets as of any Valuation Date, means the book value of
receivables for Municipal Obligations sold as of or prior to such Valuation Date
if such receivables are due within five business days of such Valuation Date.
The Standard & Poor's guidelines impose certain minimum issue size, issuer,
geographical diversification and other requirements for purposes of determining
Standard & Poor's Eligible Assets. Solely for purposes of this definition, the
term "Municipal Obligation" means any obligation the interest on which is exempt
from regular Federal income taxation and which is issued by any of the fifty
United States, the District of Columbia or any of the territories of the United
States, their subdivisions, counties, cities, towns, villages, school districts
and agencies (including authorities and special districts created by the
states), and federally sponsored agencies such as local housing authorities.
Notwithstanding the foregoing limitations:
(1) In order to be considered Standard & Poor's Eligible Assets,
Municipal Obligations owned by the Trust must:
(a) be interest bearing and pay interest at least semi-annually;
(b) be payable in U.S. dollars;
(c) be publicly rated BBB or higher by Standard & Poor's or, except
in the case of Anticipation Notes that are Grant Anticipation Notes or
Bond Anticipation Notes which must be rated by Standard & Poor's to be
included in Standard & Poor's Eligible Assets, if not rated by Standard
& Poor's but rated by another nationally recognized credit rating
agency, be publicly rated A or higher by such agency;
(d) not be private placements (except in the case of Inverse
Floaters);
(e) be part of an issue with an original issue size of at least $20
million or, if of an issue with an original issue size below $20 million
(but in no event lower than $10 million), be issued by an issuer with a
total of at least $50 million of securities outstanding; and
(f) not be subject to a covered call or covered put option written
by the Trust.
(2) Municipal Obligations (excluding Escrowed Bonds) of any one issuer
or guarantor (excluding bond insurers) will be considered Standard & Poor's
Eligible Assets only to the extent the Market Value of such Municipal
Obligations does not exceed 10% of the aggregate Market Value of Standard &
Poor's Eligible Assets, provided that 2% is added to the applicable
Standard & Poor's Discount Factor for every 1% by which the Market Value of
such Municipal Obligations exceeds 5% of the aggregate Market Value of
Standard & Poor's Eligible Assets, and provided that Municipal Obligations
(excluding Escrowed Bonds) not rated or rated less than BBB by Standard &
Poor's and not rated at least A by another nationally recognized credit
rating agency of any one issuer or guarantor (excluding bond insurers)
shall constitute Standard & Poor's Eligible Assets only to the extent the
Market Value of such Municipal Obligations does not exceed 5% of the
aggregate Market Value of Standard & Poor's Eligible Assets.
(3) Municipal Obligations not rated at least BBB or not rated by
Standard & Poor's and not rated at least A by another nationally recognized
credit rating agency will be considered Standard & Poor's Eligible Assets
only to the extent the Market Value of such Municipal Obligations does not
exceed 50% of the aggregate Market Value of Standard & Poor's Eligible
Assets; provided, however, that if the Market Value of such Municipal
Obligations exceeds 50% of the aggregate Market Value of Standard & Poor's
Eligible Assets, a portion of such Municipal Obligations (selected by the
Trust) shall not be considered Standard & Poor's Eligible Assets, so that
the Market Value of such Municipal Obligations (excluding such portion)
does not exceed 50% of the aggregate Market Value of Standard & Poor's
Eligible Assets.
(4) Long-term Municipal Obligations (excluding Escrowed Bonds) issued
by issuers in any one state or territory will be considered Standard &
Poor's Eligible Assets only to the extent the Market
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<PAGE> 91
Value of such Municipal Obligations does not exceed 25% of the aggregate
Market Value of Standard & Poor's Eligible Assets.
(5) Municipal Obligations which are not interest bearing or do not pay
interest at least semi-annually shall be considered Standard & Poor's
Eligible Assets if rated AAA by Standard & Poor's.
MOODY'S "aaa" RATING GUIDELINES. For purposes of calculating the
Discounted Value of the Trust's portfolio under current Moody's guidelines,
Municipal Obligations eligible for consideration under such guidelines ("Moody's
Eligible Assets") must be discounted by certain discount factors set forth in
the table below ("Moody's Discount Factors"). The Discounted Value of a
Municipal Obligation under Moody's guidelines is, as of any Valuation Date, (i)
with respect to a Moody's Eligible Asset that is not currently callable as of
such Valuation Date at the option of the issuer thereof, the quotient of the
market value thereof divided by the applicable Moody's Discount Factor, or (ii)
with respect to a Moody's Eligible Asset that is currently callable as of such
Valuation Date at the option of the issuer thereof, the quotient of (a) the
lesser of the market value or call price thereof, including any call premium,
divided by (b) the applicable Moody's Discount Factor. The Moody's Discount
Factor used to discount a particular Municipal Obligation will be determined by
reference to the "Moody's Exposure Period" (currently, the period commencing on
a given Valuation Date and ending 49 days thereafter) and the Moody's rating on
such Municipal Obligation. Moody's Discount Factors for a range of exposure
periods are set forth below:
<TABLE>
<CAPTION>
MOODY'S DISCOUNT FACTORS RATING CATEGORY
---------------------------------------------------------------------------
EXPOSURE PERIOD AAA* AA* A* BAA* OTHER** (V)MIG-1*** SP-1+**** UNRATED*****
- --------------- ---- --- -- ---- ------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
7 weeks........................ 151% 159% 166% 173% 187% 136% 148% 225%
8 weeks or less but greater
than 7 weeks................. 154 161 168 176 190 137 149 231
9 weeks or less but greater
than 8 weeks................. 156 163 170 177 192 138 150 240
</TABLE>
- ---------------
* Moody's rating.
** Municipal Obligations not rated by Moody's but rated BBB by Standard &
Poor's.
*** Municipal Obligations rated MIG-1 or VMIG-1, which do not mature or have a
demand feature at par exercisable in 30 days and which do not have a
long-term rating.
**** Municipal Obligations not rated by Moody's but rated SP-1+ by Standard &
Poor's, which do not mature or have a demand feature at par exercisable in
30 days and which do not have a long-term rating.
***** Municipal Obligations not rated or rated lower than Baa3 by Moody's and
not rated or rated lower than Baa3 by Moody's and not rated or rated lower
than BBB by Standard & Poor's.
Since the Moody's Exposure Period currently applicable to the Trust is 49
days, the Moody's Discount Factors currently applicable to Moody's Eligible
Assets will be determined by reference to the factors set forth opposite the
line entitled "7 weeks." Notwithstanding the foregoing, (i) the Moody's Discount
Factor for short-term Municipal Obligations will be 115%, so long as such
Municipal Obligations are rated at least MIG-1, VMIG-1 or P-1 by Moody's and
mature or have a demand feature at par exercisable in 30 days or less or 125% so
long as such Municipal Obligations are rated at least A-1+/AA or SP-1+/AA by
Standard & Poor's and mature or have a demand feature at par exercisable in 30
days or less and (ii) no Moody's Discount Factor will be applied to cash or to
Receivables for Municipal Obligations Sold. "Receivables for Municipal
Obligations Sold," for purposes of calculating Moody's Eligible Assets as of any
Valuation Date, means no more than the aggregate of the following: (i) the book
value of receivables for Municipal Obligations sold as of or prior to such
Valuation Date if such receivables are due within five business days of such
Valuation Date, and if the trades which generated such receivables are (x)
settled through clearing house firms with respect to which the Trust has
received prior written authorization from Moody's or (y) with counterparties
having a Moody's long-term debt rating of at least Baa3; and (ii) the Moody's
Discounted Value of Municipal Obligations sold as of or
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<PAGE> 92
prior to such Valuation Date which generated receivables, if such receivables
are due within five business days of such Valuation Date but do not comply with
either of conditions (x) or (y).
The Moody's guidelines impose certain minimum issue size, issuer,
geographical diversification and other requirements for purposes of determining
Moody's Eligible Assets, as set forth in the table below:
<TABLE>
<CAPTION>
MINIMUM MAXIMUM MAXIMUM
ISSUE SIZE UNDERLYING STATE OR TERRITORY
RATING ($ MILLIONS) OBLIGOR(%) CONCENTRATION(%)
- ------ ------------ ---------- ------------------
<S> <C> <C> <C>
Aaa.......................................... 10 100 100
Aa........................................... 10 20 60
A............................................ 10 10 40
Baa.......................................... 10 6 20
Other*....................................... 10 4 12
Unrated**.................................... 10 4 12
</TABLE>
- ---------------
* Municipal Obligations not rated by Moody's but rated BBB by Standard &
Poor's.
** Municipal Obligations not rated or rated lower than Baa3 by Moody's and not
rated or rated lower than BBB by Standard & Poor's.
For purposes of the foregoing table, the percentages provided, for a given
rating, in the columns entitled "Maximum Underlying Obligor" and "Maximum State
or Territory Concentration" shall apply to the aggregate total of the Municipal
Obligations in the rating category indicated and all rated Municipal Obligations
in lower rating categories, as well as unrated Municipal Obligations that are
Moody's Eligible Assets.
The percentages set forth in the preceding table are based upon Moody's
Eligible Assets calculated excluding cash. Current Moody's guidelines also
require that Municipal Obligations constituting Moody's Eligible Assets pay
interest in cash, be publicly rated Baa or higher by Moody's or, if not rated by
Moody's but rated by Standard & Poor's, that they be rated at least BBB by
Standard & Poor's, and that they not have suspended ratings. For purposes of
determining the Moody's Discount Factors applicable to such Standard &
Poor's-rated Municipal Obligations, any such Municipal Obligation (excluding
short-term Municipal Obligations) will be deemed to have a Moody's rating which
is one full rating category lower than its Standard & Poor's rating. For
purposes of applying the foregoing requirements, Municipal Obligations rated
MIG-1, VMIG-1, or P-1, or, if not rated by Moody's, rated A-1+/AA or SP-1+/AA by
Standard & Poor's, will be considered to have a long-term rating of A.
The Trust will enter into futures and options transactions only for bona
fide hedging purposes and not for leveraging or speculative purposes. So long as
either Standard & Poor's or Moody's is rating the Municipal Preferred, the Trust
will only engage in futures or options transactions in accordance with the
then-current guidelines of such rating agencies, and only after it has received
written confirmation from Standard & Poor's or Moody's, as appropriate, that
such transactions would not impair the ratings then assigned by such rating
agency to shares of Municipal Preferred.
REDEMPTION
OPTIONAL REDEMPTION. Except as described below,
(i) shares of a series of Municipal Preferred are redeemable, at the
option of the Trust, as a whole or from time to time in part, on the second
Business Day preceding any Dividend Payment Date therefor, out of funds
legally available therefor in accordance with the Declaration, the By-Laws
and applicable law, at a redemption price per share equal to the sum of
$25,000 plus an amount equal to accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date fixed
for redemption; provided, however, that (1) shares of a series of Municipal
Preferred may not be redeemed in part if after such partial redemption
fewer than 500 shares of such series remain outstanding; (2) unless
otherwise provided in the By-laws, shares of a series of
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<PAGE> 93
Municipal Preferred are redeemable by the Trust during the Initial Rate
Period thereof only on the second Business Day next preceding the last
Dividend Payment Date for such Initial Rate Period; and (3) subject to the
next succeeding sentence, the Notice of Special Rate Period relating to a
Special Rate Period of shares of a series of Municipal Preferred, as
delivered to the Auction Agent and filed with the Secretary of the Trust,
may provide that shares of such series shall not be redeemable during the
whole or any part of such Special Rate Period (except as provided in (ii)
below) or shall be redeemable during the whole or any part of such Special
Rate Period only upon payment of such redemption premium or premiums as
shall be specified therein ("Special Redemption Provisions"); and
(ii) shares of a series of Municipal Preferred are redeemable, at the
option of the Trust, as a whole but not in part, out of funds legally
available therefor in accordance with the Declaration, the By-Laws and
applicable law, on the first day following any Dividend Period thereof
included in a Rate Period of more than 364 Rate Period Days if, on the date
of determination of the Applicable Rate for shares of such series for such
Rate Period, such Applicable Rate equaled or exceeded on such date of
determination the Treasury Note Rate for such Rate Period, at a redemption
price of $25,000 per share plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption.
A Notice of Special Rate Period relating to shares of a series of Municipal
Preferred for a Special Rate Period may contain Special Redemption Provisions
only if the Board of Trustees, after consultation with the Broker-Dealer or
Broker-Dealers for such Special Rate Period of such shares, determines that such
Special Redemption Provisions are in the best interest of the Trust.
If fewer than all of the outstanding shares of a series of Municipal
Preferred are to be redeemed as set forth above, the number of shares of such
series to be redeemed shall be determined by the Board of Trustees, and such
shares shall be redeemed pro rata from the holders of record of shares of such
series (initially Cede & Co. as nominee of the Securities Depository) in
proportion to the number of shares of such series held by such holders. Since
the nominee of the Securities Depository is the only record holder of shares of
Municipal Preferred, the Securities Depository will determine the number of
shares to be redeemed from the accounts of the Agent Members. The Agent Members,
in turn, may determine to redeem shares from some persons listed on their
records as beneficial owners (which may include an Agent Member holding shares
for its own account) without redeeming shares from the accounts of other persons
listed on their records as beneficial owners.
The Trust may not mail a Notice of Redemption relating to an optional
redemption as described above on any date unless on such date (a) the Trust has
available certain Deposit Securities with maturity or tender dates not later
than the day preceding the applicable redemption date and having a value not
less than the amount (including any applicable premium) due to holders of shares
of Municipal Preferred by reason of the redemption of such shares on such
redemption date and (b) the Discounted Value of Moody's Eligible Assets (if
Moody's is then rating the shares of Municipal Preferred) and the Discounted
Value of Standard & Poor's Eligible Assets (if Standard & Poor's is then rating
the shares of Municipal Preferred) each at least equal the Municipal Preferred
Basic Maintenance Amount and would at least equal the Municipal Preferred Basic
Maintenance Amount immediately subsequent to such redemption if such redemption
were to occur on such date. For purposes of determining in clause (b) of the
preceding sentence whether the Discounted Value of Moody's Eligible Assets at
least equals the Municipal Preferred Basic Maintenance Amount, the Moody's
Discount Factors applicable to Moody's Eligible Assets will be determined by
reference to the first Moody's Exposure Period longer than the Moody's Exposure
Period then applicable to the Trust.
MANDATORY REDEMPTION. The Trust will be required to redeem, at a
redemption price equal to $25,000 per share plus accumulated but unpaid
dividends thereon (whether or not earned or declared) to (but not including) the
date fixed by the Board of Trustees for redemption (such amount, together with
the redemption prices described above under "Optional Redemption," being herein
referred to as the "Redemption Price"), certain of the shares of Municipal
Preferred to the extent permitted under the 1940
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<PAGE> 94
Act, the Declaration, the By-Laws and any applicable law, if the Trust fails to
maintain the Municipal Preferred Basic Maintenance Amount or the 1940 Act
Municipal Preferred Asset Coverage in accordance with the requirements of the
rating agency or rating agencies then rating the shares of Municipal Preferred
and such failure is not cured on or before the Municipal Preferred Basic
Maintenance Cure Date or the 1940 Act Cure Date (herein respectively referred to
as a "Cure Date"), as the case may be. The number of shares of Municipal
Preferred to be redeemed will be equal to the lesser of (a) the minimum number
of shares of Municipal Preferred, together with all other Preferred Shares
subject to redemption or retirement, the redemption of which, if deemed to have
occurred immediately prior to the opening of business on the Cure Date, would
have resulted in the satisfaction of the Municipal Preferred Basic Maintenance
Amount or the 1940 Act Municipal Preferred Asset Coverage, as the case may be,
on such Cure Date (provided, however, that, if there is no such minimum number
of shares of Municipal Preferred and other Preferred Shares the redemption or
retirement of which would have had such result, all shares of Municipal
Preferred and Preferred Shares then outstanding will be redeemed), and (b) the
maximum number of shares of Municipal Preferred, together with all other
Preferred Shares subject to redemption or retirement, that can be redeemed out
of funds expected to be legally available therefor. In determining the shares of
Municipal Preferred required to be redeemed in accordance with the foregoing,
the Trust will allocate the number of shares required to be redeemed to satisfy
the Municipal Preferred Basic Maintenance Amount or the 1940 Act Municipal
Preferred Asset Coverage, as the case may be, pro rata among shares of Municipal
Preferred and any other Preferred Shares subject to redemption or retirement
(and then pro rata among each series of Municipal Preferred).
The Trust is required to effect such a mandatory redemption not earlier
than 20 days and not later than 40 days after such Cure Date, except that if the
Trust does not have funds legally available under the Declaration, the By-Laws
and applicable law for the redemption of all of the required number of shares of
Municipal Preferred and other Preferred Shares which are subject to mandatory
redemption or retirement or the Trust otherwise is unable to effect such
redemption on or prior to 40 days after such Cure Date, the Trust will redeem
those shares of Municipal Preferred and other Preferred Shares which it was
unable to redeem on the earliest practicable date on which it is able to effect
such redemption. If fewer than all of the outstanding shares of a series of
Municipal Preferred are to be redeemed pursuant to a mandatory redemption, the
number of shares of such series to be redeemed shall be redeemed pro rata from
the holders of shares of such series in proportion to the number of shares of
such series held by such holders, in the same manner as described above in
respect of optional redemptions of fewer than all outstanding shares of
Municipal Preferred.
NOTICE OF REDEMPTION. Notice of redemption shall be given by mailing the
same to each holder of the shares of a series to be redeemed (initially Cede &
Co. as nominee of the Securities Depository), not less than 20 nor more than 45
days prior to the date fixed for redemption thereof, to the respective addresses
of such holders as the same shall appear on the record books of the Trust
("Notice of Redemption"). Each such notice shall state (i) the redemption date;
(ii) the number of shares of Municipal Preferred to be redeemed and the series
thereof; (iii) the CUSIP number for the shares of such series; (iv) the
Redemption Price; (v) the place or places where certificate(s) for such shares
(properly endorsed or assigned for transfer, if the Board of Trustees shall so
require and the notice shall so state) are to be surrendered for payment of the
Redemption Price; (vi) that dividends on the shares to be redeemed will cease to
accumulate on such redemption date; and (vii) the provisions of the By-Laws
under which such redemption is made. If fewer than all shares of a series of
Municipal Preferred held by any holder are to be redeemed, the notice mailed to
such holder shall also specify the number of shares of such series to be
redeemed from such holder. The Trust may provide in any Notice of Redemption
relating to an optional redemption that such redemption is subject to one or
more conditions precedent and that the Trust shall not be required to effect
such redemption unless each such condition shall have been satisfied at the time
or times and in the manner specified in such Notice of Redemption.
OTHER REDEMPTION PROCEDURES. To the extent that any redemption for which a
Notice of Redemption has been mailed is not made by reason of the absence of
legally available funds therefor, such redemption will be made as soon as
practicable to the extent such funds become available. Failure to redeem shares
of
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<PAGE> 95
Municipal Preferred will be deemed to exist at any time after the date specified
for redemption in a Notice of Redemption when the Trust shall have failed, for
any reason whatsoever, to deposit with the Auction Agent the Redemption Price
with respect to any shares for which such Notice of Redemption has been mailed.
Notwithstanding the fact that the Trust may not have redeemed shares of
Municipal Preferred for which a Notice of Redemption has been mailed, dividends
may be declared and paid on shares of Municipal Preferred and will include those
shares of Municipal Preferred for which a Notice of Redemption has been mailed.
The first two sentences of this paragraph shall not apply in the event the Trust
provides in any Notice of Redemption relating to an optional redemption that
such redemption is subject to one or more conditions precedent and any such
condition precedent shall not have been satisfied at the time or times and in
the manner specified in such Notice of Redemption.
Provided a Notice of Redemption has been mailed as described above, upon
the deposit with the Auction Agent (on the Business Day next preceding the date
fixed for redemption thereby, in funds available on the next Business Day in The
City of New York, New York) of funds sufficient to redeem the shares of
Municipal Preferred that are the subject of such notice, dividends on such
shares will cease to accumulate and such shares will no longer be deemed
outstanding for any purpose, and all rights of the holders of the shares so
called for redemption will cease and terminate, except the right of the holders
thereof to receive the Redemption Price, but without any interest or other
additional amount, except as otherwise provided above under
"Dividends -- Determination of Dividend Rate" and "-- Gross-up Payments." Upon
surrender in accordance with the Notice of Redemption of the certificates for
any shares so redeemed (properly endorsed or assigned for transfer, if the Board
of Trustees shall so require and the notice shall so state), the Redemption
Price shall be paid by the Auction Agent to the holders of shares of Municipal
Preferred subject to redemption. In the case that fewer than all of the shares
represented by any such certificate are redeemed, a new certificate shall be
issued, representing the unredeemed shares, without cost to the holder thereof.
The Trust will be entitled to receive from the Auction Agent, promptly after the
date fixed for redemption, any cash deposited with the Auction Agent in excess
of (i) the aggregate Redemption Price of the shares of Municipal Preferred
called for redemption on such date and (ii) all other amounts to which holders
of shares of Municipal Preferred called for redemption may be entitled. Any
funds so deposited that are unclaimed at the end of 90 days from such redemption
date will, to the extent permitted by law, be repaid to the Trust, after which
time the holders of shares of Municipal Preferred so called for redemption may
look only to the Trust for payment of the Redemption Price and all other amounts
to which they may be entitled. The Trust will be entitled to receive, from time
to time after the date fixed for redemption, any interest on the funds so
deposited.
Notwithstanding the foregoing, if any dividends on shares of a series of
Municipal Preferred (whether or not earned or declared) are in arrears, no
shares of such series of Municipal Preferred shall be redeemed unless all
outstanding shares of such series of Municipal Preferred are simultaneously
redeemed, and the Trust shall not purchase or otherwise acquire any shares of
such series of Municipal Preferred; provided, however, that the foregoing shall
not prevent the purchase or acquisition of all outstanding shares of such series
of Municipal Preferred pursuant to the successful completion of an otherwise
lawful purchase or exchange offer made on the same terms to, and accepted by,
holders of all outstanding shares of such series of Municipal Preferred.
Except as described above with respect to redemptions and under "The
Auction -- Orders by Existing Holders and Potential Holders," the Declaration
and the By-Laws do not prohibit the Trust or any affiliate of the Trust from
purchasing or otherwise acquiring any shares of Municipal Preferred.
The Trust has the right to arrange for third parties to purchase from the
holders thereof shares of Municipal Preferred which are to be redeemed as
described above.
LIQUIDATION
Upon a dissolution, liquidation or winding up of the affairs of the Trust,
whether voluntary or involuntary, the holders of shares of Municipal Preferred
then outstanding will be entitled to receive and to be paid out of the assets of
the Trust available for distribution to its shareholders, before any payment or
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distribution shall be made on the Common Shares or on any other class of shares
of the Trust ranking junior to the Municipal Preferred upon dissolution,
liquidation or winding up of the affairs of the Trust, an amount equal to the
liquidation preference with respect to such shares. The liquidation preference
for shares of Municipal Preferred shall be $25,000 per share, plus an amount
equal to all dividends thereon (whether or not earned or declared) accumulated
but unpaid to (but not including) the date of final distribution in same-day
funds, together with any applicable Gross-up Payments in connection with the
dissolution, liquidation or winding up of the affairs of the Trust. After the
payment to the holders of the shares of Municipal Preferred of the full
liquidation preference amounts provided for as described herein, the holders of
Municipal Preferred as such shall have no right or claim to any of the remaining
assets of the Trust. In the event the assets of the Trust available for
distribution to the holders of shares of Municipal Preferred, upon any
dissolution, liquidation or winding up of the affairs of the Trust, whether
voluntary or involuntary, shall be insufficient to pay in full all amounts to
which such holders are entitled, no such distribution shall be made on account
of any other class or series of Preferred Shares ranking on a parity with the
shares of Municipal Preferred upon such dissolution, liquidation or winding up
unless proportionate distributive amounts shall be paid on account of the shares
of Municipal Preferred, ratably, in proportion to the full distributable amounts
for which holders of all such parity shares are respectively entitled upon such
dissolution, liquidation or winding up. Subject to the rights of the holders of
any series or class or classes of shares ranking on a parity with the shares of
Municipal Preferred with respect to the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Trust, after payment shall have
been made in full to the holders of the shares of Municipal Preferred as
described herein, but not prior thereto, any other series or class or classes of
shares ranking junior to the shares of Municipal Preferred with respect to the
distribution of assets upon dissolution, liquidation or winding up shall,
subject to the respective terms and provisions (if any) applying thereto, be
entitled to receive any and all assets remaining to be paid or distributed, and
the holders of the shares of Municipal Preferred shall not be entitled to share
therein.
Neither the sale of all or substantially all the property or business of
the Trust, nor the merger or consolidation of the Trust into or with any
Massachusetts business trust or corporation nor the merger or consolidation of
any Massachusetts business trust or corporation into or with the Trust shall be
a dissolution, liquidation or winding up of the affairs of the Trust, whether
voluntary or involuntary, for the purposes of the foregoing paragraph.
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REPURCHASE OF COMMON SHARES
The Trust is a closed-end investment company and as such its shareholders
will not have the right to cause the Trust to redeem their shares. Common Shares
trade in the open market at a price that is a function of several factors,
including net asset value and yield. Although the common shares of a closed-end
investment company such as the Trust that invests substantially all of its
assets in investment grade municipal obligations have generally traded at a
premium to net asset value, such shares have occasionally traded at a discount
to net asset value. The Board of Trustees has currently determined that, at
least annually, it will consider action that might be taken to reduce or
eliminate any material discount from net asset value in respect of Common
Shares, which may include the repurchase of such shares in the open market or in
private transactions, the making of a tender offer for such shares at net asset
value, or the conversion of the Trust to an open-end investment company. There
can be no assurance, however, that the Board of Trustees will decide to take any
of these actions, or that share repurchases or tender offers, if undertaken,
will reduce market discount. In addition, see "Description of Municipal
Preferred -- Dividends -- Restrictions on Dividends and Other Payments"for a
discussion of the limitations on the Trust's ability to engage in certain
transactions. The staff of the SEC currently requires that any tender offer made
by a closed-end investment company for its shares must be at a price equal to
the net asset value of such shares on the close of business on the last day of
the tender offer. Any service fees incurred in connection with any tender offer
made by the Trust will be borne by the Trust and will not reduce the stated
consideration to be paid to tendering shareholders.
Subject to its investment limitations, the Trust may borrow to finance the
repurchase of shares or to make a tender offer. Interest on any borrowings to
finance share repurchase transactions or the accumulation of cash by the Trust
in anticipation of share repurchases or tenders will reduce the Trust's net
income. Any share repurchase, tender offer or borrowing that might be approved
by the Board of Trustees would have to comply with the Securities Exchange Act
of 1934, as amended, and the 1940 Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from net
asset value will be made by the Board of Trustees at the time it considers such
issue, it is the Board's present policy, which may be changed by the Board, not
to authorize repurchases of the Trust's Common Shares or a tender offer for such
shares if (1) such transactions, if consummated, would (a) result in the
delisting of the Common Shares from the New York Stock Exchange (the
"Exchange"), or (b) impair the Trust's status as a regulated investment company
under the Code (which would make the Trust a taxable entity, causing the Trust's
income to be taxed at the corporate level in addition to the taxation of
shareholders who receive dividends from the Trust) or as a registered closed-end
investment company under the 1940 Act; (2) the Trust would not be able to
liquidate portfolio securities in an orderly manner and consistent with the
Trust's investment objectives and policies in order to repurchase shares; or (3)
there is, in the Board's judgment, any (a) material legal action or proceeding
instituted or threatened challenging such transactions or otherwise materially
adversely affecting the Trust, (b) general suspension of or limitation on prices
for trading securities on the Exchange, (c) declaration of a banking moratorium
by Federal or state authorities or any suspension of payment by United States or
New York State banks in which the Trust invests, (d) material limitation
affecting the Trust or the issuers of its portfolio securities by Federal or
state authorities on the extension of credit by lending institutions or on the
exchange of foreign currency, (e) commencement of war, armed hostilities or
other international or national calamity directly or indirectly involving the
United States, or (f) other event or condition which would have a material
adverse effect (including any adverse tax effect) on the Trust or its
shareholders if shares were repurchased. The Board of Trustees may in the future
modify these conditions in light of experience. Before deciding whether to take
any action in response to a discount from net asset value, the Board of Trustees
would consider all relevant factors, including the extent and duration of the
discount, the liquidity of the Trust's portfolio, the impact of any action that
might be taken on the Trust or its shareholders, and market considerations.
Based on these considerations, even if the Trust's Common Shares should trade at
a discount, the Board may determine that, in the interest of the Trust and its
shareholders, no action should be taken.
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MISCELLANEOUS INVESTMENT PRACTICES
SHORT-TERM TRADING
In seeking the Trust's objective, the Advisor will buy or sell portfolio
securities whenever the Advisor believes it appropriate to do so. In deciding
whether to sell a portfolio security, the Advisor does not consider how long the
Trust has owned the security. From time to time the Trust will buy securities
intending to seek short-term trading profits. A change in the securities held by
the Trust is known as "portfolio turnover" and generally involves some expense
to the Trust. This expense may include brokerage commissions or dealer markups
and other transaction costs on both the sale of securities and the reinvestment
of the proceeds in other securities. If sales of portfolio securities cause the
Trust to realize net short-term capital gain, such gain generally will be
taxable as ordinary income. As a result of the Trust's investment policies,
under certain market conditions the Trust's portfolio turnover rate may be
higher than that of other investment companies. Portfolio turnover rate for a
fiscal year is the ratio of the lesser of purchases or sales of portfolio
securities to the monthly average of the value of portfolio
securities -- excluding securities whose maturities at acquisition were one year
or less. The Trust's portfolio turnover rate is not a limiting factor when the
Advisor considers a change in the Trust's portfolio.
LOWER-RATED SECURITIES
The Trust may invest in lower-rated securities (commonly known as "high
yield," high risk securities or "junk bonds"). The lower ratings of certain
securities held by the Trust reflect a greater possibility that adverse changes
in the financial condition of the issuer or in general economic conditions, or
both, or an unanticipated rise in interest rates, may impair the ability of the
issuer to make payments of interest and principal. The inability (or perceived
inability) of issuers to make timely payments of interest and principal would
likely make the values of securities held by the Trust more volatile and could
limit the Trust's ability to sell its securities at prices approximating the
values the Trust had placed on such securities. In the absence of a liquid
trading market for securities held by it, the Trust at times may be unable to
establish the fair value for such securities.
Securities ratings are based largely on the issuer's historical financial
condition and the rating agencies' analysis at the time of rating. Consequently,
the rating assigned to any particular security is not necessarily a reflection
of the issuer's current financial condition, which may be better or worse than
the rating would indicate. In addition, the rating assigned to a security by
Moody's or Standard & Poor's (or by any other nationally recognized securities
rating organization) does not reflect an assessment of the volatility of the
security's market value or the liquidity of an investment in the security. See
Appendix A for a description of security ratings.
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. A decrease in
interest rates will generally result in an increase in the value of the Trust's
assets. Conversely, during periods of rising interest rates, the value of the
Trust's assets will generally decline. The values of lower-rated securities may
often be affected to a greater extent by changes in general economic conditions
and business conditions affecting the issuers of such securities and their
industries. Negative publicity or investor perceptions may also adversely affect
the values of lower-rated securities. Changes by recognized rating services in
their ratings of any fixed-income security and changes in the ability of an
issuer to make payments of interest and principal may also affect the value of
these investments. Changes in the value of portfolio securities generally will
not affect income derived from these securities, but will affect the Trust's net
asset value. The Trust will not necessarily dispose of a security when its
rating is reduced below its rating at the time of purchase. However, the Advisor
will monitor the investment to determine whether its retention will assist in
meeting the Trust's investment objective.
Issuers of lower-rated securities are often highly leveraged, so that their
ability to service their debt obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. Such issuers may not
have more traditional methods of financing available to them and may be
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unable to repay outstanding obligations at maturity by refinancing. The risk of
loss due to default in payment of interest or repayment of principal by such
issuers is significantly greater because such securities frequently are
unsecured and subordinated to the prior payment of senior indebtedness.
At times, a substantial portion of the Trust's assets may be invested in
securities as to which the Trust, by itself or together with other Trusts and
accounts managed by the Advisor and its affiliates, holds all or a major portion
of the securities outstanding. Although the Advisor generally considers such
securities to be liquid because of the availability of an institutional market
for such securities, it is possible that, under adverse market or economic
conditions or in the event of adverse changes in the financial condition of the
issuer, the Trust could find it more difficult to sell these securities when the
Advisor believes it advisable to do so or may be able to sell the securities
only at prices lower than if they were more widely held. Under these
circumstances, it may also be more difficult to determine the fair value of such
securities for purposes of computing the Trust's net asset value. In order to
enforce its rights in the event of a default under such securities, the Trust
may be required to participate in various legal proceedings or take possession
of and manage assets securing the issuer's obligations on such securities. This
could increase the Trust's operating expenses and adversely affect the Trust's
net asset value.
Certain securities held by the Trust may permit the issuer at its option to
"call," or redeem, its securities. If an issuer were to redeem securities held
by the Trust during a time of declining interest rates, the Trust might not be
able to reinvest the proceeds in securities providing the same investment return
as the securities redeemed. The Trust may invest without limit in such bonds.
To the extent the Trust invests in securities in the lower rating
categories, the achievement of the Trust's goals is more dependent on the
Advisor's investment analysis than would be the case if the Trust were investing
in securities in the higher rating categories.
PRIVATE PLACEMENTS
The Trust may invest in securities that are purchased in private placements
and, accordingly, may be subject to restrictions on resale as a matter of
contract or under federal securities laws. Because there may be relatively few
potential purchasers for such investments, especially under adverse market or
economic conditions or in the event of adverse changes in the financial
condition of the issuer, the Trust could find it more difficult to sell such
securities when the Advisor believes it advisable to do so or may be able to
sell such securities only at prices lower than if such securities were more
widely held. At times, it may also be more difficult to determine the fair value
of such securities for purposes of computing the Trust's net asset value.
STEP COUPON BONDS (STEPS)
The Trust may invest in debt securities which do not pay interest for a
stated period of time and then pay interest at a series of different rates for a
series of periods. In addition to the risks associated with the credit rating of
the issuers, these securities are subject to the volatility risk of zero coupon
bonds for the period when no interest is paid.
TENDER OPTION BONDS
A tender option bond is a municipal security (generally held pursuant to a
custodial arrangement) having a relatively long maturity and bearing interest at
a fixed rate substantially higher than prevailing short-term tax-exempt rates
that has been coupled with the agreement of a third party, such as a bank,
broker-dealer or other financial institution, pursuant to which such institution
grants the security holders the option, at periodic intervals, to tender their
securities to the institution and receive the face value thereof. As
consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the municipal security's fixed
coupon rate and the rate, as determined by a remarketing or similar agent at or
near the commencement of such period, that would cause the securities, coupled
with the tender option, to trade at par on the date of such determination. Thus,
after payment of this fee, the security holder effectively holds a demand
obligation that bears interest at the prevailing
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short-term tax-exempt rate. The Advisor will consider on an ongoing basis the
creditworthiness of the issuer of the underlying municipal securities, of any
custodian, and of the third-party provider of the tender option. In certain
instances and for certain tender option bonds, the option may be terminable in
the event of a default in payment of principal or interest on the underlying
municipal securities and for other reasons.
PAY-IN-KIND (PIK) SECURITIES
The Trust may invest in securities which pay interest either in cash or
additional securities at the issuer's option. These securities are generally
high yield securities and in addition to the other risks associated with
investing in high yield securities are subject to the risks that the interest
payments, which consist of additional securities, will also be subject to the
risks of high yield securities.
MONEY MARKET INSTRUMENTS
The Trust may invest in short-term money market instruments as follows:
Government obligations are issued by the U.S. or foreign governments, their
subdivisions, agencies and instrumentalities. Supranational obligations are
issued by supranational entities and are generally designed to promote economic
improvements. Certificates of deposit are issued against deposits in a
commercial bank with a defined return and maturity. Banker's acceptances are
used to finance the import, export or storage of goods and are "accepted" when
guaranteed at maturity by a bank. Commercial paper is promissory notes issued by
businesses to finance short-term needs (including those with floating or
variable interest rates, or including a frequent interval put feature).
Short-term corporate obligations are bonds and notes (with one year or less to
maturity at the time of purchase) issued by businesses to finance long-term
needs.
FORWARD COMMITMENTS
The Trust may enter into contracts to purchase securities for a fixed price
at a future date beyond customary settlement time ("forward commitments") if the
Trust sets aside, on the books and records of its custodian, liquid assets in an
amount sufficient to meet the purchase price, or if the Trust enters into
offsetting contracts for the forward sale of other securities it owns. In the
case of to-be-announced ("TBA") purchase commitments, the unit price and the
estimated principal amount are established when the Trust enters into a
contract, with the actual principal amount being within a specified range of the
estimate. Forward commitments may be considered securities in themselves, and
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date, which risk is in addition to the risk of decline
in the value of the Trust's other assets. Where such purchases are made through
dealers, the Trust relies on the dealer to consummate the sale. The dealer's
failure to do so may result in the loss to the Trust of an advantageous yield or
price. Although the Trust will generally enter into forward commitments with the
intention of acquiring securities for its portfolio or for delivery pursuant to
options contracts it has entered into, the Trust may dispose of a commitment
prior to settlement if the Advisor deems it appropriate to do so. The Trust may
realize short-term profits or losses on the sale of forward commitments.
The Trust may enter into TBA sale commitments to hedge its portfolio
positions or to sell securities it owns under delayed delivery arrangements.
Proceeds of TBA sale commitments are not received until the contractual
settlement date. During the time a TBA sale commitment is outstanding,
equivalent deliverable securities, or an offsetting TBA purchase commitment
deliverable on or before the sale commitment date, are held as "cover" for the
transaction. Unsettled TBA sale commitments are valued at current market value
of the underlying securities. If the TBA sale commitment is closed through the
acquisition of an offsetting purchase commitment, the Trust realizes a gain or
loss on the commitment without regard to any unrealized gain or loss on the
underlying security. If the Trust delivers securities under the commitment, the
Trust realizes a gain or loss from the sale of the securities based upon the
unit price established at the date the commitment was entered into.
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REPURCHASE AGREEMENTS
The Trust may enter into repurchase agreements. A repurchase agreement is a
contract under which the Trust acquires a security for a relatively short period
(usually not more than one week), subject to the obligation of the seller to
repurchase and the Trust to resell such security at a fixed time and price
(representing the Trust's cost plus interest). It is the Trust's present
intention to enter into repurchase agreements only with commercial banks and
registered broker-dealers and only with respect to obligations of the U.S.
government or its agencies or instrumentalities. Repurchase agreements may also
be viewed as loans made by the Trust which are collateralized by the securities
subject to repurchase. The Advisor will monitor such transactions to ensure that
the value of the underlying securities will be at least equal at all times to
the total amount of the repurchase obligation, including the interest factor. If
the seller defaults, the Trust could realize a loss on the sale of the
underlying security to the extent that the proceeds of sale, including accrued
interest, are less than the resale price provided in the agreement, including
interest. In addition, if the seller should be involved in bankruptcy or
insolvency proceedings, the Trust may incur delay and costs in selling the
underlying security or may suffer a loss of principal and interest if the Trust
is treated as an unsecured creditor and required to return the underlying
collateral to the seller's estate.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Trust may transfer uninvested cash balances into a joint
account, along with cash of other Liberty Funds and certain other accounts.
These balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
OPTIONS ON SECURITIES
WRITING COVERED OPTIONS. The Trust may write covered call options and
covered put options on optionable securities held in its portfolio, when in the
opinion of the Advisor such transactions are consistent with the Trust's
investment objective and policies. Call options written by the Trust give the
purchaser the right to buy the underlying securities from the Trust at a stated
exercise price; put options give the purchaser the right to sell the underlying
securities to the Trust at a stated price.
The Trust may write only covered options, which means that, so long as the
Trust is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, the Trust
will hold cash and/or high-grade short-term debt obligations equal to the price
to be paid if the option is exercised. In addition, the Trust will be considered
to have covered a put or call option if and to the extent that it holds an
option that offsets some or all of the risk of the option it has written. The
Trust may write combinations of covered puts and calls on the same underlying
security.
The Trust will receive a premium from writing a put or call option, which
increases the Trust's return on the underlying security in the event the option
expires unexercised or is closed out at a profit. The amount of the premium
reflects, among other things, the relationship between the exercise price and
the current market value of the underlying security, the volatility of the
underlying security, the amount of time remaining until expiration, current
interest rates and the effect of supply and demand in the options market and in
the market for the underlying security. By writing a call option, the Trust
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option but continues to bear
the risk of a decline in the value of the underlying security. By writing a put
option, the Trust assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then-current market
value, resulting in a potential capital loss unless the security subsequently
appreciates in value.
The Trust may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an offsetting option. The Trust realizes a profit or loss from a closing
transaction if the cost of the transaction (option premium plus transaction
costs) is less or more than the premium received from writing the option. If the
Trust writes a call option but does not own the underlying security, and when it
writes a put option, the Trust may be required to deposit cash or securities
with its broker as "margin," or collateral, for its obligation to buy or sell
the underlying security.
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As the value of the underlying security varies, the Trust may have to deposit
additional margin with the broker. Margin requirements are complex and are fixed
by individual brokers, subject to minimum requirements currently imposed by the
Federal Reserve Board and by stock exchanges and other self-regulatory
organizations.
PURCHASING PUT OPTIONS. The Trust may purchase put options to protect its
portfolio holdings in an underlying security against a decline in market value.
Such protection is provided during the life of the put option since the Trust,
as holder of the option, is able to sell the underlying security at the put
exercise price regardless of any decline in the underlying security's market
price. In order for a put option to be profitable, the market price of the
underlying security must decline sufficiently below the exercise price to cover
the premium and transaction costs. By using put options in this manner, the
Trust will reduce any profit it might otherwise have realized from appreciation
of the underlying security by the premium paid for the put option and by
transaction costs.
PURCHASING CALL OPTIONS. The Trust may purchase call options to hedge
against an increase in the price of securities that the Trust wants ultimately
to buy. Such hedge protection is provided during the life of the call option
since the Trust, as holder of the call option, is able to buy the underlying
security at the exercise price regardless of any increase in the underlying
security's market price. In order for a call option to be profitable, the market
price of the underlying security must rise sufficiently above the exercise price
to cover the premium and transaction costs.
RISK FACTORS IN OPTIONS TRANSACTIONS
The successful use of the Trust's options strategies depends on the ability
of the Advisor to forecast interest rate and market movements correctly. For
example, if the Trust were to write a call option based on the Advisor's
expectation that the price of the underlying security would fall, but the price
were to rise instead, the Trust could be required to sell the security upon
exercise at a price below the current market price. Similarly, if the Trust were
to write a put option based on the Advisor's expectation that the price of the
underlying security would rise, but the price were to fall instead, the Trust
could be required to purchase the security upon exercise at a price higher than
the current market price.
When the Trust purchases an option, it runs the risk that it will lose its
entire investment in the option in a relatively short period of time, unless the
Trust exercises the option or enters into a closing sale transaction before the
option's expiration. If the price of the underlying security does not rise (in
the case of a call) or fall (in the case of a put) to an extent sufficient to
cover the option premium and transaction costs, the Trust will lose part or all
of its investment in the option. This contrasts with an investment by the Trust
in the underlying security, since the Trust will not realize a loss if the
security's price does not change.
The effective use of options also depends on the Trust's ability to
terminate option positions at times when the Advisor deems it desirable to do
so. There is no assurance that the Trust will be able to effect closing
transactions at any particular time or at an acceptable price.
If a secondary market in options were to become unavailable, the Trust
could no longer engage in closing transactions. Lack of investor interest might
adversely affect the liquidity of the market for particular options or series of
options. A market may discontinue trading of a particular option or options
generally. In addition, a market could become temporarily unavailable if unusual
events -- such as volume in excess of trading or clearing capability -- were to
interrupt its normal operations.
A market may at times find it necessary to impose restrictions on
particular types of options transactions, such as opening transactions. For
example, if an underlying security ceases to meet qualifications imposed by the
market or the Options Clearing Corporation, new series of options on that
security will no longer be opened to replace expiring series, and opening
transactions in existing series may be prohibited. If an options market were to
become unavailable, the Trust as a holder of an option would be able to realize
profits or limit losses only by exercising the option, and the Trust, as option
writer, would remain obligated under the option until expiration or exercise.
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Disruptions in the markets for the securities underlying options purchased
or sold by the Trust could result in losses on the options. If trading is
interrupted in an underlying security, the trading of options on that security
is normally halted as well. As a result, the Trust as purchaser or writer of an
option will be unable to close out its positions until options trading resumes,
and it may be faced with considerable losses if trading in the security reopens
at a substantially different price. In addition, the Options Clearing
Corporation or other options markets may impose exercise restrictions. If a
prohibition on exercise is imposed at the time when trading in the option has
also been halted, the Trust as purchaser or writer of an option will be locked
into its position until one of the two restrictions has been lifted. If the
Options Clearing Corporation were to determine that the available supply of an
underlying security appears insufficient to permit delivery by the writers of
all outstanding calls in the event of exercise, it may prohibit indefinitely the
exercise of put options. The Trust, as holder of such a put option, could lose
its entire investment if the prohibition remained in effect until the put
option's expiration.
FUTURES CONTRACTS AND RELATED OPTIONS
Subject to applicable law, the Trust may invest without limit in the types
of futures contracts and related options identified in the Prospectus for
hedging and non-hedging purposes, such as to manage the effective duration of
the Trust's portfolio or as a substitute for direct investment. A financial
futures contract sale creates an obligation by the seller to deliver the type of
financial instrument called for in the contract in a specified delivery month
for a stated price. A financial futures contract purchase creates an obligation
by the purchaser to take delivery of the type of financial instrument called for
in the contract in a specified delivery month at a stated price. The
determination is made in accordance with the rules of the exchange on which the
futures contract sale or purchase was made. Futures contracts are traded in the
United States only on commodity exchanges or boards of trade -- known as
"contract markets" -- approved for such trading by the Commodity Futures Trading
Commission (the "CFTC"), and must be executed through a futures commission
merchant or brokerage firm which is a member of the relevant contract market.
Although futures contracts (other than index futures) by their terms call
for actual delivery or acceptance of commodities or securities, in most cases
the contracts are closed out before the settlement date without the making or
taking of delivery. Closing out a futures contract sale is effected by
purchasing a futures contract for the same aggregate amount of the specific type
of financial instrument or commodity with the same delivery date. If the price
of the initial sale of the futures contract exceeds the price of the offsetting
purchase, the seller is paid the difference and realizes a gain. Conversely, if
the price of the offsetting purchase exceeds the price of the initial sale, the
seller realizes a loss. If the Trust is unable to enter into a closing
transaction, the amount of the Trust's potential loss is unlimited. The closing
out of a futures contract purchase is effected by the purchaser's entering into
a futures contract sale. If the offsetting sale price exceeds the purchase
price, the purchaser realizes a gain, and if the purchase price exceeds the
offsetting sale price, the purchaser realizes a loss. In general, 40% of the
gain or loss arising from the closing out of a futures contract traded on an
exchange approved by the CFTC is treated as short-term gain or loss, and 60% is
treated as long-term gain or loss.
Unlike when the Trust purchases or sells a security, no price is paid or
received by the Trust upon the purchase or sale of a futures contract. Upon
entering into a contract, the Trust is required to deposit with its custodian in
a segregated account in the name of the futures broker an amount of liquid
assets. This amount is known as "initial margin." The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds to finance the transactions. Rather, initial margin is similar to a
performance bond or good faith deposit which is returned to the Trust upon
termination of the futures contract, assuming all contractual obligations have
been satisfied. Futures contracts also involve brokerage costs.
Subsequent payments, called "variation margin" or "maintenance margin," to
and from the broker (or the custodian) are made on a daily basis as the price of
the underlying security or commodity fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"marking to the market." For example, when the Trust has purchased a futures
contract on a security and
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the price of the underlying security has risen, that position will have
increased in value and the Trust will receive from the broker a variation margin
payment based on that increase in value. Conversely, when the Trust has
purchased a security futures contract and the price of the underlying security
has declined, the position would be less valuable and the Trust would be
required to make a variation margin payment to the broker.
The Trust may elect to close some or all of its futures positions at any
time prior to their expiration in order to reduce or eliminate a position then
currently held by the Trust. The Trust may close its positions by taking
opposite positions which will operate to terminate the Trust's position in the
futures contracts. Final determinations of variation margin are then made,
additional cash is required to be paid by or released to the Trust, and the
Trust realizes a loss or a gain. Such closing transactions involve additional
commission costs.
The Trust does not intend to purchase or sell futures or related options
for other than hedging purposes if, as a result, the sum of the initial margin
deposits on the Trust's existing futures and related options positions and
premiums paid for outstanding options on futures contracts would exceed 5% of
the Trust's net assets.
OPTIONS ON FUTURES CONTRACTS. The Trust may purchase and write call and
put options on futures contracts and it may buy or sell and enter into closing
transactions with respect to such options to terminate existing positions.
Options on futures contracts give the purchaser the right, in return for the
premium paid, to assume a position in a futures contract at the specified option
exercise price at any time during the period of the option. The Trust may use
options on futures contracts in lieu of writing or buying options directly on
the underlying securities or purchasing and selling the underlying futures
contracts. For example, to hedge against a possible decrease in the value of its
portfolio securities, the Trust may purchase put options or write call options
on futures contracts rather than selling futures contracts. Similarly, the Trust
may purchase call options or write put options on futures contracts as a
substitute for the purchase of futures contracts to hedge against a possible
increase in the price of securities which the Trust expects to purchase. Such
options generally operate in the same manner as options purchased or written
directly on the underlying investments.
As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an offsetting option. There is
no guarantee that such closing transactions can be effected.
The Trust will be required to deposit initial margin and maintenance margin
with respect to put and call options on futures contracts written by it pursuant
to brokers' requirements, similar to those described above in connection with
the discussion of futures contracts.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. Successful
use of futures contracts by the Trust is subject to the Advisor's ability to
predict movements in various factors affecting securities markets, including
interest rates. Compared to the purchase or sale of futures contracts, the
purchase of call or put options on futures contracts involves less potential
risk to the Trust because the maximum amount at risk is the premium paid for the
options (plus transaction costs). However, there may be circumstances when the
purchase of a call or put option on a futures contract would result in a loss to
the Trust when the purchase or sale of a futures contract would not, such as
when there is no movement in the prices of the hedged investments. The writing
of an option on a futures contract involves risks similar to those risks
relating to the sale of futures contracts.
The use of options and futures strategies also involves the risk of
imperfect correlation among movements in the prices of the securities underlying
the futures and options purchased and sold by the Trust, of the options and
futures contracts themselves, and, in the case of hedging transactions, of the
securities which are the subject of a hedge.
There is no assurance that higher than normal trading activity or other
unforeseen events might not, at times, render certain market clearing facilities
inadequate, and thereby result in the institution by exchanges of special
procedures which may interfere with the timely execution of customer orders.
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To reduce or eliminate a position held by the Trust, the Trust may seek to
close out such position. The ability to establish and close out positions will
be subject to the development and maintenance of a liquid secondary market. It
is not certain that this market will develop or continue to exist for a
particular futures contract or option. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain contracts or options, (ii) restrictions
may be imposed by an exchange on opening transactions or closing transactions or
both, (iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of contracts or options, or underlying
securities, (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange, (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current trading volume,
or (vi) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of contracts or options
(or a particular class or series of contracts or options), in which event the
secondary market on that exchange for such contracts or options (or in the class
or series of contracts or options) would cease to exist, although outstanding
contracts or options on the exchange that had been issued by a clearing
corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
U.S. TREASURY SECURITY FUTURES CONTRACTS AND OPTIONS. U.S. Treasury
security futures contracts require the seller to deliver, or the purchaser to
take delivery of, the type of U.S. Treasury security called for in the contract
at a specified date and price. Options on U.S. Treasury security futures
contracts give the purchaser the right, in return for the premium paid, to
assume a position in a U.S. Treasury security futures contract at the specified
option exercise price at any time during the period of the option.
Successful use of U.S. Treasury security futures contracts by the Trust is
subject to the Advisor's ability to predict movements in the direction of
interest rates and other factors affecting markets for debt securities. For
example, if the Trust has sold U.S. Treasury security futures contracts in order
to hedge against the possibility of an increase in interest rates which would
adversely affect securities held in its portfolio, and the prices of the Trust's
securities increase instead as a result of a decline in interest rates, the
Trust would be likely to lose part or all of the benefit of the increased value
of its securities which it has hedged because it will have offsetting losses in
its futures positions. In addition, in such situations, if the Trust has
insufficient cash, it may have to sell securities to meet daily maintenance
margin requirements at a time when it may be disadvantageous to do so.
There is also a risk that price movements in U.S. Treasury security futures
contracts and related options will not correlate closely with price movements in
markets for particular securities. For example, if the Trust has hedged against
a decline in the values of high yield corporate securities held by it by selling
Treasury security futures and the values of Treasury securities subsequently
increase while the values of its high yield corporate securities decrease, the
Trust would incur losses on both the Treasury security futures contracts written
by it and the high yield corporate securities held in its portfolio.
INDEX FUTURES CONTRACTS. An index futures contract is a contract to buy or
sell units of an index at a specified future date at a price agreed upon when
the contract is made. Entering into a contract to buy units of an index is
commonly referred to as buying or purchasing a contract or holding a long
position in the index. Entering into a contract to sell units of an index is
commonly referred to as selling a contract or holding a short position. A unit
is the current value of the index. The Trust may enter into stock index futures
contracts, debt index futures contracts, or other index futures contracts
appropriate to its objective. The Trust may also purchase and sell options on
index futures contracts.
There are several risks in connection with the use by the Trust of index
futures. One risk arises because of the imperfect correlation between movements
in the prices of the index futures and movements in the prices of securities
which are the subject of the hedge. The Advisor will, however, attempt to reduce
this risk by buying or selling, to the extent possible, futures on indices the
movements of which will, in its judgment, have a significant correlation with
movements in the prices of the securities sought to be hedged.
Successful use of index futures by the Trust is also subject to the
Advisor's ability to predict movements in the direction of the market. For
example, it is possible that, where the Trust has sold
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futures to hedge its portfolio against a decline in the market, the index on
which the futures are written may advance and the value of securities held in
the Trust's portfolio may decline. If this occurred, the Trust would lose money
on the futures and also experience a decline in value in its portfolio
securities. It is also possible that, if the Trust has hedged against the
possibility of a decline in the market adversely affecting securities held in
its portfolio and securities prices increase instead, the Trust will lose part
or all of the benefit of the increased value of those securities it has hedged
because it will have offsetting losses in its futures positions. In addition, in
such situations, if the Trust has insufficient cash, it may have to sell
securities to meet daily variation margin requirements at a time when it is
disadvantageous to do so.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the index futures and the portion
of the portfolio being hedged, the prices of index futures may not correlate
perfectly with movements in the underlying index due to certain market
distortions. First, all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the index and
futures markets. Second, margin requirements in the futures market are less
onerous than margin requirements in the securities market, and as a result the
futures market may attract more speculators than the securities market does.
Increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and also because of the imperfect correlation between movements
in the index and movements in the prices of index futures, even a correct
forecast of general market trends by the Advisor may still not result in a
profitable position over a short time period.
OPTIONS ON INDEX FUTURES. Options on index futures are similar to options
on securities except that options on index futures give the purchaser the right,
in return for the premium paid, to assume a position in an index futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the period of
the option. Upon exercise of the option, the delivery of the futures position by
the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account which
represents the amount by which the market price of the index futures contract,
at exercise, exceeds (in the case of a call) or is less than (in the case of a
put) the exercise price of the option on the index future. If an option is
exercised on the last trading day prior to its expiration date, the settlement
will be made entirely in cash equal to the difference between the exercise price
of the option and the closing level of the index on which the future is based on
the expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
OPTIONS ON INDICES
As an alternative to purchasing call and put options on index futures, the
Trust may purchase and sell call and put options on the underlying indices
themselves. Such options would be used in a manner identical to the use of
options on index futures.
INDEX WARRANTS
The Trust may purchase put warrants and call warrants whose values vary
depending on the change in the value of one or more specified securities indices
("index warrants"). Index warrants are generally issued by banks or other
financial institutions and give the holder the right, at any time during the
term of the warrant, to receive upon exercise of the warrant a cash payment from
the issuer based on the value of the underlying index at the time of exercise.
In general, if the value of the underlying index rises above the exercise price
of the index warrant, the holder of a call warrant will be entitled to receive a
cash payment from the issuer upon exercise based on the difference between the
value of the index and the exercise price of the warrant. If the value of the
underlying index falls, the holder of a put warrant will be entitled to receive
a cash payment from the issuer upon exercise based on the difference between the
exercise price of the warrant and the value of the index. The holder of a
warrant would not be entitled to any payments from the issuer at any time when,
in the case of a call warrant, the exercise price is greater than the value
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of the underlying index, or, in the case of a put warrant, the exercise price is
less than the value of the underlying index. If the Trust were not to exercise
an index warrant prior to its expiration, then the Trust would lose the amount
of the purchase price paid by it for the warrant.
The Trust will normally use index warrants in a manner similar to its use
of options on securities indices. The risks of the Trust's use of index warrants
are generally similar to those relating to its use of index options. Unlike most
index options, however, index warrants are issued in limited amounts and are not
obligations of a regulated clearing agency, but are backed only by the credit of
the bank or other institution which issues the warrant. Also, index warrants
generally have longer terms than index options. Although the Trust will normally
invest only in exchange-listed warrants, index warrants are not likely to be as
liquid as certain index options backed by a recognized clearing agency. In
addition, the terms of index warrants may limit the Trust's ability to exercise
the warrants at such time, or in such quantities, as the Trust would otherwise
wish to do.
ZERO COUPON SECURITIES (ZEROS)
The Trust may invest in zero coupon securities, which are securities issued
at a significant discount from face value and pay interest only at maturity
rather than at intervals during the life of the security and in certificates
representing undivided interests in the interest or principal of mortgage-backed
securities (interest only/principal only), which tend to be more volatile than
other types of securities. The Trust will accrue and distribute income from zero
coupon and stripped securities and certificates on a current basis and may have
to sell securities to generate cash for distributions.
INVERSE FLOATERS
Inverse floaters are derivative securities whose interest rates vary
inversely to changes in short-term interest rates and whose values fluctuate
inversely to changes in long-term interest rates. The value of certain inverse
floaters will fluctuate substantially more in response to a given change in
long-term rates than would a traditional debt security. These securities have
investment characteristics similar to leverage, in that interest rate changes
have a magnified effect on the value of inverse floaters.
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TAX MATTERS
FEDERAL INCOME TAX MATTERS
Federal Taxation of the Trust
The ability of the Trust to qualify for taxation as a regulated investment
company under Subchapter M of the Code requires, among other things, that the
Trust distribute to its shareholders with respect to each year at least 90% of
the sum of (1) its net tax-exempt interest income and (2) its taxable net
investment income (including, generally, taxable interest, dividends and certain
other income, less certain expenses, and the excess, if any, of net short-term
capital gain over net long-term capital loss) (the "Distribution Requirement").
In addition to satisfying the Distribution Requirement for each taxable
year, a regulated investment company must derive at least 90% of its gross
income from dividends, interest, certain payments with respect to securities
loans, gains from the sale or other disposition of stock or securities or
foreign currencies (to the extent such currency gains are directly related to
the regulated investment company's principal business of investing in stock or
securities, or options and futures with respect to stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement").
Further, the Trust must satisfy an asset diversification test in order to
qualify as a regulated investment company. Under this test, at the close of each
quarter of the Trust's taxable year, at least 50% of the value of the Trust's
assets must consist of cash and cash items (including receivables), U.S.
Government securities, securities of other regulated investment companies, and
securities of other issuers (as to which the Trust has not invested more than 5%
of the value of the Trust's total assets in securities of such issuer and as to
which the Trust does not hold more than 10% of the outstanding voting securities
of such issuer), and no more than 25% of the value of its total assets may be
invested in the securities of any one issuer (other than U.S. Government
securities and securities of other regulated investment companies), or in two or
more issuers which the Trust controls and which are engaged in the same or
similar trades or businesses or related trades or businesses.
A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in each calendar year an amount at least equal to the
sum of 98% of ordinary taxable income for the calendar year and 98% of capital
gain net income for the one-year period ended on October 31 of such calendar
year (or, at the election of a regulated investment company having a taxable
year ending November 30 or December 31, for its taxable year), plus 100% of any
undistributed income from the preceding year. For the foregoing purposes, a
regulated investment company is treated as having distributed any amount on
which it is subject to income tax for any taxable year ending in such calendar
year.
The Trust generally intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the Trust may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability. In addition, the Trust may elect to pay the excise tax liability
if it determines that the costs of making an excise tax distribution are greater
than the excise tax liability that would be due upon the failure to make such
excise tax distribution.
To satisfy the Distribution Requirement described above, amounts paid as
dividends by the Trust to its shareholders, including shareholders of the two
series of Municipal Preferred, must qualify for the dividends-paid deduction. In
certain circumstances, the Internal Revenue Service could take the position that
dividends paid on the different series of Municipal Preferred constitute
preferential dividends under section 562(c) of the Code, and thus do not qualify
for the dividends-paid deduction. The Trust has received an opinion from Ropes &
Gray that dividends paid on its different series of Municipal Preferred
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will qualify for the dividends-paid deduction. Such opinion represents only
counsel's best legal judgment and is not binding on the Internal Revenue
Service.
If the Trust does not qualify for taxation as a regulated investment
company for any taxable year, the Trust's income will be taxed subject to
corporate income taxes imposed at the Trust level, and all distributions from
earnings and profits, including distributions of net exempt-interest income and
net capital gain (i.e., the excess, if any, of net long-term capital gain over
net short-term capital loss), will be taxable to shareholders as ordinary
income. In addition, in order to requalify for taxation as a regulated
investment company, the Trust may be required to recognize unrealized gains, pay
substantial taxes and interest, and make certain distributions.
If at any time when shares of a series of Municipal Preferred are
outstanding the Trust does not meet applicable asset coverage requirements, the
Trust will be required to suspend distributions to holders of Common Shares
until the requisite asset coverage is restored. Any such suspension may cause
the Trust to pay the 4% Federal excise tax described above and may prevent the
Trust from satisfying the Distribution Requirement. The Trust may redeem shares
of each series of Municipal Preferred in an effort to comply with the
Distribution Requirement and to avoid the excise tax. See "Description of
Municipal Preferred -- Dividends."
Federal Taxation of Shareholders
DIVIDENDS AND OTHER DISTRIBUTIONS. In order for any distributions to
holders of shares of a series of Municipal Preferred to be eligible to be
treated as exempt-interest dividends, the shares of such series of Municipal
Preferred must be treated as equity for Federal income tax purposes. Based in
part on certain representations made by the Trust to Ropes & Gray relating to
the lack of any present intention to redeem or purchase shares of a series of
Municipal Preferred at any time in the future, it is the opinion of Ropes & Gray
that the shares of each series of Municipal Preferred will constitute equity for
Federal income tax purposes. This opinion relies in part on a published ruling
of the Internal Revenue Service stating that certain auction rate preferred
stock similar in many material respects to the series of Municipal Preferred
represents equity. The opinion of Ropes & Gray represents only its best legal
judgment and is not binding on the Internal Revenue Service or the courts. If
the Internal Revenue Service were successfully to assert that variable rate
preferred stock such as the shares of a series of Municipal Preferred should be
treated as debt for Federal income tax purposes, dividends on shares of such
series of Municipal Preferred would be treated as taxable interest for Federal
income tax purposes. In such event, dividends on shares of a series of Municipal
Preferred would not be increased by the Trust and holders of shares of a series
of Municipal Preferred would not be entitled to any additional distributions
from the Trust (including any Gross-up Payments) to offset the effect of paying
Federal income tax on Trust distributions so recharacterized as interest. Ropes
& Gray has advised the Trust that, should the Internal Revenue Service pursue in
court the position that the shares of a series of Municipal Preferred should be
treated as debt for Federal income tax purposes, the Internal Revenue Service
would be unlikely to prevail.
Prior proposed legislation that was ultimately not enacted would have
reinstated a deductible tax (the "Environmental Tax"), imposed through tax years
beginning before January 1, 1996, at a rate of 0.12% on a corporation's
alternative minimum taxable income (computed without regard to the alternative
minimum tax net operating loss deduction) in excess of $2 million. If the
Environmental Tax is reinstated, exempt-interest dividends paid by the Trust
that are included in a corporate shareholder's alternative minimum taxable
income may subject such shareholder to the Environmental Tax. It is not possible
for the Trust to predict whether similar legislation might be proposed and
enacted in the future. Corporate shareholders should consult with their own tax
advisors regarding the likelihood of such legislation and its effect on them.
As discussed in the Prospectus, exempt-interest dividends attributable to
interest received on certain private activity bonds and certain industrial
development bonds will not be tax-exempt to any shareholders who are, within the
meaning of Section 147(a) of the Code, "substantial users" of the facilities
financed by such obligations or bonds or who are "related persons" of such
substantial users. In general, a
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"substantial user" of a facility includes a "non-exempt person who regularly
uses a part of such facility in his trade or business." "Related persons" are in
general defined to include persons among whom there exists a relationship,
either by family or business, which would result in a disallowance of losses in
transactions among them under various provisions of the Code (or if they are
members of the same controlled group of corporations under the Code), including
a partnership and each of its partners (and their spouses and minor children),
an S corporation and each of its shareholders (and their spouses and minor
children) and various combinations of these relationships. The foregoing is not
a complete statement of all of the provisions of the Code covering the
definitions of "substantial user" and "related person." For additional
information, investors should consult their tax advisors before investing in
shares of a series of Municipal Preferred.
All or a portion of interest on indebtedness incurred or continued by a
shareholder to purchase or carry Trust shares may not be deductible by the
shareholder. The portion of interest that is not deductible is equal to the
total interest paid or accrued on the indebtedness multiplied by the percentage
of the Trust's total distributions (not including distributions of net capital
gain) paid to the shareholder that are exempt-interest dividends. Under rules
used by the Internal Revenue Service for determining when borrowed funds are
considered to have been used for the purpose of purchasing or carrying
particular assets, the purchase of shares of a series of Municipal Preferred may
be considered to have been made with borrowed funds even though such funds are
not directly traceable to the purchase of such shares.
Under Federal tax law in effect at the date of this Prospectus, a
shareholder's interest deduction generally will not be disallowed if the average
adjusted basis of the shareholder's tax-exempt obligations (including shares of
a series of Municipal Preferred) does not exceed two percent of the average
adjusted basis of the shareholder's trade or business assets (in the case of
most corporations and some individuals) and portfolio investments (in the case
of individuals). Prior proposed legislation that was ultimately not enacted
would have further limited or repealed this two-percent de minimis exception,
which could reduce the total after-tax yield of the shares of a series of
Municipal Preferred to investors to whom the de minimis exception would
otherwise apply. It is not possible for the Trust to predict whether similar
legislation might be proposed and enacted in the future. Shareholders should
consult with their own tax advisors regarding the likelihood of such legislation
and its effect on them.
SALES OR REDEMPTIONS OF SHARES. From time to time the Trust may make a
tender or repurchase offer for its Common Shares. It is expected that the terms
of any such offer will require a tendering shareholder to tender all Common
Shares, and dispose of all shares of each series of Municipal Preferred, held or
considered under Code rules to be held by such shareholder. Shareholders who
tender all Common Shares and dispose of all shares of each series of Municipal
Preferred held, or considered held, by them will be treated as having sold such
shares and generally will realize a capital gain or loss. If, however, a
shareholder tenders fewer than all of its Common Shares, or retains a
substantial portion of its shares of any series of Municipal Preferred, such
shareholder may be treated as having received a taxable dividend upon the tender
of its Common Shares. In such a case, there is a remote risk that non-tendering
shareholders (including holders of shares of a series of Municipal Preferred)
will be treated as having received taxable distributions from the Trust.
Likewise, if the Trust redeems some but not all of the shares of a series of
Municipal Preferred held by a holder of shares of a series of Municipal
Preferred and such holder of shares of a series of Municipal Preferred is
treated as having received a taxable dividend upon such redemption, there is a
remote risk that holders of Common Shares and non-redeeming holders of shares of
a series of Municipal Preferred will be treated as having received taxable
distributions from the Trust.
BACKUP WITHHOLDING. The Trust generally is required to withhold and remit
to the U.S. Treasury 31% of the taxable dividends and other distributions paid
to non-corporate shareholders who fail to furnish the Trust with a correct
taxpayer identification number, who have underreported dividends or interest
income, or who fail to certify to the Trust that they are not subject to such
withholding. An individual's taxpayer identification number is his or her social
security number.
FOREIGN INVESTORS. Non-resident alien individuals, foreign corporations
and certain other foreign entities generally will be subject to a U.S.
withholding tax at a rate of 30% on the Trust's distributions
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from its ordinary income and the excess of its net short-term capital gain over
its net long-term capital loss, unless the tax is reduced or eliminated by an
applicable tax treaty. Distributions from the excess of the Trust's net capital
gain received by such shareholders and any gain from the sale or other
disposition of shares of the Trust generally will not be subject to U.S. Federal
income taxation, provided that non-resident alien status has been certified by
the shareholder. Different U.S. tax consequences may result if the shareholder
is engaged in a trade or business in the United States, is present in the United
States for a sufficient period of time during a taxable year to be treated as a
U.S. resident, or fails to provide any required certifications regarding status
as a non-resident alien investor. Foreign shareholders should consult their tax
advisors regarding the U.S. and foreign tax consequences of an investment in the
Trust.
The Internal Revenue Service recently revised its regulations affecting the
application to foreign investors of the back-up withholding and withholding tax
rules described above. The new regulations will generally be effective for
payments made after December 31, 2000. In some circumstances, the new rules will
increase the certification and filing requirements imposed on foreign investors
in order to qualify for exemption from the 31% back-up withholding tax and for
reduced withholding tax rates under income tax treaties. Foreign investors in
the Trust should consult their tax advisors with respect to the potential
application of these new regulations.
The foregoing is a general, abbreviated summary of the provisions of the
Code and regulations thereunder presently in effect as they directly govern the
taxation of the Trust and owners of shares of a series of Municipal Preferred.
These provisions are subject to change by legislative or administrative action,
and any such change may be retroactive with respect to Trust transactions.
Owners of shares of a series of Municipal Preferred are advised to consult with
their own tax advisors for more detailed information concerning Federal income
tax matters.
FOREIGN, STATE AND LOCAL TAX MATTERS
The exemption from Federal income tax for exempt-interest dividends does
not necessarily result in exemption for such dividends under the income or other
tax laws of any foreign, state or local taxing authority. Some states exempt
from state income tax that portion of any exempt-interest dividend that is
derived from interest received by a regulated investment company on its holdings
of securities of that state and its political subdivisions and
instrumentalities. Therefore, the Trust will report annually to its shareholders
the percentage of interest income earned by the Trust during the preceding year
on tax-exempt obligations indicating, on a state-by-state basis, the source of
such income. Holders of shares of a series of Municipal Preferred are advised to
consult with their own tax advisors about foreign, state and local tax matters.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Trust. However, the
Declaration disclaims shareholder liability for acts or obligations of the Trust
and requires that a notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Trust or the Trustees.
The Declaration provides for indemnification out of Trust property for all loss
and expense of any shareholder held personally liable for the obligations of the
Trust. Thus, the risk of a shareholder's incurring financial loss on account of
shareholder liability is limited to circumstances (which are considered remote)
in which the Trust would be unable to meet its obligations and the disclaimer
was inoperative.
CUSTODIAN
The Chase Manhattan Bank, located at 270 Park Avenue, New York, New York
10017-2070, is the Trust's custodian. The custodian is responsible for
safeguarding the Trust's cash and securities, receiving and delivering
securities and collecting the Trust's interest and dividends.
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INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP are the Trust's independent accountants,
providing audit and tax return preparation services and assistance and
consultation in connection with the review of various Securities and Exchange
Commission filings. The address of PricewaterhouseCoopers LLP is 160 Federal
Street, Boston, Massachusetts 02110. The financial statements included in this
SAI have been so included, and the financial highlights included in the
Prospectus have been so included, in reliance upon the report of
PricewaterhouseCoopers LLP given on the authority of said firm as experts in
accounting and auditing.
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GLOSSARY
" 'AA' Composite Commercial Paper Rate" has the meaning set forth on page
B-18 of this Statement of Additional Information.
"Advisor" means Colonial Management Associates, Inc.
"Affected Series" has the meaning set forth on page B-34 of this Statement
of Additional Information.
"Affiliate" means, for purposes of the definition of "Outstanding," any
Person known to the Auction Agent to be controlled by, in control of or under
common control with the Trust; provided, however, that no Broker-Dealer
controlled by, in control of or under common control with the Trust shall be
deemed to be an Affiliate nor shall any corporation or any Person controlled by,
in control of or under common control with such corporation one of the
directors, trustees or executive officers of which is a trustee of the Trust be
deemed to be an Affiliate solely because such director, trustee or executive
officer is also a trustee of the Trust.
"Agent Member" means a member of or participant in the Securities
Depository that will act on behalf of a Bidder.
"Anticipation Notes" means Tax Anticipation Notes (TANs), Revenue
Anticipation Notes (RANs), Tax and Revenue Anticipation Notes (TRANs), Grant
Anticipation Notes (GANs) that are rated by Standard & Poor's and Bond
Anticipation Notes (BANs).
"Applicable Rate" has the meaning set forth on page B-13 of this Statement
of Additional Information.
"Auction" means each periodic implementation of the Auction Procedures.
"Auction Agency Agreement" has the meaning set forth on page B-13 of this
Statement of Additional Information.
"Auction Agent" means the entity appointed as such by a resolution of the
Board of Trustees.
"Auction Date," with respect to any Rate Period, means the Business Day
next preceding the first day of such Rate Period.
"Auction Procedures" means the procedures for conducting Auctions as
described in this Statement of Additional Information, including Appendix B
hereto.
"Available Municipal Preferred" has the meaning set forth on page B-21 of
this Statement of Additional Information.
"Benchmark Rate" has the meaning set forth on page B-22 of this Statement
of Additional Information.
"Beneficial Owner" has the meaning set forth on page B-13 of this Statement
of Additional Information.
"Bid" has the meaning set forth on page B-15 of this Statement of
Additional Information.
"Bidder" and "Bidders" have the respective meanings set forth on page B-15
of this Statement of Additional Information.
"Board of Trustees" or "Board" means the Board of Trustees of the Trust or
any duly authorized committee thereof.
"Broker-Dealer" means any broker-dealer, commercial bank or other entity
permitted by law to perform the functions required of a Broker-Dealer, that is a
member of, or a participant in, the Securities Depository or is an affiliate of
such member or participant, has been selected by the Trust and has entered into
a Broker-Dealer Agreement that remains effective.
B-62
<PAGE> 114
"Broker-Dealer Agreement" means an agreement among the Trust, the Auction
Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow
the procedures specified in the By-Laws, the Prospectus and this Statement of
Additional Information.
"Business Day" has the meaning set forth on page B-13 of this Statement of
Additional Information.
"By-Laws" means the Amended and Restated By-Laws of Colonial High Income
Municipal Trust on file with the Secretary of the Commonwealth of Massachusetts.
"Cede" means Cede & Co., the nominee of DTC in whose name the shares of
Municipal Preferred initially will be registered.
"CFTC" has the meaning set forth on page B-52 of this Statement of
Additional Information.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" has the meaning set forth on page B-18 of this
Statement of Additional Information.
"Common Shares" means the common shares of beneficial interest, without par
value, of the Trust.
"Cure Date" means the Municipal Preferred Basic Maintenance Cure Date or
the 1940 Act Cure Date, as the case may be.
"Date of Original Issue" has the meaning set forth on page B-13 of this
Statement of Additional Information.
"Declaration" means the Agreement and Declaration of Trust of Colonial High
Income Municipal Trust, as amended, on file with the Secretary of the
Commonwealth of Massachusetts.
"Deposit Securities" means cash and Municipal Obligations rated at least
A-1+ or SP-1+ by Standard & Poor's, except that, for purposes of determining
whether the Trust may mail a Notice of Redemption, such Municipal Obligations
shall be considered "Deposit Securities" only if they are also rated P-1, MIG-1
or VMIG-1 by Moody's.
"Discount Factor" means a Moody's Discount Factor or a Standard & Poor's
Discount Factor, as the case may be.
"Discounted Value" means, as of any Valuation Date, (i) with respect to a
Standard & Poor's Eligible Asset, the quotient of the Market Value thereof
divided by the applicable Standard & Poor's Discount Factor and (ii)(a) with
respect to a Moody's Eligible Asset that is not currently callable as of such
Valuation Date at the option of the issuer thereof, the quotient of the Market
Value thereof divided by the applicable Moody's Discount Factor, or (b) with
respect to a Moody's Eligible Asset that is currently callable as of such
Valuation Date at the option of the issuer thereof, the quotient of (1) the
lesser of the Market Value or call price thereof, including any call premium,
divided by (2) the applicable Moody's Discount Factor.
"Dividend Payment Date" has the meaning set forth on page B-13 of this
Statement of Additional Information.
"Dividend Period" has the meaning set forth on page B-13 of this Statement
of Additional Information.
"DTC" has the meaning set forth on page B-14 of this Statement of
Additional Information.
"Eligible Assets" means Moody's Eligible Assets or Standard & Poor's
Eligible Assets, as the case may be.
"Escrowed Bonds" means Municipal Obligations that (i) have been determined
to be legally defeased in accordance with Standard & Poor's legal defeasance
criteria, (ii) have been determined to be economically defeased in accordance
with Standard & Poor's economic defeasance criteria and assigned a rating of AAA
by Standard & Poor's, (iii) are not rated by Standard & Poor's but have been
determined
B-63
<PAGE> 115
to be legally defeased by Moody's, or (iv) have been determined to be
economically defeased by Moody's and assigned a rating no lower than the rating
that is Moody's equivalent of Standard & Poor's AAA rating.
"Exchange" has the meaning set forth on page B-46 of this Statement of
Additional Information.
"Existing Holder" has the meaning set forth on page B-13 of this Statement
of Additional Information.
"Failure to Deposit," with respect to shares of a series of Municipal
Preferred, means a failure by the Trust to pay to the Auction Agent, not later
than 12:00 noon, Eastern time, (A) on the Business Day next preceding any
Dividend Payment Date for shares of such series, in funds available on such
Dividend Payment Date in The City of New York, New York, the full amount of any
dividend (whether or not earned or declared) to be paid on such Dividend Payment
Date on any share of such series or (B) on the Business Day next preceding any
redemption date in funds available on such redemption date for shares of such
series in The City of New York, New York, the Redemption Price to be paid on
such redemption date for any share of such series after Notice of Redemption is
mailed as set forth in the By-Laws, the Prospectus or this Statement of
Additional Information; provided, however, that the foregoing clause (B) shall
not apply to the Trust's failure to pay the Redemption Price in respect of
shares of a series of Municipal Preferred when the related Notice of Redemption
provides that redemption of shares of such series is subject to one or more
conditions precedent and any such condition precedent shall not have been
satisfied at the time or times and in the manner specified in such Notice of
Redemption.
"Gross-up Payment" has the meaning set forth on page B-30 of this Statement
of Additional Information.
"Hold Order" has the meaning set forth on page B-15 of this Statement of
Additional Information.
"Holder" means the registered holder of shares of a series of Municipal
Preferred as the same appears on the record books of the Trust.
"Initial Margin" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a futures
contract.
"Initial Rate Period" has the meaning set forth on page B-13 of this
Statement of Additional Information.
"IRS" means the Internal Revenue Service.
"Inverse Floater" shall mean trust certificates or other instruments
evidencing interests in one or more municipal securities that qualify as
Standard & Poor's Eligible Assets (and are not part of a private placement of
municipal securities and satisfy the issuer and size requirements of the
definition of Standard & Poor's Eligible Assets) the interest rates on which are
adjusted at short-term intervals on a basis that is inverse to the simultaneous
readjustment of the interest rates on corresponding floating rate trust
certificates or other instruments issued by the same issuer, provided that the
ratio of the aggregate dollar amount of floating rate instruments to inverse
floating rate instruments issued by the same issuer does not exceed one to one
at their time of original issuance unless the floating rate instrument has only
one reset remaining until maturity.
"Kenny Index" has the meaning set forth on page B-17 of this Statement of
Additional Information.
"Late Charge" has the meaning set forth on pages B-27 to B-28 of this
Statement of Additional Information.
"Liquidation Preference," with respect to a given number of shares of
Municipal Preferred, means $25,000 times that number.
"Market Value" of any asset of the Trust means the market value thereof
determined by the pricing service designated from time to time by the Board of
Trustees. Market Value of any asset shall include any interest accrued thereon.
The pricing service will use current industry standards to value portfolio
B-64
<PAGE> 116
securities. The pricing service may employ electronic data processing techniques
or a matrix system, or both, to determine valuations. Securities for which
quotations are not readily available shall be valued at fair value as determined
by the pricing service using methods which include consideration of: yields or
prices of municipal bonds of comparable quality, type of issue, coupon, maturity
and rating; indications as to value from dealers; and general market conditions.
In the event the pricing service is unable to value a security, the security
shall be valued at the lower of two dealer bids obtained by the Trust from
dealers who are members of the National Association of Securities Dealers, Inc.
and make a market in the security, at least one of which shall be in writing.
Futures contracts and options are valued at closing prices for such instruments
established by the exchange or board of trade on which they are traded, or if
market quotations are not readily available, are valued at fair value on a
consistent basis using methods determined in good faith by the Trustees.
"Maximum Potential Gross-up Payment Liability" has the meaning set forth on
page B-37 of this Statement of Additional Information.
"Maximum Rate" has the meaning set forth on pages B-16 to B-17 of this
Statement of Additional Information.
"Minimum Rate Period" means any Rate Period consisting of 7 Rate Period
Days.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Moody's Discount Factors" has the meaning set forth on page B-40 of this
Statement of Additional Information.
"Moody's Eligible Assets" has the meaning set forth on page B-40 of this
Statement of Additional Information.
"Moody's Exposure Period" has the meaning set forth on page B-40 of this
Statement of Additional Information.
"Moody's Volatility Factor" means, as of any Valuation Date, (i) in the
case of any Minimum Rate Period, any Special Rate Period of 28 Rate Period Days
or fewer, or any Special Rate Period of 57 Rate Period Days or more, a
multiplicative factor equal to 275%, except as otherwise provided in the last
sentence of this definition; (ii) in the case of any Special Rate Period of more
than 28 but fewer than 36 Rate Period Days, a multiplicative factor equal to
203%; (iii) in the case of any Special Rate Period of more than 35 but fewer
than 43 Rate Period Days, a multiplicative factor equal to 217%; (iv) in the
case of any Special Rate Period of more than 42 but fewer than 50 Rate Period
Days, a multiplicative factor equal to 226%; and (v) in the case of any Special
Rate Period of more than 49 but fewer than 57 Rate Period Days, a multiplicative
factor equal to 235%. If, as a result of the enactment of changes to the Code,
the greater of the maximum marginal Federal individual income tax rate
applicable to ordinary income and the maximum marginal Federal corporate income
tax rate applicable to ordinary income will increase, such increase being
rounded up to the next five percentage points, until the effective date of such
increase, the Moody's Volatility Factor in the case of any Rate Period described
in (i) above in this definition instead shall be determined by reference to the
following table:
<TABLE>
<CAPTION>
FEDERAL VOLATILITY
TAX RATE INCREASE FACTOR
- ----------------------------------------------------------- ----------
<S> <C>
5%................................................... 295 %
10%................................................... 317 %
15%................................................... 341 %
20%................................................... 369 %
25%................................................... 400 %
30%................................................... 436 %
35%................................................... 477 %
40%................................................... 525 %
</TABLE>
B-65
<PAGE> 117
"Municipal Obligations" shall mean "Municipal Obligations" as defined on
page 10 of the prospectus filed as part of the Trust's registration statement on
Form N-2 on file with the Securities and Exchange Commission.
"Municipal Preferred" means the Municipal Auction Rate Cumulative Preferred
Shares, Series T, without par value, liquidation preference $25,000 per share,
of the Trust, or the Municipal Auction Rate Cumulative Preferred Shares, Series
W, without par value, liquidation preference $25,000 per share, of the Trust, or
both, as the case may be.
"Municipal Preferred Basic Maintenance Amount" has the meaning set forth on
pages B-36 to B-37 of this Statement of Additional Information.
"Municipal Preferred Basic Maintenance Cure Date" has the meaning set forth
on page B-36 of this Statement of Additional Information.
"Municipal Preferred Basic Maintenance Report" has the meaning set forth on
page B-37 of this Statement of Additional Information.
"1940 Act" means the Investment Company Act of 1940, as amended.
"1940 Act Cure Date" has the meaning set forth on page B-36 of this
Statement of Additional Information.
"1940 Act Municipal Preferred Asset Coverage" has the meaning set forth on
page B-36 of this Statement of Additional Information.
"Notice of Redemption" has the meaning set forth on page B-43 of this
Statement of Additional Information.
"Notice of Special Rate Period" has the meaning set forth on page B-32 of
this Statement of Additional Information.
"Order" and "Orders" have the respective meanings set forth on page B-15 of
this Statement of Additional Information.
"Outstanding" means, as of any Auction Date with respect to shares of a
series of Municipal Preferred, the number of shares of such series theretofore
issued by the Trust except, without duplication, (i) any shares of such series
of Municipal Preferred theretofore canceled or delivered to the Auction Agent
for cancellation or redeemed by the Trust, (ii) any shares of such series of
Municipal Preferred as to which the Trust or any Affiliate thereof shall be an
Existing Holder, and (iii) any shares of such series of Municipal Preferred
represented by any certificate in lieu of which a new certificate has been
executed and delivered by the Trust.
"Person" means and includes an individual, a partnership, a corporation, a
trust, an unincorporated association, a joint venture or other entity or a
government or any agency or political subdivision thereof.
"Potential Beneficial Owner" has the meaning set forth on page B-13 of this
Statement of Additional Information.
"Potential Holder" has the meaning set forth on page B-13 of this Statement
of Additional Information.
"Preferred Shares" means the preferred shares of beneficial interest,
without par value of the Trust, and includes the Municipal Preferred.
"Rate Multiple" has the meaning set forth on pages B-19 to B-20 of this
Statement of Additional Information.
"Rate Period" has the meaning set forth on page B-13 of this Statement of
Additional Information.
"Rate Period Days," for any Rate Period or Dividend Period, means the
number of days that would constitute such Rate Period or Dividend Period but for
the application of the second paragraph under
B-66
<PAGE> 118
"Description of Municipal Preferred -- Dividends -- General" or the second
paragraph under "Description of Municipal Preferred -- Dividends -- Designation
of Special Rate Periods."
"Receivables for Municipal Obligations Sold," for purposes of calculating
Moody's Eligible Assets or Standard & Poor's Eligible Assets, as the case may
be, has the meaning set forth on pages B-40 to B-41 and B-38 to B-39 of this
Statement of Additional Information, respectively.
"Redemption Price" has the meaning set forth on page B-42 of this Statement
of Additional Information.
"Reference Rate" has the meaning set forth on page B-17 of this Statement
of Additional Information.
"SEC" means the Securities and Exchange Commission.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any other securities depository selected by the Trust
which agrees to follow the procedures required to be followed by such securities
depository in connection with shares of Municipal Preferred.
"Sell Order" has the meaning set forth on page B-15 of this Statement of
Additional Information.
"Special Rate Period" has the meaning set forth on page B-13 of this
Statement of Additional Information.
"Special Redemption Provisions" has the meaning set forth on page B-42 of
this Statement of Additional Information.
"Standard & Poor's" means Standard & Poor's Ratings Services, a division of
The McGraw-Hill Companies, Inc. and its successors.
"Standard & Poor's Discount Factors" has the meaning set forth on page B-38
of this Statement of Additional Information.
"Standard & Poor's Eligible Assets" has the meaning set forth on page B-38
of this Statement of Additional Information.
"Standard & Poor's Exposure Period" has the meaning set forth on page B-38
of this Statement of Additional Information.
"Standard & Poor's Volatility Factor" means, as of any Valuation Date, a
multiplicative factor equal to (i) 305% in the case of any Minimum Rate Period
or any Special Rate Period of 28 Rate Period Days or fewer, (ii) 268% in the
case of any Special Rate Period of more than 28 Rate Period Days but fewer than
183 Rate Period Days, and (iii) 204% in the case of any Special Rate Period of
more than 182 Rate Period Days.
"Submission Deadline" means 1:30 P.M., Eastern time, on any Auction Date or
such other time on any Auction Date by which Broker-Dealers are required to
submit Orders to the Auction Agent as specified by the Auction Agent from time
to time.
"Submitted Bid" and "Submitted Bids" have the respective meanings set forth
on page B-21 of this Statement of Additional Information.
"Submitted Hold Order" and "Submitted Hold Orders" have the respective
meanings set forth on page B-21 of this Statement of Additional Information.
"Submitted Order" and "Submitted Orders" have the respective meanings set
forth on page B-21 of this Statement of Additional Information.
"Submitted Sell Order" and "Submitted Sell Orders" have the respective
meanings set forth on page B-21 of this Statement of Additional Information.
B-67
<PAGE> 119
"Subsequent Rate Period" has the meaning set forth on page B-13 of this
Statement of Additional Information.
"Substitute Commercial Paper Dealer" has the meaning set forth on page B-18
of this Statement of Additional Information.
"Substitute U.S. Government Securities Dealer" has the meaning set forth on
page B-19 of this Statement of Additional Information.
"Sufficient Clearing Bids" has the meaning set forth on pages B-21 to B-22
of this Statement of Additional Information.
"Taxable Allocation" has the meaning set forth on page B-29 of this
Statement of Additional Information.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" has the meaning
set forth on pages B-17 to B-18 of this Statement of Additional Information.
"Taxable Income" has the meaning set forth on page B-22 of this Statement
of Additional Information.
"Taxable Yield Rate" has the meaning set forth on page B-22 of this
Statement of Additional Information.
"Treasury Bill" has the meaning set forth on page B-19 of this Statement of
Additional Information.
"Treasury Bill Rate" has the meaning set forth on page B-19 of this
Statement of Additional Information.
"Treasury Note" has the meaning set forth on page B-19 of this Statement of
Additional Information.
"Treasury Note Rate" has the meaning set forth on page B-19 of this
Statement of Additional Information.
"Trust" means Colonial High Income Municipal Trust, a Massachusetts
business trust, which is the issuer of the shares of Municipal Preferred.
"U.S. Government Securities Dealer" has the meaning set forth on page B-19
of this Statement of Additional Information.
"Valuation Date" has the meaning set forth on page B-36 of this Statement
of Additional Information.
"Variation Margin" means, in connection with an outstanding futures
contract owned or sold by the Trust, the amount of cash or securities paid to or
received from a broker (subsequent to the Initial Margin payment) from time to
time as the price of such futures contract fluctuates.
"Volatility Factor" means, as of any Valuation Date, the greater of the
Moody's Volatility Factor and the Standard & Poor's Volatility Factor.
"Voting Period" means a period that shall commence (A) if at the close of
business on any dividend payment date accumulated dividends (whether or not
earned or declared) on any outstanding Preferred Share, including Municipal
Preferred, equal to at least two full years' dividends shall be due and unpaid
and sufficient cash or specified securities shall not have been deposited with
the Auction Agent for the payment of such accumulated dividends; or (B) if at
any time holders of Preferred Shares are entitled under the 1940 Act to elect a
majority of the trustees of the Trust.
"Winning Bid Rate" has the meaning set forth on page B-22 of this Statement
of Additional Information.
B-68
<PAGE> 120
FINANCIAL STATEMENTS
INVESTMENT PORTFOLIO
DECEMBER 31, 1998 (IN THOUSANDS)
MUNICIPAL BONDS - 99.0% PAR VALUE
- - ------------------------------------------------------------------------------
EDUCATION - 3.7%
EDUCATION
CA Statewide Communities Development Corp.,
J. Paul Getty Trust Center,
5.000% 10/1/23 (a) $ 2,250 $ 2,228
CA Statewide Communities Development Authority,
Crossroads School for Arts & Sciences,
Series 1998,
6.000% 8/1/28 (j) 1,400 1,426
IL State Development Finance Authority,
Latin School of Chicago,
Series 1998:
5.600% 8/1/18 350 354
5.650% 8/1/28 730 738
MA State Industrial Finance Agency:
Cambridge Friends School,
Series 1998,
5.800% 9/1/28 1,000 1,028
St. John's High School,
Series 1998,
5.350% 6/1/28 300 298
Wentworth Institute of Technology,
Series 1998,
5.750% 10/1/28 1,000 1,034
MI Southfield Economic Development Corp.,
Lawrence University,
Series 1998 A,
5.400% 2/1/18 1,000 997
NM Santa Fe,
College of Santa Fe,
Series 1998 A,
5.500% 10/1/28 250 252
VT State Educational & Health Buildings Finance Agency,
Norwich University,
Series 1998,
5.500% 7/1/21 1,500 1,511
--------
9,866
--------
F-1
<PAGE> 121
...............................................................................
HEALTHCARE - 30.2%
HEALTH SERVICES - 0.1%
IL State Health Facilities Authority,
Midwest Physician Group Ltd.,
Series 1998,
5.500% 11/15/19 350 342
--------
HOSPITAL - 11.7%
AL Alabama Special Care Facilities Authority,
Montgomery Healthcare,
Series 1989,
11.000% 10/1/19 3,335 3,385
CA State Health Facilities Financing Authority,
Kaiser Permanente,
Series 1989 A,
(b) 10/1/12 (a) 5,500 2,873
CO State Health Care Facilities Authority,
National Jewish Medical & Research Center,
Series 1998,
5.375% 1/1/23 830 817
GA Baldwin County Hospital Authority,
Oconee Regional Medical Center,
Series 1998,
5.250% 12/1/22 500 483
GA Clayton Hospital Authority,
The Woodlands Foundation, Inc.,
Series 1991 A,
9.750% 5/1/21 (c) 2,500 1,625
GA Forsyth County Hospital Authority,
Georgia Baptist Healthcare System,
Series 1998,
6.000% 10/1/08 1,000 998
IL Health Facilities Authority,
Thorek Hospital & Medical Center,
5.250% 8/15/18 600 585
LA State Public Facilities Authority,
Pendleton Memorial Methodist Hospital,
Series 1998,
5.250% 6/1/17 1,250 1,213
MI Flint Hospital Building Authority,
Hurley Medical Center,
Series 1998 A,
5.375% 7/1/20 625 618
MN St. Paul Housing & Redevelopment Authority,
Healtheast Project,
Series A,
5.700% 11/1/15 1,000 1,019
F-2
<PAGE> 122
MN Washington County Housing
& Redevelopment Authority,
Healtheast, Inc.,
Series 1998,
5.250% 11/15/12 1,500 1,478
MO State Housing Development Commission,
Freeman Health Systems,
Series 1998,
5.250% 2/15/18 750 737
MS Lowndes County,
Golden Triangle Regional Medical Center,
Series 1990,
8.500% 2/1/10 235 249
MS State Business Finance Corp.,
Medical Foundation, Inc.,
Series 1998,
5.625% 7/1/23 1,450 1,452
NH State Higher Educational & Health Facilities Authority,
Littleton Hospital Assoc., Inc.:
5.900% 5/1/28 780 776
Series 1998 A,
6.000% 5/1/28 625 633
OH Belmont County,
East Ohio Regional Hospital,
Series 1998,
5.700% 1/1/13 1,875 1,854
OH Doctors OhioHealth Corp.,
5.600% 12/1/28 (d) 2,150 2,101
OH Sandusky County,
Series 1998,
5.150% 1/1/10 250 253
PA Allegheny County Hospital Development,
Ohio Valley General Hospital,
Series 1998 A,
5.450% 1/1/28 1,000 994
PA Mount Pleasant Business District Authority,
Frick Hospital,
5.750% 12/1/27 1,300 1,322
PA Pottsville Hospital Authority,
5.500% 7/1/18 1,000 995
TX Baylor Richardson Hospital,
5.625% 12/1/28 (d) 750 739
TX Lufkin Health Facilities Development Corp.,
Memorial Health Systems of East Texas,
Series 1998,
5.700% 2/15/28 1,120 1,131
F-3
<PAGE> 123
VT State Educational & Health Buildings Authority,
Springfield Hospital,
Series A,
7.750% 1/1/13 1,115 1,253
VT State Educational & Health Buildings Finance Agency,
Brattleboro Memorial Hospital,
5.375% 3/1/28 1,325 1,297
--------
30,880
--------
INTERMEDIATE CARE FACILITIES - 1.8%
IL Champaign,
Hoosier Care, Inc.,
Series 1989-A,
9.750% 8/1/19 1,425 1,489
MA State Health & Educational Facilities Authority,
Corp. for Independent Living,
8.100% 7/1/18 725 816
PA Economic Development Northwestern
Human Services, Series 1998-A,
5.250% 6/1/14 2,510 2,453
--------
4,758
--------
LIFECARE - 2.7%
CO State Health Care Facilities Authority,
National Benevolent Association,
Series 1998-B,
5.250% 2/1/28 750 738
KY State Economic Development Finance Authority,
Christian Church Homes of Kentucky, Inc.,
Series 1998,
5.500% 11/15/30 750 746
MI State Strategic Fund,
Holland Home,
Series 1998,
5.750% 11/15/28 400 397
MN Columbia Heights,
Crest View Corp.,
Series 1998,
6.000% 3/1/33 740 742
NH State Higher Educational & Health Facilities Authority,
Rivermead at Peterborough,
Series 1998:
5.625% 7/1/18 500 493
F-4
<PAGE> 124
5.750% 7/1/28 500 498
PA Philadelphia Authority for Industrial Development,
Baptist Home of Philadelphia, Series 1998 A:
5.500% 11/15/18 360 356
5.600% 11/15/28 570 555
TN Metropolitan Government,
Nashville & Davidson County,
Blakeford at Green Hills,
Series 1998,
5.650% 7/1/24 600 590
TX Abilene Health Facilities Development Corp.,
Sears Methodist Retirement Obligation Group,
Series 1998 A,
5.900% 11/15/25 1,000 991
WI State Health & Educational Facilities Authority,
Attic Angel Obligated Group,
5.750% 11/15/27 1,000 978
--------
7,084
--------
NURSING HOME - 13.9%
CO State Health Facilities Authority:
American Housing Foundation, Inc.,
Series 1990 A,
10.250% 12/1/20 1,300 1,300
Pioneer Health Care,
Series 1989,
10.500% 5/1/19 2,000 2,086
CO State Health Facilities Authority, Volunteers of
America Care Facilities, Inc., Series 1998 A:
5.450% 7/1/08 300 300
5.750% 7/1/20 865 852
FL Gadsden County Industrial Development Authority,
Florida Properties, Inc.,
Series 1988 A,
10.450% 10/1/18 1,865 1,894
IA State Finance Authority,
Care Initiatives Project:
Series 1996,
9.250% 7/1/25 1,000 1,350
Series 1998 B:
5.750% 7/1/18 550 550
5.750% 7/1/28 1,475 1,468
F-5
<PAGE> 125
IN Gary Industrial Economic Development,
West Side Health Care Center,
Series 1987 A,
11.500% 10/1/17 1,455 1,498
IN Metro Health,
6.400% 12/1/33 1,210 1,201
IN Michigan City Health Facilities,
Metro Health Foundation, Inc. Project,
10.000% 11/1/22 3,085 3,085
KS Washington County Industrial Development Authority,
Central States, Series 1989,
10.250% 11/1/19 1,835 1,872
MA Boston,
St. Joseph Nursing Care Center, Inc.,
Series 1990,
10.000% 1/1/20 (e) 935 1,002
MA State Industrial Finance Agency,
American Health Foundation, Inc.,
Series 1989,
10.125% 3/1/19 (c) 1,975 1,481
MN Minneapolis,
Walker Methodist Senior Services Group,
Series 1998 A,
6.000% 11/15/28 1,200 1,209
NJ State Economic Development Authority,
Geriatric & Medical Service, Inc.,
Series B,
10.500% 5/1/20 2,000 2,111
NM State Hospital Equipment Loan Council,
Memorial Medical Center,
Series 1998,
5.500% 6/1/28 1,220 1,203
PA Chester County Industrial Development,
Pennsylvania Nursing Home, Inc.,
Series 1989,
10.125% 5/1/19 (c) 2,548 2,344
TN Metropolitan Government,
Nashville & Davidson Counties Health
& Education Facilities, Central States,
Series 1989,
10.250% 11/1/19 1,705 1,739
TX Bell County Health Facilities Development Corp.,
Heartway Corp. Project:
(b) 3/1/19 255 64
9.500% 3/1/19 1,500 1,528
TX Kirbyville Health Facilities Development Corp.,
Heartway III Project:
Series 1997 A,
F-6
<PAGE> 126
10.000% 3/20/18 732 736
Series 1997 B,
(b) 3/20/04 106 58
TX Whitehouse Health Facilities Development Corp.,
Oak Brook Health Care Center,
Series 1989,
10.000% 12/1/19 1,755 1,865
WA Kitsap County Housing Authority,
Martha & Mary Nursing Home,
7.100% 2/20/36 1,000 1,184
WI State Health & Educational Facilities Authority,
Metro Health Foundation, Inc.,
Series 1993,
8.000% 11/1/22 2,775 2,775
--------
36,755
--------
...............................................................................
HOUSING - 15.7%
ASSISTED LIVING/SENIOR - 4.6%
CA Abag Finance Authority for
Non-Profit Corps.,
Eskaton Gold River Lodge,
Series 1998:
6.375% 11/15/15 (k) 750 743
6.375% 11/15/28 (k) 550 540
IL Clarendon Hills Residential Facilities,
Churchill Estate,
Series 1998 A:
6.750% 3/1/24 1,050 1,068
6.750% 3/1/31 1,370 1,394
IL State Development Finance Authority,
Care Institute, Inc.,
8.250% 6/1/25 1,300 1,463
MA Boston Industrial Development Finance Authority,
Springhouse, Inc.,
Series 1988,
5.875% 7/1/20 605 603
MN Roseville,
Care Institute, Inc.,
Series 1993,
7.750% 11/1/23 1,740 1,760
PA Montgomery County Industrial Development Authority,
Assisted Living Facility,
Series 1993-A,
F-7
<PAGE> 127
8.250% 5/1/23 850 942
TX Bell County Health Facilities Development Corp.,
Care Institute, Inc.,
9.000% 11/1/24 1,800 2,063
WI State Health & Educational Facilities Authority:
Clement Manor, Series 1998,
5.750% 8/15/24 600 581
United Lutheran Program for Aging, Inc.,
5.700% 3/1/28 1,000 989
--------
12,146
--------
MULTI-FAMILY - 9.0%
DE Wilmington,
Electra Arms Senior Association Project,
6.250% 6/1/28 1,000 980
FL State Housing Finance Agency,
Windsong Apartments,
Series 1993 C,
9.250% 1/1/19 1,000 900
GA Augusta Housing Authority,
Mountain Ridge Holdings II Project,
Series A,
8.960% 9/1/24 (c) 1,880 1,060
MN Lakeville,
Southfork Apartments Project:
Series 1989 A,
9.875% 2/1/20 2,570 2,583
Series 1989 B,
(f) 2/1/20 1,056 1,268
MN Washington County Housing & Redevelopment Authority,
Cottages of Aspen,
Series 1992,
9.250% 6/1/22 1,065 1,174
MN White Bear Lake,
Birch Lake Townhome Project:
Series 1989-A,
10.250% 7/15/19 2,200 2,233
Series 1989-B,
(f) 7/15/19 735 220
NC Eastern Carolina Regional Housing Authority,
New River Apartments-Jacksonville,
Series 1994,
8.250% 9/1/14 1,845 1,995
F-8
<PAGE> 128
NY Nyack Housing Assistance Corp.,
Nyack Plaza Apartments,
7.375% 6/1/21 (g) 394 395
Resolution Trust Corp.,
Pass Through Certificates,
Series 1993 A,
9.250% 12/1/16 (g) 5,098 5,251
TN Franklin Industrial Board,
Landings Apartment Project,
Series 1996 B,
8.750% 4/1/27 935 957
TX Galveston Health Facilities Center,
Pass Through Certificates,
8.000% 8/1/23 1,000 1,076
TX State Department of Housing & Community Affairs,
Pebble Brooks Apartments,
Series 1998,
5.500% 12/1/18 1,000 1,024
VA Alexandria Redevelopment & Housing Authority,
Courthouse Commons Apartments,
Series 1990-A,
10.000% 1/1/21 1,500 1,530
WA Vancouver Housing Authority,
Series I,
5.500% 3/1/28 1,000 1,015
--------
23,661
--------
SINGLE FAMILY - 2.1%
LA Louisiana Housing Finance Agency,
Residual Lien Mortgage, Series 1992,
7.375% 9/1/13 (f) 505 536
OH State Housing Finance Agency,
Series B-4, IFRN (variable rate),
10.226% 3/31/31 875 977
TX Bexar County Housing Finance Corp.,
GNMA Collateralized Mortgage,
Series 1989-A,
8.200% 4/1/22 2,340 2,423
TX Harris County Housing Finance,
Corp. Single Family, Series 1987,
8.875% 12/1/17 270 275
WA State Housing Finance Commission,
Series 1992 D-1,
6.150% 1/1/26 1,165 1,287
F-9
<PAGE> 129
--------
5,498
--------
...............................................................................
OTHER - 14.0%
OTHER - 1.2%
IN Hammond,
American Maize Products Co.,
Series 1994,
8.000% 12/1/24 2,000 2,328
MD Baltimore,
Park Charles Project,
Series 1986,
8.000% 1/1/10 810 875
--------
3,203
--------
REFUNDED/ESCROWED (h) - 12.8%
CA Colton Public Financing Authority,
Series 1995,
7.500% 10/1/20 2,000 2,335
CA San Joaquin Hills Transportation Corridor Agency,
Series 1993:
6.750% 1/1/32 (a) 1,500 1,699
7.000% 1/1/30 775 885
CO Denver City and County Airport:
Series B,
7.250% 11/15/23 580 662
Series C,
6.125% 11/15/25 2,280 2,504
FL Clearwater Housing Authority,
Hampton Apartments,
Series 1994,
8.250% 5/1/24 2,500 3,072
ID State Health Facilities Authority,
IHC Hospitals, Inc.,
8.470% 2/15/21 1,750 2,151
IL State Health Facilities Authority:
Edgewater Medical Center,
Series A,
9.250% 7/1/24 1,985 2,521
Hinsdale Hospital,
Series 1990 C,
9.500% 11/15/19 620 698
F-10
<PAGE> 130
MA State Industrial Finance Agency,
Tunnel Revenue, Series 1990,
9.000% 10/1/20 2,280 2,534
MN Mille Lacs Capital Improvement Authority,
Mille Lacs Band of Chippewa,
Series 1992 A,
9.250% 11/1/12 1,020 1,242
NC Lincoln County,
Lincoln County Hospital,
9.000% 5/1/07 455 550
NM City of Clovis,
Retirement Ranches Project:
10.750% 4/1/19 2,300 2,409
PA Delaware County Authority,
Southeastern Pennsylvania Obligated Group,
Series 1996:
6.000% 12/15/26 1,000 1,139
6.000% 12/15/16 1,400 1,582
TN Shelby County, Health, Education,
& Housing Facilities Board,
Open Arms Development Center:
Series 1992-A,
9.750% 8/1/19 920 1,298
Series 1992-C,
9.750% 8/1/19 895 1,263
VI Virgin Islands Public Financing,
Series 1992 A,
7.250% 10/1/18 2,000 2,285
VI Water and Power Authority Electric Systems,
Series 1991-A,
7.400% 7/1/11 920 1,008
WA State Health Care Facilities Authority,
Grays Harbor Community Hospital,
Series 1993:
7.200% 7/1/03 170 181
8.025% 7/1/20 1,480 1,630
--------
33,648
--------
...............................................................................
OTHER REVENUE - 9.2%
CHEMICALS - 1.2%
LA Saint Charles Parish,
F-11
<PAGE> 131
Union Carbide Corp.,
Series 1992,
7.350% 11/1/22 3,000 3,289
--------
INDUSTRIAL - 5.0%
CO Mesa County Industrial Development Revenue,
Joy Technologies, Inc. Project,
Series 1992,
8.500% 9/15/06 1,000 1,111
IL State Development Finance Authority,
Armstrong World Industries, Inc. Project,
5.950% 12/1/24 1,000 1,112
IL Will-Kankakee Regional Development Authority,
Flanders Corp./Precisionaire Project,
Series 1997,
6.500% 12/15/17 975 1,032
LA Southern Louisiana Port Commission,
Cargill, Inc. Project,
5.850% 4/1/17 1,000 1,070
MA State Industrial Finance Agency,
House of Bianchi, Inc.,
8.750% 6/1/18 335 345
MI State Strategic Fund,
Michigan Sugar Co., Sebewaing Project,
Series 1998 A,
6.250% 11/1/15 1,250 1,248
MN Brooklyn Park,
TL Systems Corp.,
Series 1991,
10.000% 9/1/16 755 918
NV Henderson Public Improvement Trust,
Dongsung America Co., Inc., Series 1998,
7.000% 11/1/10 500 502
OH Cuyahoga County,
Joy Technologies, Inc.,
Series 1992,
8.750% 9/15/07 550 615
TN McKenzie Individual Development Board,
American Lantern Co.,
10.500% 5/1/16 (c) 2,086 1,252
TX Trinity River Authority,
Texas Instruments Project,
Series 1996,
6.200% 3/1/20 1,000 1,088
VA Dongsung America,
7.250% 11/1/15 500 501
WA Pilchuck Public Development Corp.,
F-12
<PAGE> 132
Goodrich (B.F.) Co. Tramco Project,
Series 1993,
6.000% 8/1/23 2,420 2,490
--------
13,284
--------
OIL & GAS - 0.5%
NY State Environmental Facilities Corp.,
Occidental Petroleum Corp. Project,
Series 1995,
6.100% 11/1/30 1,300 1,363
--------
PAPER PRODUCTS - 0.7%
GA Rockdale County Development Authority,
Solid Waste Disposal, Visy Paper, Inc.,
Series 1993,
7.500% 1/1/26 1,800 1,917
--------
RECREATION - 0.5%
NM Red River Sports Facility,
Red River Ski Area Project,
Series 1998,
6.450% 6/1/07 1,180 1,187
--------
RETAIL - 1.3%
NJ State Economic Development Authority,
Glimcher Properties L.P. Project,
6.000% 11/1/28 1,250 1,254
OH Lake County,
North Madison Properties,
Series 1993,
8.819% 9/1/11 765 878
VA Virginia Beach Development Authority,
SC Diamond Associates, Inc.,
8.000% 12/1/10 1,180 1,316
--------
3,448
--------
...............................................................................
RESOURCE RECOVERY - 3.0%
DISPOSAL - 1.2%
CT State Development Authority,
Sewer Sludge Disposal Facilities,
F-13
<PAGE> 133
Series 1996,
8.250% 12/1/06 965 1,107
MA State Industrial Finance Agency,
Peabody Monofill Associates, Inc.,
Series 1995,
9.000% 9/1/05 1,125 1,245
MA State Industrial Finance Agency,
Massachusetts Environmental Services,
Series 1994 A,
8.750% 11/1/21 (c) 975 780
--------
3,132
--------
RESOURCE RECOVERY - 1.8%
MA State Industrial Finance Agency,
Ogden Hill Project,
Series 1998 A,
5.500% 12/1/13 500 511
PA Delaware County Industrial Development Authority,
Series A,
6.200% 7/1/19 4,000 4,261
--------
4,772
--------
TAX-BACKED - 7.4%
LOCAL GENERAL OBLIGATIONS - 1.2%
NY New York City:
Series 1997 A,
7.000% 8/1/07 1,000 1,187
Series 1997 H,
6.000% 8/1/17 1,400 1,526
TX Irving Independent School District,
Series 1997,
(b) 2/15/18 (a) 1,000 378
--------
3,091
--------
SPECIAL NON-PROPERTY TAX - 2.3%
IL Metropolitan Pier & Exposition Authority,
McCormick Place Expansion Project,
Series A,
(b) 6/15/16 (a) 10,000 4,138
F-14
<PAGE> 134
IL State Development Finance Authority,
City of Marion Project, Series 1991,
9.625% 9/15/21 2,400 1,800
--------
5,938
--------
SPECIAL PROPERTY TAX - 1.5%
CA Carson,
Series 1992,
7.375% 9/2/22 185 199
CA Poway Community Facilities District No. 88-1,
Parkway Business Center,
Series 1998,
6.750% 8/15/15 600 656
CA Riverside County Public Financing Authority,
Redevelopment Projects,
Series A,
5.500% 10/1/22 650 659
FL Lexington Oaks Community Development District:
Series 1998 A,
6.125% 5/1/19 400 403
Series 1998 B,
5.500% 5/1/05 750 747
FL Orlando,
Conroy Road Interchange Project,
Series 1998 A:
5.500% 5/1/10 180 179
5.800% 5/1/26 500 499
FL Stoney Brook Community Development,
5.700% 5/1/08 600 599
--------
3,941
--------
STATE APPROPRIATED - 2.4%
NY Metropolitan Transportation Authority,
Commuter Facilities Board Project:
Series 7,
5.625% 7/1/16 2,000 2,076
Series 1997-8,
5.250% 7/1/17 3,240 3,261
NY State Urban Development Corp.,
University Facilities Grants, Series 1995,
5.875% 1/1/21 1,000 1,119
F-15
<PAGE> 135
--------
6,456
--------
...............................................................................
TRANSPORTATION - 5.6%
AIR TRANSPORTATION - 2.5%
CO Denver City & County Airport,
United Airlines Inc., Series 1992 A,
6.875% 10/1/32 1,645 1,768
TX Alliance Airport Authority:
American Airlines Project,
7.500% 12/1/29 1,600 1,719
Federal Express Corp., Series 1996,
6.375% 4/1/21 3,000 3,222
--------
6,709
--------
AIRPORT - 2.3%
CO Denver City and County Airport:
Series B,
7.250% 11/15/23 2,275 2,512
Series C,
6.125% 11/15/25 2,840 2,989
OH Toledo-Lucas County Port Authority,
Series 1998,
5.500% 5/15/20 585 575
--------
6,076
--------
TOLL FACILITIES - 0.8%
VA Richmond Metropolitan Authority,
Series 1998,
5.250% 7/15/22 2,000 2,093
--------
...............................................................................
UTILITY - 10.2%
INDEPENDENT POWER PRODUCER - 3.4%
FL Martin County Industrial Development Authority,
Indiantown Cogeneration Project,
Series 1994 A,
F-16
<PAGE> 136
7.875% 12/15/25 1,000 1,148
NY Port Authority of New York & New Jersey,
KIAC Partners,
Series 1996 IV,
6.750% 10/1/11 2,000 2,238
PA State Economic Development Finance Authority:
Colver Project, Series D,
7.125% 12/1/15 4,000 4,425
Northampton Generating, Series A,
6.500% 1/1/13 1,000 1,059
--------
8,870
--------
INVESTOR OWNED - 4.7%
AZ Pima County Industrial Development Authority,
Tucson Electric Power Co.,
Series A,
6.100% 9/1/25 750 748
CT State Development Authority,
Connecticut Light & Power Co.,
Series 1993 B,
5.950% 9/1/28 400 402
IL Bryant,
Central Illinois Light Co.,
Series 1993,
5.900% 8/1/23 (a) 5,000 5,221
MS State Business Finance Corp.,
Systems Energy Resources Project,
Series 1998,
5.875% 4/1/22 2,000 1,995
NM Farmington,
San Juan Public Service Co. Project,
Series D,
6.375% 4/1/22 1,300 1,386
PA Beaver County Industrial Development Authority,
Ohio Edison Co., Series 1989 A,
7.750% 9/1/24 2,500 2,599
--------
12,351
--------
MUNICIPAL ELECTRIC - 0.9%
WA Chelan County Public Utilities District No. 1,
Columbia River Rock Hydroelectric,
(b) 6/1/14 (a) 5,000 2,349
--------
F-17
<PAGE> 137
--------
WATER & SEWER - 1.2%
LA Public Facility Belmont Water Authority,
9.000% 3/15/24 (i) 760 684
MS Five Lakes Utility District,
8.250% 7/15/24 500 400
NJ State Economic Development Authority,
Hills Development Co.,
10.500% 9/1/08 2,000 2,050
--------
3,134
--------
TOTAL MUNICIPAL BONDS (cost of $253,178) (l) 261,241
--------
SHORT-TERM OBLIGATIONS - 0.2%
- - ------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTES (m)
IN State Housing Finance Authority,
Pedcor Investments,
Series 1997 M-A,
4.100% 1/1/29 500 500
--------
TOTAL SHORT-TERM OBLIGATIONS 500
--------
OTHER ASSETS & LIABILITIES, NET - 0.8% 1,964
- - ------------------------------------------------------------------------------
NET ASSETS - 100% $263,705
--------
NOTES TO INVESTMENT PORTFOLIO:
- - ------------------------------------------------------------------------------
(a) These securities, or a portion thereof, with a total market value of
$17,528, are being used to collateralize the delayed delivery purchases
indicated in note (d) below and open futures contracts.
(b) Zero coupon bond.
(c) This issuer is in default of certain debt covenants. Income is not
F-18
<PAGE> 138
being accrued.
(d) These securities have been purchased on a delayed delivery basis for
settlement at a future date beyond the customary settlement date.
(e) This is a restricted security which was acquired at a cost of $942. This
security represents 0.4% of the Fund's net assets at December 31, 1998.
(f) Accrued interest accumulates in the value of the security and is payable at
redemption.
(g) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At December 31,
1998, the value of these securities amounted to $5,646 or 2.1% of net
assets.
(h) The Fund has been informed that each issuer has placed direct obligations of
the U.S. Government in an irrevocable trust, solely for the payment of the
principal and interest.
(i) This is a restricted security which was acquired at a cost of $820. This
security represents 0.3% of the Fund's net assets at December 31, 1998.
(j) This is a restricted security which was acquired at a cost of $1,400. This
security represents 0.5% of the Fund's net assets at December 31, 1998.
(k) This is a restricted security which was acquired at a cost of $1,287. This
security represents 0.5% of the Fund's net assets at December 31, 1998.
(l) Cost for federal income tax purposes is $253,306.
(m) Variable rate demand notes are considered short-term obligations. Interest
rates change periodically on specified dates. These securities are payable
on demand and are secured by either letters of credit or other credit
support agreements from banks. The rates listed are as of December 31, 1998.
Long and short futures contracts open at December 31, 1998:
Unrealized
Par value appreciation
covered by Expiration (depreciation)
Type contracts month at 12/31/98
- - ------------------------------------------------------------------------------
Municipal Bond $ 5,500 March $ (76)
Treasury Bond $ 4,800 March ( 1)
Treasury Bond $ 300 March 58
F-19
<PAGE> 139
-----
$ 19)
-----
Acronym Name
------- ----
IFRN Inverse Floating Rate Note
See notes to financial statements.
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
(in thousands except for per share amount)
<S> <C> <C>
ASSETS
Investments at value (cost $253,178) $261,241
Short-term obligations 500
---------
261,741
Cash $ 1,382
Receivable for:
Interest 4,772
Investments sold 293
Other 48 6,495
-------- ---------
Total Assets 268,236
LIABILITIES
Payable for:
Investments purchased 2,882
Distributions 1,305
Variation margin on futures 9
Accrued:
Deferred Trustees fees 5
Other 330
--------
Total Liabilities 4,531
---------
NET ASSETS at value for 31,059
shares of beneficial interest outstanding $263,705
---------
Net asset value per share $ 8.49
---------
</TABLE>
F-20
<PAGE> 140
<TABLE>
<CAPTION>
<S> <C>
COMPOSITION OF NET ASSETS
Capital paid in 287,776
Undistributed net investment income 115
Accumulated net realized loss (32,230)
Net unrealized appreciation on:
Investments 8,063
Open futures contracts (19)
---------
$263,705
---------
</TABLE>
See notes to financial statements.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
(in thousands)
<S> <C> <C>
INVESTMENT INCOME
Interest $ 18,444
EXPENSES
Management fee $ 2,123
Transfer agent 45
Bookkeeping fee 68
Trustees fee 15
Custodian fee 2
Audit fee 28
Legal fee 106
Reports to shareholders 17
Registration fee 31
Other 37 2,472
------- --------
Net Investment Income 15,972
--------
NET REALIZED & UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS
Net realized gain on:
Investments 3,446
Closed futures contracts 29
-------
Net Realized Gain 3,475
Change in net unrealized depreciation
during the period on:
Investments (5,254)
Open futures contracts (55)
</TABLE>
F-21
<PAGE> 141
<TABLE>
<CAPTION>
<S> <C>
--------
Net Unrealized Depreciation (5,309)
--------
Net Loss (1,834)
--------
Increase in Net Assets from Operations $ 14,138
--------
</TABLE>
See notes to financial statements.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
(in thousands) Year ended December 31
------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS 1998 1997
Operations:
Net investment income $ 15,972 $ 16,994
Net realized gain (loss) 3,475 (4,664)
Net unrealized appreciation (depreciation) (5,309) 11,381
-------- --------
Net Increase from Operations 14,138 23,711
Distributions:
From net investment income (16,218) (16,893)
-------- --------
(2,080) 6,818
Fund share transactions
Value of distributions reinvested 595 604
-------- --------
Total Increase (Decrease) (1,485) 7,422
NET ASSETS
Beginning of period 265,190 257,768
-------- --------
End of period (including undistributed
net investment income of $115 and $261,
respectively) $263,705 $265,190
-------- --------
</TABLE>
F-22
<PAGE> 142
<TABLE>
<CAPTION>
<S> <C> <C>
NUMBER OF FUND SHARES
Issued for distributions reinvested 69 71
Outstanding at
Beginning of period 30,990 30,919
--------- --------
End of period 31,059 30,990
--------- --------
</TABLE>
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1. ACCOUNTING POLICIES
...............................................................................
ORGANIZATION: Colonial High Income Municipal Trust (the Trust), is a
Massachusetts business trust registered under the Investment Company Act of
1940, as amended, as a diversified, closed-end, management investment company.
The Trust's investment objective is to provide high current income, generally
exempt from federal income taxes, by investing primarily in medium and lower
quality municipal securities. The Trust authorized an unlimited number of
shares.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The following significant
accounting policies are consistently followed by the Trust in the preparation of
its financial statements.
SECURITY VALUATION AND TRANSACTIONS: Debt securities generally are valued by a
pricing service based upon market transactions for normal, institutional-size
trading units of similar securities. When management deems it
F-23
<PAGE> 143
appropriate, an over-the-counter or exchange bid quotation is used.
Futures contracts are valued based on the difference between the last sale price
and the opening price of the contract.
Options are valued at the last reported sale price, or in the absence of a sale,
the mean between the last quoted bid and asking price.
Short-term obligations with a maturity of 60 days or less are valued at
amortized cost.
Portfolio positions for which market quotations are not readily available are
valued at fair value under procedures approved by the Trustees.
Security transactions are accounted for on the date the securities are
purchased, sold or mature.
Cost is determined and gains and losses are based upon the specific
identification method for both financial statement and federal income tax
purposes.
The Trust may trade securities on other than normal settlement terms. This may
increase the risk if the other party to the transaction fails to deliver and
causes the Trust to subsequently invest at less advantageous prices.
FEDERAL INCOME TAXES: Consistent with the Trust's policy to qualify as a
regulated investment company and to distribute all of its taxable and tax-exempt
income, no federal income tax has been accrued.
INTEREST INCOME, DEBT DISCOUNT AND PREMIUM: Interest income is recorded on the
accrual basis. Original issue discount is accreted to interest income over the
life of a security with a corresponding increase in the cost basis; market
discount is not accreted. Premium is amortized against interest income with a
corresponding decrease in the cost basis.
DISTRIBUTIONS TO SHAREHOLDERS: Distributions to shareholders are recorded on the
ex-date.
The amount and character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. Reclassifications are made to the Trust's capital
accounts to reflect income and gains available for distribution (or available
capital loss carryforwards) under income tax regulations.
OTHER: The Trust had an agreement with its custodian bank under which
F-24
<PAGE> 144
custodian fees were reduced by balance credits of $560 applied during the year
ended December 31, 1998. The Trust could have invested a portion of the assets
utilized in connection with the expense offset arrangements in an income
producing asset if it had not entered into such agreements.
NOTE 2. FEES AND COMPENSATION PAID TO AFFILIATES
...............................................................................
MANAGEMENT FEE: Colonial Management Associates, Inc. (the Advisor) is the
investment Advisor of the Trust and furnishes accounting and other services and
office facilities for a monthly fee equal to 0.80% annually of the Trust's
average weekly net assets.
BOOKKEEPING FEE: The Advisor provides bookkeeping and pricing services for
$18,000 per year plus 0.0233% of the Trust's average weekly net assets over $50
million.
OTHER: The Trust pays no compensation to its officers, all of whom are employees
of the Advisor.
The Trust's Trustees may participate in a deferred compensation plan which may
be terminated at any time. Obligations of the plan will be paid solely out of
the Trust's assets.
NOTE 3. PORTFOLIO INFORMATION
...............................................................................
INVESTMENT ACTIVITY: During the year ended December 31, 1998, purchases and
sales of investments, other than short-term obligations, were $75,813,488 and
$77,606,186, respectively.
Unrealized appreciation (depreciation) at December 31, 1998, based on cost of
investments for federal income tax purposes was:
Gross unrealized appreciation $15,897,472
Gross unrealized depreciation (7,962,825)
-----------
Net unrealized appreciation $ 7,934,647
-----------
Capital loss carryforwards: At December 31, 1998, capital loss carryforwards
available (to the extent provided in regulations) to offset future realized
gains were approximately as follows:
Year of Capital loss
expiration carryforward
F-25
<PAGE> 145
------------- ------------
1999 $ 2,751,000
2000 3,157,000
2001 5,578,000
2002 6,579,000
2003 5,268,000
2004 2,815,000
2005 5,927,000
------------
$ 32,075,000
------------
Expired capital loss carryforwards, if any, are recorded as a reduction of
capital paid in.
To the extent loss carryforwards are used to offset any future realized gains,
it is unlikely that such gains would be distributed since they may be taxable to
shareholders as ordinary income.
OTHER: There are certain risks arising from geographic concentration in any
state. Certain revenue or tax related events in a state may impair the ability
of certain issuers of municipal securities to pay principal and interest on
their obligations.
The Trust may focus its investments in certain industries, subjecting it to
greater risk than a fund that is more diversified.
The Trust may purchase or sell municipal and Treasury bond futures contracts and
purchase and write options on futures. The Trust will invest in these
instruments to hedge against the effects of changes in the value of portfolio
securities due to anticipated changes in interest rates and/or market
conditions, for duration management, or when the transactions are economically
appropriate to the reduction of risk inherent in the management of the Trust and
not for trading purposes. The use of futures contracts and options involves
certain risks, which include (1) imperfect correlation between the price
movement of the instruments and the underlying securities, (2) inability to
close out positions due to different trading hours or the temporary absence of a
liquid market for either the instrument or the underlying securities or (3) an
inaccurate prediction by the Advisor of the future direction of interest rates.
Any of these risks may involve amounts exceeding the amount recorded in the
Trust's Statement of Assets and Liabilities at any given time.
F-26
<PAGE> 146
FINANCIAL HIGHLIGHTS
Selected per share data, total return, ratios and supplemental data throughout
each period are as follows:
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Net asset value -
Beginning of period $ 8.560 $ 8.340
--------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.519 0.552
Net realized and
unrealized gain (loss) (0.066) 0.214
--------- ---------
Total from Investment
Operations 0.453 0.766
--------- ---------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.523) (0.546)
--------- ---------
Net asset value -
End of period $ 8.490 $ 8.560
--------- ---------
Market price per share $ 8.312 $ 8.630
--------- ---------
Total return based on net
asset value (a) 5.45% 9.57%
--------- ---------
Total return based on market
value (b) 2.47% 11.60%
--------- ---------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.93% (c) 0.96% (c)
</TABLE>
F-27
<PAGE> 147
<TABLE>
<CAPTION>
<S> <C> <C>
Net investment income 6.02% (c) 6.54% (c)
Portfolio turnover 29% 17%
Net assets at end
of period (000) $ 263,705 $ 265,190
</TABLE>
(a) Total return at net asset value assuming all distributions reinvested.
(b) Total return at market value assuming all distributions reinvested and
excluding brokerage commissions.
(c) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
----------------------------------------------------------------------------
Federal Income Tax Information (unaudited)
All income distributions will be treated as exempt income for federal income
tax purposes.
----------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS - CONT.
Selected per share data, total return, ratios and supplemental data throughout
each period are as follows:
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C>
$ 8.550 $ 7.960 $ 8.670
--------- --------- ---------
0.566 0.597 0.616
(0.193) 0.583 (0.716)
--------- --------- ---------
0.373 1.180 (0.100)
--------- --------- ---------
(0.583) (0.590) (0.610)
--------- --------- ---------
$ 8.340 $ 8.550 $ 7.960
--------- --------- ---------
</TABLE>
F-28
<PAGE> 148
<TABLE>
<CAPTION>
<S> <C> <C>
$ 8.250 $ 7.380 $ 6.880
--------- --------- ---------
4.71% 15.70% (0.75)%
--------- --------- ---------
20.09% 15.65% (9.83)%
--------- --------- ---------
1.00% (c) 1.06% (c) 1.03%
6.74% (c) 7.15% (c) 7.44%
15% 23% 20%
$ 257,768 $ 264,467 $ 245,967
</TABLE>
F-29
<PAGE> 149
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND THE TRUSTEES OF
COLONIAL HIGH INCOME MUNICIPAL TRUST FUND
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations, changes in
net assets and the financial highlights present fairly, in all material
respects, the financial position of Colonial High Income Municipal Trust (the
"Trust") at December 31, 1998, the results of its operations, the changes in its
net assets and the financial highlights for the periods indicated, in conformity
with generally accepted accounting principles. These financial statements and
the financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Trust management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of portfolio positions at December 31, 1998
by correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 13, 1999
F-30
<PAGE> 150
APPENDIX A
RATINGS OF INVESTMENTS
STANDARD & POOR'S RATINGS SERVICES -- A brief description of the applicable
Standard & Poor's Ratings Services ("S&P") rating symbols and their meanings (as
published by S&P) follows:
LONG TERM DEBT
An S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
INVESTMENT GRADE
<TABLE>
<S> <C>
AAA Debt rated 'AAA' has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Debt rated 'AA' has a very strong capacity to pay interest
and repay principal and differs from the highest rated
issues only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
</TABLE>
SPECULATIVE GRADE RATING
Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree of speculation and
'C' the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by major uncertainties or major exposures
to adverse conditions.
A-1
<PAGE> 151
<TABLE>
<S> <C>
BB Debt rated 'BB' has less near-term vulnerability to default
than other speculative issues. However, it faces major
ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal
payments. The 'BB' rating category is also used for debt
subordinated to senior debt that is assigned an actual or
implied 'BBB-' rating.
B Debt rated 'B' has a greater vulnerability to default but
currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial, or
economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
The 'B' rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied 'BB' or
'BB-' rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability
to default, and is dependent upon favorable business,
financial, and economic conditions to meet timely payment of
interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay
principal.
The 'CCC' rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied 'B' or
'B-' rating.
CC The rating 'CC' typically is applied to debt subordinated to
senior debt that is assigned an actual or implied 'CCC' debt
rating.
C The rating 'C' typically is applied to debt subordinated to
senior debt which is assigned an actual or implied 'CCC-'
debt rating. The 'C' rating may be used to cover a situation
where a bankruptcy petition has been filed, but debt service
payments are continued.
CI The rating 'CI' is reserved for income bonds on which no
interest is being paid.
D Debt rated 'D' is in payment default. The 'D' rating
category is used when interest payments or principal
payments are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The 'D'
rating also will be used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.
</TABLE>
PLUS (+) OR MINUS (-): The ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
<TABLE>
<S> <C>
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.
* Continuance of the ratings is contingent upon S&P'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 S&P 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.
</TABLE>
PROVISIONAL RATINGS: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should exercise judgment
with respect to such likelihood and risk.
<TABLE>
<S> <C>
NR Indicates no rating has been requested, that there is
insufficient information on which to base a rating, or that
S&P does not rate a particular type of obligation as a
matter of policy.
</TABLE>
A-2
<PAGE> 152
MUNICIPAL NOTES
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note rating.
Notes maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment:
-- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
NOTE RATING SYMBOLS ARE AS FOLLOWS:
<TABLE>
<S> <C>
SP-1 Very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming
safety characteristics will be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
</TABLE>
A note rating is not a recommendation to purchase, sell, or hold a security
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
COMMERCIAL PAPER
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
<TABLE>
<S> <C>
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined
to possess extremely strong safety characteristics are
denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation
is satisfactory. However, the relative degree of safety is
not as high as for issues designated "A-l."
A-3 Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
B Issues rated "B" are regarded as having only speculative
capacity for timely payment.
C This rating is assigned to short-term debt obligations with
a doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D" rating
category is used when interest payments or principal
payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period.
</TABLE>
A commercial paper rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
A-3
<PAGE> 153
MOODY'S INVESTORS SERVICE, INC. -- A brief description of the applicable Moody's
Investors Service, Inc. ("Moody's") rating symbols and their meanings (as
published by Moody's) follows:
MUNICIPAL BONDS
<TABLE>
<S> <C>
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edge." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise
what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and
interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations, i.e. they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may
be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of
projects under construction, (b) earnings of projects
unseasoned in operation experience, (c) rentals which begin
when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating
denotes probable credit stature upon completion of
construction or elimination of basis of condition.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are
designated by the symbols Aa1, A1, Baa1, Ba1 and B1.
</TABLE>
A-4
<PAGE> 154
SHORT-TERM LOANS
<TABLE>
<S> <C>
MIG 1/VMIG 1 This designation denotes best quality. There is present
strong protection by established cash flows, superior
liquidity support or demonstrated broadbased access to the
market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security
elements are accounted for but there is lacking the
undeniable strength of the preceding grades. Liquidity and
cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is
present and although not distinctly or predominantly
speculative, there is specific risk.
S.G. This designation denotes speculative quality. Debt
instruments in this category lack margins of protection.
</TABLE>
COMMERCIAL PAPER
Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated PRIME-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
A-5
<PAGE> 155
APPENDIX B
AUCTION PROCEDURES
The following procedures will be set forth as Paragraphs 1 through 8 of
Part II of Section 12.1 of the Amended and Restated By-Laws of the Trust. The
terms not defined below are defined in the Prospectus or this Statement of
Additional Information, including the Glossary.
1. Orders.
(a) Prior to the Submission Deadline on each Auction Date for shares
of a series of Municipal Preferred:
(i) each Beneficial Owner of shares of such series may submit to
its Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares, if any, of such series
held by such Beneficial Owner which such Beneficial Owners desires to
continue to hold without regard to the Applicable Rate for shares of
such series for the next succeeding Rate Period of such shares;
(B) the number of Outstanding shares, if any, of such series
held by such Beneficial Owner offers to sell if the Applicable Rate
for shares of such series for the next succeeding Rate Period of
shares of such series shall be less than the rate per annum specified
by such Beneficial Owner; and/or
(C) the number of Outstanding shares, if any, of such series
held by such Beneficial Owners which such Beneficial Owner offers to
sell without regard to the Applicable Rate for shares of such series
for the next Rate Period of shares of such series;
and
(ii) one or more Broker-Dealers, using lists of Potential
Beneficial Owners, shall in good faith for the purpose of conducting a
competitive Auction in a commercially reasonable manner, contact
Potential Beneficial Owners (by telephone or otherwise), including
Persons that are not Beneficial Owners, on such lists to determine the
number of shares, if any, of such series which each such Potential
Beneficial Owner offers to purchase if the Applicable Rate for shares of
such series for the next succeeding Rate Period of shares of such series
shall not be less than the rate per annum specified by such Potential
Beneficial Owner.
For purposes hereof, the communication by a Beneficial Owner or Potential
Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the Auction Agent,
of information referred to in clause (i)(a), (i)(B), (i)(C), or (ii) of this
subparagraph (a) is hereinafter referred to as an "order" and collectively as
"Orders" and each Beneficial Owner and each Potential Beneficial Owner placing
an Order with a Broker-Dealer, and such Broker-Dealer placing an Order with the
Auction Agent, is hereinafter referred to as a "Bidder" and collectively as
"Bidders"; an Order containing the information referred to in clause (i)(A) of
this subparagraph (a) is hereinafter referred to as a "Hold Order" and
collectively as "Hold Orders"; an Order containing the information referred to
in clause (i)(B) or (ii) of this subparagraph (a) is hereinafter referred to as
a "Bid" and collectively as "Bids"; and an Order containing the information
referred to in clause (i)(C) of this subparagraph (a) is hereinafter referred to
as a "Sell Order" and collectively as "Sell Orders."
(b)(i) A Bid by a Beneficial Owner or an Existing Holder of shares of
a series of Municipal Preferred subject to an Auction on any Auction Date
shall constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified in
such Bid if the Applicable Rate for shares of such series determined
on such Auction Date shall be less than the rate specified therein;
B-1
<PAGE> 156
(B) such number or a lesser number of Outstanding shares of such
series to be determined as set forth in paragraph 4(a)(iv) herein if
the Applicable Rate for shares of such series determined on such
Auction Date shall be equal to the rate specified therein; or
(C) the number of Outstanding shares of such series specified in
such Bid if the rate specified therein shall be higher than the
Maximum Rate for shares of such series, or such number or a lesser
number of Outstanding shares of such series to be determined as set
forth in paragraph 4(b)(iii) herein if the rate specified therein
shall be higher than the Maximum Rate for shares of such series and
Sufficient Clearing Bids for shares of such series do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder of
shares of a series of Municipal Preferred subject to an Auction on any
Auction Date shall constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified in
such Sell Order; or
(B) such number or a lesser number of Outstanding shares of such
series as set forth in paragraph 4(b)(iii) herein if Sufficient
Clearing Bids for shares of such series do not exist;
provided, however, that a Broker-Dealer that is an Existing Holder with respect
to shares of a series of Municipal Preferred shall not be liable to any Person
for failing to sell such shares pursuant to a Sell Order described in the
proviso to paragraph 2(c) herein if (1) such shares were transferred by the
Beneficial Owner thereof without compliance by such Beneficial Owner or its
transferee Broker-Dealer (or other transferee person, if permitted by the Trust)
with the provisions of paragraph 7 herein or (2) such Broker-Dealer has informed
the Auction Agent pursuant to the terms of its Broker-Dealer Agreement that,
according to such Broker-Dealer's records, such Broker-Dealer believes it is not
the Existing Holder of such shares.
(iii) A Bid by a Potential Beneficial Holder or a Potential Holder
of shares of a series of Municipal Preferred subject to an Auction on
any Auction Date shall constitute an irrevocable offer to purchase:
(A) the number of Outstanding shares of such series specified in
such Bid if the Applicable Rate for shares of such series determined
on such Auction Date shall be higher than the rate specified therein;
or
(B) such number or a lesser number of Outstanding shares of such
series as set forth in paragraph 4(a)(v) herein if the Applicable
Rate for shares of such series determined on such Auction Date shall
be equal to the rate specified therein.
(c) No Order for any number of shares of Municipal Preferred other
than whole shares shall be valid.
2. Submission of Orders by Broker-Dealers to Auction Agent.
(a) Each Broker-Dealer shall submit in writing to the Auction Agent
prior to the Submission Deadline on each Auction Date all Orders for shares
of Municipal Preferred of a series subject to an Auction on such Auction
Date obtained by such Broker-Dealer, designating itself (unless otherwise
permitted by the Trust) as an Existing Holder in respect of shares subject
to Orders submitted or deemed submitted to it by Beneficial Owners and as a
Potential Holder in respect of shares subject to Orders submitted to it by
Potential Beneficial Owners, and shall specify with respect to each Order
for such shares:
(i) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Trust);
(ii) the aggregate number of shares of such series that are the
subject of such Order;
B-2
<PAGE> 157
(iii) to the extent that such Bidder is an Existing Holder of
shares of such series:
(A) the number of shares, if any, of such series subject to any
Hold Order of such Existing Holder;
(B) the number of shares, if any, of such series subject to any
Bid of such Existing Holder and the rate specified in such Bid; and
(C) the number of shares, if any, of such series subject to any
Sell Order of such Existing Holder; and
(iv) to the extent such Bidder is a Potential Holder of shares of
such series, the rate and number of shares of such series specified in
such Potential Holder's Bid.
(b) If any rate specified in any Bid contains more than three figures
to the right of the decimal point, the Auction Agent shall round such rate
up to the next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding shares of
Municipal Preferred of a series held by any Existing Holder is not
submitted to the Auction Agent prior to the Submission Deadline, the
Auction Agent shall deem a Hold Order to have been submitted by or on
behalf of such Existing Holder covering the number of Outstanding shares of
such series held by such Existing Holder and not subject to Orders
submitted to the Auction Agent; provided, however, that if an Order or
Orders covering all of the Outstanding shares of such series held by any
Existing Holder is not submitted to the Auction Agent prior to the
Submission Deadline for an Auction relating to a Special Rate Period
consisting of more than 28 Rate Period Days, the Auction Agent shall deem a
Sell Order to have been submitted by or on behalf of such Existing Holder
covering the number of outstanding shares of such series held by such
Existing Holder and not subject to Orders submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted to the
Auction Agent covering in the aggregate more than the number of Outstanding
shares of Municipal Preferred of a series subject to an Auction held by
such Existing Holder, such Orders shall be considered valid in the
following order of priority:
(i) all Hold Orders for shares of such series shall be considered
valid, but only up to and including in the aggregate the number of
Outstanding shares of such series held by such Existing Holder, and if
the number of shares of such series subject to such Hold Orders exceeds
the number of Outstanding shares of such series held by such Existing
Holder, the number of shares subject to each such Hold Order shall be
reduced pro rata to cover the number of Outstanding shares of such
series held by such Existing Holder;
(ii) (A) any Bid for shares of such series shall be considered
valid up to and including the excess of the number of Outstanding shares
of such series held by such Existing Holder over the number of shares of
such series subject to any Hold Orders referred to in clause (i) above;
(B) subject to subclause (A), if more than one Bid of an
Existing Holder for shares of such series is submitted to the Auction
Agent with the same rate and the number of Outstanding shares of such
series subject to such Bids is greater than such excess, such Bids
shall be considered valid up to and including the amount of such
excess, and the number of shares of such series subject to each Bid
with the same rate shall be reduced pro rata to cover the number of
shares of such series equal to such excess;
(C) subject to subclauses (A) and (B), if more than one Bid of
an Existing Holder for shares of such series is submitted to the
Auction Agent with different rates, such Bids shall be considered
valid in the ascending order of their respective rates up to and
including the amount of such excess; and
(D) in any such event, the number, if any, of such Outstanding
shares of such series subject to any portion of Bids considered not
valid in whole or in part under this clause (ii)
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shall be treated as the subject of a Bid for shares of such series by
or on behalf of a Potential Holder at the rate therein specified; and
(iii) all Sell Orders for shares of such series shall be considered
valid up to and including the excess of the number of Outstanding shares
of such series held by such Existing Holder over the sum of shares of
such series subject to valid Hold Orders referred to in clause (i) above
and valid Bids referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of a series of
Municipal Preferred is submitted to the Auction Agent by or on behalf of
any Potential Holder, each such Bid submitted shall be a separate Bid with
the rate and number of shares therein specified.
(f) Any Order submitted by a Beneficial Owner or a Potential
Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction
Agent, prior to the Submission Deadline on any Auction Date, shall be
irrevocable.
3. Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate.
(a) Not earlier than the Submission Deadline on each Auction Date for
shares of a series of Municipal Preferred, the Auction Agent shall assemble
all valid Orders submitted or deemed submitted to it by the Broker-Dealers
in respect of shares of such series (each such Order as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to individually as
a "Submitted Holder Order," a "Submitted Bid" or a "Submitted Sell Order,"
as the case may be, or as a "Submitted Order" and collectively as
"Submitted Hold Orders," "Submitted Bids" or "Submitted Sell Orders," as
the case may be, or as "Submitted Orders") and shall determine for such
series:
(i) the excess of the number of Outstanding shares of such series
over the number of Outstanding shares of such series subject to
Submitted Hold Orders (such excess being hereinafter referred to as the
"Available Municipal Preferred" of such series);
(ii) from the Submitted Orders for shares of such series whether:
(A) the number of Outstanding shares of such series subject to
Submitted Bids of Potential Holders specifying one or more rates
equal to or lower than the Maximum Rate for shares of such series;
exceeds or is equal to the sum of:
(B) the number of Outstanding shares of such series subject to
Submitted Bids of Existing Holders specifying one or more rates
higher than the Maximum Rate for shares of such series; and
(C) the number of Outstanding shares of such series subject to
Submitted Sell Orders
(in the event such excess or such equality exists (other than because
the number of shares of such series in subclauses (B) and (C) above is
zero because all of the Outstanding shares of such series are subject to
Submitted Hold Orders), such Submitted Bids in subclause (A) above being
hereinafter referred to collectively as "Sufficient Clearing Bids" for
shares of such series); and
(iii) if Sufficient Clearing Bids for shares of such series exist,
the lowest rate specified in such Submitted Bids (the "Winning Bid Rate"
for shares of such series) which if:
(A) (I) each such Submitted Bid of Existing Holders specifying
such lowest rate and (II) all other such Submitted Bids of Existing
Holders specifying lower rates were rejected, thus entitling such
Existing Holders to continue to hold the shares of such series that
are subject to such Submitted Bids; and
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(B) (I) each such Submitted Bid of Potential Holders specifying
such lowest rate and (II) all other such Submitted Bids of Potential
Holders specifying lower rates were accepted;
would result in such Existing Holders described in subclause (A) above
continuing to hold an aggregate number of Outstanding shares of such series
which, when added to the number of Outstanding shares of such series to be
purchased by such Potential Holders described in subclause (B) above, would
equal not less than the Available Municipal Preferred of such series.
(b) Promptly after the Auction Agent has made the determinations
pursuant to subparagraph (a) of this paragraph 3, the Auction Agent shall
advise the Trust of the Maximum Rate for shares of the series of Municipal
Preferred for which an Auction is being held on the Auction Date and, based
on such determination, the Applicable Rate for shares of such series for
the next succeeding Rate Period thereof as follows:
(i) if Sufficient Clearing Bids for shares of such series exist,
that the Applicable Rate for all shares of such series for the next
succeeding Rate Period thereof shall be equal to the Winning Bid Rate
for shares of such series so determined;
(ii) if Sufficient Clearing Bids for shares of such series do not
exist (other than because all of the Outstanding shares of such series
are subject to Submitted Hold Orders), that the Applicable Rate for all
shares of such series for the next succeeding Rate Period thereof shall
be equal to the Maximum Rate for shares of such series; or
(iii) if all of the Outstanding shares of such series are subject
to Submitted Hold Orders, that the Applicable Rate for all shares of
such series for the next succeeding Rate Period thereof shall be as set
forth in subparagraph (c) of this paragraph 3.
(c) For purposes of subparagraph (b)(iii) of this paragraph 3, the
Applicable Rate for shares of such series for the next succeeding Rate
Period of shares of such series shall be equal to the lesser of the Kenny
Index (if such Rate Period consists of fewer than 183 Rate Period Days) or
the product of (A) (I) the "AA" Composite Commercial Paper Rate on such
Auction Date for such Rate Period, if such Rate Period consists of fewer
than 183 Rate Period Days; (II) the Treasury Bill Rate on such Auction Date
for such Rate Period, if such Rate Period consists of more than 182 but
fewer than 365 Rate Period Days; or (III) the Treasury Note Rate on such
Auction Date for such Rate Period, if such Rate Period is more than 364
Rate Period Days (the rate described in the foregoing clause (A)(I), (II)
or (III), as applicable, being referred to herein as the "Benchmark Rate")
and (B) 1 minus the maximum marginal regular Federal individual income tax
rate applicable to ordinary income or the maximum marginal regular Federal
corporate income tax rate applicable to ordinary income, whichever is
greater; provided, however, that if the Trust has notified the Auction
Agent of its intent to allocate to shares of such series in such Rate
Period any net capital gains or other income taxable for Federal income tax
purposes ("Taxable Income"), the Applicable Rate for shares of such series
for such Rate Period will be (i) if the Taxable Yield Rate (as defined
below) is greater than the Benchmark Rate, then the Benchmark Rate, or (ii)
if the Taxable Yield Rate is less than or equal to the Benchmark Rate, then
the rate equal to the sum of (x) the lesser of the Kenny Index (if such
Rate Period consists of fewer than 183 Rate Period Days) or the product of
the Benchmark Rate multiplied by the factor set forth in the preceding
clause (B) and (y) the product of the maximum marginal regular Federal
individual income tax rate applicable to ordinary income or the maximum
marginal regular Federal corporate income tax applicable to ordinary
income, whichever is greater, multiplied by the Taxable Yield Rate. For
purposes of the foregoing, Taxable Yield Rate means the rate determined by
(a) dividing the amount of Taxable Income available for distribution per
such share of Municipal Preferred by the number of days in the Dividend
Period in respect of which such Taxable Income is contemplated to be
distributed, (b) multiplying the amount determined in (a) above by 365 (in
the case of a Dividend Period of 7 Rate Period Days) or 360 (in the case of
any other Dividend Period), and (c) dividing the amount determined in (b)
above by $25,000.
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4. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares. Existing Holders shall continue to hold the shares of
Municipal Preferred that are subject to Submitted Hold Orders, and, based on the
determinations made pursuant to paragraph 3(a) herein, the Submitted Bids and
Submitted Sell Orders shall be accepted or rejected by the Auction Agent and the
Auction Agent shall take such other action as set forth below:
(a) If Sufficient Clearing Bids for shares of a series of Municipal
Preferred have been made, all Submitted Sell Orders with respect to shares
of such series shall be accepted and, subject to the provisions of
subparagraphs (d) and (e) of this paragraph 4, Submitted Bids with respect
to shares of such series shall be accepted or rejected as follows in the
following order of priority and all other Submitted Bids with respect to
shares of such series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is higher than the Winning Bid Rate for shares
of such series shall be accepted, thus requiring each such Existing
Holder to sell the shares of Municipal Preferred subject to such
Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares
of such series shall be rejected, thus entitling each such Existing
Holder to continue to hold the shares of Municipal Preferred subject to
such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares
of such series shall be accepted;
(iv) each Existing Holders' Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate for shares of
such series shall be rejected, thus entitling such Existing Holder to
continue to hold the share of Municipal Preferred subject to such
Submitted Bid, unless the number of Outstanding shares of Municipal
Preferred subject to all such Submitted Bids shall be greater than the
number of shares of Municipal Preferred ("remaining shares") in the
excess of the Available Municipal Preferred of such series over the
number of shares of Municipal Preferred subject to Submitted Bids
described in clauses (ii) and (iii) of this paragraph (a), in which
event such Submitted Bid of such Existing Holder shall be rejected in
part, and such Existing Holder shall be entitled to continue to hold
shares of Municipal Preferred subject to such Submitted Bid, but only in
an amount equal to the number of shares of Municipal Preferred of such
series obtained by multiplying the number of remaining shares by a
fraction, the numerator of which shall be the number of Outstanding
shares of Municipal Preferred held by such Existing Holder subject to
such Submitted Bid and the denominator of which shall be the aggregate
number of Outstanding shares of Municipal Preferred subject to such
Submitted Bids may be all such Existing Holders that specified a rate
equal to the Winning Bid Rate for shares of such series; and
(v) each Potential Holder's Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate of shares of
such series shall be accepted but only in an amount equal to the number
of shares of such series obtained by multiplying the number of shares in
the excess of the Available Municipal Preferred of such series over the
number of shares of Municipal Preferred subject to Submitted Bids
described in clauses (ii) through (iv) of this subparagraph (a) by a
fraction, the numerator of which shall be the number of Outstanding
shares Municipal Preferred subject to such Submitted Bids made by all
such Potential Holders that specified a rate equal to the Winning Bid
Rate for shares of such series.
(b) If Sufficient Clearing Bids for shares of a series of Municipal
Preferred have not been made (other than because all of the Outstanding
shares of such series are subject to Submitted Hold Orders), subject to the
provisions of subparagraph (d) of this paragraph 4, Submitted Orders for
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shares of such series shall be accepted or rejected as follows in the
following orders of priority and all other Submitted Bids for shares of
such series shall be rejected:
(i) Existing Holder's Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Rate for
shares of such series shall be rejected, thus entitling such Existing
Holders to continue to hold the shares of Municipal Preferred subject to
such Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Rate for
shares of such series shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for shares of such
series specifying any rate that is higher than the Maximum Rate for
shares of such series and the Submitted Sell Orders for shares of such
series of each Existing Holder shall be accepted, thus entitling each
Existing Holder that submitted or on whose behalf was submitted any such
Submitted Bid or Submitted Sell Order to sell the shares of such series
subject to such Submitted Bid or Submitted Sell Order, but in both cases
only in an amount equal to the number of shares of such series obtained
by multiplying the number of shares of such series subject to Submitted
Bids described in clause (ii) of this subparagraph (b) by a fraction,
the numerator of which shall be the number of Outstanding shares of such
series held by such Existing Holder subject to such Submitted Bid or
Submitted Sell Order and the denominator of which shall be the aggregate
number of Outstanding shares of such series subject to all such
Submitted Bids and Submitted Sell Orders.
(c) If all of the Outstanding shares of a series of Municipal
Preferred are subject to Submitted Hold Orders, all Submitted Bids for
shares of such series shall be rejected.
(d) If, as a result of the procedures described in clause (iv) or (v)
of subparagraph (a) or clause (iii) of subparagraph (b) of this paragraph
4, any Existing Holder would be entitled or required to sell, or any
Potential Holder would be entitled or required to purchase, a fraction of a
share of a series of Municipal Preferred on any Auction Date, the Auction
Agent shall, in such manner as it shall determine in its sole discretion,
round up or down the number of shares of Municipal Preferred of such series
to be purchased or sold by any Existing Holder or Potential Holder on such
Auction Date as a result of such procedures so that the number of shares so
purchased or sold by each Existing Holder or Potential Holder on such
Auction Date shall be whole shares of Municipal Preferred.
(e) If, as a result of the procedures described in clause (v) of
subparagraph (a) of this paragraph 4, any Potential Holder would be
entitled or required to purchase less than a whole share of series of
Municipal Preferred on any Auction Date, the Auction Agent shall, in such
manner as it shall determine in its sole discretion, allocate shares of
Municipal Preferred of such series for purchase among Potential Holders so
that only whole shares of Municipal Preferred of such series are purchased
on such Auction Date as a result of such procedures by any Potential
Holder, even if such allocation results in one or more Potential Holders
not purchasing shares of Municipal Preferred of such series on such Auction
Date.
(f) Based on the results of each Auction for shares of a series of
Municipal Preferred, the Auction Agent shall determine the aggregate of
shares of such series to be purchased and the aggregate number of shares of
such series to be sold by Potential Holders and Existing Holders and, with
respect to each Potential Holder and Existing Holder, to the extent that
such aggregate number of shares to be purchased and such aggregate number
of shares to be sold differ, determine to which other Potential Holder(s)
or Existing Holder(s) they shall deliver, or from which other Potential
Holder(s) or Existing Holder(s) they shall receive, as the case may be,
shares of Municipal Preferred of such series. Notwithstanding any provision
of the Auction procedures or the Settlement Procedures to the contrary, in
the event an Existing Holder or Beneficial Owner of shares of a series of
Municipal Preferred with respect to whom a Broker-Dealer submitted a Bid to
the Auction Agent for such shares that was accepted in whole or in part, or
submitted or is deemed to have submitted a Sell
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Order for such shares that was accepted in whole or in part, fails to
instruct its Agent Member to deliver such shares against payment therefor,
partial deliveries of shares of Municipal Preferred that have been made in
respect of Potential Holders' or Potential Beneficial Owners' Submitted
Bids for shares of such series that have been accepted in whole or in part
shall constitute good delivery to such Potential Holders and Potential
Beneficial Owners.
(g) Neither the Trust nor the Auction Agent nor any affiliate of
either shall have any responsibility or liability with respect to the
failure of an Existing Holder, a Potential Holder, a Benefit Owner, a
Potential Beneficial Owner or its respective Agent Member to deliver shares
of Municipal Preferred of any series or to pay for shares of Municipal
Preferred of any series sold or purchased pursuant to the Auction
Procedures or otherwise.
5. Notification of Allocations. Whenever the Trust intends to include any
net capital gain or other income taxable for Federal income tax purposes in any
dividend on shares of Municipal Preferred, the Trust shall, in the case of a
Minimum Rate Period or a Special Rate Period of 28 Rate Period Days or fewer,
and may, in the case of any other Special Rate Period, notify the Auction Agent
of the amount to be so included not later than the Dividend Payment Date next
preceding the Auction Date on which the Applicable Rate for such dividend is to
be established. Whenever the Auction Agent receives such notice from the Trust,
it will be required in turn to notify each Broker-Dealer, who, on or prior to
such Auction Date, in accordance with its Broker-Dealer Agreement, will be
required to notify its Beneficial Owners and Potential Beneficial Owners of
shares of Municipal Preferred believed by it to be interested in submitting an
Order in the Auction to be held on such Auction Date.
6. Auction Agent. For so long as any shares of Municipal Preferred are
outstanding, the Auction Agent, duly appointed by the Trust to so act, shall be
in each case a commercial bank, trust company or other financial institution
independent of the Trust and its affiliates (which however, may engage or have
engaged in business transactions with the Trust or its affiliates) and at no
time shall the Trust or any of its affiliates act as the Auction Agent in
connection with the Auction Procedures. If the Auction Agent resigns or for any
reason its appointment is terminated during any period that any shares of
Municipal Preferred are outstanding, the Board of Trustees shall use its best
efforts promptly thereafter to appoint another qualified commercial bank, trust
company or financial institution to act as the Auction Agent. The Auction
Agent's registry of Existing Holders of shares of a series of Municipal
Preferred shall be conclusive and binding on the Broker-Dealers. A Broker-Dealer
may inquire of the Auction Agent between 3:00 p.m. on the Business Day preceding
an Auction for shares of a series of Municipal Preferred and 9:30 a.m. on the
Auction Date for such Auction to ascertain the number of shares of a series in
respect of which the Auction Agent has determined such Broker-Dealer to be an
Existing Holder. If such Broker-Dealer believes it is the Existing Holder of
fewer shares of such series than specified by the Auction Agent in response to
such Broker-Dealer's inquiry, such Broker-Dealer may so inform the Auction Agent
of that belief. Such Broker-Dealer shall not, in its capacity as Existing Holder
of shares of such series, submit Orders in such Auction in respect of shares of
such series covering in the aggregate more than the number of shares of such
series specified by the Auction Agent in response to such Broker-Dealer's
inquiry.
7. Transfer of Shares of Municipal Preferred. Unless otherwise permitted
by the Trust, a Beneficial Owner or an Existing Holder may sell, transfer or
otherwise dispose of shares of Municipal Preferred only in whole shares and only
pursuant to a Bid or Sell Order placed with the Auction Agent in accordance with
the procedures described herein or to a Broker-Dealer; provided, however, that
(a) a sale, transfer or other disposition of shares of Municipal Preferred from
a customer of a Broker-Dealer who is listed on the records of that Broker-Dealer
as the holder of such shares to that Broker-Dealer or another customer of that
Broker-Dealer shall not be deemed to be a sale, transfer or other disposition
for purposes of this paragraph 7 if such Broker-Dealer remains the Existing
Holder of the shares so sold, transferred or disposed of immediately after such
sale, transfer or disposition and (b) in the case of all transfers other than
pursuant to Auctions, the Broker-Dealer (or other Person, if permitted by the
Trust) to whom such transfer is made shall advise the Auction Agent of such
transfer.
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8. Global Certificate. Prior to the commencement of a Voting Period, (i)
all of the shares of a series of Municipal Preferred outstanding from time to
time shall be represented by one global certificate registered in the name of
the Securities Depository or its nominee and (ii) no registration of transfer of
shares of a series of Municipal Preferred shall be made on the books of the
Trust to any Person other than the Securities Depository or its nominee.
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APPENDIX C
SETTLEMENT PROCEDURES
Capitalized terms used herein have the respective meanings specified in the
Statement of Additional Information, including the Glossary.
(a) On each Auction Date for shares of a series of Municipal Preferred, the
Auction Agent shall notify by telephone the Broker-Dealers that participated in
the Auction for shares of such series held on such Auction Date and submitted an
Order to the Auction Agent as or on behalf of an Existing Holder or Potential
Holder of:
(i) the Applicable Rate fixed for the next Rate Period;
(ii) whether Sufficient Clearing Bids existed for the determination of
the Applicable Rate for such series;
(iii) if such Broker-Dealer submitted a Bid or a Sell Order to the
Auction Agent for shares of such series as or on behalf of an Existing
Holder, whether such Bid or Sell Order was accepted or rejected, in whole
or in part, and the number of shares, if any, of such series of Municipal
Preferred then outstanding to be sold by such Existing Holder;
(iv) if such Broker-Dealer submitted a Bid to the Auction Agent for
shares of such series as or on behalf of a Potential Holder, whether such
Bid was accepted or rejected, in whole or in part, and the number of
shares, if any, of Municipal Preferred to be purchased by such Potential
Holder;
(v) if the aggregate number of shares of such series of Municipal
Preferred to be sold by all Existing Holders with respect to whom such
Broker-Dealer submitted Bids or Sell Orders to the Auction Agent for shares
of such series is different than the aggregate number of shares of such
series of Municipal Preferred to be purchased by all Potential Holders with
respect to whom such Broker-Dealer submitted Bids to the Auction Agent, the
name or names of one or more other Broker-Dealers (and the Agent Member, if
any, of each such other Broker-Dealer) and the number of shares of
Municipal Preferred to be (x) purchased from one or more Existing Holders
with respect to whom such other Broker-Dealers submitted Bids or Sell
Orders to the Auction Agent for shares of such series, or (y) sold to one
or more Potential Holders with respect to whom such other Broker-Dealers
submitted Bids to the Auction Agent for shares of such series; and
(vi) the scheduled Auction Date of the next succeeding Auction for
shares of such series of Municipal Preferred.
(b) On each Auction Date for shares of a series of Municipal Preferred,
each Broker-Dealer that submitted an Order to the Auction Agent for shares of
such series as or on behalf of any Existing Holder or Potential Holder shall:
(i) advise each Existing Holder and Potential Holder (and each
Beneficial Owner and Potential Beneficial Owner) with respect to whom such
Broker-Dealer submitted a Bid or Sell Order to the Auction Agent whether
such Bid or Sell Order was accepted or rejected, in whole or in part;
(ii) instruct each Potential Holder (and each Potential Beneficial
Owner) with respect to whom such Broker-Dealer submitted a Bid to the
Auction Agent for shares of such series that was accepted, in whole or in
part, to instruct such Bidder's Agent Member to pay to such Broker-Dealer
(or its Agent Member) through the Securities Depository the amount
necessary to purchase the number of shares of such series of Municipal
Preferred to be purchased pursuant to such Bid against receipt of such
shares;
(iii) instruct each Existing Holder (and each Beneficial Owner) with
respect to whom such Broker-Dealer submitted a Bid to the Auction Agent for
shares of such series that was accepted, in whole or in part, or a Sell
Order that was accepted, in whole or in part, to instruct such Bidder's
Agent Member to deliver to such Broker-Dealer (or its Agent Member) through
the Securities
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Depository the number of shares of such series of Municipal Preferred to be
sold pursuant to such Bid or Sell Order against payment therefor;
(iv) advise each Existing Holder (and each Beneficial Owner) with
respect to whom such Broker-Dealer submitted an Order to the Auction Agent
for shares of such series and each Potential Holder (and each Potential
Beneficial Owner) with respect to whom such Broker-Dealer submitted a Bid
to the Auction Agent for shares of such series of the Applicable Rate for
shares of such series for the next succeeding Rate Period;
(v) advise each Existing Holder (and each Beneficial Owner) with
respect to whom such Broker-Dealer submitted an Order to the Auction Agent
for shares of such series of the Auction Date of the next succeeding
Auction for shares of such series; and
(vi) advise each Potential Holder (and each Potential Beneficial
Owner) with respect to whom such Broker-Dealer submitted a Bid to the
Auction Agent for shares of such series that was accepted, in whole or in
part, of the Auction Date of the next succeeding Auction for shares of such
series.
(c) On the basis of the information provided to it pursuant to paragraph
(a) above, each Broker-Dealer that submitted a Bid or Sell Order to the Auction
Agent for any shares of a series of Municipal Preferred shall allocate any funds
received by it (or its Agent Member) in respect of such shares pursuant to
paragraph (b)(ii) above and any shares of such series of Municipal Preferred
received by it (or its Agent Member) pursuant to paragraph (b)(iii) above among
the Potential Holders and Potential Beneficial Owners, if any, with respect to
whom such Broker-Dealer submitted Bids to the Auction Agent for such shares, the
Existing Holders and Beneficial Owners, if any, with respect to whom such
Broker-Dealer submitted Bids or Sell Orders to the Auction Agent for such
shares, and any Broker-Dealers identified to it by the Auction Agent pursuant to
paragraph (a)(v) above.
(d) On the Business Day after the Auction Date, the Securities Depository
shall execute the transactions described above, debiting and crediting the
accounts of the respective Agent Members as necessary to effect the purchases
and sales of shares of a series of Municipal Preferred as determined in the
Auction for shares of such series of Municipal Preferred.
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APPENDIX D
RATING AGENCY FUTURES AND OPTIONS RESTRICTIONS
The following restrictions will be set forth in Paragraph 10(a) of Part I
of Section 12.1 of the Amended and Restated By-Laws (the "By-Laws") of the
Trust. The terms not defined below are defined in the Prospectus, the Statement
of Additional Information, including the Glossary, or the By-Laws, filed as an
exhibit to the Registration Statement of the Trust. Reference is made to the
By-Laws for the full text of the rating agency restrictions on futures and
options transactions and certain other actions or investments by the Trust.
(a) For so long as any shares of Municipal Preferred are rated by Standard
& Poor's or Moody's, the Trust will not purchase or sell futures contracts,
write, purchase or sell options on futures contracts or write put options
(except covered put options) or call options (except covered call options) on
portfolio securities unless it receives written confirmation from Standard &
Poor's or Moody's, or both, as the case may be, that engaging in such
transactions will not impair the ratings then assigned to the Municipal
Preferred by Standard & Poor's or Moody's, or both, except that the Trust may
purchase or sell futures contracts based on the Bond Buyer Municipal Bond Index
(the "Municipal Index") or United States Treasury Bonds or Notes ("Treasury
Bonds") and write, purchase or sell put and call options on such contracts
(collectively, "Hedging Transactions"), subject to the following limitations:
(i) the Trust will not engage in any Hedging Transaction based on the
Municipal Index (other than transactions which terminate a futures contract
or option held by the Trust by the Trust's taking an opposite position
thereto ("Closing Transactions")), which would cause the Trust at the time
of such transaction to own or have sold the least of (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 Trust'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
outstanding futures contracts based on the Municipal Index in the 30 days
preceding the time of effecting such transaction as reported by The Wall
Street Journal.
(ii) the Trust will not engage in any Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) which would cause the
Trust at the time of such transaction to own or have sold the lesser of (A)
outstanding futures contracts based on Treasury Bonds exceeding in number
50% of the quotient of the Market Value of the Trust's total assets divided
by $100,000 ($200,000 in the case of the two-year United States Treasury
Note) or (B) outstanding futures contracts based on Treasury Bonds
exceeding in number 10% of the average number of daily traded futures
contracts based on Treasury Bonds in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street Journal;
(iii) the Trust will engage in Closing Transactions to close out any
outstanding futures contract which the Trust owns or has sold or any
outstanding option thereon owned by the Trust in the event (A) the Trust
does not have Standard & Poor's Eligible Assets or Moody's Eligible Assets,
as the case may be, with an aggregate Discounted Value equal to or greater
than the Municipal Preferred Basic Maintenance Amount on two consecutive
Valuation Dates and (B) the Trust is required to pay Variation Margin on
the second such Valuation Date;
(iv) the Trust will engage in a Closing Transaction to close out any
outstanding futures contract or option thereon in the month prior to the
delivery month under the terms of such futures contract or option thereon
unless the Trust holds the securities deliverable under such terms; and
(v) when the Trust writes a futures contract or option thereon, it
will either maintain an amount of cash, cash equivalents or high grade
(rated A or better by Standard & Poor's or Moody's, as the case may be),
fixed-income securities in a segregated account with the Trust's custodian,
so that the amount so segregated plus the amount of Initial Margin and
Variation Margin held in the account of or on behalf of the Trust's broker
with respect to such futures contract or option equals the Market Value of
the futures contract or option, or, in the event the Trust writes a futures
contract or option
D-1
<PAGE> 167
thereon which requires delivery of an underlying security, it shall hold
such underlying security in its portfolio.
For purposes of determining whether the Trust has Standard & Poor's
Eligible Assets or Moody's Eligible Assets, as the case may be, with a
Discounted Value that equals or exceeds the Municipal Preferred Basic
Maintenance Amount, the Discounted Value of cash or securities held for the
payment of Initial Margin or Variation Margin shall be zero and the aggregate
Discounted Value of Standard & Poor's Eligible Assets or Moody's Eligible
Assets, as the case may be, shall be reduced by an amount equal to (I) 30% of
the aggregate settlement value, as marked to market, of any outstanding futures
contracts based on the Municipal Index which are owned by the Trust plus (II)
25% of the aggregate settlement value, as marked to market, of any outstanding
futures contracts based on Treasury Bonds which contracts are owned by the
Trust.
D-2
<PAGE> 168
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
Included in Part A
Fee Table
Financial Highlights
Included in Part B
Incorporated by reference into Part B are the financial
statements contained in the Registrant's Annual Report dated
December 31, 1998 (which were previously filed electronically
pursuant to Section 30(b)(2) of the Investment Company Act of
1940 - Accession Number: 0000950156-99-000215):
The Financial Statements contained in the Registrant's Annual
Report are as follows:
Investment portfolio, December 31, 1998
Statement of assets and liabilities, December 31, 1998
Statement of operations, December 31, 1998
Statement of changes in net assets,
Years ended December 31, 1997 & 1998
Notes to Financial Statements
Financial Highlights
Report of Independent Accountants
(2) Exhibits
(a)(1) Agreement and Declaration of Trust(1)
(a)(2) Amendment No. 1 to Agreement and Declaration of Trust(1)
(a)(3) Amendment No. 2 to Agreement and Declaration of Trust
(b)(1) By-Laws, as amended(1)
(b)(2) Form of Amended and Restated By-Laws
(c) Not applicable
(d)(1) Portions of the Agreement and Declaration of Trust, as
amended, included as Exhibit (a)(1), (a)(2) and (a)(3),
and the Form of Amended and Restated By-Laws of the
Registrant, included as Exhibit (b)(2) (see Article
III, Sections 1, 2, 4 and 5; Article V; Article VIII,
Section 4; and Article IX, Sections 4 and 7 of the
Agreement and Declaration of Trust, as amended, and
Sections 2-3, 4(c), 5 and 9-12 of Part I of Section 12.1
and Section 1-5 and 7 of Part II of Section 12.1 of the
Form of Amended and Restated By-Laws.
(d)(2) Form of specimen certificate for the Series T Municipal
Auction Rate Cumulative Preferred Shares
(d)(3) Form of specimen certificate for the Series W Municipal
Auction Rate Cumulative Preferred Shares
(e) Dividend Reinvestment Plan(2)
(f) Not applicable
(g) Management Agreement with Colonial Management
Associates, Inc.(2)
(h)(1) Form of Underwriting Agreement for the Series T
Municipal Auction Rate Cumulative Preferred Shares
(h)(2) Form of Underwriting Agreement for the Series W
Municipal Auction Rate Cumulative Preferred Shares
(i) Not applicable
(j)(1) Global Custody Agreement with The Chase
C-1
<PAGE> 169
Manhattan Bank (incorporated herein by reference to
Exhibit 8. to Post-Effective Amendment No. 13 to the
Registration Statement of Liberty Funds Trust VI
(formerly known as Colonial Trust VI), Registration Nos.
33-45117 and 811-6529, filed with the Commission on or
about October 24, 1997)
(j)(2) Amendment 4 to Appendix A of Custody Agreement with the
Chase Manhattan Bank (incorporated herein by reference
to Exhibit (g) (2) to the Registration Statement of
Liberty Funds Trust I (formerly known as Colonial Trust
I), Registration Nos. 2-41251 and 811-2214 filed with
the Commission on about May 27, 1999)
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<PAGE> 170
(k)(1) Form of Auction Agency Agreement
(k)(2) Form of Broker-Dealer Agreement
(k)(3) Agreement for Stock Transfer Services between the
Registrant and The First National Bank of Boston(1)
(k)(4) Service Contract with Colonial Management Associates,
Inc.(1)
(k)(5) Amendment to Service Contract with Colonial Management
Associates, Inc.(1)
(k)(6) Agreement for Stock Transfer Services between Colonial
High Income Municipal Trust and BankBoston, N.A.(2)
(l)(1) Opinion and Consent of Ropes & Gray, counsel to
Registrant
(m) Not applicable
(n) Consent of independent accountants
(o) Not applicable
(p) Not applicable
(q) Not applicable
A copy of the Power of Attorney for each of Robert J. Birnbaum, Tom Bleasdale,
John Carberry, Lora S. Collins, James E. Grinnell, Richard W. Lowry, Salvatore
Macera, William E. Mayer, James L. Moody, Jr., John J. Neuhauser, Robert L.
Sullivan and Anne-Lee Verville is incorporated herein by reference to
Post-Effective Amendment No. 50 to the Registration Statement of Colonial Trust
IV, Registration Nos. 2-62492 and 811-2865, filed with the Commission on or
about November 6, 1998.
- ---------------------------------
(1) Incorporated by reference to the Registration Statement filed with the
Commission via EDGAR on or about June 18, 1999.
(2) Incorporated by reference to the Registration Statement filed with the
Commission via EDGAR on or about August 18, 1999.
Item 25. Marketing Arrangements.
See Sections 5(l), 5(m) and 6(s) of Exhibit (h)(1) and
Sections 5(l), 5(m) and 6(s) of Exhibit (h)(2) of
Item 24(2) of this Registration Statement.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the expenses to be incurred in
connection with the Offer described in this Registration
Statement:
<TABLE>
<S> <C>
Registration fees $ 33,360
Printing $ 20,000
Accounting fees and expenses $ 7,500
Legal fees and expenses $155,000
Miscellaneous $ 15,000
--------
Total $230,860(*)
========
</TABLE>
(*) Estimated.
Item 27. Persons Controlled by or under Common Control with Registrant.
None.
Item 28. Number of Holders of Securities
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class as of May 31, 1999
-------------- ------------------------
<S> <C>
Shares of Beneficial Interest 2,889
Municipal Auction Rate Cumulative
Preferred Shares -0-
</TABLE>
Item 29. Indemnification.
The Agreement and Declaration of Trust, as amended, filed as
Exhibit (a)(1), (a)(2) and (a)(3) to this Registration
Statement, provides for indemnification to each of the
Registrant's Trustees and officers against all liabilities and
expenses incurred in acting
C-3
<PAGE> 171
as Trustee or officer, except in the case of wilful misfeasance,
bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such Trustees and officers.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a trustee,
officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The Registrant, Colonial Management Associates, Inc. and their
respective trustees, directors and officers are insured by a
directors and officers/errors and omissions liability policy.
Item 30. Business and Other Connections of Investment Adviser.
The description of the business of Colonial Management
Associates, Inc., the Registrant's Investment Adviser, is set
forth under the caption "The Advisor" in the Prospectus forming
part of this Registration Statement. The following sets forth
business and other connections of each director and officer of
Colonial Management Associates, Inc.
Registrant's investment adviser, Colonial Management Associates, Inc.
("Colonial"), is registered as an investment adviser under the Investment
Advisers Act of 1940 (1940 Act). Colonial Advisory Services, Inc. (CASI), an
affiliate of Colonial, is also registered as an investment adviser under the
1940 Act. As of the end of the fiscal year, December 31, 1998, CASI had four
institutional, corporate or other accounts under management
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<PAGE> 172
or supervision, the market value of which was approximately $227 million. As of
the end of the fiscal year, December 31, 1998, Colonial was the investment
adviser, sub-adviser and/or administrator to 57 mutual funds, including funds
sub-advised by Colonial, the market value of which investment companies was
approximately $18,950.90 million.
The following sets forth the business and other connections of each director and
officer of Colonial Management Associates, Inc.:
<TABLE>
<CAPTION>
(1) (2) (3) (4)
Name and principal
business
addresses* Affiliation
of officers and with Period is through 05/31/99. Other
directors of investment business, profession, vocation or
investment adviser adviser employment connection Affiliation
- ------------------ ---------- -------------------------------- -----------
<S> <C> <C> <C>
Allard, Laurie V.P.
Archer, Joseph A. V.P.
Ballou, William J. V.P., Liberty Trusts I through IX Asst. Sec.
Asst. Colonial High Income
Sec., Municipal Trust Asst. Sec.
Counsel Colonial InterMarket Income
Trust I Asst. Sec.
Colonial Intermediate High
</TABLE>
C-5
<PAGE> 173
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
AlphaTrade Inc. Asst. Clerk
Liberty Funds Distributor,
Inc. Asst. Clerk
Liberty Financial Advisers,
Inc. Asst. Sec.
Liberty Funds Group LLC Asst. Sec.
Liberty Variable Investment
Trust Asst. Sec.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund,
Inc. Asst. Sec.
Barron, Suzan M. V.P., Liberty Trusts I through IX Asst. Sec.
Asst. Colonial High Income
Sec., Municipal Trust Asst. Sec.
Counsel Colonial InterMarket Income
Trust I Asst. Sec.
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
AlphaTrade Inc. Asst. Clerk
Liberty Funds Distributor,
Inc. Asst. Clerk
Liberty Financial Advisers,
Inc. Asst. Sec.
Liberty Funds Group LLC Asst. Sec.
Liberty Variable Investment
Trust Asst. Sec.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund,
Inc. Asst. Sec.
</TABLE>
C-6
<PAGE> 174
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Barsketis, Ophelia Sr.V.P. Stein Roe & Farnham Incorporated Snr. V.P.
Berliant, Allan V.P.
Boatman, Bonny E. Sr.V.P.; Colonial Advisory Services,
IPC Mbr. Inc. Exec. V.P.
Bunten, Walter V.P.
Campbell, Kimberly V.P.
Carnabucci,
Dominick V.P.
Carome, Kevin Sr.V.P.; Liberty Funds Distributor,
IPC Mbr. Inc. Assistant Clerk
Liberty Funds Group LLC Sr. V.P.
Stein Roe & Farnham
Incorporated General Counsel
Carroll, Sheila A. Sr.V.P.
Citrone, Frank Sr.V.P.
Conlin, Nancy L. Sr. V.P.; Liberty Trusts I through IX Secretary
Sec.; Clerk Colonial High Income
IPC Mbr.; Municipal Trust Secretary
Dir; Gen. Colonial InterMarket Income
Counsel Trust I Secretary
Colonial Intermediate High
Income Fund Secretary
Colonial Investment Grade
Municipal Trust Secretary
Colonial Municipal Income
Trust Secretary
Liberty Funds Distributor,
Inc. Dir.; Clerk
Liberty Funds Services, Inc. Clerk; Dir.
Liberty Funds Group LLC V.P.; Gen.
Counsel and
Secretary
Liberty Variable Investment
Trust Secretary
</TABLE>
C-7
<PAGE> 175
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Colonial Advisory Services,
Inc. Dir.; Clerk
AlphaTrade Inc. Dir.; Clerk
Liberty Financial Advisors,
Inc. Dir.; Sec.
Liberty All-Star Equity Fund Secretary
Liberty All-Star Growth Fund,
Inc. Secretary
Connaughton, V.P. Liberty Trust I through VIII CAO; Controller
J. Kevin Liberty Variable Investment
Trust CAO; Controller
Colonial High Income
Municipal Trust CAO; Controller
Colonial Intermarket Income
Trust I CAO; Controller
Colonial Intermediate High
Income Fund CAO; Controller
Colonial Investment Grade
Municipal Trust CAO; Controller
Colonial Municipal Income
Trust CAO; Controller
Liberty All-Star Equity Fund Controller
Liberty All-Star Growth Fund,
Inc. Controller
Liberty Trust IX Controller
Daniszewski, V.P.
Joseph J.
Dearborn, James V.P.
Desilets, Marian H. V.P. Liberty Funds Distributor,
Inc. V.P.
Liberty Trust I through IX Asst. Sec.
Colonial High Income
Municipal Trust Asst. Sec.
Colonial Intermarket Income
Trust I Asst. Sec.
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
</TABLE>
C-8
<PAGE> 176
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
Liberty Variable Investment
Trust Asst. Sec.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund,
Inc. Asst. Sec.
DiSilva-Begley, V.P. Colonial Advisory Services, Compliance
Linda IPC Mbr. Inc. Officer
Eckelman, Marilyn Sr.V.P.
Ericson, Carl C. Sr.V.P. Colonial Intermediate High
IPC Mbr. Income Fund V.P.
Colonial Advisory Services, Pres.; CEO
Inc. and CIO
Evans, C. Frazier Sr.V.P. Liberty Funds Distributor,
Inc. Mng. Director
Feloney, Joseph L. V.P. Colonial Advisory Services,
Asst. Treas. Inc. Asst. Treas.
Liberty Funds Group LLC Asst. Treas.
Finnemore, Sr.V.P. Colonial Advisory Services,
Leslie W. Inc. Sr. V.P.
Franklin, Sr. V.P. AlphaTrade Inc. President
Fred J. IPC Mbr. Liberty Financial Companies, Chief
Inc. Compliance Ofcr
Garrison, William V.P. Stein Roe & Farnham
Incorporated V.P.
Gibson, Stephen E. Dir.; Pres.; Liberty Funds Group LLC Dir.;
CEO; Pres.; CEO;
Chairman of Exec. Cmte.
the Board; Mbr.; Chm.
IPC Mbr. Liberty Funds Distributor,
Inc. Dir.; Chm.
Colonial Advisory Services,
Inc. Dir.; Chm.
</TABLE>
C-9
<PAGE> 177
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Liberty Funds Services, Inc. Dir.; Chm.
AlphaTrade Inc. Dir.
Liberty Trusts I through VIII President
Colonial High Income
Municipal Trust President
Colonial InterMarket Income
Trust I President
Colonial Intermediate High
Income Fund President
Colonial Investment Grade
Municipal Trust President
Colonial Municipal Income
Trust President
Liberty Financial Advisors,
Inc. Director
Stein Roe & Farnham
Incorporated Asst. Chairman
Liberty Variable Investment
Trust President
Grabowski, Neil V.P.
Hanson, Loren Sr. V.P.;
IPC Mbr.
Harasimowicz, V.P.
Stephen
Harris, David V.P. Stein Roe Global Capital Mngmt. Principal
Hartford, Brian Sr.V.P.
Haynie, James P. Sr.V.P. Colonial Advisory Services,
Inc. Sr. V.P.
Held, Dorothy V.P.
Hernon, Mary V.P.
Hill, William V.P. Colonial Advisory Services,
Inc. V.P.
Hounsell, Clare V.P. Stein Roe & Farnham
Incorporated V.P.
Iudice, Jr. V.P.; Liberty Funds Group LLC Controller,
Philip J. Controller CAO, Asst.
</TABLE>
C-10
<PAGE> 178
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Asst. Treas.
Treasurer Liberty Funds Distributor, CFO,
Inc. Treasurer
Colonial Advisory Services, Controller;
Inc. Asst. Treas.
AlphaTrade Inc. CFO, Treas.
Liberty Financial Advisors,
Inc. Asst. Treas.
Jacoby, Timothy J. Sr. V.P.; Liberty Funds Group LLC V.P., Treasr.,
CFO; CFO
Treasurer Liberty Trusts I through VIII Treasr.,CFO
Colonial High Income
Municipal Trust Treasr.,CFO
Colonial InterMarket Income
Trust I Treasr.,CFO
Colonial Intermediate High
Income Fund Treasr.,CFO
Colonial Investment Grade
Municipal Trust Treasr.,CFO
Colonial Municipal Income
Trust Treasr.,CFO
Colonial Advisory Services,
Inc. CFO, Treasr.
Liberty Financial Advisors,
Inc. Treasurer
Stein Roe & Farnham
Incorporated Snr. V.P.
Liberty Variable Investment
Trust Treasurer, CFO
Liberty All-Star Equity Fund Treasurer
Liberty All-Star Growth Fund,
Inc. Treasurer
Liberty Trust IX Treasurer
Jansen, Deborah Sr.V.P. Stein Roe & Farnham
Incorporated Sr. V.P.
Jersild, North V.P. Stein Roe & Farnham
Incorporated V.P.
</TABLE>
C-11
<PAGE> 179
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Johnson, Gordon V.P.
Knudsen, Gail E. V.P. Liberty Trusts I through IX Asst. Treas.
Colonial High Income
Municipal Trust Asst. Treas.
Colonial InterMarket Income
Trust I Asst. Treas.
Colonial Intermediate High
Income Fund Asst. Treas.
Colonial Investment Grade
Municipal Trust Asst. Treas.
Colonial Municipal Income
Trust Asst. Treas.
Liberty Variable Investment
Trust Asst. Treas.
Liberty All-Star Equity Fund Asst. Treas.
Liberty All-Star Growth Fund,
Inc. Asst. Treas.
Lapointe, Thomas V.P.
Lasher, Bennett V.P.
Lasman, Gary V.P.
Lennon, John E. Sr.V.P. Colonial Advisory Services,
Inc. V.P.
Lenzi, Sharon V.P.
Lessard, Kristen V.P.
Loring, William
C., Jr. Sr.V.P.
MacKinnon,
Donald S. Sr.V.P.
Marcus, Harold V.P.
Muldoon, Robert V.P.
Newman, Maureen Sr.V.P.
O'Brien, David Sr.V.P.
Ostrander, Laura Sr.V.P. Colonial Advisory Services,
Inc. V.P.
Palombo, Joseph R. Dir.; Colonial Advisory Services,
Exe.V.P.; Inc. Dir.
IPC Mbr.; Colonial High Income
</TABLE>
C-12
<PAGE> 180
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Municipal Trust V.P.
Colonial InterMarket
Income Trust I V.P.
Colonial Intermediate High
Income Fund V.P.
Colonial Investment Grade
Municipal Trust V.P.
Colonial Municipal Income
Trust V.P.
Liberty Trusts I through IX V.P.
Liberty Funds Services, Inc. Director
Liberty Funds Group LLC CAO; Ex. V.P.
Liberty Funds Distributor,
Inc. Director
AlphaTrade Inc. Director
Liberty Financial Advisors,
Inc. Director
Stein Roe & Farnham
Incorporated Exec. V.P.
Liberty Variable Investment
Trust V.P.
Liberty All-Star Equity Fund V.P.
Liberty All-Star Growth Fund,
Inc. V.P.
Peishoff, William V.P.
Peterson, Ann T. V.P. Colonial Advisory Services,
Inc. V.P.
Pielech, Mitchell V.P.
Pope, David V.P.
Rao, Gita Sr.V.P.
Reading, John V.P.; Liberty Funds Services, Inc. Asst. Clerk
Asst. Liberty Funds Group LLC Asst. Sec.
Sec.; Colonial Advisory Services,
Asst. Inc. Asst. Clerk
Clerk and Liberty Funds Distributor,
Counsel Inc. Asst. Clerk
AlphaTrade Inc. Asst. Clerk
Liberty Trusts I through IX Asst. Sec.
Colonial High Income
Municipal Trust Asst. Sec.
Colonial InterMarket Income
Trust I Asst. Sec.
</TABLE>
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<PAGE> 181
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
Liberty Financial Advisors,
Inc. Asst. Sec.
Liberty Variable Investment
Trust Asst. Sec.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund,
Inc. Asst. Sec.
Rega, Michael V.P. Colonial Advisory Services,
Inc. V.P.
Salopek, Steven V.P. Stein Roe & Farnham
Incorporated V.P.
Schermerhorn, Scott Sr. V.P.
Seibel, Sandra L. V.P. Colonial Advisory Services,
Inc. V.P.
Shields, Yvonne V.P. Stein Roe & Farnham
Incorporated V.P.
Smalley, Greg V.P.
Spanos, Gregory J. Sr. V.P. Colonial Advisory Services,
Inc. Exec. V.P.
Stevens, Richard V.P. Colonial Advisory Services,
Inc. V.P.
Stoeckle, Mark Sr.V.P. Colonial Advisory Services,
Inc. V.P.
Swayze, Gary Sr.V.P.
Thomas, Ronald V.P.
Wallace, John V.P. Colonial Advisory Services,
Asst.Treas. Inc. Asst. Treas.
Liberty Funds Group LLC Asst. Treas.
Ware, Elizabeth M. V.P.
Wiley, Christine V.P.
</TABLE>
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<PAGE> 182
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Wiley, Peter V.P.
</TABLE>
- -----------------------------------------------
*The Principal address of all of the officers and directors of the investment
adviser is One Financial Center, Boston, MA 02111.
Item 31. Location of Accounts and Records:
<TABLE>
<CAPTION>
<S> <C> <C>
Registrant: Colonial High Income Municipal Trust
One Financial Center
Boston, Massachusetts 02111-2621
Investment Advisor: Colonial Management Associates, Inc.
One Financial Center
Boston, Massachusetts 02111-2621
Custodian: The Chase Manhattan Bank
270 Park Avenue
New York, New York 10017-2070
Transfer Agent: BankBoston, N.A.
100 Federal Street
Boston, Massachusetts 02110
</TABLE>
Item 32. Management Services.
Not Applicable.
Item 33. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To suspend the offering of its preferred shares until it amends
its prospectus contained herein if (i) subsequent to the
effective date of this Registration Statement, its net asset
value per share of beneficial interest declines more than ten
percent from its net asset value per share of beneficial
interest as of the effective date of this Registration
Statement, or (ii) its net asset value per share of beneficial
interest increases to an amount greater than its net proceeds
as stated in the prospectus contained herein.
(2) Not applicable.
(3) Not applicable.
(4) Not applicable.
(5)(a) That, for the purpose of determining any liability under the
Securities Act of 1933, the information omitted from the form
of prospectus filed as a part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant under Rule 497(h) under the Securities
Act of 1933 shall be deemed to be a part of this Registration
Statement as of the time it was declared effective; and
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of the securities at that time shall
be deemed to be the initial bona fide offering thereof.
(6) To send by first class mail or other means designed to ensure
equally prompt delivery, within two business days of receipt of
a written or oral request, the Statement of Additional
Information.
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<PAGE> 183
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Amendment to the Registration Statement on Form N-2 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Boston and the
Commonwealth of Massachusetts on the 20th day of August, 1999.
COLONIAL HIGH INCOME MUNICIPAL TRUST
By: /s/ STEPHEN E. GIBSON
---------------------
Stephen E. Gibson
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed below by the following persons in
their capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
/s/ STEPHEN E. GIBSON President (chief August 20, 1999
- --------------------- executive officer)
Stephen E. Gibson
/s/ J. KEVIN CONNAUGHTON Controller and Chief August 20, 1999
- ------------------------ Accounting Officer
J. Kevin Connaughton
/s/ TIMOTHY J. JACOBY Treasurer and Chief August 20, 1999
- --------------------- Financial Officer
Timothy J. Jacoby
</TABLE>
C-16
<PAGE> 184
<TABLE>
<S> <C> <C>
ROBERT J. BIRNBAUM* Trustee
- -------------------
Robert J. Birnbaum
TOM BLEASDALE* Trustee
- --------------
Tom Bleasdale
JOHN CARBERRY* Trustee
- --------------
John Carberry
LORA S. COLLINS* Trustee
- ----------------
Lora S. Collins
JAMES E. GRINNELL* Trustee
- ------------------
James E. Grinnell
RICHARD W. LOWRY* Trustee By:*/s/ WILLIAM J. BALLOU
- ----------------- --------------------------
Richard W. Lowry William J. Ballou
Attorney-in-fact
For each Trustee
SALVATORE MACERA* Trustee August 20, 1999
- -----------------
Salvatore Macera
WILLIAM E. MAYER* Trustee
- -----------------
William E. Mayer
JAMES L. MOODY, JR. * Trustee
- ---------------------
James L. Moody, Jr.
JOHN J. NEUHAUSER* Trustee
- ------------------
John J. Neuhauser
THOMAS E. STITZEL* Trustee
- ------------------
Thomas E. Stitzel
ROBERT L. SULLIVAN* Trustee
- -------------------
Robert L. Sullivan
ANNE-LEE VERVILLE* Trustee
- ------------------
Anne-Lee Verville
</TABLE>
C-17
<PAGE> 185
EXHIBIT INDEX
(a)(3) Amendment No. 2 to Agreement and Declaration of Trust
(b)(2) Form of Amended and Restated By-Laws
(d)(2) Form of specimen certificate for the Series T Municipal Auction Rate
Cumulative Preferred Shares
(d)(3) Form of specimen certificate for the Series W Municipal Auction Rate
Cumulative Preferred Shares
(h)(1) Form of Underwriting Agreement for the Series T Municipal Auction
Rate Cumulative Preferred Shares
(h)(2) Form of Underwriting Agreement for the Series W Municipal Auction
Rate Cumulative Preferred Shares
(k)(1) Form of Auction Agency Agreement
(k)(2) Form of Broker-Dealer Agreement
(l)(1) Opinion and Consent of Ropes & Gray
(n) Consent of independent accountants
<PAGE> 1
Exhibit (a)(3)
AMENDMENT NO. 2
TO THE
AGREEMENT AND DECLARATION OF TRUST
OF
COLONIAL HIGH INCOME MUNICIPAL TRUST
This Amendment No. 2 to the AGREEMENT AND DECLARATION OF TRUST OF
COLONIAL HIGH INCOME MUNICIPAL TRUST is made at Boston, Massachusetts this 30th
day of July 1999 by the Trustees hereunder, and by the holders of Shares to be
issued hereunder as hereinafter provided.
WHEREAS, Article IX, Section 7 of the Declaration of Trust (the
"Declaration of Trust") dated January 9, 1989, of Colonial High Income Municipal
Trust, a copy of which is on file in the Office of the Secretary of State of The
Commonwealth of Massachusetts, authorizes the trustees of the Trust to amend
said Declaration of Trust at any time by an instrument in writing signed by a
majority of the then Trustees when authorized to do so by vote of shareholders
holding a majority of the Shares entitled to vote;
WHEREAS, the holders of a majority of the Shares of Colonial High
Income Municipal Trust entitled to vote have authorized this amendment of the
Declaration of Trust;
NOW, THEREFORE, the undersigned, being a majority of the Trustees of
the Trust, and being authorized to do so by the holders of a majority of the
outstanding shares of beneficial interest of Colonial High Income Municipal
Trust, have authorized the following amendments to the Declaration of Trust:
Subsection (c) of Section 2 of Article I of the Agreement and
Declaration of Trust is amended to read in its entirety as follows:
(c) "Shares" means the equal proportionate transferable units of
interest into which the beneficial interest in the Trust shall be
divided from time to time or, if more than one class or series of
Shares is authorized by the Trustees, the equal proportionate
transferable units into which each class or series of shares shall be
divided from time to time;
Subsections (g) and (h) of Section 2 of Article I of the Agreement and
Declaration of Trust are amended to read in their entirety, and new subsections
(i) and (j) are added immediately thereafter, as follows:
(g) "Declaration of Trust" shall mean this Agreement and
Declaration of Trust as amended or restated from time to time;
(h) "By-Laws" shall mean the By-Laws of the Trust as amended
from time to time;
(i) The term "class" or "class of Shares" refers to the division
of Shares into two or more classes as provided in Article III, Section
1 hereof; and
(j) The term "series" or "series of Shares" refers to the
division of Shares representing any class into two or more series as
provided in Article III, Section 1 hereof.
Sections 1 and 2 of Article III of the Agreement and Declaration of
Trust are amended to read in their entirety as follows:
<PAGE> 2
DIVISION OF BENEFICIAL INTEREST
SECTION 1. The Trustees may, without Shareholder approval,
authorize one or more classes of Shares (which classes may be divided
into two or more series), Shares of each such class or series having
such preferences, voting powers, terms of redemption, if any, and
special or relative rights or privileges (including conversion rights,
if any) as the Trustees may determine and as shall be set forth in the
By-Laws. The number of Shares of each class or series authorized shall
be unlimited, except as the By-Laws may otherwise provide, and the
Shares so authorized may be represented in part by fractional shares.
The Trustees may from time to time divide or combine the Shares of any
class or series into a greater or lesser number without thereby
changing the proportionate beneficial interest in the class or series.
OWNERSHIP OF SHARES
SECTION 2. The ownership of Shares shall be recorded on the
books of the Trust or its transfer or similar agent. No certificates
certifying the ownership of Shares shall be issued except as the
Trustees may otherwise determine from time to time. The Trustees may
make such rules as they consider appropriate for the issuance of Share
certificates, the transfer of Shares and similar matters. The record
books of the Trust as kept by the Trust or any transfer or similar
agent of the Trust, as the case may be, shall be conclusive as to who
are the Shareholders of each class or series and as to the number of
Shares of each class or series held from time to time by each
Shareholder.
Sections 1 and 2 of Article IV of the Agreement and Declaration of
Trust are amended to read in their entirety as follows:
NUMBER OF TRUSTEES AND TERM OF OFFICE
SECTION 1. Subject to the voting powers of one or more classes
or series of Shares as set forth in the By-Laws, the number of Trustees
shall be such number as shall be fixed from time to time by a written
instrument signed by a majority of the Trustees, provided, however,
that the number of Trustees shall in no event be less than three (3).
No reduction in the number of Trustees shall have the effect of
removing any Trustee from office prior to the expiration of his term
unless the Trustee is specifically removed pursuant to Section 2 of
this Article at the time of the decrease. The Board of Trustees shall
be divided into three classes. The number of Trustees in each class
shall be determined by resolution of the Board of Trustees. The initial
Trustees, each of whom shall serve until the first meeting of
Shareholders at which Trustees are elected and until his or her
successor is elected and qualified, or until he or she sooner dies,
resigns or is removed, shall be John A. McNeice, Jr. and such other
persons as the Trustee or Trustees then in office shall, prior to any
sale of Shares pursuant to a public offering, appoint. The term of
office of all of the initial Trustees shall expire on the date of the
first annual meeting of Shareholders or special meeting in lieu
thereof, which annual or special meeting shall be called to be held not
more than fifteen months after Shares are first sold pursuant to a
public offering. The term of office of the first class shall expire on
the date of the second annual meeting of Shareholders or any special
meeting in lieu thereof. The term of office of the second class shall
expire on the date of the third annual meeting of Shareholders or any
special meeting in lieu thereof. The term of office of the third class
shall expire on the date of the fourth annual meeting of Shareholders
or any special meeting in lieu thereof. Upon expiration of the term of
office of each class as set forth above, the number of Trustees in such
class, as determined by the Board of Trustees, shall be elected for a
term expiring on the date of the third annual meeting of Shareholders
or any special meeting in lieu thereof following such expiration to
succeed the Trustees whose terms of office expire. The Trustees shall
2
<PAGE> 3
be elected at an annual meeting of the Shareholders or a special
meeting in lieu thereof, except as provided in Section 2 of this
Article.
VACANCIES; REMOVAL
SECTION 2. Subject to the voting powers of one or more classes
or series of Shares as set forth in the By-Laws, any vacancies
occurring in the Board of Trustees may be filled by the Trustees if,
immediately after filling any such vacancy, at least two-thirds of the
Trustees then holding office shall have been elected to such office by
the Shareholders. In the event that at any time less than a majority of
the Trustees then holding office were elected to such office by the
Shareholders, the Trustees shall call a meeting of Shareholders for the
purpose of electing Trustees. At any meeting called for such purpose
and subject to the voting powers of one or more classes or series of
Shares as set forth in the By-Laws, a Trustee may be removed, with or
without cause, by vote of a majority of the outstanding Shares of the
classes or series entitled to vote for the election of such Trustee. By
vote of a majority of the Trustees then in office, the Trustees may
remove a Trustee with or without cause.
The first paragraph of Section 4 of Article IV of the Agreement and
Declaration of Trust is amended to read in its entirety as follows:
POWERS
SECTION 4. Subject to the provisions of this Declaration of
Trust, the business of the Trust shall be managed by the Trustees, and
they shall have all powers necessary or convenient to carry out that
responsibility. Without limiting the foregoing, the Trustees may adopt
By-Laws not inconsistent with this Declaration of Trust providing for
the conduct of the business of the Trust and may amend and repeal them
to the extent that such By-Laws do not reserve that right to the
Shareholders of one or more classes or series. Subject to the voting
power of one or more classes or series of shares as set forth in the
By-Laws, the Trustees may fill vacancies in or add to their number,
including vacancies resulting from increases in their number, and may
elect and remove such officers and appoint and terminate such agents as
they consider appropriate; they may appoint from their own number, and
terminate, any one or more committees consisting of two or more
Trustees, including an executive committee which may, when the Trustees
are not in session, exercise some or all of the power and authority of
the Trustees as the Trustees may determine; they may appoint an
advisory board, the members of which shall not be Trustees and need not
be Shareholders; they may employ one or more custodians of the assets
of the Trust and may authorize such custodians to employ subcustodians
and to deposit all or any part of such assets in a system or systems
for the central handling of securities, retain a transfer agent or a
Shareholder services agent, or both, provide for the distribution of
Shares by the Trust, through one or more principal underwriters or
otherwise, set record dates for the determination of Shareholders with
respect to various matters, and in general delegate such authority as
they consider desirable to any officer of the Trust, to any committee
of the Trustees and to any agent or employee of the Trust or to any
such custodian or underwriter.
Sections 1, 2, 3 and 4 of Article V of the Agreement and Declaration of
Trust are amended to read in their entirety as follows:
VOTING POWERS
SECTION 1. Subject to the voting powers of one or more classes
or series of Shares as set forth in the By-Laws, the Shareholders shall
have power to vote only (i) for the election or removal of Trustees as
provided in Article IV, Section 1, (ii) with respect to any Adviser as
provided in Article
3
<PAGE> 4
IV, Section 7, (iii) with respect to any termination of this Trust to
the extent and as provided in Article IX, Section 4, (iv) with respect
to any amendment of this Declaration of Trust to the extent and as
provided in Article IX, Section 7, (v) to the same extent as the
stockholders of a Massachusetts business corporation as to whether or
not a court action, proceeding or claim should or should not be brought
or maintained derivatively or as a class action on behalf of the Trust
or the Shareholders, (vi) with respect to such additional matters
relating to the Trust as may be required by law, this Declaration of
Trust, the By-Laws or any registration of the Trust with the Securities
and Exchange Commission (or any successor agency) or any state, or as
the Trustees may consider necessary or desirable. Each whole Share
shall be entitled to one vote as to any matter on which it is entitled
to vote and each fractional Share shall be entitled to a proportionate
fractional vote, except as otherwise provided in the By-Laws.
Notwithstanding any other provision of this Declaration of Trust, on
any matter submitted to a vote of Shareholders, all Shares of the Trust
then entitled to vote shall, except as otherwise provided in the
By-Laws or required by law, be voted in the aggregate as a single class
without regard to classes or series of Shares. There shall be no
cumulative voting in the election of Trustees. Shares may be voted in
person or by proxy. A proxy with respect to Shares held in the name of
two or more persons shall be valid if executed by any one of them
unless at or prior to exercise of the proxy the Trust receives a
specific written notice to the contrary from any one of them. A proxy
purporting to be executed by or on behalf of a Shareholder shall be
deemed valid unless challenged at or prior to its exercise and the
burden of proving invalidity shall rest on the challenger. Until Shares
of a particular class or series are issued, the Trustees may exercise
all rights of Shareholders and may take any action required by law,
this Declaration of Trust or the By-Laws to be taken by Shareholders as
to such class or series.
VOTING POWER AND MEETINGS
SECTION 2. There shall be an annual meeting of the Shareholders
on the date fixed in the By-Laws at the office of the Trust in Boston,
Massachusetts, or at such other place as may be designated in the call
thereof, which call shall be made by the Trustees. In the event that
such meeting is not held in any year on the date fixed in the By-Laws,
whether the omission be by oversight or otherwise, a subsequent special
meeting may be called by the Trustees and held in lieu of the annual
meeting with the same effect as though held on such date. Special
meetings of Shareholders of any or all classes or series may also be
called by the Trustees from time to time for the purpose of taking
action upon any matter requiring the vote or authority of the
Shareholders of such class or series as herein provided or upon any
other matter deemed by the Trustees to be necessary or desirable.
Written notice of any meeting of Shareholders shall be given or caused
to be given by the Trustees by mailing such notice at least seven days
before such meeting, postage prepaid, stating the time, place and
purpose of the meeting, to each Shareholder entitled to vote at such
meeting at the Shareholder's address as it appears on the records of
the Trust. If the Trustees shall fail to call or give notice of any
meeting of Shareholders for a period of 30 days after written
application by Shareholders holding at least 10% of the Shares then
outstanding of all classes and series entitled to vote at such meeting
requesting a meeting to be called for a purpose requiring action by the
Shareholders as provided herein or in the By-Laws, then Shareholders
holding at least 10% of the Shares then outstanding of all classes and
series entitled to vote at such meeting may call and give notice of
such meeting, and thereupon the meeting shall be held in the manner
provided for herein in case of call thereof by the Trustees.
QUORUM AND REQUIRED VOTE
SECTION 3. A majority of the Shares entitled to vote on a
particular matter shall be a quorum for the transaction of business at
a Shareholders' meeting, except that where the By-Laws require that
holders of any class or series shall vote as an individual class or
series, then a majority of the aggregate number of Shares of that class
or series entitled to vote shall be necessary to constitute
4
<PAGE> 5
a quorum for the transaction of business by that class or series. Any
lesser number, however, shall be sufficient for adjournments. Any
adjourned session or sessions may be held within a reasonable time
after the date set for the original meeting without the necessity of
further notice. Except when a larger vote is required by any provision
of this Declaration of Trust or the By-Laws, a majority of the Shares
voted shall decide any questions and a plurality shall elect a Trustee,
provided that where the By-Laws require that the holders of any class
or series shall vote as an individual class or series a majority of the
Shares of that class or series voted on the matter (or a plurality with
respect to the election of a Trustee) shall decide that matter insofar
as that class or series is concerned.
CONVERSION
SECTION 4. Notwithstanding any other provision of this
Declaration of Trust, the conversion of the Trust from a "closed-end
company" to an "open-end company," as those terms are defined in
Sections 5(a)(2) and 5(a)(1), respectively, of the 1940 Act as in
effect on January 1, 1989, shall require the affirmative vote or
consent of the holders of at least 66 2/3% of the Shares of each class
entitled to vote. Such affirmative vote or consent shall be in addition
to the vote or consent of the holders of the Shares otherwise required
by law or by any agreement between the Trust and any national
securities exchange.
Section 1 of Article VI of the Agreement and Declaration of Trust is
amended to read in its entirety as follows:
DISTRIBUTIONS
SECTION 1. The Trustees may, but need not, each year distribute
to the Shareholders of any or all classes or series such income and
gains, accrued or realized, as the Trustees may determine, after
providing for actual and accrued expenses and liabilities (including
such reserves as the Trustees may establish) determined in accordance
with good accounting practices and subject to the preferences, special
or relative rights and privileges of the various classes or series of
Shares. The Trustees shall have full discretion to determine which
items shall be treated as income and which items as capital and their
determination shall be binding upon the Shareholders. Distributions of
each year's income, if any be made, may be made in one or more
payments, which shall be in Shares, in cash or otherwise and on a date
or dates and as of a record date or dates determined by the Trustees.
At any time and from time to time in their discretion, the Trustees may
distribute to the Shareholders as of a record date or dates determined
by the Trustees, in Shares, in cash or otherwise, all or part of any
gains realized on the sale or disposition of property or otherwise, or
all or part of any other principal of the Trust. Each distribution
pursuant to this Section 1 to the Shareholders of a particular class or
series shall be made ratably according to the number of Shares of such
class or series held by the several Shareholders on the applicable
record date thereof, provided that no distribution need be made on
Shares purchased pursuant to orders received, or for which payment is
made, after such time or times as the Trustees may determine. Any such
distribution paid in Shares will be paid at the net asset value thereof
as determined in accordance with Section 2 of this Article VI, or at
such other value as may be specified by the By-Laws or as the Trustees
may from time to time determine, subject to applicable laws and
regulations then in effect.
The first paragraph of Section 2 of Article VI of the Agreement and
Declaration of Trust is amended to read in its entirety as follows:
5
<PAGE> 6
DETERMINATION OF NET ASSET VALUE
SECTION 2. At such times as the Trust shall have outstanding
only one class or series of Shares, the term "net asset value" of the
Shares shall mean: (i) the value of all the assets of the Trust; (ii)
less the total liabilities of the Trust; (iii) divided by the number of
Shares outstanding, in each case at the time of each determination. Any
fractions involved in the computation of net asset value per share
shall be adjusted to the nearer cent unless the Trustees shall
determine to adjust such fractions to a fraction of a cent. At such
times as the Trust shall have outstanding more than one class or series
of Shares, the term "net asset value" of the Shares shall have such
meaning, with respect to the Shares of any particular class or series
of Shares, as shall from time to time be specified in the By-Laws.
Section 4 of Article IX of the Agreement and Declaration of Trust is
amended to read in its entirety as follows:
DURATION AND TERMINATION OF TRUST
SECTION 4. Unless terminated as provided herein, the Trust shall
continue without limitation of time. Subject to the voting powers of
one or more classes or series of Shares as set forth in the By-Laws,
the Trust may be terminated at any time by vote of Shareholders holding
at least 66 2/3 % of the Shares entitled to vote or by the Trustees by
written notice to the Shareholders.
Upon termination of the Trust, after paying or otherwise
providing for all charges, taxes, expenses and liabilities, whether due
or accrued or anticipated as may be determined by the Trustees, the
Trust shall in accordance with such procedures as the Trustees consider
appropriate reduce the remaining assets to distributable form in cash
or shares or other securities, or any combination thereof, and
distribute the proceeds to the Shareholders, ratably according to the
number of Shares held by the several Shareholders on the date of
termination, except to the extent otherwise required or permitted by
the preferences and special or relative rights and privileges of any
classes or series of Shares.
Section 7 of Article IX of the Agreement and Declaration of Trust is
amended to read in its entirety as follows:
AMENDMENTS
SECTION 7. (a) Except to the extent that the By-Laws or
applicable law may require a higher vote or the separate vote of one or
more classes or series of Shares, and except as provided in paragraph
(b) of this Section 7, this Declaration of Trust may be amended at any
time by an instrument in writing signed by a majority of the then
Trustees (1) when authorized so to do by a vote of Shareholders holding
a majority of the Shares entitled to vote or (2) without Shareholder
approval as may be necessary or desirable in order to authorize one or
more classes or series of Shares as in Section 1 of Article III.
Amendments having the purpose of changing the name of the Trust or of
supplying any omission, curing any ambiguity or curing, correcting or
supplementing any defective or inconsistent provision contained herein
shall not require authorization by Shareholder vote.
(b) Except to the extent that the By-Laws or applicable law may
require a higher vote or the separate vote of one or more classes or
series of Shares, no amendment may be made under this Section 7 which
shall amend, alter, change or repeal any of the provisions of Article
IV, Section 1, Article V, Section 4 or this paragraph (b) unless the
amendment effecting such amendment, alteration, change or repeal shall
receive the affirmative vote or consent of at least 66 2/3% of the
6
<PAGE> 7
Shares entitled to vote. Such affirmative vote or consent shall be in
addition to the vote or consent of the holders of Shares otherwise
required by law or by the terms of any agreement between the Trust and
any national securities exchange.
7
<PAGE> 8
IN WITNESS WHEREOF, the undersigned have hereunto set their hands in
the City of Boston, Massachusetts, for themselves and their assigns, as of this
30th day of July, 1999.
- --------------------------------------- ---------------------------------------
Robert J. Birnbaum William E. Mayer
- --------------------------------------- ---------------------------------------
Tom Bleasdale James L. Moody, Jr.
- --------------------------------------- ---------------------------------------
John V. Carberry John J. Neuhauser
- --------------------------------------- ---------------------------------------
Lora S. Collins Thomas E. Stitzel
- --------------------------------------- ---------------------------------------
James E. Grinnell Robert L. Sullivan
- --------------------------------------- ---------------------------------------
Richard W. Lowry Anne-Lee Verville
- ---------------------------------------
Salvatore Macera
Commonwealth of Massachusetts )
)ss.
County of Suffolk )
Then personally appeared the above-named Trustees and executed Amendment No. 2
to the Agreement and Declaration of Trust of Colonial High Income Municipal
Trust as their free act and deed, before me, this 30th day of July, 1999.
Mary P Mohoney
Notary Public
My Commission Expires 2/22/2002
8
<PAGE> 1
Exhibit (b)(2)
AMENDED AND RESTATED BY-LAWS
OF
COLONIAL HIGH INCOME MUNICIPAL TRUST
Article 1.
AGREEMENT AND DECLARATION OF TRUST AND PRINCIPAL OFFICE
1.1. AGREEMENT AND DECLARATION OF TRUST. These By-Laws shall be subject
to the Agreement and Declaration of Trust, as from time to time in effect (the
"Declaration of Trust"), of Colonial High Income Municipal Trust, a
Massachusetts business trust established by the Declaration of Trust (the
"Trust").
1.2. PRINCIPAL OFFICE OF THE TRUST. The principal office of the Trust
shall be located in Boston, Massachusetts.
Article 2.
SHAREHOLDERS
2.1. SHAREHOLDERS MEETINGS. The annual meeting of the shareholders of
the Trust shall be held between April 1 and May 31 in each year, beginning in
1990, on a date and at a time within that period set by the Trustees. A special
meeting of the shareholders of the Trust may be called at any time by the
Trustees, by the president or, if the Trustees and the president shall fail to
call any meeting of shareholders for a period of 30 days after written
application of one or more shareholders who hold at least 10% of all outstanding
shares of the Trust, then such shareholders may call such meeting. Each call of
a meeting shall state the place, date, hour and purposes of the meeting.
2.2. PLACE OF MEETINGS. All meetings of the shareholders shall be held
at the principal office of the Trust, or, to the extent permitted by the
Declaration of Trust, at such other place within the United States as shall be
designated by the Trustees or the president of the Trust.
2.3. NOTICE OF MEETINGS. A written notice of each meeting of
shareholders, stating the place, date and hour and the purposes of the meeting,
shall be given at least seven days before the meeting to each shareholder
entitled to vote thereat by leaving such notice with him or at his residence or
usual place of business or by mailing it, postage prepaid, and addressed to such
shareholder at his address as it appears in the records of the Trust. Such
notice shall be given by the secretary or an assistant secretary or by an
officer designated by the Trustees. No notice of any meeting of shareholders
need be given to a shareholder if a written waiver of notice, executed before or
after the meeting by such shareholder or his attorney thereunto duly authorized,
is filed with the records of the meeting.
<PAGE> 2
2.4. BALLOTS. No ballot shall be required for any election unless
requested by a shareholder present or represented at the meeting and entitled to
vote in the election.
2.5. PROXIES. Shareholders entitled to vote may vote either in person
or by proxy in writing dated not more than six months before the meeting named
therein, which proxies shall be filed with the secretary or other person
responsible to record the proceedings of the meeting before being voted. Unless
otherwise specifically limited by their terms, such proxies shall entitle the
holders thereof to vote at any adjournment of such meeting but shall not be
valid after the final adjournment of such meeting. The placing of a
shareholder's name on a proxy pursuant to telephonic or electronically
transmitted instructions obtained pursuant to procedures reasonably designed to
verify that such instructions have been authorized by such shareholder shall
constitute execution of such proxy by or on behalf of such shareholder.
Article 3.
TRUSTEES
3.1. COMMITTEES AND ADVISORY BOARD. The Trustees may appoint from their
number an executive committee and other committees. Except as the Trustees may
otherwise determine, any such committee may make rules for conduct of its
business. The Trustees may appoint an advisory board to consist of not less than
two nor more than five members. The members of the advisory board shall be
compensated in such manner as the Trustees may determine and shall confer with
and advise the Trustees regarding the investments and other affairs of the
Trust. Each member of the advisory board shall hold office until the first
meeting of the Trustees following the next meeting of the shareholders and until
his successor is elected and qualified, or until he sooner dies, resigns, is
removed, or becomes disqualified, or until the advisory board is sooner
abolished by the Trustees.
In addition, the Trustees may appoint a Dividend Committee of not less
than three persons, at least one of whom shall be a Trustee of the Trust.
No special compensation shall be payable to members of the Dividend
Committee. Each member of the Dividend Committee will hold office until his or
her successor is elected and qualified or until the member dies, resigns, is
removed, becomes disqualified or until the Committee is abolished by the
Trustees.
3.2. REGULAR MEETINGS. Regular meetings of the Trustees may be held
without call or notice at such places and at such times as the Trustees may from
time to time determine, provided that notice of the first regular meeting
following any such determination shall be given to absent Trustees.
3.3. SPECIAL MEETINGS. Special meetings of the Trustees may be held at
any time and at any place designated in the call of the meeting, when called by
the president or the treasurer or by
-2-
<PAGE> 3
two or more Trustees, sufficient notice thereof being given to each Trustee by
the secretary or an assistant secretary or by the officer or one of the Trustees
calling the meeting.
3.4. NOTICE. It shall be sufficient notice to a Trustee to send notice
by mail at least forty-eight hours or by telegram at least twenty-four hours
before the meeting addressed to the Trustee at his or her usual or last known
business or residence address or to give notice to him or her in person or by
telephone at least twenty-four hours before the meeting. Notice of a meeting
need not be given to any Trustee if a written waiver of notice, executed by him
or her before or after the meeting, is filed with the records of the meeting, or
to any Trustee who attends the meeting without protesting prior thereto or at
its commencement the lack of notice to him or her. Neither notice of a meeting
nor a waiver of a notice need specify the purposes of the meeting.
3.5. QUORUM. At any meeting of the Trustees one-third of the Trustees
then in office shall constitute a quorum; provided, however, a quorum shall not
be less than two unless the number of Trustees then in office shall be one. Any
meeting may be adjourned from time to time by a majority of the votes cast upon
the question, whether or not a quorum is present, and the meeting may be held as
adjourned without further notice.
Article 4.
OFFICERS AND AGENTS
4.1. ENUMERATION; QUALIFICATION. The officers of the Trust shall be a
president, a treasurer, a secretary and such other officers, if any, as the
Trustees from time to time may in their discretion elect or appoint or as the
elected officers may appoint pursuant to section 4.3 of these By-Laws. The Trust
may also have such agents, if any, as the Trustees from time to time may in
their discretion appoint. Any officer may be but none need be a Trustee or
shareholder. Any two or more offices may be held by the same person.
4.2. POWERS. Subject to the other provisions of these By-Laws, each
officer shall have, in addition to the duties and powers herein and in the
Declaration of Trust set forth, such duties and powers as are commonly incident
to his or her office as if the Trust were organized as a Massachusetts business
corporation and such other duties and powers as the Trustees may from time to
time designate, including without limitation the power to make purchases and
sales of portfolio securities of the Trust pursuant to recommendations of the
Trust's investment adviser in accordance with the policies and objectives of the
Trust set forth in its prospectus and with such general or specific instructions
as the Trustees may from time to time have issued.
4.3. ELECTION. The president, the treasurer and the secretary shall be
elected annually by the Trustees at their first meeting following the annual
meeting of the shareholders. Other elected officers, if any, may be elected or
appointed by the Trustees at said meeting or at any other time. Assistant
officers may be appointed by the elected officers.
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4.4. TENURE. The president, the treasurer and the secretary shall hold
office until their respective successors are chosen and qualified, or in each
case until he or she sooner dies, resigns, is removed or becomes disqualified.
Each other officer shall hold office at the pleasure of the Trustees. Each agent
shall retain his or her authority at the pleasure of the Trustees.
4.5. PRESIDENT AND VICE PRESIDENTS. The president shall be the chief
executive officer of the Trust. The president shall preside at all meetings of
the shareholders and of the Trustees at which he or she is present, except as
otherwise voted by the Trustees. Any vice president shall have such duties and
powers as shall be designated from time to time by the Trustees.
4.6. TREASURER AND CONTROLLER. The treasurer shall be the chief
financial officer of the Trust and, subject to any arrangement made by the
Trustees with a bank or trust company or other organization as custodian or
transfer or shareholder services agent, shall be in charge of its valuable
papers and shall have such duties and powers as shall be designated from time to
time by the Trustees or by the president. Any assistant treasurer shall have
such duties and powers as shall be designated from time to time by the Trustees.
The Controller shall be the chief accounting officer of the Trust and
shall be in charge of its books of account and accounting records. The
Controller shall be responsible for preparation of financial statements of the
Trust and shall have such other duties and powers as may be designated from time
to time by the Trustees or the President.
4.7. SECRETARY AND ASSISTANT SECRETARIES. The secretary shall record
all proceedings of the shareholders and the Trustees in books to be kept
therefor, which books shall be kept at the principal office of the Trust. In the
absence of the secretary from any meeting of shareholders or Trustees, an
assistant secretary, or if there be none or he or she is absent, a temporary
clerk chosen at the meeting shall record the proceedings thereof in the
aforesaid books.
Article 5.
RESIGNATIONS AND REMOVALS
Any Trustee, officer or advisory board member may resign at any time by
delivering his or her resignation in writing to the president, the treasurer or
the secretary or to a meeting of the Trustees. The Trustees may remove any
officer elected by them with or without cause by the vote of a majority of the
Trustees then in office. Except to the extent expressly provided in a written
agreement with the Trust, no Trustee, officer, or advisory board member
resigning, and no officer or advisory board member removed, shall have any right
to any compensation for any period following his or her resignation or removal,
or any right to damages on account of such removal.
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Article 6.
VACANCIES
A vacancy in any office may be filled at any time. Each successor shall
hold office for the unexpired term, and in the case of the president, the
treasurer and the secretary, until his or her successor is chosen and qualified,
or in each case until he or she sooner dies, resigns, is removed or becomes
disqualified.
Article 7.
SHARES OF BENEFICIAL INTEREST
7.1. SHARE CERTIFICATES. Except as provided in Section 12.1, each
shareholder shall be entitled to a certificate stating the number of shares
owned by him or her, in such form as shall be prescribed from time to time by
the Trustees. Such certificate shall be signed by the president or a vice
president and by the treasurer or an assistant treasurer. Such signatures may be
facsimiles if the certificate is signed by a transfer agent or by a registrar
who is not a Trustee, officer or employee of the Trust. In case any officer who
has signed or whose facsimile signature has been placed on such certificate
shall have ceased to be such officer before such certificate is issued, it may
be issued by the Trust with the same effect as if he or she were such officer at
the time of its issue.
In lieu of issuing certificates for shares, the Trustees or the
transfer agent may either issue receipts therefor or may keep accounts upon the
books of the Trust for the record holders of such shares, who shall in either
case be deemed, for all purposes hereunder, to be the holders of certificates
for such shares as if they had accepted such certificates and shall be held to
have expressly assented and agreed to the terms hereof.
7.2. LOSS OF CERTIFICATES. In the case of the alleged loss or
destruction or the mutilation of a share certificate, a duplicate certificate
may be issued in place thereof, upon such terms as the Trustees may prescribe.
7.3. DISCONTINUANCE OF ISSUANCE OF CERTIFICATES. The Trustees may at
any time discontinue the issuance of share certificates and may, by written
notice to each shareholder, require the surrender of share certificates of the
Trust for cancellation. Such surrender and cancellation shall not affect the
ownership of shares in the Trust.
Article 8.
RECORD DATE AND CLOSING TRANSFER BOOKS
The Trustees may fix in advance a time, which shall not be more than 90
days before the date of any meeting of shareholders or the date for the payment
of any dividend or making of any other distribution to shareholders, as the
record date for determining the shareholders having the right to notice and to
vote at such meeting and any adjournment thereof or the right to receive
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such dividend or distribution, and in such case only shareholders of record on
such record date shall have such right, notwithstanding any transfer of shares
on the books of the Trust after the record date; or without fixing such record
date the Trustees may for any such purposes close the transfer books for all or
any part of such period.
Article 9.
SEAL
The seal of the Trust shall, subject to alteration by the Trustees,
consist of a flat-faced circular die with the word "Massachusetts" together with
the name of the Trust and the year of its organization, cut or engraved thereon;
but, unless otherwise required by the Trustees, the seal shall not be necessary
to be placed on, and its absence shall not impair the validity of, any document,
instrument or other paper executed and delivered by or on behalf of the Trust.
Article 10.
EXECUTION OF PAPERS
Except as the Trustees may generally or in particular cases authorize
the execution thereof in some other manner, all deeds, leases, transfers,
contracts, bonds, notes, checks, drafts and other obligations made, accepted or
endorsed by the Trust shall be signed, and all transfers of securities standing
in the name of the Trust shall be executed, by the president or by one of the
vice presidents or by the treasurer or by whomsoever else shall be designated
for that purpose by the vote of the Trustees and need not bear the seal of the
Trust.
Article 11.
FISCAL YEAR
Except as from time to time otherwise provided by the Trustees, the
fiscal year of the Trust shall end on December 31.
Article 12.
SHARES OF BENEFICIAL INTEREST
The Trust has an unlimited number of common shares, without par value,
which may be issued from time to time by the Trustees of the Trust. The Trust
also has 4,800 preferred shares, without par value, which may be issued by the
Trustees from time to time in one or more series and with such designations,
preferences and other rights, qualifications, limitations and restrictions as
are determined by the Board of Trustees or a duly authorized committee thereof
and set forth in this Article 12.
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12.1. STATEMENT CREATING TWO SERIES OF MUNICIPAL AUCTION RATE
CUMULATIVE PREFERRED SHARES.
There are two series of Municipal Auction Rate Cumulative Preferred
Shares, each of which will be treated as a separate class under this instrument.
PART I
DESIGNATION
SERIES T: A series of 2,400 preferred shares, without par value,
liquidation preference $25,000 per share plus accumulated but unpaid dividends,
if any, thereon (whether or not earned or declared), is hereby designated
"Municipal Auction Rate Cumulative Preferred Shares, Series T" and is referred
to below as "Series T Municipal Preferred." Each share of Series T Municipal
Preferred shall be issued on __________ __, 1999; have an Applicable Rate for
its Initial Rate Period equal to ___% per annum; have an initial Dividend
Payment Date of Wednesday, __________ __, 1999; and have such other preferences,
limitations and relative voting and other rights, in addition to those required
by applicable law or set forth in the Trust's Declaration of Trust, as are set
forth in Part I and Part II of this Section 12.1. Series T Municipal Preferred
shall constitute a separate series of Municipal Preferred of the Trust.
SERIES W: A series of 2,400 preferred shares, without par value,
liquidation preference $25,000 per share plus accumulated but unpaid dividends,
if any, thereon (whether or not earned or declared), is hereby designated
"Municipal Auction Rate Cumulative Preferred Shares, Series W" and is referred
to below as "Series W Municipal Preferred." Each share of Series W Municipal
Preferred shall be issued on __________ __, 1999; have an Applicable Rate for
its Initial Rate Period equal to ___% per annum; have an initial Dividend
Payment Date of Thursday, __________ __, 1999; and have such other preferences,
limitations and relative voting and other rights, in addition to those required
by applicable law or set forth in the Trust's Declaration of Trust, as are set
forth in Part I and Part II of this Section 12.1. Series W Municipal Preferred
shall constitute a separate series of Municipal Preferred of the Trust. The
Board of Trustees of the Trust may, in their discretion, increase the number of
shares of Municipal Preferred authorized under these By-laws to authorize the
issuance of another series of Municipal Preferred so long as such issuance is
permitted by paragraph 5 of Part I of this Section 12.1.
1. DEFINITIONS. Unless the context or use indicates another or
different meaning or intent, in Part I and Part II of this Section 12.1 the
following terms have the following meanings, whether used in the singular or
plural:
"'AA' Composite Commercial Paper Rate," on any date for any Rate Period
of shares of a series of Municipal Preferred, shall mean (i) (A) in the case of
any Minimum Rate Period or any
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Special Rate Period of fewer than 49 Rate Period Days, the interest equivalent
of the 30-day rate; provided, however, that if such Rate Period is a Minimum
Rate Period and the "AA" Composite Commercial Paper Rate is being used to
determine the Applicable Rate for shares of such series when all of the
Outstanding shares of such series are subject to Submitted Hold Orders, then the
interest equivalent of the seven-day rate, and (B) in the case of any Special
Rate Period of (1) 49 or more but fewer than 70 Rate Period Days, the interest
equivalent of the 60-day rate; (2) 70 or more but fewer than 85 Rate Period
Days, the arithmetic average of the interest equivalent of the 60-day and 90-day
rates; (3) 85 or more but fewer than 99 Rate Period Days, the interest
equivalent of the 90-day rate; (4) 99 or more but fewer than 120 Rate Period
Days, the arithmetic average of the interest equivalent of the 90-day and
120-day rates; (5) 120 or more but fewer than 141 Rate Period Days, the interest
equivalent of the 120-day rate; (6) 141 or more but fewer than 162 Rate Period
Days, the arithmetic average of the interest equivalent of the 120-day and 180-
day rates; and (7) 162 or more but fewer than 183 Rate Period Days, the interest
equivalent of the 180-day rate, in each case on commercial paper placed on
behalf of issuers whose corporate bonds are rated "AA" by S&P or the equivalent
of such rating by S&P or another rating agency, as made available on a discount
basis or otherwise by the Federal Reserve Bank of New York for the Business Day
next preceding such date; or (ii) in the event that the Federal Reserve Bank of
New York does not make available any such rate, then the arithmetic average of
such rates, as quoted on a discount basis or otherwise, by the Commercial Paper
Dealers to the Auction Agent for the close of business on the Business Day next
preceding such date. If any Commercial Paper Dealer does not quote a rate
required to determine the "AA" Composite Commercial Paper Rate, the "AA"
Composite Commercial Paper Rate shall be determined on the basis of the
quotation or quotations furnished by the remaining Commercial Paper Dealer or
Commercial Paper Dealers and any Substitute Commercial Paper Dealer or
Substitute Commercial Paper Dealers selected by the Trust to provide such rate
or rates not being supplied by any Commercial Paper Dealer or Commercial Paper
Dealers, as the case may be, or, if the Trust does not select any such
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers, by
the remaining Commercial Paper Dealer or Commercial Paper Dealers. For purposes
of this definition, the "interest equivalent" of a rate stated on a discount
basis (a "discount rate") for commercial paper of a given days' maturity shall
be equal to the quotient (rounded upwards to the next higher one-thousandth
(.001) of 1% of (A) the discount rate divided by (B) the difference between (x)
1.00 and (y) a fraction the numerator of which shall be the product of the
discount rate times the number of days in which such commercial paper matures
and the denominator of which shall be 360.
"Accountant's Confirmation" shall have the meaning specified in
paragraph 7(c) of Part I of this Section 12.1.
"Affiliate" shall mean, for purposes of the definition of
"Outstanding," any Person known to the Auction Agent to be controlled by, in
control of or under common control with the Trust; provided, however, that no
Broker-Dealer controlled by, in control of or under common control with the
Trust shall be deemed to be an Affiliate nor shall any corporation or any Person
controlled by, in control of or under common control with such corporation, one
of the trustees,
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directors or executive officers of which is a trustee of the Trust be deemed to
be an Affiliate solely because such trustee, director or executive officer is
also a trustee of the Trust.
"Agent Member" shall mean a member of or participant in the Securities
Depository that will act on behalf of a Bidder.
"Anticipation Notes" shall mean Tax Anticipation Notes (TANs), Revenue
Anticipation Notes (RANs), Tax and Revenue Anticipation Notes (TRANs), Grant
Anticipation Notes (GANs) that are rated by S&P and Bond Anticipation Notes
(BANs).
"Applicable Rate" shall have the meaning specified in paragraph 2(e)(i)
of Part I of this Section 12.1.
"Auction" shall mean each periodic implementation of the Auction
Procedures.
"Auction Agency Agreement" shall mean the agreement between the Trust
and the Auction Agent which provides, among other things, that the Auction Agent
will follow the Auction Procedures for purposes of determining the Applicable
Rate for shares of a series of Municipal Preferred so long as the Applicable
Rate for shares of such series is to be based on the results of an Auction.
"Auction Agent" shall mean the entity appointed as such by a resolution
of the Board of Trustees in accordance with paragraph 6 of Part II of this
Section 12.1.
"Auction Date," with respect to any Rate Period, shall mean the
Business Day next preceding the first day of such Rate Period.
"Auction Procedures" shall mean the procedures for conducting Auctions
set forth in Part II of this Section 12.1.
"Available Municipal Preferred" shall have the meaning specified in
paragraph 3(a) of Part II of this Section 12.1.
"Benchmark Rate" shall have the meaning specified in paragraph 3(c) of
Part II of this Section 12.1.
"Beneficial Owner" with respect to shares of a series of Municipal
Preferred, means a customer of a Broker-Dealer who is listed on the records of
that Broker-Dealer (or, if applicable, the Auction Agent) as a holder of shares
of such series.
"Bid" and "Bids" shall have the respective meanings specified in
paragraph 1(a) of Part II of this Section 12.1.
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"Bidder" and "Bidders" shall have the respective meanings specified in
paragraph 1(a) of Part II of this Section 12.1; provided, however, that neither
the Trust nor any affiliate thereof shall be permitted to be a Bidder in an
Auction, except that any Broker-Dealer that is an affiliate of the Trust may be
a Bidder in an Auction, but only if the Orders placed by such Broker-Dealer are
not for its own account.
"Board of Trustees" shall mean the Board of Trustees of the Trust or
any duly authorized committee thereof.
"Broker-Dealer" shall mean any broker-dealer, commercial bank or other
entity permitted by law to perform the functions required of a Broker-Dealer in
Part II of this Section 12.1, that is a member of, or a participant in, the
Securities Depository or is an affiliate of such member or participant, has been
selected by the Trust and has entered into a Broker-Dealer Agreement that
remains effective.
"Broker-Dealer Agreement" shall mean an agreement among the Trust, the
Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to
follow the procedures specified in Part II of this Section 12.1.
"Business Day" shall mean a day on which the New York Stock Exchange is
open for trading, and which is neither a Saturday, Sunday nor any other day on
which banks in The City of New York, New York are authorized by law to close.
"By-laws" means these Amended and Restated By-laws of the Trust.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Commercial Paper Dealers" means Lehman Commercial Paper Incorporated,
Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated and
such other commercial paper dealer or dealers as the Trust may from time to time
appoint, or, in lieu of any thereof, their respective affiliates or successors.
"Common Shares" means the common shares of beneficial interest, without
par value, of the Trust.
"Cure Date" shall have the meaning specified in paragraph 11(b) of Part
I of this Section 12.1.
"Date of Original Issue" with respect to shares of a series of
Municipal Preferred, shall mean the date on which the Trust originally issued
such shares.
"Declaration" shall mean the Agreement and Declaration of Trust dated
January 9, 1989 of the Trust, as amended by Amendment No. 1 dated February 8,
1989 to the Agreement and
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Declaration of Trust of the Trust and Amendment No. 2 dated July 30, 1999 to the
Agreement and Declaration of Trust of the Trust, all on file with the Secretary
of The Commonwealth of Massachusetts and as hereafter restated or amended from
time to time.
"Deposit Securities" shall mean cash and Municipal Obligations rated at
least A-1+ or SP-1+ by S&P, except that, for purposes of subparagraph (a)(v) of
paragraph 11 of Part I of this Section 12.1, such Municipal Obligations shall be
considered "Deposit Securities" only if they are also rated P-1, MIG-1 or VMIG-1
by Moody's.
"Discounted Value," as of any Valuation Date, shall mean, (i) with
respect to an S&P Eligible Asset, the quotient of the Market Value thereof
divided by the applicable S&P Discount Factor and (ii) (a) with respect to a
Moody's Eligible Asset that is not currently callable as of such Valuation Date
at the option of the issuer thereof, the quotient of the Market Value thereof
divided by the applicable Moody's Discount Factor, or (b) with respect to a
Moody's Eligible Asset that is currently callable as of such Valuation Date at
the option of the issuer thereof, the quotient of (1) the lesser of the Market
Value or call price thereof, including any call premium, divided by (2) the
applicable Moody's Discount Factor.
"Dividend Payment Date," with respect to shares of a series of
Municipal Preferred, shall mean any date on which dividends are payable on
shares of such series pursuant to the provisions of paragraph 2(d) of Part I of
this Section 12.1.
"Dividend Period," with respect to shares of a series of Municipal
Preferred, shall mean the period from and including the Date of Original Issue
of shares of such series to but excluding the initial Dividend Payment Date for
shares of such series and any period thereafter from and including one Dividend
Payment Date for shares of such series to but excluding the next succeeding
Dividend Payment Date for shares of such series; provided, however, that the
Dividend Periods for each of Series T Municipal Preferred and Series W Municipal
Preferred will never be co-extensive with the Dividend Period of any other
series of Municipal Preferred unless the Trust has received an opinion of tax
counsel that having such co-extensive periods will not affect the deductibility,
for federal income tax purposes, of dividends paid on the different series of
Municipal Preferred.
"Escrowed Bonds" means Municipal Obligations that (i) have been
determined to be legally defeased in accordance with S&P's legal defeasance
criteria, (ii) have been determined to be economically defeased in accordance
with S&P's economic defeasance criteria and assigned a rating of AAA by S&P,
(iii) are not rated by S&P but have been determined to be legally defeased by
Moody's, or (iv) have been determined to be economically defeased by Moody's and
assigned a rating no lower than the rating that is Moody's equivalent of S&P's
AAA rating.
"Existing Holder," with respect to shares of a series of Municipal
Preferred, shall mean a Broker-Dealer (or any such other Person as may be
permitted by the Trust) that is listed on the records of the Auction Agent as a
holder of shares of such series.
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"Failure to Deposit," with respect to shares of a series of Municipal
Preferred, shall mean a failure by the Trust to pay to the Auction Agent, not
later than 12:00 noon, New York City time, (A) on the Business Day next
preceding any Dividend Payment Date for shares of such series, in funds
available on such Dividend Payment Date in The City of New York, New York, the
full amount of any dividend (whether or not earned or declared) to be paid on
such Dividend Payment Date on any share of such series or (B) on the Business
Day next preceding any redemption date in funds available on such redemption
date for shares of such series in The City of New York, New York, the Redemption
Price to be paid on such redemption date for any shares of such series after
notice of redemption is mailed pursuant to paragraph 11(c) of Part I of this
Section 12.1; provided, however, that the foregoing clause (B) shall not apply
to the Trust's failure to pay the Redemption Price in respect of shares of
Municipal Preferred when the related Notice of Redemption provides that
redemption of such shares is subject to one or more conditions precedent and any
such condition precedent shall not have been satisfied at the time or times and
in the manner specified in such Notice of Redemption.
"Federal Tax Rate Increase" shall have the meaning specified in the
definition of "Moody's Volatility Factor."
"Gross-up Payment" in respect of any dividend means payment to a Holder
of shares of a series of Municipal Preferred of an amount which, giving effect
to the Taxable Allocations made with respect to such dividend, would cause such
Holder's after-tax returns (taking into account both the Taxable Allocations and
the Gross-up Payment) to be equal to the after-tax return the Holder would have
received if no such Taxable Allocations had occurred. Such Gross-up Payment
shall be calculated: (i) without consideration being given to the time value of
money; (ii) assuming that no Holder of shares of Municipal Preferred is subject
to the Federal alternative minimum tax with respect to dividends received from
the Trust; and (iii) assuming that each Holder of shares of Municipal Preferred
is taxable at the maximum marginal regular Federal individual income tax rate
applicable to ordinary income or net capital gain, as applicable, or the maximum
marginal regular Federal corporate income tax rate applicable to ordinary income
or net capital gain, as applicable, whichever is greater, in effect at the time
such Gross-up Payment is made.
"Holder," with respect to shares of a series of Municipal Preferred,
shall mean the Registered Holder of such shares as the same appears on the
record books of the Trust.
"Hold Order" and "Hold Orders" shall have the respective meanings
specified in paragraph 1(a) of Part II of this Section 12.1.
"Independent Accountant" shall mean a nationally recognized accountant,
or firm of accountants, that is, with respect to the Trust, an independent
public accountant or firm of independent public accountants under the Securities
Act of 1933, as amended from time to time.
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"Initial Margin" means the amount of cash or securities deposited with
a broker as a margin payment at the time of purchase or sale of a futures
contract.
"Initial Rate Period," with respect to shares of a series of Municipal
Preferred, shall mean the period from and including the Date of Original Issue
for such series to but excluding the initial Dividend Payment Date for such
series.
"Interest Equivalent" shall mean a yield on a 360-day basis of a
discount basis security which is equal to the yield on an equivalent
interest-bearing security.
"Inverse Floater" shall mean trust certificates or other instruments
evidencing interests in one or more municipal securities that qualify as S&P
Eligible Assets (and satisfy the issuer and size requirements of the definition
of S&P Eligible Assets) the interest rates on which are adjusted at short-term
intervals on a basis that is inverse to the simultaneous readjustment of the
interest rates on corresponding floating rate trust certificates or other
instruments issued by the same issuer, provided that the ratio of the aggregate
dollar amount of floating rate instruments to inverse floating rate instruments
issued by the same issuer does not exceed one to one at their time or original
issuance unless the floating rate instrument has only one reset remaining until
maturity.
"Kenny Index" shall have the meaning set forth under the definition of
"Taxable Equivalent of the Short-Term Municipal Bond Rate."
"Late Charge" shall have the meaning specified in paragraph 2(e)(i)(B)
of Part I of this Section 12.1.
"Liquidation Preference," with respect to a given number of shares of
Municipal Preferred, means $25,000 times that number.
"Market Value" of any asset of the Trust means the market value thereof
determined by the pricing service designated from time to time by the Board of
Trustees. Market Value of any asset shall include any interest accrued thereon.
The pricing service will use current industry standards to value portfolio
securities. The pricing service may employ electronic data processing techniques
or a matrix system, or both, to determine valuations. Securities for which
quotations are not readily available shall be valued at fair value as determined
by the pricing service using methods which include consideration of: yields or
prices of municipal bonds of comparable quality, type of issue, coupon, maturity
and rating; indications as to value from dealers; and general market conditions.
In the event the pricing service is unable to value a security, the security
shall be valued at the lower of two dealer bids obtained by the Trust from
dealers who are nationally recognized members of the National Association of
Securities Dealers, Inc. who are independent of the investment advisor to the
Trust and make a market in the security, at least one of which shall be in
writing. Futures contracts and options are valued at closing prices for such
instruments established by the exchange or board of trade on which they are
traded, or if market
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quotations are not readily available, are valued at fair value on a consistent
basis using methods determined in good faith by the Trustees.
"Maximum Potential Gross-up Payment Liability," as of any Valuation
Date, shall mean the aggregate amount of Gross-up Payments that would be due if
the Trust were to make Taxable Allocations, with respect to any taxable year,
estimated based upon dividends paid and the amount of undistributed realized net
capital gains and other taxable income earned by the Trust, as of the end of the
calendar month immediately preceding such Valuation Date, and assuming such
Gross-up Payments are fully taxable.
"Maximum Rate," for shares of a series of Municipal Preferred on any
Auction Date for shares of such series, shall mean:
(i) in the case of any Auction Date which is not the Auction
Date immediately prior to the first day of any proposed Special Rate
Period designated by the Trust pursuant to paragraph 4 of Part I of
this Section 12.1, the product of (A) the Reference Rate on such
Auction Date for the next Rate Period of shares of such series and (B)
the Rate Multiple on such Auction Date, unless shares of such series
have or had a Special Rate Period (other than a Special Rate Period of
28 Rate Period Days or fewer) and an Auction at which Sufficient
Clearing Bids existed has not yet occurred for a Minimum Rate Period of
shares of such series after such Special Rate Period, in which case the
higher of:
(A) the dividend rate on shares of such series for
the then-ending Rate Period; and
(B) the product of (1) the higher of (x) the
Reference Rate on such Auction Date for a Rate Period equal in
length to the then-ending Rate Period of shares of such
series, if such then-ending Rate Period was 364 Rate Period
Days or fewer, or the Treasury Note Rate on such Auction Date
for a Rate Period equal in length to the then-ending Rate
Period of shares of such series, if such then- ending Rate
Period was more than 364 Rate Period Days, and (y) the
Reference Rate on such Auction Date for a Rate Period equal in
length to such Special Rate Period of shares of such series,
if such Special Rate Period was 364 Rate Period Days or fewer,
or the Treasury Note Rate on such Auction Date for a Rate
Period equal in length to such Special Rate Period, if such
Special Rate Period was more than 364 Rate Period Days and (2)
the Rate Multiple on such Auction Date; or
(ii) in the case of any Auction Date which is the Auction Date
immediately prior to the first day of any proposed Special Rate Period
designated by the Trust pursuant to paragraph 4 of Part I of this
Section 12.1, the product of (A) the highest of (1) the Reference Rate
on such Auction Date for a Rate Period equal in length to the
then-ending Rate Period of shares of such series, if such then-ending
Rate Period was 364 Rate Period Days or fewer, or the Treasury Note
Rate on such Auction Date for a Rate Period equal in
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length to the then-ending Rate Period of shares of such series, if such
then-ending Rate Period was more than 364 Rate Period Days, (2) the
Reference Rate on such Auction Date for the Special Rate Period for
which the Auction is being held if such Special Rate Period is 364 Rate
Period Days or fewer or the Treasury Note Rate on such Auction Date for
the Special Rate Period for which the Auction is being held if such
Special Rate Period is more than 364 Rate Period Days, and (3) the
Reference Rate on such Auction Date for Minimum Rate Periods and (B)
the Rate Multiple on such Auction Date.
"Minimum Rate Period" shall mean any Rate Period consisting of 7 Rate
Period Days.
"Moody's" shall mean Moody's Investors Service, Inc., a Delaware
corporation, and its successors.
"Moody's Discount Factor" shall mean, for purposes of determining the
Discounted Value of any Moody's Eligible Asset, the percentage determined by
reference to the rating on such asset and the shortest Exposure Period set forth
opposite such rating that is the same length as or is longer than the Moody's
Exposure Period, in accordance with the table set forth below:
<TABLE>
<CAPTION>
RATING CATEGORY
-------------------------------------------------------------------------------------------------
Exposure Period Aaa* Aa* A* Baa* Other** (V)MIG-1*** SP-1+**** Unrated*****
- --------------- ---- --- -- ---- ------- ----------- --------- -----------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
7 weeks............ 151% 159% 166% 173% 187% 136% 148% 225%
8 weeks or less but
greater than seven
weeks.............. 154 161 168 176 190 137 149 231
9 weeks or less but
greater than eight
weeks.............. 156 163 170 177 192 138 150 240
</TABLE>
* Moody's rating.
** Municipal Obligations not rated by Moody's but rated BBB by S&P.
*** Municipal Obligations rated MIG-1 or VMIG-1, which do not mature or
have a demand feature at par exercisable in 30 days and which do not
have a long-term rating.
**** Municipal Obligations not rated by Moody's but rated SP-1+ by S&P,
which do not mature or have a demand feature at par exercisable in 30
days and which do not have a long-term rating.
***** Municipal Obligations rated less than Baa3 by Moody's or less than BBB
by S&P or not rated by Moody's or S&P.
Notwithstanding the foregoing, (i) the Moody's Discount Factor for
short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated at least MIG-1, VMIG-1 or P-1 by Moody's and mature or
have a demand feature at par exercisable
-15-
<PAGE> 16
in 30 days or less, or 125%, so long as such Municipal Obligations are rated at
least A-1+/AA or SP-1+/AA by S&P and mature or have a demand feature at par
exercisable in 30 days or less, and (ii) no Moody's Discount Factor will be
applied to cash or to Receivables for Municipal Obligations Sold or futures,
options and similar instruments (to the extent such securities are Moody's
Eligible Assets); provided, however, that for purposes of determining the
Moody's Discount Factor applicable to a Municipal Obligation, any Municipal
Obligation (excluding any short-term Municipal Obligation) not rated by Moody's
but rated by S&P shall be deemed to have a Moody's rating which is one full
rating category lower than its S&P rating.
"Moody's Eligible Asset" shall mean cash, Receivables for Municipal
Obligations Sold, futures, options and similar instruments (other than Inverse
Floaters and index warrants) or a Municipal Obligation that (i) pays interest in
cash, (ii) does not have its Moody's rating, if applicable, suspended by
Moody's, (iii) is part of an issue of Municipal Obligations of at least
$10,000,000, and (iv) is not subject to a covered call or a covered put option
written by the Trust. Municipal Obligations issued by any one issuer and not
rated by Moody's or rated lower than Baa3 by Moody's and not rated by S&P or
rated lower than BBB by S&P ("Unrated Moody's Municipal Obligations") may
comprise no more than 4% of total Moody's Eligible Assets; such Unrated Moody's
Municipal Obligations, if any, together with any Municipal Obligations issued by
the same issuer and rated BBB by S&P may comprise no more than 4% of total
Moody's Eligible Assets; such BBB-rated Municipal Obligations and Unrated
Moody's Municipal Obligations, if any, together with any Municipal Obligations
issued by the same issuer and rated Baa by Moody's or A by S&P may comprise no
more than 6% of total Moody's Eligible Assets; such BBB, Baa and A-rated
Municipal Obligations and Unrated Moody's Municipal Obligations, if any,
together with any Municipal Obligations issued by the same issuer and rated A by
Moody's or AA by S&P, may comprise no more than 10% of total Moody's Eligible
Assets; and such BBB, Baa, A and AA-rated Municipal Obligations and Unrated
Moody's Municipal Obligations, if any, together with any Municipal Obligations
issued by the same issuer and rated Aa by Moody's or AAA by S&P, may comprise no
more than 20% of total Moody's Eligible Assets. For purposes of the foregoing
sentence, any Municipal Obligation backed by the guaranty, letter of credit or
insurance issued by a third party shall be deemed to be issued by such third
party if the issuance of such third-party credit is the sole determinant of the
rating on such Municipal Obligations. Municipal Obligations issued by issuers
located within a single state or territory and not rated by Moody's or rated
lower than Baa3 by Moody's and not rated by S&P or rated lower than BBB by S&P
may comprise no more than 12% of total Moody's Eligible Assets; such Unrated
Moody's Municipal Obligations, if any, together with any Municipal Obligations
issued by issuers located within the same state or territory and rated BBB by
S&P may comprise no more than 12% of total Moody's Eligible Assets; such
BBB-rated Municipal Obligations and Unrated Moody's Municipal Obligations, if
any, together with any Municipal Obligations issued by issuers located within
the same state or territory and rated Baa by Moody's or A by S&P, may comprise
no more than 20% of total Moody's Eligible Assets; such BBB, Baa and A-rated
Municipal Obligations and Unrated Moody's Municipal Obligations, if any,
together with any Municipal Obligations issued by issuers located within the
same state or territory and rated A by
-16-
<PAGE> 17
Moody's or AA by S&P, may comprise no more than 40% of total Moody's Eligible
Assets; and such BBB, Baa, A and AA-rated Municipal Obligations and Unrated
Moody's Municipal Obligations, if any, together with any Municipal Obligations
issued by issuers located within the same state or territory and rated Aa by
Moody's or AAA by S&P, may comprise no more than 60% of total Moody's Eligible
Assets. Municipal Obligations which are not rated by Moody's or S&P may comprise
no more than 40% of the aggregate Market Value of Moody's Eligible Assets;
provided, however, that if the Market Value of such Municipal Obligations
exceeds 40% of the aggregate Market Value of Moody's Eligible Assets, a portion
of such Municipal Obligations (selected by the Trust) shall not be considered
Moody's Eligible Assets, so that the Market Value of such Municipal Obligations
(excluding such portion) does not exceed 40% of the aggregate Market Value of
Moody's Eligible Assets; provided, however, that no such unrated Municipal
Obligation shall be considered a Moody's Eligible Asset if such Municipal
Obligation shall be in "default", which term shall mean for purposes of this
definition, either (a) the nonpayment by the issuer of interest or principal
when due or (b) the notification of the Trust by the trustee under the
underlying indenture or other governing instrument for such Municipal Obligation
that the issuer will fail to pay when due principal or interest on such
Municipal Obligation. For purposes of applying the foregoing requirements, a
Municipal Obligation shall be deemed to be rated BBB by S&P if rated BBB-, BBB
or BBB+ by S&P, Moody's Eligible Assets shall be calculated without including
cash, and Municipal Obligations rated MIG-1, VMIG-1 or P-1 or, if not rated by
Moody's, rated A-1+/Aa or SP-1+/AA by S&P, shall be considered to have a
long-term rating of A. When the Trust sells a Municipal Obligation and agrees to
repurchase such Municipal Obligation at a future day, such Municipal Obligation
shall be valued at its Discounted Value for purposes of determining Moody's
Eligible Assets, and the amount of the repurchase price of such Municipal
Obligation shall be included as a liability for purposes of calculating the
Municipal Preferred Basic Maintenance Amount. When the Trust purchases a Moody's
Eligible Asset and agrees to sell it at a future date, such Eligible Asset shall
be valued at the amount of cash to be received by the Trust upon such future
date, provided that the counterparty to the transaction has a long-term debt
rating of at least A2 and a short-term debt rating of at least P1 from Moody's
and the transaction has a term of no more than 30 days; otherwise such Eligible
Asset shall be valued at the Discounted Value of such Eligible Asset. For
purposes of determining the aggregate Discounted Value of Moody's Eligible
Assets, such aggregate amount shall be reduced with respect to any futures
contracts as set forth in paragraph 10(a) of Part I of this Section 12.1.
Notwithstanding the foregoing, an asset will not be considered a
Moody's Eligible Asset to the extent it is (i) subject to any material lien,
mortgage, pledge, security interest or security agreement of any kind
(collectively, "Liens"), except for (a) Liens which are being contested in good
faith by appropriate proceedings and which Moody's has indicated to the Trust
will not affect the status of such asset as a Moody's Eligible Asset, (b) Liens
for taxes that are not then due and payable or that can be paid thereafter
without penalty, (c) Liens to secure payment for services rendered or cash
advanced to the Trust by Colonial Management Associates, Inc., The Chase
Manhattan Bank or the Auction Agent and (d) Liens by virtue of any repurchase
agreement or futures contract; or (ii) deposited irrevocably for the payment of
any liabilities for purposes of determine the Municipal Preferred Basic
Maintenance Amount.
-17-
<PAGE> 18
"Moody's Exposure Period" shall mean the period commencing on a given
Valuation Date and ending 49 days thereafter.
"Moody's Volatility Factor" shall mean, as of any Valuation Date, (i)
in the case of any Minimum Rate Period, any Special Rate period of 28 Rate
Period Days or fewer, or any Special Rate Period of 57 Rate Period Days or more,
a multiplicative factor equal to 275%, except as otherwise provided in the last
sentence of this definition; (ii) in the case of any Special Rate Period of more
than 28 but fewer than 36 Rate Period Days, a multiplicative factor equal to
203%; (iii) in the case of any Special Rate Period of more than 35 but fewer
than 43 Rate Period Days, a multiplicative factor equal to 217%; (iv) in the
case of any Special Rate Period of more than 42 but fewer than 50 Rate Period
Days, a multiplicative factor equal to 226%; and (v) in the case of any Special
Rate Period of more than 49 but fewer than 57 Rate Period Days, a multiplicative
factor equal to 235%. If, as a result of the enactment of changes to the Code,
the greater of the maximum marginal Federal individual income tax rate
applicable to ordinary income and the maximum marginal Federal corporate income
tax rate applicable to ordinary income will increase, such increase being
rounded up to the next five percentage points (the "Federal Tax Rate Increase"),
until the effective date of such increase, the Moody's Volatility Factor in the
case of any Rate Period described in (i) above in this definition instead shall
be determined by reference to the following table:
Federal Volatility
Tax Rate Increase Factor
----------------- ------
5% 295%
10% 317%
15% 341%
20% 369%
25% 400%
30% 436%
35% 477%
40% 525%
"Municipal Obligations" shall mean "Municipal Obligations" as defined
in the Trust's registration statement on Form N-2 as filed with the Securities
and Exchange Commission on August 20, 1999 (the "Registration Statement").
"Municipal Preferred" shall mean the Municipal Auction Rate Cumulative
Preferred Shares, Series T, without par value, liquidation preference $25,000
per share, of the Trust, or the Municipal Auction Rate Cumulative Preferred
Shares, Series W, without par value, liquidation preference $25,000 per share,
of the Trust, or both, as the case may be.
"Municipal Preferred Basic Maintenance Amount," as of any Valuation
Date, shall mean the dollar amount equal to the sum of (i) (A) the product of
the number of shares of Municipal Preferred outstanding on such date multiplied
by $25,000 (plus the product of the number of shares of any other series of
Preferred Shares outstanding on such date multiplied by the liquidation
preference of such shares), plus any redemption premium applicable to shares of
-18-
<PAGE> 19
Municipal Preferred (or other Preferred Shares) then subject to redemption; (B)
the aggregate amount of dividends that will have accumulated at the respective
Applicable Rates (whether or not earned or declared) to (but not including) the
first respective Dividend Payment Dates for shares of Municipal Preferred
outstanding that follow such Valuation Date (plus the aggregate amount of
dividends, whether or not earned or declared, that will have accumulated in
respect of other outstanding Preferred Shares to, but not including, the first
respective dividend payment dates for such other shares that follow such
Valuation Date); (C) the aggregate amount of dividends that would accumulate on
shares of each series of Municipal Preferred outstanding from such first
respective Dividend Payment Date therefor through the 49th day after such
Valuation Date, at the Maximum Rate (calculated as if such Valuation Date were
the Auction Date for the Rate Period commencing on such Dividend Payment Date)
for a Minimum Rate Period of shares of such series to commence on such Dividend
Payment Date, assuming, solely for purposes of the foregoing, that if on such
Valuation Date the Trust shall have delivered a Notice of Special Rate Period to
the Auction Agent pursuant to paragraph 4(d)(i) of Part I of this Section 12.1
with respect to shares of such series, such Maximum Rate shall be the higher of
(a) the Maximum Rate for the Special Rate Period of shares of such series to
commence on such Dividend Payment Date and (b) the Maximum Rate for a Minimum
Rate Period of shares of such series to commence on such Dividend Payment Date,
multiplied by the Volatility Factor applicable to a Minimum Rate Period, or, in
the event the Trust shall have delivered a Notice of Special Rate Period to the
Auction Agent pursuant to paragraph 4(d)(i) of Part I of this Section 12.1 with
respect to shares of such series designating a Special Rate Period consisting of
49 Rate Period Days or more, the Volatility Factor applicable to a Special Rate
Period of that length (plus the aggregate amount of dividends that would
accumulate at the maximum dividend rate or rates on any other Preferred Shares
outstanding from such respective dividend payment dates through the 49th day
after such Valuation Date, as established by or pursuant to the respective
statements establishing and fixing the rights and preferences of such other
Preferred Shares) (except that (1) if such Valuation Date occurs at a time when
a Failure to Deposit (or, in the case of Preferred Shares other than Municipal
Preferred, a failure similar to a Failure to Deposit) has occurred that has not
been cured, the dividend for purposes of calculation would accumulate at the
current dividend rate then applicable to the shares in respect of which such
failure has occurred and (2) for those days during the period described in this
subparagraph (C) in respect of which the Applicable Rate in effect immediately
prior to such Dividend Payment Date will remain in effect (or, in the case of
the Preferred Shares other than Municipal Preferred, in respect of which the
dividend rate or rates in effect immediately prior to such respective dividend
payment dates will remain in effect), the dividend for purposes of calculation
would accumulate at such Applicable Rate (or other rate or rates, as the case
may be) in respect of those days); (D) the amount of anticipated expenses of the
Trust for the 90 days subsequent to such Valuation Date; (E) the amount of the
Trust's Maximum Potential Gross-up Payment Liability in respect of shares of
Municipal Preferred (and similar amounts payable in respect of other Preferred
Shares pursuant to provisions similar to those contained in paragraph 3 of Part
I of this Section 12.1) as of such Valuation Date; and (F) any current
liabilities as of such Valuation Date to the extent not reflected in any of (i)
(A) through (i)(E) (including, without limitation, any payables for Municipal
Obligations purchased as of such Valuation Date and any liabilities incurred for
the purpose of clearing securities transactions) less
-19-
<PAGE> 20
(ii) the value (i.e., for purposes of current Moody's guidelines, the face value
of cash, short-term Municipal Obligations rated MIG-1, VMIG-1 or P-1, and
short-term securities that are the direct obligation of the U.S. government,
provided in each case that such securities mature on or prior to the date upon
which any of (i) (A) through (i)(F) become payable, otherwise the Moody's
Discounted Value or for purposes of current S&P guides, the face value of cash,
short-term municipal securities rated "A-1+" or "SP- 1+" and mature or have a
demand feature exercisable in 30 days or less, and short-term securities that
are the direct obligation of the U.S. government, provided in each case that
such securities mature on or prior to the date upon which any of (i)(A) through
(i)(F) become payable, otherwise S&P's Discounted Value) of any of the Trust's
assets irrevocably deposited by the Trust for the payment of any of (i) (A)
through (i)(F).
"Municipal Preferred Basic Maintenance Cure Date," with respect to the
failure by the Trust to satisfy the Municipal Preferred Basic Maintenance Amount
(as required by paragraph 7(a) of Part I of this Section 12.1) as a given
Valuation Date, shall mean the second Business Day following such Valuation
Date.
"Municipal Preferred Basic Maintenance Report" shall mean a report
signed by the President, Treasurer, Controller, Secretary or any Senior Vice
President or Vice President of the Trust which sets forth, as of the related
Valuation Date, the assets of the Trust, the Market Value and the Discounted
Value thereof (seriatim and in aggregate), and the Municipal Preferred Basic
Maintenance Amount.
"1940 Act" shall mean the Investment Company Act of 1940, as amended
from time to time.
"1940 Act Cure Date," with respect to the failure by the Trust to
maintain the 1940 Act Municipal Preferred Asset Coverage (as required by
paragraph 7 of Part I of this Section 12.1) as of the last Business Day of each
month, shall mean the last Business Day of the following month.
"1940 Act Municipal Preferred Asset Coverage" shall mean asset
coverage, as defined in Section 18(h) of the 1940 Act, of at least 200% with
respect to all outstanding senior securities of the Trust which are shares of
beneficial interest, including all outstanding shares of Municipal Preferred (or
such other asset coverage as may in the future be specified in or under the 1940
Act as the minimum asset coverage for senior securities which are shares or
stock of a closed-end investment company as a condition of declaring dividends
on its common shares or stock).
"Notice of Redemption" shall mean any notice with respect to the
redemption of shares of Municipal Preferred pursuant to paragraph 11(c) of Part
I of this Section 12.1.
"Notice of Special Rate Period" shall mean any notice with respect to a
Special Rate Period of shares of Municipal Preferred pursuant to paragraph
4(d)(i) of Part I of this Section 12.1.
-20-
<PAGE> 21
"Order" and "Orders" shall have the respective meanings specified in
paragraph 1(a) of Part II of this Section 12.1.
"Outstanding" shall mean, as of any Auction Date with respect to shares
of any series of Municipal Preferred, the number of shares of such series
theretofore issued by the Trust except, without duplication, (i) any shares of
such series theretofore canceled or delivered to the Auction Agent for
cancellation or redeemed by the Trust, (ii) any shares of such series as to
which the Trust or any Affiliate thereof shall be an Existing Holder and (iii)
any shares of such series represented by any certificate in lieu of which a new
certificate has been executed and delivered by the Trust.
"Persons" shall mean and include an individual, a partnership, a
corporation, a trust, an unincorporated association, a joint venture or other
entity or a government or any agency or political subdivision thereof.
"Potential Beneficial Owner," with respect to shares of a series of
Municipal Preferred, shall mean a customer of a Broker-Dealer that is not a
Beneficial Owner of shares of such series but that wishes to purchase shares of
such series, or that is a Beneficial Owner of shares of such series that wishes
to purchase additional shares of such series.
"Potential Holder," with respect to shares of a series of Municipal
Preferred, shall mean a Broker-Dealer (or any such other person as may be
permitted by the Trust) that is not an Existing Holder of shares of such series
or that is an Existing Holder of shares of such series that wishes to become the
Existing Holder of additional shares of such series.
"Preferred Shares" shall mean the preferred shares, without par value,
of the Trust, and includes the shares of Municipal Preferred.
"Quarterly Valuation Date" shall mean the last Business Day of each
March, June, September and December of each year, commencing on September 30,
1999 with respect to Series T Municipal Preferred and Series W Municipal
Preferred.
"Rate Multiple," for shares of a series of Municipal Preferred on any
Auction Date for shares of such series, shall mean the percentage, determined as
set forth below, based on the prevailing rating of shares of such series in
effect at the close of business on the Business Day next preceding such Auction
Date:
Prevailing Rating Percentage
----------------- ----------
"aa3"/AA- or higher............................... 110%
"a3"/A-........................................... 125%
"baa3"/BBB-....................................... 150%
"ba3"/BB-......................................... 200%
Below "ba3"/BB-................................... 250%
-21-
<PAGE> 22
provided, however, that in the event the Trust has notified the Auction Agent of
its intent to allocate income taxable for Federal income tax purposes to shares
of such series prior to the Auction establishing the Applicable Rate for shares
of such series, the applicable percentage in the foregoing table shall be
divided by the quantity 1 minus the greater of the maximum marginal regular
Federal individual income tax rate applicable to ordinary income or the maximum
marginal regular Federal corporate income tax rate applicable to ordinary
income.
For purposes of this definition, the "prevailing rating" of shares of a
series of Municipal Preferred shall be (i) "aa3"/AA- or higher if such shares
have a rating of "aa3" or better by Moody's and AA- or better by S&P or the
equivalent of such ratings by such agencies or a substitute rating agency or
substitute rating agencies selected as provided below, (ii) if not "aa3"/AA- or
higher, then "a3"/A- if such shares have a rating of "a3" or better by Moody's
and A- or better by S&P or the equivalent of such ratings by such agencies or a
substitute rating agency or substitute rating agencies selected as provided
below, (iii) if not "aa3"/AA- or higher or "a3"/A-, then "baa3"/BBB- if such
shares have a rating of "baa3" or better by Moody's and BBB- or better by S&P or
the equivalent of such ratings by such agencies or a substitute rating agency or
substitute rating agencies selected as provided below, (iv) if not "aa3"/AA- or
higher, "a3"/A- or "baa3"/BBB-, then "ba3"/BB- if such shares have a rating of
"ba3" or better by Moody's and BB- or better by S&P or the equivalent of such
ratings by such agencies or a substitute rating agency or substitute rating
agencies selected as provided below, and (v) if not "aa3"/AA- or higher,
"a3"/A-, "baa3"/BBB-, or "ba3"/BB-, then below "ba3"/BB-; provided, however,
that if such shares are rated by only one rating agency, the prevailing rating
will be determined without reference to the rating of any other rating agency.
The Trust shall take all reasonable action necessary to enable either S&P or
Moody's to provide a rating for shares of Municipal Preferred. If neither S&P
nor Moody's shall make such a rating available, Salomon Smith Barney Inc. or its
successor shall select at least one nationally recognized statistical rating
organization (as that term is used in the rules and regulations of the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended from time to time) to act as a substitute rating agency in respect of
shares of such series of Municipal Preferred, and the Trust shall take all
reasonable action to enable such rating agency to provide a rating for such
shares.
"Rate Period," with respect to shares of a series of Municipal
Preferred, shall mean the Initial Rate Period of shares of such series and any
Subsequent Rate Period, including any Special Rate Period, of shares of such
series.
"Rate Period Days," for any Rate Period or Dividend Period, means the
number of days that would constitute such Rate Period or Dividend Period but for
the application of paragraph 2(d) of Part I of this Section 12.1 or paragraph
4(b) of Part I of this Section 12.1.
"Receivables for Municipal Obligations Sold" shall mean (A) for
purposes of calculating Moody's Eligible Assets as of any Valuation Date, no
more than the aggregate of the following: (i) the book value of receivables for
Municipal Obligations sold as of or prior to such Valuation Date if such
receivables are due within five business days of such Valuation Date, and if the
trades
-22-
<PAGE> 23
which generated such receivables are (x) settled through clearing house firms
with respect to which the Trust has received prior written authorization from
Moody's or (y) with counterparties having a Moody's long-term debt rating of at
least Baa3; and (ii) the Moody's Discounted Value of Municipal Obligations sold
as of or prior to such Valuation Date which generated receivables, if such
receivables are due within five business days of such Valuation Date but do not
comply with either of the conditions specified in (i) above, and (B) for
purposes of calculating S&P Eligible Assets as of any Valuation Date, the book
value of receivables for Municipal Obligations sold as of or prior to such
Valuation Date if such receivables are due within five business days of such
Valuation Date.
"Redemption Price" shall mean the applicable redemption price specified
in paragraph 11(a) or (b) of Part I of this Section 12.1.
"Reference Rate" shall mean (i) the higher of the Taxable Equivalent of
the Short-Term Municipal Bond Rate and the "AA" Composite Commercial Paper Rate
in the case of Minimum Rate Periods and Special Rate Periods of 28 Rate Period
Days or fewer; (ii) the "AA" Composite Commercial Paper Rate in the case of
Special Rate Periods of more than 28 Rate Period Days but fewer than 183 Rate
Period Days; and (iii) the Treasury Bill Rate in the case of Special Rate
Periods of more than 182 Rate Period Days but fewer than 365 Rate Period Days.
"Registration Statement" has the meaning specified in the definition of
"Municipal Obligations."
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., and its successors.
"S&P Discount Factor" shall mean, for purposes of determining the
Discounted Value of any S&P Eligible Asset, the percentage determined by
reference to the rating on such asset and the shortest S&P Exposure Period set
forth opposite such rating that is the same length as or is longer than the S&P
Exposure Period, in accordance with the table set forth below:
Rating Category
------------------------------------------
Exposure Period AAA* AA* A* BBB* Unrated** Zeros***
- --------------- --- -- - --- ------- -----
45 Business Days................. 190% 195% 210% 250% 220% 572%
25 Business Days................. 170 175 190 230 220 496
10 Business Days................. 155 160 175 215 220 426
7 Business Days................. 150 155 170 210 220 411
3 Business Days................. 130 135 150 190 220 388
- --------------
* S&P rating.
** S&P Eligible Assets not rated by S&P or rated less than BBB by S&P and not
rated at least the equivalent of an "A" rating by another nationally
recognized credit rating agency.
*** Municipal Obligations rated AAA by S&P which are not interest bearing or do
not pay interest at least semi-annually.
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<PAGE> 24
Notwithstanding the foregoing, (i) the S&P Discount Factor for
short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated A-1+ or SP-1+ by S&P and mature or have a demand feature
exercisable within 30 days or less, 120% if such Municipal Obligations are rated
A-1 or SP-1- by S&P and mature or have a demand feature exercisable within 30
days or less, or 125% if such Municipal Obligations are not rated by S&P but are
rated VMIG-1, P-1 or MIG-1 by Moody's; provided, however, that any such Moody's-
rated short-term Municipal Obligations which have demand features exercisable
within 30 days or less must be backed by a letter of credit, liquidity facility
or guarantee from a bank or other financial institution with a short-term rating
of at least A-1+ from S&P; and further provided that such Moody's-rated
short-term Municipal Obligations may comprise no more than 50% of short-term
Municipal Obligations that qualify as S&P Eligible Assets; (ii) no S&P Discount
Factor will be applied to cash, options and similar instruments or to
Receivables for Municipal Obligations Sold, except that S&P Discount Factors
will be applied to futures and Inverse Floaters; and (iii) except as set forth
in clause (i) above, in the case of any Municipal Obligation that is not rated
by S&P but qualifies as an S&P Eligible Asset pursuant to clause (iii) of that
definition, such Municipal Obligation will be deemed to have an S&P rating one
full rating category lower than the S&P rating category that is the equivalent
of the rating category in which such Municipal Obligation is placed by such
other nationally recognized credit rating agency. For purposes of the foregoing,
Anticipation Notes rated SP-1+ or, if not rated by S&P, rated MIG-1 or VMIG-1 by
Moody's, which do not mature or have a demand feature at par exercisable in 30
days and which do not have a long-term rating, shall be considered to be
short-term Municipal Obligations.
"S&P Eligible Asset" shall mean cash (excluding any cash irrevocably
deposited by the Trust for the payment of any liabilities within the meaning of
Municipal Preferred Basic Maintenance Amount), Receivables for Municipal
Obligations Sold, futures, options, Inverse Floaters and similar instruments or
a Municipal Obligation owned by the Trust that (i) is interest bearing and pays
interest at least semi-annually; (ii) is payable with respect to principal and
interest in U.S. Dollars; (iii) is publicly rated BBB or higher by S&P or,
except in the case of Anticipation Notes that are Grant Anticipation Notes or
Bond Anticipation Notes which must be rated by S&P to be included in S&P
Eligible Assets, if not rated by S&P but rated by another nationally recognized
credit rating agency, is rated at least A by such agency; (iv) is not part of a
private placement of Municipal Obligations (except in the case of Inverse
Floaters); (v) is part of an issue of Municipal Obligations with an original
issue size of at least $20 million or, if of an issue with an original issue
size below $20 million (but in no event below $10 million), is issued by an
issuer with a total of at least $50 million of securities outstanding; and (vi)
is not subject to a covered call or covered put option written by the Trust.
Solely for purposes of this definition, the term "Municipal Obligation" means
any obligation the interest on which is exempt from regular Federal income
taxation and which is issued by any of the fifty United States, the District of
Columbia or any of the territories of the United States, their subdivisions,
counties, cities, towns, villages, school districts and agencies (including
authorities and special districts created by the states), and federally
sponsored agencies such as local housing authorities. Notwithstanding the
foregoing limitations:
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(1) Municipal Obligations (excluding Escrowed Bonds) of any
one issuer or guarantor (excluding bond insurers) shall be considered
S&P Eligible Assets only to the extent the Market Value of such
Municipal Obligations does not exceed 10% of the aggregate Market Value
of S&P Eligible Assets, provided that 2% is added to the applicable S&P
Discount Factor for every 1% by which the Market Value of such
Municipal Obligations exceeds 5% of the aggregate Market Value of S&P
Eligible Assets, and provided that Municipal Obligations (excluding
Escrowed Bonds) not rated by S&P or rated less than BBB by S&P or not
rated at least A by another nationally recognized credit rating agency
of any one issuer or guarantor (excluding bond insurers) shall
constitute S&P Eligible Assets only to the extent the Market Value of
such Municipal Obligations does not exceed 5% of the aggregate Market
Value of S&P Eligible Assets;
(2) Municipal Obligations not rated at least BBB by S&P or not
rated by S&P and not rated at least A by another nationally recognized
credit rating agency shall be considered S&P Eligible Assets only to
the extent the Market Value of such Municipal Obligations does not
exceed 50% of the aggregate Market Value of S&P Eligible Assets;
provided, however, that if the Market Value of such Municipal
Obligations exceeds 50% of the aggregate Market Value of S&P Eligible
Assets, a portion of such Municipal Obligations (selected by the Trust)
shall not be considered S&P Eligible Assets, so that the Market Value
of such Municipal Obligations (excluding such portion) does not exceed
50% of the aggregate Market Value of S&P Eligible Assets;
(3) Long-term Municipal Obligations (excluding Escrowed Bonds)
issued by issuers in any one state or territory shall be considered S&P
Eligible Assets only to the extent that the Market Value of such
Municipal Obligations does not exceed 25% of the aggregate Market Value
of S&P Eligible Assets; and
(4) Municipal Obligations which are not interest bearing or do
not pay interest at least semi-annually shall be considered S&P
Eligible Assets if rated AAA by S&P.
For purposes of determining the aggregate Discounted Value of S&P's
Eligible Assets, such aggregate amount shall be reduced with respect to any
futures contracts as set forth in paragraph 10(a) of Part I of this Section
12.1.
"S&P Exposure Period" shall mean the period commencing on a given
Valuation Date and ending three business days thereafter.
"S&P Volatility Factor" shall mean, as of any Valuation Date, a
multiplicative factor equal to (i) 305% in the case of any Minimum Rate Period
or any Special Rate Period of 28 Rate Period Days or fewer; (ii) 268% in the
case of any Special Rate Period of more than 28 Rate Period Days but fewer than
183 Rate Period Days; and (iii) 204% in the case of any Special Rate Period of
more than 182 Rate Period Days.
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"Securities Depository" shall mean The Depository Trust Company and its
successors and assigns or any other securities depository selected by the Trust
which agrees to follow the procedures required to be followed by such securities
depository in connection with shares of Municipal Preferred.
"Sell Order" and "Sell Orders" shall have the respective meanings
specified in paragraph 1(a) of Part II of this Section 12.1.
"Special Rate Period," with respect to shares of a series of Municipal
Preferred, shall have the meaning specified in paragraph 4(a) of Part I of this
Section 12.1.
"Special Redemption Provisions" shall have the meaning specified in
paragraph 11(a)(i) of Part I of this Section 12.1.
"Submission Deadline" shall mean 1:30 P.M., New York City time, on any
Auction Date or such other time on any Auction Date by which Broker-Dealers are
required to submit Orders to the Auction Agent as specified by the Auction Agent
from time to time.
"Submitted Bid" and "Submitted Bids" shall have the respective meanings
specified in paragraph 3(a) of Part II of this Section 12.1.
"Submitted Hold Order" and "Submitted Hold Orders" shall have the
respective meanings specified in paragraph 3(a) of Part II of this Section 12.1.
"Submitted Order" and "Submitted Orders" shall have the respective
meanings specified in paragraph 3(a) of Part II of this Section 12.1.
"Submitted Sell Order" and "Submitted Sell Orders" shall have the
respective meanings specified in paragraph 3(a) of Part II of this Section 12.1.
"Subsequent Rate Period," with respect to shares of a series of
Municipal Preferred, shall mean the period from and including the first day
following the Initial Rate Period of shares of such series to but excluding the
next Dividend Payment Date for shares of such series and any period thereafter
from and including one Dividend Payment Date for shares of such series to but
excluding the next succeeding Dividend Payment Date for shares of such series;
provided, however, that if any Subsequent Rate Period is also a Special Rate
Period, such term shall mean the period commencing on the first day of such
Special Rate Period and ending on the last day of the last Dividend Period
thereof.
"Substitute Commercial Paper Dealer" shall mean CS First Boston or
Morgan Stanley & Co. Incorporated or their respective affiliates or successors,
if such entity is a commercial paper dealer; provided, however, that none of
such entities shall be a Commercial Paper Dealer.
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"Substitute U.S. Government Securities Dealer" shall mean CS First
Boston and Merrill Lynch, Pierce, Fenner & Smith Incorporated or their
respective affiliates or successors, if such entity is a U.S. Government
securities dealer; provided, however, that none of such entities shall be a U.S.
Government Securities Dealer.
"Sufficient Clearing Bids" shall have the meaning specified in
paragraph 3(a) of Part II of this Section 12.1.
"Taxable Allocation" shall have the meaning specified in paragraph 3 of
Part I of this Section 12.1.
"Taxable Equivalent of the Short-Term Municipal Bond Rate," on any date
for any Minimum Rate Period or Special Rate Period of 28 Rate Period Days or
fewer, shall mean 90% of the quotient of (A) the per annum rate expressed on an
interest equivalent basis equal to the S&P Kenny 30 day High Grade Index or any
successor index (the "Kenny Index") (provided, however, that any such successor
index must be approved by Moody's (if Moody's is then rating the shares of
Municipal Preferred) and S&P (if S&P is then rating the shares of Municipal
Preferred)), made available for the Business Day immediately preceding such date
but in any event not later than 8:30 A.M., New York City time, on such date by
S&P J.J. Kenny Evaluation Services or any successor thereto, based upon 30-day
yield evaluations at par of short-term bonds the interest on which is excludable
for regular Federal income tax purposes under the Code, of "high grade"
component issuers selected by S&P J.J. Kenny Evaluation Services or any such
successor from time to time in its discretion, which component issuers shall
include, without limitation, issuers of general obligation bonds, but shall
exclude any bonds the interest on which constitutes an item of tax preference
under Section 57(a)(5) of the Code, or successor provisions, for purposes of the
"alternative minimum tax," divided by (B) 1.00 minus the greater of the maximum
marginal regular Federal individual income tax rate applicable to ordinary
income or the maximum marginal regular Federal corporate income tax rate
applicable to ordinary income (in each case expressed as a decimal); provided,
however, that if the Kenny Index is not made so available by 8:30 A.M., New York
City time, on such date by S&P J.J. Kenny Evaluation Services or any successor,
the Taxable Equivalent of the Short-Term Municipal Bond Rate shall mean the
quotient of (A) the per annum rate expressed on an interest equivalent basis
equal to the most recent Kenny Index so made available for any preceding
Business Day, divided by (B) 1.00 minus the greater of the maximum marginal
regular Federal individual income tax rate applicable to ordinary income or the
maximum marginal regular Federal corporate income tax rate applicable to
ordinary income (in each case expressed as a decimal).
"Taxable Income" shall have the meaning specified in paragraph 3(c) of
Part II of this Section 12.1.
"Treasury Bill" shall mean a direct obligation of the U.S. Government
having a maturity at the time of issuance of 364 days or less.
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"Treasury Bill Rate," on any date for any Rate Period, shall mean (i)
the bond equivalent yield, calculated in accordance with prevailing industry
convention, of the rate on the most recently auctioned Treasury Bill with a
remaining maturity closest to the length of such Rate Period, as quoted in The
Wall Street Journal on such date for the Business Day next preceding such date;
or (ii) in the event that any such rate is not published in The Wall Street
Journal, then the bond equivalent yield, calculated in accordance with
prevailing industry convention, as calculated by reference to the arithmetic
average of the bid price quotations of the most recently auctioned Treasury Bill
with a remaining maturity closest to the length of such Rate Period, as
determined by bid price quotations as of the close of business on the Business
Day immediately preceding such date obtained from the U.S. Government Securities
Dealers to the Auction Agent.
"Treasury Note" shall mean a direct obligation of the U.S. Government
having a maturity at the time of issuance of five years or less but more than
364 days.
"Treasury Note Rate," on any date for any Rate Period, shall mean (i)
the yield on the most recently auctioned Treasury Note with a remaining maturity
closest to the length of such Rate Period, as quoted in The Wall Street Journal
on such date for the Business Day next preceding such date; or (ii) in the event
that any such rate is not published in The Wall Street Journal, then the yield
as calculated by reference to the arithmetic average of the bid price quotations
of the most recently auctioned Treasury Note with a remaining maturity closest
to the length of such Rate Period, as determined by bid price quotations as of
the close of business on the Business Day immediately preceding such date
obtained from the U.S. Government Securities Dealers to the Auction Agent. If
any U.S. Government Securities Dealer does not quote a rate required to
determine the Treasury Bill Rate or the Treasury Note Rate, the Treasury Bill
Rate or the Treasury Note Rate shall be determined on the basis of the quotation
or quotations furnished by the remaining U.S. Government Securities Dealer or
U.S. Government Securities Dealers and any Substitute U.S. Government Securities
Dealers selected by the Trust to provide such rate or rates not being supplied
by any U.S. Government Securities Dealer or U.S. Government Securities Dealers,
as the case may be, or, if the Trust does not select any such Substitute U.S.
Government Securities Dealer or Substitute U.S. Government Securities Dealers,
by the remaining U.S. Government Securities Dealer or U.S. Government Securities
Dealers.
"U.S. Government Securities Dealer" shall mean Lehman Government
Securities Incorporated, Goldman, Sachs & Co., Salomon Smith Barney Inc. and
Morgan Guaranty Trust Company of New York or their respective affiliates or
successors, if such entity is a U.S. government securities dealer.
"Valuation Date" shall mean, for purposes of determining whether the
Trust is maintaining the Municipal Preferred Basic Maintenance Amount, each
Business Day.
"Variation Margin" means, in connection with an outstanding futures
contract owned or sold by the Trust, the amount of cash or securities paid to or
received from a broker
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(subsequent to the Initial Margin payment) from time to time as the price of
such futures contract fluctuates.
"Volatility Factor" shall mean, as of any Valuation Date, the greater
of the Moody's Volatility Factor and the S&P Volatility Factor.
"Voting Period" shall have the meaning specified in paragraph 5(b) of
Part I of this Section 12.1.
"Winning Bid Rate" shall have the meaning specified in paragraph 3(a)
of Part II of this Section 12.1.
2. DIVIDENDS.
(a) RANKING. The shares of a series of Municipal Preferred shall rank
on a parity with each other, with shares of any other series of Municipal
Preferred and with shares of any other series of Preferred Shares as to the
payment of dividends by the Trust.
(b) CUMULATIVE CASH DIVIDENDS. The Holders of shares of Municipal
Preferred of any series shall be entitled to receive, when, as and if declared
by the Board of Trustees, out of funds legally available therefor in accordance
with the Declaration, these By-laws and applicable law, cumulative cash
dividends at the Applicable Rate for shares of such series, determined as set
forth in subparagraph (e) of this paragraph 2, and no more (except to the extent
set forth in paragraph 3 of Part I of this Section 12.1), payable on the
Dividend Payment Dates with respect to shares of such series determined pursuant
to subparagraph (d) of this paragraph 2. Holders of shares of Municipal
Preferred shall not be entitled to any dividend, whether payable in cash,
property or shares, in excess of full cumulative dividends, as herein provided,
on shares of Municipal Preferred. No interest, or sum of money in lieu of
interest, shall be payable in respect of any dividend payment or payments on
shares of Municipal Preferred which may be in arrears, and, except to the extent
set forth in subparagraph (e)(i) of this paragraph 2, no additional sum of money
shall be payable in respect of any such arrearage.
(c) DIVIDENDS CUMULATIVE FROM DATE OF ORIGINAL ISSUE. Dividends on
shares of Municipal Preferred of any series shall accumulate at the Applicable
Rate for shares of such series from the Date of Original Issue thereof.
(d) DIVIDEND PAYMENT DATES AND ADJUSTMENTS THEREOF. The Dividend
Payment Dates with respect to shares of a series of Municipal Preferred shall be
Wednesday, __________ __, 1999 and each Wednesday thereafter with respect to
shares of Series T Municipal Preferred and Thursday, __________ __, 1999 and
each Thursday thereafter with respect to shares of Series W Municipal Preferred;
provided, however, that
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(i) if the Wednesday or Thursday as the case may be, on
which dividends would otherwise be payable on shares of such series is
not a Business Day, then such dividends shall be payable on shares of
such series on the first Business Day that falls prior to such
Wednesday or Thursday, as the case may be; and
(ii) notwithstanding the foregoing provisions of this
paragraph 2(d), the Trust in its discretion may establish the Dividend
Payment Dates in respect of any Special Rate Period of shares of a
series of Municipal Preferred consisting of more than 28 Rate Period
Days; provided, however, that such dates shall be set forth in the
Notice of Special Rate Period relating to such Special Rate Period, as
delivered to the Auction Agent, which Notice of Special Rate Period
shall be filed with the Secretary of the Trust; and further provided
that (1) any such Dividend Payment Date shall be a Business Day and
(2) the last Dividend Payment Date in respect of such Special Rate
Period shall be the Business Day immediately following the last day
thereof, as such last day is determined in accordance with
subparagraph (b) of paragraph 4 of Part I of this Section 12.1.
(e) DIVIDEND RATES AND CALCULATION OF DIVIDENDS.
(i) DIVIDEND RATES. The dividend rate on shares of Municipal
Preferred of any series during the period from and after the Date of
Original Issue of shares of such series to and including the last day
of the Initial Rate Period of shares of such series shall be equal to
the rate per annum set forth with respect to shares of such series
under "Designation" in Part I of this Section 12.1. For each
Subsequent Rate Period of shares of such series thereafter, the
dividend rate on shares of such series shall be equal to the rate per
annum that results from an Auction for shares of such series on the
Auction Date next preceding such Subsequent Rate Period; provided,
however, that if:
(A) an Auction for any such Subsequent Rate Period is
not held for any reason other than as described below, the
dividend rate on shares of such series for such Subsequent
Rate Period will be the Maximum Rate for shares of such series
on the Auction Date therefor;
(B) any Failure to Deposit shall have occurred with
respect to shares of such series during any Rate Period
thereof (other than any Special Rate Period consisting of more
than 364 Rate Period Days or any Rate Period succeeding any
Special Rate Period consisting of more than 364 Rate Period
Days during which a
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Failure to Deposit occurred that has not been cured), but,
prior to 12:00 Noon, New York City time, on the third Business
Day next succeeding the date on which such Failure to Deposit
occurred, such Failure to Deposit shall have been cured in
accordance with subparagraph (f) of this paragraph 2 and the
Trust shall have paid to the Auction Agent a late charge
("Late Charge") equal to the sum of (1) if such Failure to
Deposit consisted of the failure timely to pay to the Auction
Agent the full amount of dividends with respect to any
Dividend Period of the shares of such series, an amount
computed by multiplying (x) 200% of the Reference Rate for the
Rate Period during which such Failure to Deposit occurs on the
Dividend Payment Date for such Dividend Period by (y) a
fraction, the numerator of which shall be the number of days
for which such Failure to Deposit has not been cured in
accordance with subparagraph (f) of this paragraph 2
(including the day such Failure to Deposit occurs and
excluding the day such Failure to Deposit is cured) and the
denominator of which shall be 360, and applying the rate
obtained against the aggregate Liquidation Preference of the
outstanding shares of such series and (2) if such Failure to
Deposit consisted of the failure timely to pay to the Auction
Agent the Redemption Price of the shares, if any, of such
series for which Notice of Redemption has been mailed by the
Trust pursuant to paragraph 11(c) of Part I of this Section
12.1, an amount computed by multiplying (x) 200% of the
Reference Rate for the Rate Period during which such Failure
to Deposit occurs on the redemption date by (y) a fraction,
the numerator of which shall be the number of days for which
such Failure to Deposit is not cured in accordance with
subparagraph (f) of this paragraph 2 (including the day such
Failure to Deposit occurs and excluding the day such Failure
to Deposit is cured) and the denominator of which shall be
360, and applying the rate obtained against the aggregate
Liquidation Preference of the outstanding shares of such
series to be redeemed, no Auction will be held in respect of
shares of such series for the Subsequent Rate Period thereof
and the dividend rate for shares of such series for such
Subsequent Rate Period will be the Maximum Rate for shares of
such series on the Auction Date for such Subsequent Rate
Period;
(C) any Failure to Deposit shall have occurred with
respect to shares of such series during any Rate Period
thereof (other than any Special Rate Period consisting of more
than 364 Rate Period Days or any Rate Period succeeding any
Special Rate Period consisting of more than 364 Rate Period
Days during which a Failure to Deposit occurred that has not
been cured), and, prior to 12:00 Noon, New York City time, on
the third Business Day next succeeding the date on which such
Failure to Deposit occurred, such Failure to Deposit shall not
have been cured in accordance with subparagraph (f) of this
paragraph 2 or the Trust shall not have paid the applicable
Late Charge to the Auction Agent, no Auction will be held in
respect of shares of such series for the first Subsequent Rate
Period thereof thereafter (or for any Rate Period thereof
thereafter to and including the Rate Period during which (1)
such Failure to Deposit is cured in accordance with
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subparagraph (f) of this paragraph 2 and (2) the Trust pays
the applicable Late Charge to the Auction Agent (the condition
set forth in this clause (2) to apply only in the event
Moody's is rating such shares at the time the Trust cures such
Failure to Deposit), in each case no later than 12:00 Noon,
New York City time, on the fourth Business Day prior to the
end of such Rate Period), and the dividend rate for shares of
such series for each such Subsequent Rate Period shall be a
rate per annum equal to the Maximum Rate for shares of such
series on the Auction Date for such Subsequent Rate Period
(but with the prevailing rating for shares of such series, for
purposes of determining such Maximum Rate, being deemed to be
"Below 'ba3'/BB-"); or
(D) any Failure to Deposit shall have occurred with
respect to shares of such series during a Special Rate Period
thereof consisting of more than 364 Rate Period Days, or
during any Rate Period thereof succeeding any Special Rate
Period consisting of more than 364 Rate Period Days during
which a Failure to Deposit occurred that has not been cured,
and, prior to 12:00 Noon, New York City time, on the fourth
Business Day preceding the Auction Date for the Rate Period
subsequent to such Rate Period, such Failure to Deposit shall
not have been cured in accordance with subparagraph (f) of
this paragraph 2 or, in the event Moody's is then rating such
shares, the Trust shall not have paid the applicable Late
Charge to the Auction Agent (such Late Charge, for purposes of
this subparagraph (D), to be calculated by using, as the
Reference Rate, the Reference Rate applicable to a Rate Period
(x) consisting of more than 182 Rate Period Days but fewer
than 365 Rate Period Days and (y) commencing on the date on
which the Rate Period during which Failure to Deposit occurs
commenced), no Auction will be held in respect of shares of
such series for such Subsequent Rate Period (or for any Rate
Period thereof thereafter to and including the Rate Period
during which (1) such Failure to Deposit is cured in
accordance with subparagraph (f) of this paragraph 2 and (2)
the Trust pays the applicable Late Charge to the Auction Agent
(the condition set forth in this clause (2) to apply only in
the event Moody's is rating such shares at the time the Trust
cures such Failure to Deposit), in each case no later than
12:00 Noon, New York City time, on the fourth Business Day
prior to the end of such Rate Period), and the dividend rate
for shares of such series for each such Subsequent Rate Period
shall be a rate per annum equal to the Maximum Rate for shares
of such series on the Auction Date for such Subsequent Rate
Period (but with the prevailing rating for shares of such
series, for purposes of determining such Maximum Rate, being
deemed to be "Below 'ba3'/BB-") (the rate per annum of which
dividends are payable on shares of a series of Municipal
Preferred for any Rate Period thereof being herein referred to
as the "Applicable Rate" for shares of such series).
(ii) CALCULATION OF DIVIDENDS. The amount of dividends per
share payable on shares of a series of Municipal Preferred on any date
on which dividends shall be payable
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on shares of such series shall be computed by multiplying the
Applicable Rate for shares of such series in effect for such Dividend
Period or Dividend Periods or part thereof for which dividends have not
been paid by a fraction, the numerator of which shall be the number of
days in such Dividend Period or Dividend Periods or part thereof and
the denominator of which shall be 365 if such Dividend Period consists
of 7 Rate Period Days and 360 for all other Dividend Periods, and
applying the rate obtained against $25,000.
(f) CURING A FAILURE TO DEPOSIT. A Failure to Deposit with respect to
shares of a series of Municipal Preferred shall have been cured (if such Failure
to Deposit is not solely due to the willful failure of the Trust to make the
required payments to the Auction Agent) with respect to any Rate Period of
shares of such series if, within the respective time periods described in
subparagraph (e)(i) of this paragraph 2, the Trust shall have paid to the
Auction Agent (A) all accumulated and unpaid dividends on shares of such series
and (B) without duplication, the Redemption Price for shares, if any, of such
series for which Notice of Redemption has been mailed by the Trust pursuant to
paragraph 11(c) of Part I of this Section 12.1; provided, however, that the
foregoing clause (B) shall not apply to the Trust's failure to pay the
Redemption Price in respect of shares of Municipal Preferred when the related
Redemption Notice provides that redemption of such shares is subject to one or
more conditions precedent and any such condition precedent shall not have been
satisfied at the time or times and in the manner specified in such Notice of
Redemption.
(g) DIVIDEND PAYMENTS BY TRUST TO AUCTION AGENT. The Trust shall pay to
the Auction Agent, not later than 12:00 Noon, New York City time, on the
Business Day next preceding each Dividend Payment Date for shares of a series of
Municipal Preferred, an aggregate amount of funds available on the next Business
Day in The City of New York, New York, equal to the dividends to be paid to all
Holders of shares of such series on such Dividend Payment Date.
(h) AUCTION AGENT AS TRUSTEE OF DIVIDEND PAYMENTS BY TRUST. All moneys
paid to the Auction Agent for the payment of dividends (or for the payment of
any Late Charge) shall be held in trust for the payment of such dividends (and
any such Late Charge) by the Auction Agent for the benefit of the Holders
specified in subparagraph (i) of this paragraph 2. Any moneys paid to the
Auction Agent in accordance with the foregoing but not applied by the Auction
Agent to the payment of dividends (and any such Late Charge) will, to the extent
permitted by law, be repaid to the Trust at the end of 90 days from the date on
which such moneys were so to have been applied.
(i) DIVIDENDS PAID TO HOLDERS. Each dividend on shares of Municipal
Preferred shall be paid on the Dividend Payment Date therefor to the Holders
thereof as their names appear on the record books of the Trust on the Business
Day next preceding such Dividend Payment Date.
(j) DIVIDENDS CREDITED AGAINST EARLIEST ACCUMULATED BUT UNPAID
DIVIDENDS. Any dividend payment made on shares of Municipal Preferred shall
first be credited against the earliest accumulated but unpaid dividends due with
respect to such shares. Dividends in arrears for any
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past Dividend Period may be declared and paid at any time, without reference to
any regular Dividend Payment Date, to the Holders as their names appear on the
record books of the Trust on such date, not exceeding 15 days preceding the
payment date thereof, as may be fixed by the Board of Trustees.
(k) DIVIDENDS DESIGNATED AS EXEMPT-INTEREST DIVIDENDS. Dividends on
shares of Municipal Preferred shall be designated as exempt-interest dividends
up to the amount of tax-exempt income of the Trust, to the extent permitted by,
and for purposes of, Section 852 of the Code.
3. GROSS-UP PAYMENTS.
Holders of shares of Municipal Preferred shall be entitled to receive,
when, as and if declared by the Board of Trustees, out of funds legally
available therefor in accordance with the Declaration, these By-laws and
applicable law, dividends in an amount equal to the aggregate Gross-up Payments
as follows:
(a) MINIMUM RATE PERIODS AND SPECIAL RATE PERIODS OF 28 RATE PERIOD
DAYS OR FEWER. If, in the case of any Minimum Rate Period or any Special Rate
Period of 28 Rate Period Days or fewer, the Trust allocates any net capital gain
or other income taxable for Federal income tax purposes to a dividend paid on
shares of Municipal Preferred without having given advance notice thereof to the
Auction Agent as provided in paragraph 5 of Part II of this Section 12.1 (such
allocation being referred to herein as a "Taxable Allocation") solely by reason
of the fact that such allocation is made retroactively as a result of the
redemption of all or a portion of the outstanding shares of Municipal Preferred
or the liquidation of the Trust, the Trust shall, prior to the end of the
calendar year in which such dividend was paid, provide notice thereof to the
Auction Agent and direct the Trust's dividend disbursing agent to send such
notice with a Gross- up Payment to each Holder of such shares that was entitled
to such dividend payment during such calendar year at such Holder's address as
the same appears or last appeared on the record books of the Trust.
(b) SPECIAL RATE PERIODS OF MORE THAN 28 RATE PERIOD DAYS. If, in the
case of any Special Rate Period of more than 28 Rate Period Days, the Trust
makes a Taxable Allocation to a dividend paid on shares of Municipal Preferred,
the Trust shall, prior to the end of the calendar year in which such dividend
was paid, provide notice thereof to the Auction Agent and direct the Trust's
dividend disbursing agent to send such notice with a Gross-up Payment to each
Holder of shares that was entitled to such dividend payment during such calendar
year at such Holder's address as the same appears or last appeared on the record
books of the Trust.
(c) NO GROSS-UP PAYMENTS IN THE EVENT OF A REALLOCATION. The Trust
shall not be required to make Gross-up Payments with respect to any net capital
gain or other taxable income determined by the Internal Revenue Service to be
allocable in a manner different from that allocated by the Trust.
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4. DESIGNATION OF SPECIAL RATE PERIODS.
(a) LENGTH OF AND PRECONDITIONS FOR SPECIAL RATE PERIOD. The Trust, at
its option, may designate any succeeding Subsequent Rate Period of shares of a
series of Municipal Preferred as a Special Rate Period consisting of a specified
number of Rate Period Days evenly divisible by seven and not more than 1,820,
subject to adjustment as provided in subparagraph (b) of this paragraph 4. A
designation of a Special Rate Period shall be effective only if (A) notice
thereof shall have been given in accordance with subparagraphs (c) and (d)(i) of
this paragraph 4, (B) an Auction for shares of such series shall have been held
on the Auction Date immediately preceding the first day of such proposed Special
Rate Period and Sufficient Clearing Bids for shares of such series shall have
existed in such Auction, and (C) if any Notice of Redemption shall have been
mailed by the Trust pursuant to paragraph 11(c) of Part I of this Section 12.1
with respect to any shares of such series, the Redemption Price with respect to
such shares shall have been deposited with the Auction Agent. In the event the
Trust wishes to designate any succeeding Subsequent Rate Period for shares of a
series of Municipal Preferred as a Special Rate Period consisting of more than
28 Rate Period Days, the Trust shall notify S&P (if S&P is then rating such
series) and Moody's (if Moody's is then rating such series) in advance of the
commencement of such Subsequent Rate Period that the Trust wishes to designate
such Subsequent Rate Period as a Special Rate Period and shall provide S&P (if
S&P is then rating such series) and Moody's (if Moody's is then rating such
series) with such documents as either may request.
(b) ADJUSTMENT OF LENGTH OF SPECIAL RATE PERIOD. In the event the
Trust wishes to designate a Subsequent Rate Period as a Special Rate Period, but
the day following what would otherwise be the last day of such Special Rate
Period is not (a) a Wednesday that is a Business Day in the case of a series of
Municipal Preferred designated as "Series T Municipal Preferred" in this Part I,
or (b) a Thursday that is a Business Day in the case of a series of Municipal
Preferred designated as "Series W Municipal Preferred" in this Part I, then the
Trust shall designate such Subsequent Rate Period as a Special Rate Period
consisting of the period commencing at the end of the immediately preceding
"Rate Period" and ending (a) on the first Tuesday that is followed by a
Wednesday that is a Business Day preceding what would otherwise be such last
day, in the case of Series T Municipal Preferred, or (b) on the first Wednesday
that is followed by a Thursday that is a Business Day preceding what would
otherwise be such last day, in the case of Series W Municipal Preferred.
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(c) NOTICE OF PROPOSED SPECIAL RATE PERIOD. If the Trust proposes to
designate any succeeding Subsequent Rate Period of shares of a series of
Municipal Preferred as a Special Rate Period pursuant to subparagraph (a) of
this paragraph 4, not less than 20 (or such lesser number of days as may be
agreed to from time to time by the Auction Agent) nor more than 30 days prior to
the date the Trust proposes to designate as the first day of such Special Rate
Period (which shall be such day that would otherwise be the first day of a
Minimum Rate Period), notice shall be (i) published or caused to be published by
the Trust in a newspaper of general circulation to the financial community in
The City of New York, New York, which carries financial news, and (ii) mailed by
the Trust by first-class mail, postage prepaid, to the Holders of shares of such
series. Each such notice shall state (A) that the Trust may exercise its option
to designate a succeeding Subsequent Rate Period of shares of such series as a
Special Rate Period, specifying the first day thereof and (B) that the Trust
will, by 11:00 A.M., New York City time, on the second Business Day next
preceding such date (or by such later time or date, or both, as may be agreed to
by the Auction Agent) notify the Auction Agent of either (x) its determination,
subject to certain conditions, to exercise such option, in which case the Trust
shall specify the Special Rate Period designated, or (y) its determination not
to exercise such option.
(d) NOTICE OF SPECIAL RATE PERIOD. No later than 11:00 A.M., New York
City time, on the second Business Day next preceding the first day of any
proposed Special Rate Period of shares of a series of Municipal Preferred as to
which notice has been given as set forth in subparagraph (c) of this paragraph 4
(or such later time or date, or both, as may be agreed to by the Auction Agent),
the Trust shall deliver to the Auction Agent either:
(i) a notice ("Notice of Special Rate Period") stating (A)
that the Trust has determined to designate the next succeeding Rate
Period of shares of such series as a Special Rate Period, specifying
the same and the first day thereof, (B) the Auction Date immediately
prior to the first day of such Special Rate Period, (C) that such
Special Rate Period shall not commence if (1) an Auction for shares of
such series shall not be held on such Auction Date for any reason or
(2) an Auction for shares of such series shall be held on such Auction
Date but Sufficient Clearing Bids for shares of such series shall not
exist in such Auction, (D) the scheduled Dividend Payment Dates for
shares of such series during such Special Rate Period and (E) the
Special Redemption Provisions, if any, applicable to shares of such
series in respect of such Special Rate Period; such notice to be
accompanied by a Municipal Preferred Basic Maintenance Report showing
that, as of the third Business Day next preceding such proposed Special
Rate Period, Moody's Eligible Assets (if Moody's is then rating such
series) and S&P Eligible Assets (if S&P is then rating such series)
each have an aggregate Discounted Value at least equal to the Municipal
Preferred Basic Maintenance Amount as of such Business Day (assuming
for purposes of the foregoing calculation that (a) the Maximum Rate is
the Maximum Rate on such Business Day as if such Business Day were the
Auction Date for the proposed Special Rate Period, and (b) the Moody's
Discount Factors applicable to Moody's Eligible Assets are determined
by reference to the first Exposure
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Period longer than the Exposure Period then applicable to the Trust, as
described in the definition of Moody's Discount Factor herein); or
(ii) a notice stating that the Trust has determined not to
exercise its option to designate a Special Rate Period of shares of
such series and that the next succeeding Rate Period of shares of such
series shall be a Minimum Rate Period.
(e) FAILURE TO DELIVER NOTICE OF SPECIAL RATE PERIOD. If the Trust
fails to deliver either of the notices described in subparagraphs (d)(i) or
(d)(ii) of this paragraph 4 (and, in the case of the notice described in
subparagraph (d)(i) of this paragraph 4, a Municipal Preferred Basic Maintenance
Report to the effect set forth in such subparagraph (if either Moody's or S&P is
then rating the series in question)) with respect to any designation of any
proposed Special Rate Period to the Auction Agent by 11:00 A.M., New York City
time, on the second Business Day next preceding the first day of such proposed
Special Rate Period (or by such later time or date, or both, as may be agreed to
by the Auction Agent), the Trust shall be deemed to have delivered a notice to
the Auction Agent with respect to such Special Rate Period to the effect set
forth in subparagraph (d)(ii) of this paragraph 4. In the event the Trust
delivers to the Auction Agent a notice described in subparagraph (d)(i) of this
paragraph 4, it shall file a copy of such notice with the Secretary of the
Trust, and the contents of such notice shall be binding on the Trust. In the
event the Trust delivers to the Auction Agent a notice described in subparagraph
(d)(ii) of this paragraph 4, the Trust will provide Moody's (if Moody's is then
rating the series in question) and S&P (if S&P is then rating the series in
question) a copy of such notice.
5. VOTING RIGHTS.
(a) ONE VOTE PER SHARE OF MUNICIPAL PREFERRED. Except as otherwise
provided in the Declaration, this paragraph 5 or as otherwise required by law,
(i) each Holder of shares of Municipal Preferred shall be entitled to one vote
for each share of Municipal Preferred held by such Holder on each matter
submitted to a vote of shareholders of the Trust, and (ii) the holders of
outstanding Preferred Shares, including each share of Municipal Preferred, and
of Common Shares shall vote together as a single class; provided, however, that,
at any meeting of the shareholders of the Trust held for the election of
trustees, the holders of outstanding Preferred Shares, including Municipal
Preferred, represented in person or by proxy at said meeting, shall be entitled,
as a class, to the exclusion of the holders of all other securities and classes
of shares of beneficial interest of the Trust, to elect two trustees of the
Trust, each Preferred Share, including each share of Municipal Preferred,
entitling the holder thereof to one vote. Subject to subparagraph (b) of this
paragraph 5, the holders of outstanding Common Shares and Preferred Shares,
including Municipal Preferred, voting together as a single class, shall elect
the balance of the trustees.
(b) VOTING FOR ADDITIONAL TRUSTEES.
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(i) VOTING PERIOD. During any period in which any one or more
of the conditions described in subparagraphs (A) or (B) of this
subparagraph (b)(i) shall exist (such period being referred to herein
as a "Voting Period"), the number of trustees constituting the Board of
Trustees shall be automatically increased by the smallest number that,
when added to the two trustees elected exclusively by the holders of
Preferred Shares, including shares of Municipal Preferred, would
constitute a majority of the Board of Trustees as so increased by such
smallest number; and the holders of Preferred Shares, including
Municipal Preferred, shall be entitled, voting as a class on a
one-vote-per-share basis (to the exclusion of the holders of all other
securities and classes of shares of beneficial interest of the Trust),
to elect such smallest number of additional trustees, together with the
two trustees that such holders are in any event entitled to elect. A
Voting Period shall commence:
(A) if at the close of business on any dividend
payment date accumulated dividends (whether or not earned or
declared) on any outstanding Preferred Share, including
Municipal Preferred, equal to at least two full years'
dividends shall be due and unpaid and sufficient cash or
specified securities shall not have been deposited with the
Auction Agent for the payment of such accumulated dividends;
or
(B) if at any time holders of Preferred Shares are
entitled under the 1940 Act to elect a majority of the
trustees of the Trust.
Upon the termination of a Voting Period, the voting rights described in this
subparagraph (b)(i) shall cease, subject always, however, to the revesting of
such voting rights in the Holders upon the further occurrence of any of the
events described in this subparagraph (b)(i).
(ii) NOTICE OF SPECIAL MEETING. As soon as practicable after
the accrual of any right of the holders of Preferred Shares to elect
additional trustees as described in subparagraph (b)(i) of this
paragraph 5, the Trust shall notify the Auction Agent and the Auction
Agent shall call a special meeting of such holders, by mailing a notice
of such special meeting to such holders, such meeting to be held not
less than 10 nor more than 20 days after the date of mailing of such
notice. If the Trust fails to send such notice to the Auction Agent or
if the Auction Agent does not call such a special meeting, it may be
called by any such holder on like notice. The record date for
determining the holders entitled to notice of and to vote at such
special meeting shall be the close of business on the fifth Business
Day preceding the day on which such notice is mailed. At any such
special meeting and at each meeting of holders of Preferred Shares held
during a Voting Period at which trustees are to be elected, such
holders, voting together as a class (to the exclusion of the holders of
all other securities and classes of shares of beneficial interest of
the Trust), shall be entitled to elect the number of trustees
prescribed in subparagraph (b)(i) of this paragraph 5 on a
one-vote-per-share basis.
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(iii) TERMS OF OFFICE OF EXISTING TRUSTEES. The terms of
office of all persons who are trustees of the Trust at the time of a
special meeting of Holders and holders of other Preferred Shares to
elect trustees shall continue, notwithstanding the election at such
meeting by the Holders and such other holders of the number of trustees
that they are entitled to elect, and the persons so elected by the
Holders and such other holders, together with the two incumbent
trustees elected by the Holders and such other holders of Preferred
Shares and the remaining incumbent trustees elected by the Holders of
the Common Shares and Preferred Shares, shall constitute the duly
elected trustees of the Trust.
(iv) TERMS OF OFFICE OF CERTAIN TRUSTEES TO TERMINATE UPON
TERMINATION OF VOTING PERIOD. Simultaneously with the termination of a
Voting Period, the term of office of the additional trustees elected by
the Holders and holders of other Preferred Shares pursuant to
subparagraph (b)(i) of this paragraph 5 shall terminate, the remaining
trustees shall constitute the trustees of the Trust and the voting
rights of the Holders and such other holders to elect additional
trustees pursuant to subparagraph (b)(i) of this paragraph 5 shall
cease, subject to the provisions of the last sentence of subparagraph
(b)(i) of this paragraph 5.
(c) HOLDERS OF MUNICIPAL PREFERRED TO VOTE ON CERTAIN OTHER MATTERS.
(i) INCREASES IN CAPITALIZATION. So long as any shares of
Municipal Preferred are outstanding, the Trust shall not, without the
affirmative vote or consent of the Holders of at least a majority of
the shares of Municipal Preferred outstanding at the time, in person or
by proxy, either in writing or at a meeting, voting as a separate
class: (a) authorize, create or issue any class or series of shares
ranking prior to or on a parity with shares of Municipal Preferred with
respect to the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Trust, or
authorize, create or issue additional shares of any series of Municipal
Preferred (except that, notwithstanding the foregoing, but subject to
the provisions of paragraph 10(c) of Part I of this Section 12.1, the
Board of Trustees, without the vote or consent of the Holders of
Municipal Preferred, may from time to time authorize and create, and
the Trust may from time to time issue, additional shares of any series
of Municipal Preferred or classes or series of Preferred Shares ranking
on a parity with shares of Municipal Preferred with respect to the
payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Trust; provided,
however, that if Moody's or S&P is not then rating the shares of
Municipal Preferred, the aggregate liquidation preference of all
Preferred Shares of the Trust outstanding after any such issuance,
exclusive of accumulated and unpaid dividends, may not exceed
$120,000,000) or (b) amend, alter or repeal the provisions of the
Declaration or the By-Laws, including this Section 12.1, whether by
merger, consolidation or otherwise, so as to materially affect any
preference, right or power of such shares of Municipal Preferred to the
Holders thereof; provided, however, that (i) none of the actions
permitted by the exception to (a) above
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will be deemed to affect such preferences, rights or powers, (ii) a
division of a share of Municipal Preferred will be deemed to affect
such preferences, rights or powers only if the terms of such division
adversely affect the Holders of shares of Municipal Preferred and (iii)
the authorization, creation and issuance of classes or series of shares
ranking junior to shares of Municipal Preferred with respect to the
payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Trust, will be deemed
to affect such preferences, rights or powers only if Moody's or S&P is
then rating shares of Municipal Preferred and such issuance would, at
the time thereof, cause the Trust not to satisfy the 1940 Act Municipal
Preferred Asset Coverage or the Municipal Preferred Basic Maintenance
Amount. So long as any shares of Municipal Preferred are outstanding,
the Trust shall not, without the affirmative vote or consent of the
Holders of at least 66 2/3% of the shares of Municipal Preferred
outstanding at the time, in person or by proxy, either in writing or at
a meeting, voting as a separate class, file a voluntary application for
relief under Federal bankruptcy law or any similar application under
state law for so long as the Trust is solvent and does not foresee
becoming insolvent.
(ii) 1940 ACT MATTERS. Unless a higher percentage is provided
for in the Declaration or these By-laws, (A) the affirmative vote of
the Holders of at least a majority of the Preferred Shares, including
Municipal Preferred, outstanding at the time, voting as a separate
class, shall be required to approve any conversion of the Trust from a
closed-end to an open-end investment company and (B) the affirmative
vote of the Holders of a "majority of the outstanding Preferred
Shares," including Municipal Preferred, voting as a separate class,
shall be required to approve any plan of reorganization (as such term
is used in the 1940 Act) adversely affecting such shares. The
affirmative vote of the Holders of a "majority of the outstanding
Preferred Shares," including Municipal Preferred, voting as a separate
class, shall be required to approve any action not described in the
first sentence of this paragraph 5(c)(ii) requiring a vote of security
holders of the Trust under Section 13(a) of the 1940 Act. For purposes
of the foregoing, "majority of the outstanding Preferred Shares" means
(i) 67% or more of such shares present at a meeting, if the Holders of
more than 50% of such shares are present or represented by proxy, or
(ii) more than 50% of such shares, whichever is less. In the event a
vote of Holders of Municipal Preferred is required pursuant to the
provisions of Section 13(a) of the 1940 Act, the Trust shall, not later
than ten Business Days prior to the date on which such vote is to be
taken, notify Moody's (if Moody's is then rating the shares of
Municipal Preferred) and S&P (if S&P is then rating the shares of
Municipal Preferred) that such vote is to be taken and the nature of
the action with respect to which such vote is to be taken. The Trust
shall, not later than ten Business Days after the date on which such
vote is taken, notify Moody's (if Moody's is then rating the shares of
Municipal Preferred) and S&P (if S&P is then rating the shares of
Municipal Preferred) of the results of such vote.
(iii) SEPARATE VOTE BY SERIES. To the extent permitted by the
1940 Act, with respect to actions set forth in paragraph 5(c)(i) and
paragraph 5(c)(ii) above (including amendment, alteration or repeal of
the provisions of the Declaration of Trust or the ByLaws, whether by
merger, consolidation or otherwise) that would adversely affect the
rights of one or more series of
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Municipal Preferred (the "Affected Series") in a manner different from
any other series of Municipal Preferred, the Trust will not approve any
such action without the affirmative vote or consent of the Holders of
at least a majority of the shares of each such Affected Series
outstanding at the time, in person or proxy, either in writing or at a
meeting (each such Affected Series voting as a separate class).
(d) BOARD MAY TAKE CERTAIN ACTIONS WITHOUT SHAREHOLDER APPROVAL. The
Board of Trustees, without the vote or consent of the shareholders of the Trust,
may from time to time amend, alter or repeal any or all of the definitions of
the terms listed below, or any provision of this Section 12.1 viewed by Moody's
or S&P as a predicate for any such definition, and any such amendment,
alteration or repeal will not be deemed to affect the preferences, rights or
powers of shares of Municipal Preferred or the Holders thereof; provided,
however, that the Board of Trustees receives written confirmation from (i)
Moody's (such confirmation being required to be obtained only in the event
Moody's is rating the shares of Municipal Preferred and in no event being
required to be obtained in the case of the definitions of (x) Deposit
Securities, Discounted Value, Receivables for Municipal Obligations Sold and
Other Issues as such terms apply to S&P Eligible Asset and (y) S&P Discount
Factor, S&P Eligible Asset, S&P Exposure Period and S&P Volatility Factor) and
(ii) S&P (such confirmation being required to be obtained only in the event S&P
is rating the shares of Municipal Preferred and in no event being required to be
obtained in the case of the definitions of (x) Discounted Value, Receivables for
Municipal Obligations Sold and Other Issues as such terms apply to Moody's
Eligible Asset, and (y) Moody's Discount Factor, Moody's Eligible Asset, Moody's
Exposure Period and Moody's Volatility Factor) that any such amendment,
alteration or repeal would not impair the ratings then assigned by Moody's or
S&P, as the case may be, to shares of Municipal Preferred:
Deposit Securities
Discounted Value
Escrowed Bonds
Market Value
Maximum Potential Gross-up Payment Liability
Municipal Preferred Basic Maintenance
Amount
Municipal Preferred Basic Maintenance Cure
Date
Municipal Preferred Basic Maintenance Report
Moody's Discount Factor
Moody's Eligible Asset
Moody's Exposure Period
Moody's Volatility Factor
1940 Act Cure Date
1940 Act Municipal Preferred Asset Coverage
Other Issues
Quarterly Valuation Date
Receivables for Municipal Obligations Sold
S&P Discount Factor
S&P Eligible Asset
S&P Exposure Period
S&P Volatility Factor
Valuation Date
Volatility Factor
(e) VOTING RIGHTS SET FORTH HEREIN ARE SOLE VOTING RIGHTS. Unless
otherwise required by law, these By-laws or by the Declaration, the Holders of
shares of Municipal Preferred shall not have any relative rights or preferences
or other special rights other than those specifically set forth herein.
(f) NO PREEMPTIVE RIGHTS OR CUMULATIVE VOTING. The Holders of shares of
Municipal Preferred shall have no preemptive rights or rights to cumulative
voting.
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(g) VOTING FOR TRUSTEES SOLE REMEDY FOR TRUST'S FAILURE TO PAY
DIVIDENDS. In the event that the Trust fails to pay any dividends on the shares
of Municipal Preferred, the exclusive remedy of the Holders shall be the right
to vote for Trustees pursuant to the provisions of this paragraph 5.
(h) HOLDERS ENTITLED TO VOTE. For purposes of determining any rights of
the Holders to vote on any matter, whether such right is created by this Section
12.1, by the other provisions of these By-laws or the Declaration, by statute or
otherwise, no Holder shall be entitled to vote any share of Municipal Preferred
and no share of Municipal Preferred shall be deemed to be "outstanding" for the
purpose of voting or determining the number of shares required to constitute a
quorum if, prior to or concurrently with the time of determination of shares
entitled to vote or shares deemed outstanding for quorum purposes, as the case
may be, the requisite Notice of Redemption with respect to such shares shall
have been mailed as provided in paragraph 11(c) of Part I of this Section 12.1
and the Redemption Price for the redemption of such shares shall have been
deposited in trust with the Auction Agent for that purpose. No shares of
Municipal Preferred held by the Trust or any affiliate of the Trust (except for
shares held by a Broker-Dealer that is an affiliate of the Trust for the account
of its customers) shall have any voting rights or be deemed to be outstanding
for voting or other purposes.
(i) Notwithstanding any provision of these By-Laws to the contrary,
neither the Holders of Municipal Preferred, nor the Holders of any one or more
series thereof, shall be entitled to vote as a separate class with respect to
any matter, if such separate class vote is prohibited by the 1940 Act.
6. 1940 ACT MUNICIPAL PREFERRED ASSET COVERAGE.
The Trust shall maintain, as of the last Business Day of each month in
which any share of Municipal Preferred is outstanding, the 1940 Act Municipal
Preferred Asset Coverage.
7. MUNICIPAL PREFERRED BASIC MAINTENANCE AMOUNT.
(a) So long as shares of Municipal Preferred are outstanding, the Trust
shall maintain, on each Valuation Date, and shall verify to its satisfaction
that it is maintaining on such Valuation Date, (i) S&P Eligible Assets having an
aggregate Discounted Value equal to or greater than the Municipal Preferred
Basic Maintenance Amount (if S&P is then rating the shares of Municipal
Preferred) and (ii) Moody's Eligible Assets having an aggregate Discounted Value
equal to or greater than the Municipal Preferred Basic Maintenance Amount (if
Moody's is then rating the shares of Municipal Preferred).
(b) On or before 5:00 P.M., New York City time, on the third Business
Day after a Valuation Date on which the Trust fails to satisfy the Municipal
Preferred Basic Maintenance Amount, and on the third Business Day after the
Municipal Preferred Basic Maintenance Cure Date with respect to such Valuation
Date, the Trust shall complete and deliver to S&P (if S&P is then rating the
shares of Municipal Preferred), Moody's (if Moody's is then rating the shares of
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Municipal Preferred) and the Auction Agent (if either S&P or Moody's is then
rating the shares of Municipal Preferred) a Municipal Preferred Basic
Maintenance Report as of the date of such failure or such Municipal Preferred
Basic Maintenance Cure Date, as the case may be, which will be deemed to have
been delivered to the Auction Agent if the Auction Agent receives a copy of
telecopy, telex or other electronic transcription thereof and on the same day
the Trust mails to the Auction Agent for delivery on the next Business Day the
full Municipal Preferred Basic Maintenance Report.
The Trust shall also deliver a Municipal Preferred Basic Maintenance
Report to (i) the Auction Agent (if either Moody's or S&P is then rating the
shares of Municipal Preferred) as of (A) the fifteenth day of each month (or, if
such day is not a Business Day, the next succeeding Business Day) and (B) the
last Business Day of each month, (ii) Moody's (if Moody's is then rating the
shares of Municipal Preferred) and S&P (if S&P is then rating the shares of
Municipal Preferred) as of any Quarterly Valuation Date, in each case on or
before the third Business Day after such day, and (iii) S&P and Moody's, if and
when requested for any Valuation Date, on or before the third Business Day after
such request. A failure by the Trust to deliver a Municipal Preferred Basic
Maintenance Report pursuant to the preceding sentence shall be deemed to be
delivery of a Municipal Preferred Basic Maintenance Report indicating the
Discounted Value for all assets of the Trust is less than the Municipal
Preferred Basic Maintenance Amount, as of the relevant Valuation Date.
(c) Within ten Business Days after the date of delivery of a Municipal
Preferred Basic Maintenance Report in accordance with subparagraph (b) of this
paragraph 7 relating to a Quarterly Valuation Date, the Trust shall cause the
Independent Accountant to confirm in writing to S&P (if S&P is then rating the
shares of Municipal Preferred), Moody's (if Moody's is then rating the shares of
Municipal Preferred) and the Auction Agent (if either S&P or Moody's is then
rating the shares of Municipal Preferred) (i) the mathematical accuracy of the
calculations reflected in such Report (and in any other Municipal Preferred
Basic Maintenance Report, randomly selected by the Independent Accountant, that
was delivered by the Trust during the quarter ending on such Quarterly Valuation
Date) and (ii) that, in such Report (and in such randomly selected Report), the
Trust determined in accordance with this paragraph whether the Trust had, at
such Quarterly Valuation Date (and at the Valuation Date addressed in such
randomly-selected Report), S&P Eligible Assets (if S&P is then rating the shares
of Municipal Preferred) of an aggregate Discounted Value at least equal to the
Municipal Preferred Basic Maintenance Amount and Moody's Eligible Assets (if
Moody's is then rating the shares of Municipal Preferred) of an aggregate
Discounted Value at least equal to the Municipal Preferred Basic Maintenance
Amount (such confirmation being herein called the "Accountant's Confirmation").
(d) Within ten Business Days after the date of delivery of a Municipal
Preferred Basic Maintenance Report in accordance with subparagraph (b) of this
paragraph 7 relating to any Valuation Date on which the Trust failed to satisfy
the Municipal Preferred Basic Maintenance Amount, and relating to the Municipal
Preferred Basic Maintenance Cure Date with respect to such failure to satisfy
the Municipal Preferred Basic Maintenance Amount, the Trust shall cause
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the Independent Accountant to provide to S&P (if S&P is then rating the shares
of Municipal Preferred), Moody's (if Moody's is then rating the shares of
Municipal Preferred) and the Auction Agent (if either S&P or Moody's is then
rating the shares of Municipal Preferred) an Accountant's Confirmation as to
such Municipal Preferred Basic Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to subparagraph
(c) or (d) of this paragraph 7 shows that an error was made in the Municipal
Preferred Basic Maintenance Report for a particular Valuation Date for which
such Accountant's Confirmation was required to be delivered, or shows that a
lower aggregate Discounted Value for the aggregate of all S&P Eligible Assets
(if S&P is then rating the shares of Municipal Preferred) or Moody's Eligible
Assets (if Moody's is then rating the shares of Municipal Preferred), as the
case may be, of the Trust was determined by the Independent Accountant, the
calculation or determination made by such Independent Accountant shall be final
and conclusive and shall be binding on the Trust, and the Trust shall
accordingly amend and deliver the Municipal Preferred Basic Maintenance Report
to S&P (if S&P is then rating the shares of Municipal Preferred), Moody's (if
Moody's is then rating the shares of Municipal Preferred) and the Auction Agent
(if either S&P or Moody's is then rating the shares of Municipal Preferred)
promptly following receipt by the Trust of such Accountant's Confirmation.
(f) On or before 5:00 p.m., New York City time, on the first Business
Day after the Date of Original Issue of any shares of Municipal Preferred, the
Trust shall complete and deliver to S&P (if S&P is then rating the shares of
Municipal Preferred) and Moody's (if Moody's is then rating the shares of
Municipal Preferred) a Municipal Preferred Basic Maintenance Report as of the
close of business on such Date of Original Issue. Within five Business Days of
such Date of Original Issue, the Trust shall cause the Independent Accountant to
confirm in writing to S&P (if S&P is then rating the shares of Municipal
Preferred) (i) the mathematical accuracy of the calculations reflected in such
Report and (ii) that the Discounted Value of S&P Eligible Assets reflected
thereon equals or exceeds the Municipal Preferred Basic Maintenance Amount
reflected thereon.
(g) On or before 5:00 p.m., New York City time, on the third Business
Day after either (i) the Trust shall have redeemed Common Shares or (ii) the
ratio of the Discounted Value of S&P Eligible Assets or the Discounted Value of
Moody's Eligible Assets to the Municipal Preferred Basic Maintenance Amount is
less than or equal to 105%, the Trust shall complete and deliver to S&P (if S&P
is then rating the shares of Municipal Preferred) or Moody's (if Moody's is then
rating the shares of Municipal Preferred), as the case may be, a Municipal
Preferred Basic Maintenance Report as of the date of either such event.
8. [RESERVED].
9. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS.
(a) DIVIDENDS ON PREFERRED SHARES OTHER THAN MUNICIPAL PREFERRED.
Except as set forth in the next sentence, no dividends shall be declared or paid
or set apart for payment on the shares of
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any class or series of shares of beneficial interest of the Trust ranking, as to
the payment of dividends, on a parity with shares of Municipal Preferred for any
period unless full cumulative dividends have been or contemporaneously are
declared and paid on the shares of each series of Municipal Preferred through
its most recent Dividend Payment Date. When dividends are not paid in full upon
the shares of each series of Municipal Preferred through its most recent
Dividend Payment Date or upon the shares of any other class or series of shares
of beneficial interest of the Trust ranking on a parity as to the payment of
dividends with shares of Municipal Preferred through their most recent
respective dividend payment dates, all dividends declared upon shares of
Municipal Preferred and any other such class or series of shares of beneficial
interest ranking on a parity as to the payment of dividends with shares of
Municipal Preferred shall be declared pro rata so that the amount of dividends
declared per share on shares of Municipal Preferred and such other class or
series of shares of beneficial interest shall in all cases bear to each other
the same ratio that accumulated dividends per share on the shares of Municipal
Preferred and such other class or series of shares of beneficial interest bear
to each other (for purposes of this sentence, the amount of dividends declared
per share of Municipal Preferred shall be based on the Applicable Rate for such
shares for the Dividend Periods during which dividends were not paid in full).
(b) DIVIDENDS AND OTHER DISTRIBUTIONS WITH RESPECT TO COMMON SHARES
UNDER THE 1940 ACT. The Board of Trustees shall not declare any dividend (except
a dividend payable in Common Shares), or declare any other distribution, upon
the Common Shares, or purchase Common Shares, unless in every such case the
Preferred Shares have, at the time of any such declaration or purchase, an asset
coverage (as defined in and determined pursuant to the 1940 Act) of at least
200% (or such other asset coverage as may in the future be specified in or under
the 1940 Act as the minimum asset coverage for senior securities which are
shares or stock of a closed-end investment company as a condition of declaring
dividends on its common shares or stock) after deducting the amount of such
dividend, distribution or purchase price, as the case may be.
(c) OTHER RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS. For so
long as any share of Municipal Preferred is outstanding, and except as set forth
in subparagraph (a) of this paragraph 9 and paragraph 12(c) of Part I of this
Section 12.1, (A) the Trust shall not declare, pay or set apart for payment any
dividend or other distribution (other than a dividend or distribution paid in
shares of, or in options, warrants or rights to subscribe for or purchase,
Common Shares or other shares, if any, ranking junior to the shares of Municipal
Preferred as to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up) in respect of the Common Shares or any
other shares of the Trust ranking junior to or on a parity with the shares of
Municipal Preferred as to the payment of dividends or the distribution of assets
upon dissolution, liquidation or winding up, or call for redemption, redeem,
purchase or otherwise acquire for consideration any Common Shares or any other
such junior shares (except by conversion into or exchange for shares of the
Trust ranking junior to the shares of Municipal Preferred as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up), or any such parity shares (except by conversion into or exchange
for shares of the Trust ranking junior to or on a parity with Municipal
Preferred as to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up), unless (i) full cumulative
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dividends on shares of each series of Municipal Preferred through its most
recently ended Dividend Period shall have been paid or shall have been declared
and sufficient funds for the payment thereof deposited with the Auction Agent
and (ii) the Trust has redeemed the full number of shares of Municipal Preferred
required to be redeemed by any provision for mandatory redemption pertaining
thereto, and (B) the Trust shall not declare, pay or set apart for payment any
dividend or other distribution (other than a dividend or distribution paid in
shares of, or in options, warrants or rights to subscribe for or purchase,
Common Shares or other shares, if any, ranking junior to shares of Municipal
Preferred as to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up) in respect of Common Shares or any other
shares of the Trust ranking junior to shares of Municipal Preferred as to the
payment of dividends or the distribution of assets upon dissolution, liquidation
or winding up, or call for redemption, redeem, purchase or otherwise acquire for
consideration any Common Shares or any other such junior shares (except by
conversion into or exchange for shares of the Trust ranking junior to shares of
Municipal Preferred as to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up), unless immediately after
such transaction the Discounted Value of Moody's Eligible Assets (if Moody's is
then rating the shares of Municipal Preferred) and S&P Eligible Assets (if S&P
is then rating the shares of Municipal Preferred) would each at least equal the
Municipal Preferred Basic Maintenance Amount.
10. RATING AGENCY RESTRICTIONS.
For so long as any shares of Municipal Preferred are outstanding and
Moody's or S&P, or both, are rating such shares, the Trust will not, unless it
has received written confirmation from Moody's or S&P, or both, as appropriate,
that any such action would not impair the ratings then assigned by such rating
agency to such shares, engage in any one or more of the following transactions:
(a) purchase or sell futures contracts, write, purchase or sell options
on futures contracts or write put options (except covered put options) or call
options (except covered call options) on portfolio securities except that the
Trust may purchase or sell futures contracts based on the Bond Buyer Municipal
Bond Index (the "Municipal Index") or United States Treasury Bonds or Notes
("Treasury Bonds") and write, purchase or sell put and call options on such
contracts (collectively, "Hedging Transactions"), subject to the following
limitations:
(i) the Trust will not engage in any Hedging Transaction based
on the Municipal Index (other than transactions which terminate a
futures contract or option held by the Trust by the Trust's taking an
opposite position thereto ("Closing Transactions")), which would cause
the Trust at the time of such transaction to own or have sold the least
of (A) more than 1,000 outstanding futures contracts based on the
Municipal Index, (B) outstanding futures contracts based on the
Municipal Index exceeding in number 25% of the quotient of the Market
Value of the Trust's total assets divided by $1,000 or (C) outstanding
futures contracts based on the Municipal Index exceeding in number 10%
of the average number of daily open interest futures
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contracts based on the Municipal Index in the 30 days preceding the
time of effecting such transaction as reported by The Wall Street
Journal.
(ii) the Trust will not engage in any Hedging Transaction
based on Treasury Bonds (other than Closing Transactions) which would
cause the Trust at the time of such transaction to own or have sold the
lesser of (A) outstanding futures contracts based on Treasury Bonds
exceeding in number 50% of the quotient of the Market Value of the
Trust's total assets divided by $100,000 ($200,000 in the case of a
two-year United States Treasury Note) or (B) outstanding futures
contracts based on Treasury Bonds exceeding in number 10% of the
average number of daily traded futures contracts based on Treasury
Bonds in the 30 days preceding the time of effecting such transaction
as reported by The Wall Street Journal;
(iii) the Trust will engage in Closing Transactions to close
out any outstanding futures contract which the Trust owns or has sold
or any outstanding option thereon owned by the Trust in the event (A)
the Trust does not have S&P Eligible Assets or Moody's Eligible Assets,
as the case may be, with an aggregate Discounted Value equal to or
greater than the Municipal Preferred Basic Maintenance Amount on two
consecutive Valuation Dates and (B) the Trust is required to pay
Variation Margin on the second such Valuation Date;
(iv) the Trust will engage in a Closing Transaction to close
out any outstanding futures contract or option thereon in the month
prior to the delivery month under the terms of such futures contract or
option thereon unless the Trust holds the securities deliverable under
such terms; and
(v) when the Trust writes a futures contract or option
thereon, it will either maintain an amount of cash, cash equivalents or
high grade (rated A or better by S&P or Moody's, as the case may be),
fixed-income securities in a segregated account with the Trust's
custodian, so that the amount so segregated plus the amount of Initial
Margin and Variation Margin held in the account of or on behalf of the
Trust's broker with respect to such futures contract or option equals
the Market Value of the futures contract or option, or, in the event
the Trust writes a futures contract or option thereon which requires
delivery of an underlying security, it shall hold such underlying
security in its portfolio.
For purposes of determining whether the Trust has S&P Eligible Assets
or Moody's Eligible Assets, as the case may be, with a Discounted Value that
equals or exceeds the Municipal Preferred Basic Maintenance Amount, the
Discounted Value of cash or securities held for the payment of Initial Margin or
Variation Margin shall be zero and the aggregate Discounted Value of S&P
Eligible Assets or Moody's Eligible Assets, as the case may be, shall be reduced
by an amount equal to (I) 30% of the aggregate settlement value, as marked to
market, of any outstanding futures contracts based on the Municipal Index which
are owned
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by the Trust plus (II) 25% of the aggregate settlement value, as marked to
market, of any outstanding futures contracts based on Treasury Bonds which
contracts are owned by the Trust.
(b) borrow money, except that the Trust may, without obtaining the
written confirmation described above, borrow money for the purpose of clearing
securities transactions if (i) the Municipal Preferred Basic Maintenance Amount
would continue to be satisfied after giving effect to such borrowing (which
shall mean, for purposes of the calculation of the Municipal Preferred Basic
Maintenance Amount, adding the amount of the liability for such borrowing to the
calculation of the Municipal Preferred Basic Maintenance Amount under
subparagraph (F) under the definition of that term in Part I of this Section
12.1) and (ii) such borrowing (A) is privately arranged with a bank or other
person and is evidenced by a promissory note or other evidence of indebtedness
that is not intended to be publicly distributed or (B) is for "temporary
purposes," is evidenced by a promissory note or other evidence of indebtedness
and is an amount not exceeding 5% of the value of the total assets of the Trust
at the time of the borrowing; for purposes of the foregoing, "temporary purpose"
means that the borrowing is to be repaid within sixty days and is not to be
extended or renewed;
(c) issue additional shares of any series of Municipal Preferred or any
class or series of shares ranking prior to or on a parity with shares of
Municipal Preferred with respect to the payment of dividends or the distribution
of assets upon dissolution, liquidation or winding up of the Trust, or reissue
any shares of Municipal Preferred previously purchased or redeemed by the Trust;
(d) engage in any short sales of securities;
(e) lend securities;
(f) merge or consolidate into or with any corporation;
(g) change the pricing service (currently both Muller Data Corporation
and Standard & Poor's J.J. Kenny Evaluation Services are used by the Trust)
referred to in the definition of Market Value to a pricing service other than
Muller Data Corporation or Standard & Poor's J.J. Kenny Evaluation Services; or
(h) enter into reverse repurchase agreements.
11. REDEMPTION.
(a) OPTIONAL REDEMPTION.
(i) Subject to the provisions of subparagraph (v) of this
subparagraph (a), shares of Municipal Preferred of any series may be
redeemed, at the option of the Trust, as a whole or from time to time
in part, on the second Business Day preceding any Dividend Payment Date
for shares of such series, out of funds legally available therefor, at
a
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redemption price per share equal to the sum of $25,000 plus an amount
equal to accumulated but unpaid dividends thereon (whether or not
earned or declared) to (but not including) the date fixed for
redemption; provided, however, that (1) shares of a series of Municipal
Preferred may not be redeemed in part if after such partial redemption
fewer than 500 shares of such series remain outstanding; (2) unless
otherwise provided herein, shares of a series of Municipal Preferred
are redeemable by the Trust during the Initial Rate Period thereof only
on the second Business Day next preceding the last Dividend Payment
Date for such Initial Rate Period; and (3) subject to subparagraph (ii)
of this subparagraph (a), the Notice of Special Rate Period relating to
a Special Rate Period of shares of a series of Municipal Preferred, as
delivered to the Auction Agent and filed with the Secretary of the
Trust, may provide that shares of such series shall not be redeemable
during the whole or any part of such Special Rate Period (except as
provided in subparagraph (iv) of this subparagraph (a)) or shall be
redeemable during the whole or any part of such Special Rate Period
only upon payment of such redemption premium or premiums as shall be
specified therein ("Special Redemption Provisions").
(ii) A Notice of Special Rate Period relating to shares of a
series of Municipal Preferred for a Special Rate Period thereof may
contain Special Redemption Provisions only if the Trust's Board of
Trustees, after consultation with the Broker-Dealer or Broker- Dealers
for such Special Rate Period of shares of such series, determines that
such Special Redemption Provisions are in the best interest of the
Trust.
(iii) If fewer than all of the outstanding shares of a series
of Municipal Preferred are to be redeemed pursuant to subparagraph (i)
of this subparagraph (a), the number of shares of such series to be
redeemed shall be determined by the Board of Trustees, and such shares
shall be redeemed pro rata from the Holders of shares of such series in
proportion to the number of shares of such series held by such Holders.
(iv) Subject to the provisions of subparagraph (v) of this
subparagraph (a), shares of any series of Municipal Preferred may be
redeemed, at the option of the Trust, as a whole but not in part, out
of funds legally available therefor, on the first day following any
Dividend Period thereof included in a Rate Period consisting of more
than 364 Rate Period Days if, on the date of determination of the
Applicable Rate for shares of such series for such Rate Period, such
Applicable Rate equaled or exceeded on such date of determination the
Treasury Note Rate for such Rate Period, at a redemption price per
share equal to the sum of $25,000 plus an amount equal to accumulated
but unpaid dividends thereon (whether or not earned or declared) to
(but not including) to the date fixed for redemption.
(v) The Trust may not on any date mail a Notice of Redemption
pursuant to subparagraph (c) of this paragraph 11 in respect of a
redemption contemplated to be effected pursuant to this subparagraph
(a) unless on such date (a) the Trust has available Deposit Securities
with maturity or tender dates not later than the day preceding the
applicable redemption date and having a value not less than the amount
(including any
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applicable premium) due to Holders of shares of Municipal Preferred by
reason of the redemption of such shares on such redemption date and (b)
the Discounted Value of Moody's Eligible Assets (if Moody's is then
rating the shares of Municipal Preferred) and the Discounted Value of
S&P Eligible Assets (if S&P is then rating the shares of Municipal
Preferred) each at least equal the Municipal Preferred Basic
Maintenance Amount, and would at least equal the Municipal Preferred
Basic Maintenance Amount immediately subsequent to such redemption if
such redemption were to occur on such date. For purposes of determining
in clause (b) of the preceding sentence whether the Discounted Value of
Moody's Eligible Assets at least equals the Municipal Preferred Basic
Maintenance Amount, the Moody's Discount Factors applicable to Moody's
Eligible Assets shall be determined by reference to the first Exposure
Period longer than the Exposure Period then applicable to the Trust, as
described in the definition of Moody's Discount Factor herein.
(b) MANDATORY REDEMPTION. The Trust shall redeem, at a redemption price
equal to $25,000 per share plus accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date fixed by the
Board of Trustees for redemption, certain of the shares of Municipal Preferred,
if the Trust fails to have either Moody's Eligible Assets with a Discounted
Value, or S&P Eligible Assets with a Discounted Value, greater than or equal to
the Municipal Preferred Basic Maintenance Amount or fails to maintain the 1940
Act Municipal Preferred Asset Coverage, in accordance with the requirements of
the rating agency or agencies then rating the shares of Municipal Preferred, and
such failure is not cured on or before the Municipal Preferred Basic Maintenance
Cure Date or the 1940 Act Cure Date, as the case may be (the "Cure Date"). The
number of shares of Municipal Preferred to be redeemed shall be equal to the
lesser of (i) the minimum number of shares of Municipal Preferred, together with
all other Preferred Shares subject to redemption or retirement, the redemption
of which, if deemed to have occurred immediately prior to the opening of
business on the Cure Date, would have resulted in the Trust's having both
Moody's Eligible Assets with a Discounted Value, and S&P Eligible Assets with a
Discounted Value, greater than or equal to the Municipal Preferred Basic
Maintenance Amount or maintaining the 1940 Act Municipal Preferred Asset
Coverage, as the case may be, on such Cure Date (provided, however, that if
there is no such minimum number of shares of Municipal Preferred and other
Preferred Shares the redemption or retirement of which would have had such
result, all shares of Municipal Preferred and Preferred Shares then outstanding
shall be redeemed), and (ii) the maximum number of shares of Municipal
Preferred, together with all other Preferred Shares subject to redemption or
retirement, that can be redeemed out of funds expected to be legally available
therefor in accordance with the Declaration, these By-laws and applicable law.
In determining the shares of Municipal Preferred required to be redeemed in
accordance with the foregoing, the Trust shall allocate the number required to
be redeemed to satisfy the Municipal Preferred Basic Maintenance Amount or the
1940 Act Municipal Preferred Asset Coverage, as the case may be, pro rata among
shares of Municipal Preferred and other Preferred Shares (and, then pro rata
among each series of Municipal Preferred) subject to redemption or retirement.
The Trust shall effect such redemption on the date fixed by the Trust therefor,
which date shall not be earlier than 20 days nor later than 40 days after such
Cure Date, except that if the Trust does not have funds legally available for
the
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redemption of all of the required number of shares of Municipal Preferred and
other Preferred Shares which are subject to redemption or retirement or the
Trust otherwise is unable to effect such redemption on or prior to 40 days after
such Cure Date, the Trust shall redeem those shares of Municipal Preferred and
other Preferred Shares which it was unable to redeem on the earliest practicable
date on which it is able to effect such redemption. If fewer than all of the
outstanding shares of a series of Municipal Preferred are to be redeemed
pursuant to this subparagraph (b), the number of shares of such series to be
redeemed shall be redeemed pro rata from the Holders of shares of such series in
proportion to the number of shares of such series held by such Holders.
(c) NOTICE OF REDEMPTION. If the Trust shall determine or be required
to redeem shares of a series of Municipal Preferred pursuant to subparagraph (a)
or (b) of this paragraph 11, it shall mail a Notice of Redemption with respect
to such redemption by first class mail, postage prepaid, to each Holder of the
shares of such series to be redeemed, at such Holder's address as the same
appears on the record books of the Trust on the record date established by the
Board of Trustees. Such Notice of Redemption shall be so mailed not less than 20
nor more than 45 days prior to the date fixed for redemption. Each such Notice
of Redemption shall state: (i) the redemption date; (ii) the number of shares of
Municipal Preferred to be redeemed and the series thereof; (iii) the CUSIP
number for shares of such series; (iv) the Redemption Price; (v) the place or
places where the certificate(s) for such shares (properly endorsed or assigned
for transfer, if the Board of Trustees shall so require and the Notice of
Redemption shall so state) are to be surrendered for payment of the Redemption
Price; (vi) that dividends on the shares to be redeemed will cease to accumulate
on such redemption date; and (vii) the provisions of this paragraph 11 under
which such redemption is made. If fewer than all shares of a series of Municipal
Preferred held by any Holder are to be redeemed, the Notice of Redemption mailed
to such Holder shall also specify the number of shares of such series to be
redeemed from such Holder. The Trust may provide in any Notice of Redemption
relating to an optional redemption contemplated to be effected pursuant to
subparagraph (a) of this paragraph 11 that such redemption is subject to one or
more conditions precedent and that the Trust shall not be required to make such
redemption unless each such condition shall have been satisfied at the time or
times and in the manner specified in such Notice of Redemption.
(d) NO REDEMPTION UNDER CERTAIN CIRCUMSTANCES. Notwithstanding the
provisions of subparagraphs (a) or (b) of this paragraph 11, if any dividends on
shares of a series of Municipal Preferred (whether or not earned or declared)
are in arrears, no shares of such series shall be redeemed unless all
outstanding shares of such series are simultaneously redeemed, and the Trust
shall not purchase or otherwise acquire any shares of such series; provided,
however, that the foregoing shall not prevent the purchase or acquisition of all
outstanding shares of such series pursuant to the successful completion of an
otherwise lawful purchase or exchange offer made on the same terms to, and
accepted by, Holders of all outstanding shares of such series.
(e) ABSENCE OF FUNDS AVAILABLE FOR REDEMPTION. To the extent that any
redemption for which Notice of Redemption has been mailed is not made by reason
of the absence of legally available funds therefor in accordance with the
Declaration, these By-laws and applicable law, such redemption shall be made as
soon as practicable to the extent such funds become available.
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Failure to redeem shares of Municipal Preferred shall be deemed to occur if at
any time after the date specified for redemption in a Notice of Redemption the
Trust shall have failed, for any reason whatsoever, to deposit in trust with the
Auction Agent the Redemption Price with respect to any shares of which such
Notice of Redemption has been mailed; provided, however, that the foregoing
shall not apply in the case of the Trust's failure to deposit in trust with the
Auction Agent the Redemption Price with respect to any shares where (1) the
Notice of Redemption relating to such redemption provided that such redemption
was subject to one or more conditions precedent and (2) any such condition
precedent shall not have been satisfied at the time or times and in the manner
specified in such Notice of Redemption. Notwithstanding the fact that the Trust
may not have redeemed shares of Municipal Preferred for which a Notice of
Redemption has been mailed, dividends may be declared and paid on shares of
Municipal Preferred and shall include those shares of Municipal Preferred for
which a Notice of Redemption has been mailed.
(f) AUCTION AGENT AS TRUSTEE OF REDEMPTION PAYMENTS BY TRUST. All
moneys paid to the Auction Agent for payment of the Redemption Price of shares
of Municipal Preferred called for redemption shall be held in trust by the
Auction Agent for the benefit of Holders of shares so to be redeemed.
(g) SHARES FOR WHICH NOTICE OF REDEMPTION HAS BEEN GIVEN ARE NO LONGER
OUTSTANDING. Provided a Notice of Redemption has been mailed pursuant to
subparagraph (c) of this paragraph 11, upon the deposit with the Auction Agent
(on the Business Day next preceding the date fixed for redemption thereby, in
funds available on the next Business Day in The City of New York, New York) of
funds sufficient to redeem the shares of Municipal Preferred that are the
subject of such notice, dividends on such shares shall cease to accumulate and
such shares shall no longer be deemed to be outstanding for any purpose, and all
rights of the Holders of the shares so called for redemption shall cease and
terminate, except the right of such Holders to receive the Redemption Price, but
without any interest or other additional amount, except as provided in
paragraphs 2(e)(i) and 3 of Part I of this Section 12.1. Upon surrender in
accordance with the Notice of Redemption of the certificates for any shares so
redeemed (properly endorsed or assigned for transfer, if the Board of Trustees
shall so require and the Notice of Redemption shall so state), the Redemption
Price shall be paid by the Auction Agent to the Holders of shares of Municipal
Preferred subject to redemption. In the case that fewer than all of the shares
represented by any such certificate are redeemed, a new certificate shall be
issued, representing the unredeemed shares, without cost to the Holder thereof.
The Trust shall be entitled to receive from the Auction Agent, promptly after
the date fixed for redemption, any cash deposited with the Auction Agent in
excess of (i) the aggregate Redemption Price of the shares of Municipal
Preferred called for redemption on such date and (ii) all other amounts to which
Holders of shares of Municipal Preferred called for redemption may be entitled.
Any funds so deposited that are unclaimed at the end of 90 days from such
redemption date shall, to the extent permitted by law, be repaid to the Trust,
after which time the Holders of shares of Municipal Preferred so called for
redemption may look only to the Trust for payment of the Redemption Price and
all other amounts to which they may be entitled. The Trust shall be entitled to
receive, from time to time after the date fixed for redemption, any interest on
the funds so deposited.
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(h) COMPLIANCE WITH APPLICABLE LAW. In effecting any redemption
pursuant to this paragraph 11, the Trust shall use its best efforts to comply
with all applicable conditions precedent to effecting such redemption under the
1940 Act and any applicable Massachusetts law, but shall effect no redemption
except in accordance with the 1940 Act and any applicable Massachusetts law.
(i) ONLY WHOLE SHARES OF MUNICIPAL PREFERRED MAY BE REDEEMED. In the
case of any redemption pursuant to this paragraph 11, only whole shares of
Municipal Preferred shall be redeemed, and in the event that any provision of
the Declaration or these By-laws would require redemption of a fractional share,
the Auction Agent shall be authorized to round up so that only whole shares are
redeemed.
12. LIQUIDATION RIGHTS.
(a) RANKING. The shares of a series of Municipal Preferred shall rank
on a parity with each other, with shares of any other series of Municipal
Preferred and with shares of any other series of Preferred Shares as to the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust.
(b) DISTRIBUTIONS UPON LIQUIDATION. Upon the dissolution, liquidation
or winding up of the affairs of the Trust, whether voluntary or involuntary, the
Holders of shares of Municipal Preferred then outstanding shall be entitled to
receive and to be paid out of the assets of the Trust available for distribution
to its shareholders, before any payment or distribution shall be made on the
Common Shares or on any other class of shares of the Trust ranking junior to the
Municipal Preferred upon dissolution, liquidation or winding up, an amount equal
to the Liquidation Preference with respect to such shares plus an amount equal
to all dividends thereon (whether or not earned or declared) accumulated but
unpaid to (but not including) the date of final distributions in same-day funds,
together with any payments required to be made pursuant to paragraph 3 of Part I
of this Section 12.1 in connection with the liquidation of the Trust. After the
payment to the Holders of the shares of Municipal Preferred of the full
preferential amounts provided for in this subparagraph (b), the holders of
Municipal Preferred as such shall have no right or claim to any of the remaining
assets of the Trust.
(c) PRO RATA DISTRIBUTIONS. In the event the assets of the Trust
available for distribution to the Holders of shares of Municipal Preferred upon
any dissolution, liquidation or winding up of the affairs of the Trust, whether
voluntary or involuntary, shall be insufficient to pay in full all amounts to
which such Holders are entitled pursuant to subparagraph (b) of this paragraph
12, no such distribution shall be made on account of any shares of any other
class or series of Preferred Shares ranking on a parity with the shares of
Municipal Preferred with respect to the distribution of assets upon such
dissolution, liquidation or winding up unless proportionate distributive amounts
shall be paid on account of the shares of Municipal Preferred, ratably, in
proportion to the full distributable amounts for which holders of all such
parity shares are respectively entitled upon such dissolution, liquidation or
winding up.
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(d) RIGHTS OF JUNIOR SHARES. Subject to the rights of the holders of
shares of any series or class or classes of shares ranking on a parity with the
shares of Municipal Preferred with respect to the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Trust, after
payment shall have been made in full to the Holders of the shares of Municipal
Preferred as provided in subparagraph (b) of this paragraph 12, but not prior
thereto, any other series or class or classes of shares ranking junior to the
shares of Municipal Preferred with respect to the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Trust shall,
subject to the respective terms and provisions (if any) applying thereto, be
entitled to receive any and all assets remaining to be paid or distributed, and
the Holders of the shares of Municipal Preferred shall not be entitled to share
therein.
(e) CERTAIN EVENTS NOT CONSTITUTING LIQUIDATION. Neither the sale of
all or substantially all of the property or business of the Trust, nor the
merger or consolidation of the Trust into or with any Massachusetts business
trust or corporation nor the merger or consolidation of any Massachusetts
business trust or corporation into or with the Trust shall be a dissolution,
liquidation or winding up, whether voluntary or involuntary, for the purposes of
this paragraph 12.
13. MISCELLANEOUS.
(a) AMENDMENT OF THIS SECTION 12.1 TO ADD ADDITIONAL SERIES. Subject to
the provisions of subparagraph (c) of paragraph 10 of Part I of this Section
12.1, the Board of Trustees may, by resolution duly adopted, without shareholder
approval (except as otherwise provided by this Section 12.1 or required by
applicable law), amend Section 12.1 to (1) reflect any amendment hereto which
the Board of Trustees is entitled to adopt pursuant to the terms of this Section
12.1 without shareholder approval or (2) add additional series of Municipal
Preferred or additional shares of a series of Municipal Preferred (and terms
relating thereto) to the series and shares of Municipal Preferred theretofore
described thereon. Each such additional series and all such additional shares
shall be governed by the terms of this Section 12.1.
(b) [RESERVED]
(c) NO FRACTIONAL SHARES. No fractional shares of Municipal Preferred
shall be issued.
(d) STATUS OF SHARES OF MUNICIPAL PREFERRED REDEEMED, EXCHANGED OR
OTHERWISE ACQUIRED BY THE TRUST. Shares of Municipal Preferred which are
redeemed, exchanged or otherwise acquired by the Trust shall return to the
status of authorized and unissued Preferred Shares without designation as to
series.
(e) BOARD MAY RESOLVE AMBIGUITIES. To the extent permitted by
applicable law, the Board of Trustees may interpret or adjust the provisions of
this Section 12.1 to resolve any inconsistency or ambiguity or to remedy any
formal defect, and may amend this Section 12.1 with respect to any series of
Municipal Preferred prior to this issuance of shares of such series.
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(f) HEADINGS NOT DETERMINATIVE. The headings contained in this Section
12.1 are for convenience of reference only and shall not affect the meaning or
interpretation of this Section 12.1.
(g) NOTICES. All notices or communications, unless otherwise specified
in these By-Laws or this Section 12.1, shall be sufficiently given if in writing
and delivered in person or mailed by first-class mail, postage prepaid.
PART II
1. ORDERS.
(a) Prior to the Submission Deadline on each Auction Date for shares of
a series of Municipal Preferred:
(i) each Beneficial Owner of shares of such series may submit
to its Broker- Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares, if any, of such
series held by such Beneficial Owner which such Beneficial
Owner desires to continue to hold without regard to the
Applicable Rate for shares of such series for the next
succeeding Rate Period of such shares;
(B) the number of Outstanding shares, if any, of such
series held by such Beneficial Owner which such Beneficial
Owner offers to sell if the Applicable Rate for shares of such
series for the next succeeding Rate Period of shares of such
series shall be less than the rate per annum specified by such
Beneficial Owner; and/or
(C) the number of Outstanding shares, if any, of such
series held by such Beneficial Owner which such Beneficial
Owner offers to sell without regard to the Applicable Rate for
shares of such series for the next succeeding Rate Period of
shares of such series;
and
(ii) one or more Broker-Dealers, using lists of Potential
Beneficial Owners, shall in good faith for the purpose of conducting a
competitive Auction in a commercially reasonable manner, contact
Potential Beneficial Owners (by telephone or otherwise), including
Persons that are not Beneficial Owners, on such lists to determine the
number of shares, if any, of such series which each such Potential
Beneficial Owner offers to purchase if the Applicable Rate for shares
of such series for the next succeeding Rate Period of shares of such
series shall not be less than the rate per annum specified by such
Potential Beneficial Owner.
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For purposes hereof, the communication by a Beneficial Owner or Potential
Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the Auction Agent,
of information referred to in clause (i)(A), (i)(B), (i)(C) or (ii) of this
subparagraph (a) is hereinafter referred to as an "Order" and collectively as
"Orders" and each Beneficial Owner and each Potential Beneficial Owner placing
an Order with a Broker-Dealer, and such Broker-Dealer placing an Order with the
Auction Agent, is hereinafter referred to as a "Bidder" and collectively as
"Bidders"; an Order containing the information referred to in clause (i)(A) of
this subparagraph (a) is hereinafter referred to as a "Hold Order" and
collectively as "Hold Orders"; an Order containing the information referred to
in clause (i)(B) or (ii) of this subparagraph (a) is hereinafter referred to as
a "Bid" and collectively as "Bids"; and an Order containing the information
referred to in clause (i)(C) of this subparagraph (a) is hereinafter referred to
as a "Sell Order" and collectively as "Sell Orders."
(b) (i) A Bid by a Beneficial Owner or an Existing Holder of shares of
a series of Municipal Preferred subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series
specified in such Bid if the Applicable Rate for shares of
such series determined on such Auction Date shall be less than
the rate specified therein;
(B) such number or a lesser number of Outstanding
shares of such series to be determined as set forth in
paragraph 4(a)(iv) of Part II of this Section 12.1 if the
Applicable Rate for shares of such series determined on such
Auction Date shall be equal to the rate specified therein; or
(C) the number of Outstanding shares of such series
specified in such Bid if the rate specified therein shall be
higher than the Maximum Rate for shares of such series, or
such number or a lesser number of Outstanding shares of such
series to be determined as set forth in paragraph 4(b)(iii) of
Part II of this Section 12.1 if the rate specified therein
shall be higher than the Maximum Rate for shares of such
series and Sufficient Clearing Bids for shares of such series
do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder
of shares of a series of Municipal Preferred subject to an Auction on
any Auction Date shall constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series
specified in such Sell Order; or
(B) such number or a lesser number of Outstanding
shares of such series as set forth in paragraph 4(b)(iii) of
Part II of this Section 12.1 if Sufficient Clearing Bids for
shares of such series do not exist;
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provided, however, that a Broker-Dealer that is an Existing Holder with
respect to shares of a series of Municipal Preferred shall not be
liable to any Person for failing to sell such shares pursuant to a Sell
Order described in the proviso to paragraph 2(c) of Part II of this
Section 12.1 if (1) such shares were transferred by the Beneficial
Owner thereof without compliance by such Beneficial Owner or its
transferee Broker-Dealer (or other transferee person, if permitted by
the Trust) with the provisions of paragraph 7 of Part II of this
Section 12.1 or (2) such Broker-Dealer has informed the Auction Agent
pursuant to the terms of its Broker-Dealer Agreement that, according to
such Broker-Dealer's records, such Broker-Dealer believes it is not the
Existing Holder of such shares.
(iii) A Bid by a Potential Beneficial Holder or a Potential
Holder of shares of a series of Municipal Preferred subject to an
Auction on any Auction Date shall constitute an irrevocable offer to
purchase:
(A) the number of Outstanding shares of such series
specified in such Bid if the Applicable Rate for shares of
such series determined on such Auction Date shall be higher
than the rate specified therein; or
(B) such number or a lesser number of Outstanding
shares of such series as set forth in paragraph 4(a)(v) of
Part II of this Section 12.1 if the Applicable Rate for shares
of such series determined on such Auction Date shall be equal
to the rate specified therein.
(c) No Order for any number of shares of Municipal Preferred other than
whole shares shall be valid.
2. SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.
(a) Each Broker-Dealer shall submit in writing to the Auction Agent
prior to the Submission Deadline on each Auction Date all Orders for shares of
Municipal Preferred of a series subject to an Auction on such Auction Date
obtained by such Broker-Dealer, designating itself (unless otherwise permitted
by the Trust) as an Existing Holder in respect of shares subject to Orders
submitted or deemed submitted to it by Beneficial Owners and as a Potential
Holder in respect of shares subject to Orders submitted to it by Potential
Beneficial Owners, and shall specify with respect to each Order for such shares:
(i) the name of the Bidder placing such Order (which shall be
the Broker-Dealer unless otherwise permitted by the Trust);
(ii) the aggregate number of shares of such series that are
the subject of such Order;
(iii) to the extent that such Bidder is an Existing Holder of
shares of such series:
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(A) the number of shares, if any, of such series
subject to any Hold Order of such Existing Holder;
(B) the number of shares, if any, of such series
subject to any Bid of such Existing Holder and the rate
specified in such Bid; and
(C) the number of shares, if any, of such series
subject to any Sell Order of such Existing Holder; and
(iv) to the extent such Bidder is a Potential Holder of shares
of such series, the rate and number of shares of such series specified
in such Potential Holder's Bid.
(b) If any rate specified in any Bid contains more than three figures
to the right of the decimal point, the Auction Agent shall round such rate up to
the next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding shares of
Municipal Preferred of a series held by any Existing Holder is not submitted to
the Auction Agent prior to the Submission Deadline, the Auction Agent shall deem
a Hold Order to have been submitted by or on behalf of such Existing Holder
covering the number of Outstanding shares of such series held by such Existing
Holder and not subject to Orders submitted to the Auction Agent; provided,
however, that if an Order or Orders covering all of the Outstanding shares of
such series held by any Existing Holder is not submitted to the Auction Agent
prior to the Submission Deadline for an Auction relating to a Special Rate
Period consisting of more than 28 Rate Period Days, the Auction Agent shall deem
a Sell Order to have been submitted by or on behalf of such Existing Holder
covering the number of outstanding shares of such series held by such Existing
Holder and not subject to Orders submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted to the
Auction Agent covering in the aggregate more than the number of Outstanding
shares of Municipal Preferred of a series subject to an Auction held by such
Existing Holder, such Orders shall be considered valid in the following order of
priority:
(i) all Hold Orders for shares of such series shall be
considered valid, but only up to and including in the aggregate the
number of Outstanding shares of such series held by such Existing
Holder, and if the number of shares of such series subject to such Hold
Order exceeds the number of Outstanding shares of such series held by
such Existing Holder, the number of shares subject to each such Hold
Order shall be reduced pro rata to cover the number of Outstanding
shares of such series held by such Existing Holder;
(ii) (A) any Bid for shares of such series shall be considered
valid up to and including the excess of the number of
Outstanding shares of such series held by such Existing Holder
over the number of shares of such series subject to any Hold
Orders referred to in clause (i) above;
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(B) subject to subclause (A), if more than one Bid of
an Existing Holder for shares of such series is submitted to
the Auction Agent with the same rate and the number of
Outstanding shares of such series subject to such Bids is
greater than such excess, such Bids shall be considered valid
up to and including the amount of such excess, and the number
of shares of such series subject to each Bid with the same
rate shall be reduced pro rata to cover the number of shares
of such series equal to such excess;
(C) subject to subclauses (A) and (B), if more than
one Bid of an Existing Holder for shares of such series is
submitted to the Auction Agent with different rates, such Bids
shall be considered valid in the ascending order of their
respective rates up to and including the amount of such
excess; and
(D) in any such event, the number, if any, of such
Outstanding shares of such series subject to any portion of
Bids considered not valid in whole or in part under this
clause (ii) shall be treated as the subject of a Bid for
shares of such series by or on behalf of a Potential Holder at
the rate therein specified; and
(iii) all Sell Orders for shares of such series shall be
considered valid up to and including the excess of the number of
Outstanding shares of such series held by such Existing Holder over the
sum of shares of such series subject to valid Hold Orders referred to
in clause (i) above and valid Bids referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of a series of
Municipal Preferred is submitted to the Auction Agent by or on behalf of any
Potential Holder, each such Bid submitted shall be a separate Bid with the rate
and number of shares therein specified.
(f) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date, shall be irrevocable.
3. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND
APPLICABLE RATE.
(a) Not earlier than the Submission Deadline on each Auction Date for
shares of a series of Municipal Preferred, the Auction Agent shall assemble all
valid Orders submitted or deemed submitted to it by the Broker-Dealers in
respect of shares of such series (each such Order as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to individually as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order," and collectively as "Submitted Hold
Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as
"Submitted Orders") and shall determine for such series:
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(i) the excess of the number of Outstanding shares of such
series over the number of Outstanding shares of such series subject to
Submitted Hold Orders (such excess being hereinafter referred to as the
"Available Municipal Preferred" of such series);
(ii) from the Submitted Orders for shares of such series
whether:
(A) the number of Outstanding shares of such series
subject to Submitted Bids of Potential Holders specifying one
or more rates equal to or lower than the Maximum Rate for
shares of such series;
exceeds or is equal to the sum of:
(B) the number of Outstanding shares of such series
subject to Submitted Bids of Existing Holders specifying one
or more rates higher than the Maximum Rate for shares of such
series; and
(C) the number of Outstanding shares of such series
subject to Submitted Sell Orders
(in the event such excess or such equality exists (other than
because the number of shares of such series in subclauses (B)
and (C) above is zero because all of the Outstanding shares of
such series are subject to Submitted Hold Orders), such
Submitted Bids in subclause (A) above being hereinafter
referred to collectively as "Sufficient Clearing Bids" for
shares of such series); and
(iii) if Sufficient Clearing Bids for shares of such series
exist, the lowest rate specified in such Submitted Bids (the "Winning
Bid Rate" for shares of such series) which if:
(A) (I) each such Submitted Bid of Existing Holders
specifying such lowest rate and (II) all other such Submitted
Bids of Existing Holders specifying lower rates were rejected,
thus entitling such Existing Holders to continue to hold the
shares of such series that are subject to such Submitted Bids;
and
(B) (I) each such Submitted Bid of Potential Holders
specifying such lowest rate and (II) all other such Submitted
Bids of Potential Holders specifying lower rates were
accepted;
would result in such Existing Holders described in subclause (A) above
continuing to hold an aggregate number of Outstanding shares of such
series which, when added to the number of Outstanding shares of such
series to be purchased by such Potential Holders described in subclause
(B) above, would equal not less than the Available Municipal Preferred
of such series.
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(b) Promptly after the Auction Agent has made the determinations
pursuant to subparagraph (a) of this paragraph 3, the Auction Agent shall advise
the Trust of the Maximum Rate for shares of the series of Municipal Preferred
for which an Auction is being held on the Auction Date and, based on such
determination, the Applicable Rate for shares of such series for the next
succeeding Rate Period thereof as follows:
(i) if Sufficient Clearing Bids for shares of such series
exist, that the Applicable Rate for all shares of such series for the
next succeeding Rate Period thereof shall be equal to the Winning Bid
Rate for shares of such series so determined;
(ii) if Sufficient Clearing Bids for shares of such series do
not exist (other than because all of the Outstanding shares of such
series are subject to Submitted Hold Orders), that the Applicable Rate
for all shares of such series for the next succeeding Rate Period
thereof shall be equal to the Maximum Rate for shares of such series;
or
(iii) if all of the Outstanding shares of such series are
subject to Submitted Hold Orders, that the Applicable Rate for all
shares of such series for the next succeeding Rate Period thereof shall
be as set forth in subparagraph (c) of this paragraph 3.
(c) For purposes of subparagraph (b)(iii) of this paragraph 3, the
Applicable Rate for shares of such series for the next succeeding Rate Period of
shares of such series shall be equal to the lesser of the Kenny Index (if such
Rate Period consists of fewer than 183 Rate Period Days) or the product of (A)
(I) the "AA" Composite Commercial Paper Rate on such Auction Date for such Rate
Period, if such Rate Period consists of fewer than 183 Rate Period Days; (II)
the Treasury Bill Rate on such Auction Date for such Rate Period, if such Rate
Period consists of more than 182 but fewer than 365 Rate Period Days; or (III)
the Treasury Note Rate on such Auction Date for such Rate Period, if such Rate
Period is more than 364 Rate Period Days (the rate described in the foregoing
clause (A)(I), (II) or (III), as applicable, being referred to herein as the
"Benchmark Rate") and (B) 1 minus the greater of the maximum marginal regular
Federal individual income tax rate applicable to ordinary income or the maximum
marginal regular Federal corporate income tax rate applicable to ordinary
income; provided, however, that if the Trust has notified the Auction Agent of
its intent to allocate to shares of such series in such Rate Period any net
capital gains or other income taxable for Federal income tax purposes ("Taxable
Income"), the Applicable Rate for shares of such series for such Rate Period
will be (i) if the Taxable Yield Rate (as defined below) is greater than the
Benchmark Rate, then the Benchmark Rate, or (ii) if the Taxable Yield Rate is
less than or equal to the Benchmark Rate, then the rate equal to the sum of (x)
the lesser of the Kenny Index (if such Rate Period consists of fewer than 183
Rate Period Days) or the product of the Benchmark Rate multiplied by the factor
set forth in the preceding clause (B) and (y) the product of the maximum
marginal regular Federal individual income tax rate applicable to ordinary
income or the maximum marginal regular Federal corporate income tax applicable
to ordinary income, whichever is greater, multiplied by the Taxable Yield Rate.
For purposes of the foregoing, "Taxable Yield Rate" means the rate determined by
(a) dividing the amount of Taxable Income available for distribution per such
share of Municipal Preferred by the number of days in the Dividend Period in
respect of which such Taxable Income is contemplated
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to be distributed, (b) multiplying the amount determined in (a) above by 365 (in
the case of a Dividend Period of 7 Rate Period Days) or 360 (in the case of any
other Dividend Period), and (c) dividing the amount determined in (b) above by
$25,000.
4. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS
AND ALLOCATION OF SHARES. Existing Holders shall continue to hold the shares of
Municipal Preferred that are subject to Submitted Hold Orders, and, based on the
determinations made pursuant to subparagraph (a) of paragraph 3 of Part II of
this Section 12.1, the Submitted Bids and Submitted Sell Orders shall be
accepted or rejected by the Auction Agent and the Auction Agent shall take such
other action as set forth below:
(a) If Sufficient Clearing Bids for shares of a series of Municipal
Preferred have been made, all Submitted Sell Orders with respect to shares of
such series shall be accepted and, subject to the provisions of subparagraphs
(d) and (e) of this paragraph 4, Submitted Bids with respect to shares of such
series shall be accepted or rejected as follows in the following order of
priority and all other Submitted Bids with respect to shares of such series
shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is higher than the Winning Bid Rate for shares
of such series shall be accepted, thus requiring each such Existing
Holder to sell the shares of Municipal Preferred subject to such
Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of such
series specifying any rate that is lower than the Winning Bid Rate for
shares of such series shall be rejected, thus entitling each such
Existing Holder to continue to hold the shares of Municipal Preferred
subject to such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of such
series specifying any rate that is lower than the Winning Bid Rate for
shares of such series shall be accepted;
(iv) each Existing Holders' Submitted Bid for shares of such
series specifying a rate that is equal to the Winning Bid Rate for
shares of such series shall be rejected, thus entitling such Existing
Holder to continue to hold the share of Municipal Preferred subject to
such Submitted Bid, unless the number of Outstanding shares of
Municipal Preferred subject to all such Submitted Bids shall be greater
than the number of shares of Municipal Preferred ("remaining shares")
in the excess of the Available Municipal Preferred of such series over
the number of shares of Municipal Preferred subject to Submitted Bids
described in clauses (ii) and (iii) of this subparagraph (a), in which
event such Submitted Bid of such Existing Holder shall be rejected in
part, and such Existing Holder shall be entitled to continue to hold
shares of Municipal Preferred subject to such Submitted Bid, but only
in an amount equal to the number of shares of Municipal Preferred of
such series obtained by multiplying the number of remaining shares by a
fraction, the numerator of which shall be the number of Outstanding
shares of Municipal Preferred held by such Existing Holder subject to
such Submitted Bid and the denominator of which shall be the
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aggregate number of Outstanding shares of Municipal Preferred subject
to such Submitted Bids made by all such Existing Holders that specified
a rate equal to the Winning Bid Rate for shares of such series; and
(v) each Potential Holder's Submitted Bid for shares of such
series specifying a rate that is equal to the Winning Bid Rate of
shares of such series shall be accepted but only in an amount equal to
the number of shares of such series obtained by multiplying the number
of shares in the excess of the Available Municipal Preferred of such
series over the number of shares of Municipal Preferred subject to
Submitted Bids described in clauses (ii) through (iv) of this
subparagraph (a) by a fraction, the numerator of which shall be the
number of Outstanding shares of Municipal Preferred subject to such
Submitted Bids and the denominator of which shall be the aggregate
number of Outstanding shares of Municipal Preferred subject to such
Submitted Bids made by all such Potential Holders that specified a rate
equal to the Winning Bid Rate for shares of such series.
(b) If Sufficient Clearing Bids for shares of a series of Municipal
Preferred have not been made (other than because all of the Outstanding shares
of such series are subject to Submitted Hold Orders), subject to the provisions
of subparagraph (d) of this paragraph 4, Submitted Orders for shares of such
series shall be accepted or rejected as follows in the following order of
priority and all other Submitted Bids for shares of such series shall be
rejected:
(i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Rate for
shares of such series shall be rejected, thus entitling such Existing
Holders to continue to hold the shares of Municipal Preferred subject
to such Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of such
series specifying any rate that is equal to or lower than the Maximum
Rate for shares of such series shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for shares of such
series specifying any rate that is higher than the Maximum Rate for
shares of such series and the Submitted Sell Orders for shares of such
series of each Existing Holder shall be accepted, thus entitling each
Existing Holder that submitted or on whose behalf was submitted any
such Submitted Bid or Submitted Sell Order to sell the shares of such
series subject to such Submitted Bid or Submitted Sell Order, but in
both cases only in an amount equal to the number of shares of such
series obtained by multiplying the number of shares of such series
subject to Submitted Bids described in clause (ii) of this subparagraph
(b) by a fraction, the numerator of which shall be the number of
Outstanding shares of such series held by such Existing Holder subject
to such Submitted Bid or Submitted Sell Order and the denominator of
which shall be the aggregate number of Outstanding shares of such
series subject to all such Submitted Bids and Submitted Sell Orders.
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(c) If all of the Outstanding shares of a series of Municipal Preferred
are subject to Submitted Hold Orders, all Submitted Bids for shares of such
series shall be rejected.
(d) If, as a result of the procedures described in clause (iv) or (v)
of subparagraph (a) or clause (iii) of subparagraph (b) of this paragraph 4, any
Existing Holder would be entitled or required to sell, or any Potential Holder
would be entitled or required to purchase, a fraction of a share of a series of
Municipal Preferred on any Auction Date, the Auction Agent shall, in such manner
as it shall determine in its sole discretion, round up or down the number of
shares of Municipal Preferred of such series to be purchased or sold by any
Existing Holder or Potential Holder on such Auction Date as a result of such
procedures so that the number of shares so purchased or sold by each Existing
Holder or Potential Holder on such Auction Date shall be whole shares of
Municipal Preferred.
(e) If, as a result of the procedures described in clause (v) of
paragraph (a) of this paragraph 4, any Potential Holder would be entitled or
required to purchase less than a whole share of series of Municipal Preferred on
any Auction Date, the Auction Agent shall, in such manner as it shall determine
in its sole discretion, allocate shares of Municipal Preferred of such series
for purchase among Potential Holders so that only whole shares of Municipal
Preferred of such series are purchased on such Auction Date as a result of such
procedures by any Potential Holder, even if such allocation results in one or
more Potential Holders not purchasing shares of Municipal Preferred of such
series on such Auction Date.
(f) Based on the results of each Auction for shares of a series of
Municipal Preferred, the Auction Agent shall determine the aggregate number of
shares of such series to be purchased and the aggregate number of shares of such
series to be sold by Potential Holders and Existing Holders and, with respect to
each Potential Holder and Existing Holder, to the extent that such aggregate
number of shares to be purchased and such aggregate number of shares to be sold
differ, determine to which other Potential Holder(s) or Existing Holder(s) they
shall deliver, or from which other Potential Holder(s) or Existing Holder(s)
they shall receive, as the case may be, shares of Municipal Preferred of such
series. Notwithstanding any provision of the Auction Procedures or the
Settlement Procedures to the contrary, in the event an Existing Holder or
Beneficial Owner of shares of a series of Municipal Preferred with respect to
whom a Broker- Dealer submitted a Bid to the Auction Agent for such shares that
was accepted in whole or in part, or submitted or is deemed to have submitted a
Sell Order for such shares that was accepted in whole or in part, fails to
instruct its Agent Member to deliver such shares against payment therefor,
partial deliveries of shares of Municipal Preferred that have been made in
respect of Potential Holders' or Potential Beneficial Owners' Submitted Bids for
shares of such series that have been accepted in whole or in part shall
constitute good delivery to such Potential Holders and Potential Beneficial
Owners.
(g) Neither the Trust nor the Auction Agent nor any affiliate of either
shall have any responsibility or liability with respect to the failure of an
Existing Holder, a Potential Holder, a Benefit Owner, a Potential Beneficial
Owner or its respective Agent Member to deliver shares of
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Municipal Preferred of any series or to pay for shares of Municipal Preferred of
any series sold or purchased pursuant to the Auction Procedures or otherwise.
5. NOTIFICATION OF ALLOCATIONS. Whenever the Trust intends to include
any net capital gain or other income taxable for Federal income tax purposes in
any dividend on shares of Municipal Preferred, the Trust shall, in the case of a
Minimum Rate Period or a Special Rate Period of 28 Rate Period Days or fewer,
and may, in the case of any other Special Rate Period, notify the Auction Agent
of the amount to be so included not later than the Dividend Payment Date next
preceding the Auction Date on which the Applicable Rate for such dividend is to
be established. Whenever the Auction Agent receives such notice from the Trust,
it will be required in turn to notify each Broker-Dealer, who, on or prior to
such Auction Date, in accordance with its Broker-Dealer Agreement, will be
required to notify its Beneficial Owners and Potential Beneficial Owners of
shares of Municipal Preferred believed by it to be interested in submitting an
Order in the Auction to be held on such Auction Date.
6. AUCTION AGENT. For so long as any shares of Municipal Preferred are
outstanding, the Auction Agent, duly appointed by the Trust to so act, shall be
in each case a commercial bank, trust company or other financial institution
independent of the Trust and its affiliates (which however, may engage or have
engaged in business transactions with the Trust or its affiliates) and at no
time shall the Trust or any of its affiliates act as the Auction Agent in
connection with the Auction Procedures. If the Auction Agent resigns or for any
reason its appointment is terminated during any period that any shares of
Municipal Preferred are outstanding, the Board of Trustees shall use its best
efforts promptly thereafter to appoint another qualified commercial bank, trust
company or financial institution to act as the Auction Agent. The Auction
Agent's registry of Existing Holders of shares of a series of Municipal
Preferred shall be conclusive and binding on the Broker-Dealers. A Broker-Dealer
may inquire of the Auction Agent between 3:00 p.m. on the Business Day preceding
an Auction for shares of a series of Municipal Preferred and 9:30 a.m. on the
Auction Date for such Auction to ascertain the number of shares of a series in
respect of which the Auction Agent has determined such Broker-Dealer to be an
Existing Holder. If such Broker-Dealer believes it is the Existing Holder of
fewer shares of such series than specified by the Auction Agent in response to
such Broker-Dealer's inquiry, such Broker- Dealer may so inform the Auction
Agent of that belief. Such Broker-Dealer shall not, in its capacity as Existing
Holder of shares of such series, submit Orders in such Auction in respect of
shares of such series covering in the aggregate more than the number of shares
of such series specified by the Auction Agent in response to such
Broker-Dealer's inquiry.
7. TRANSFER OF SHARES OF MUNICIPAL PREFERRED. Unless otherwise
permitted by the Trust, a Beneficial Owner or an Existing Holder may sell,
transfer or otherwise dispose of shares of Municipal Preferred only in whole
shares and only pursuant to a Bid or Sell Order placed with the Auction Agent in
accordance with the procedures described in Part II of this Section 12.1 or to a
Broker-Dealer; provided, however, that (a) a sale, transfer or other disposition
of shares of Municipal Preferred from a customer of a Broker-Dealer who is
listed on the records of that Broker-Dealer as the holder of such shares to that
Broker-Dealer or another customer of that Broker-Dealer shall not be deemed to
be a sale, transfer or other disposition for purposes of this
-65-
<PAGE> 66
paragraph 7 if such Broker-Dealer remains the Existing Holder of the shares so
sold, transferred or disposed of immediately after such sale, transfer or
disposition and (b) in the case of all transfers other than pursuant to
Auctions, the Broker-Dealer (or other Person, if permitted by the Trust) to whom
such transfer is made shall advise the Auction Agent of such transfer.
8. GLOBAL CERTIFICATE. Prior to the commencement of a Voting Period,
(i) all of the shares of a series of Municipal Preferred outstanding from time
to time shall be represented by one global certificate registered in the name of
the Securities Depository or its nominee and (ii) no registration of transfer of
shares of a series of Municipal Preferred shall be made on the books of the
Trust to any Person other than the Securities Depository or its nominee.
Article 13.
AMENDMENTS
Except as otherwise expressly stated herein, these By-Laws may be
amended or replaced, in whole or in part, by a majority of the Trustees then in
office at any meeting of the Trustees, or by one or more writings signed by such
a majority.
-66-
<PAGE> 1
Exhibit (d)(2)
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED
SHARE(S) OF BENEFICIAL INTEREST, SERIES T
Number
U NO PAR VALUE
$25,000 Liquidation Preference per Share
THIS CERTIFICATE IS TRANSFERABLE
IN BOSTON OR IN NEW YORK CITY CUSIP
SEE REVERSE FOR
CERTAIN DEFINITIONS
COLONIAL HIGH INCOME MUNICIPAL TRUST
SHARE CERTIFICATE
S P E C I M E N
THIS
CERTIFIES
THAT Cede & Co.
IS THE
OWNER OF *Two Thousand Four Hundred* (2,400)
FULLY PAID AND NON-ASSESSABLE MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
OF BENEFICIAL INTEREST, SERIES T, NO PAR VALUE, $25,000 LIQUIDATION
PREFERENCE PER SHARE, OF
Colonial High Income Municipal Trust, the said shares being issued, received
and held under and subject to the terms and provisions of the Agreement and
Declaration of Trust dated as of January 9, 1989, establishing Colonial High
Income Municipal Trust, and all amendments thereto, copies of which are on file
with the Secretary of the Commonwealth of Massachusetts, and to the terms and
provisions of the Amended and Restated By-Laws of Colonial High Income
Municipal Trust, copies of which are on file with the Secretary of the Trust.
The said owner by accepting this certificate agrees to and is bound by all of
the said terms and provisions. The shares represented hereby are only
transferable in writing by the owner thereof in person or by attorney upon
surrender of this certificate to the Trustees properly endorsed for transfer.
This certificate is executed on behalf of the Trustees of the Trust as Trustees
and not individually and the obligations hereof are not binding upon any of the
Trustees, officers or shareholders of the Trust individually but are binding
only upon the assets and property of the Trust. This certificate is not valid
until countersigned and registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Trust and the facsimile signatures of
its duly authorized officers.
Dated:
Countersigned and Registered:
<PAGE> 2
BANKERS TRUST COMPANY
(Boston, Massachusetts) Transfer Agent
and Registrar
BY
Authorized Signature. TREASURER PRESIDENT
EXPLANATION OF ABBREVIATIONS
The following abbreviations when used in the form of ownership on the
face of this certificate shall be construed as though they were written out in
full according to applicable laws or regulations.
Abbreviations in addition to those appearing below, may be used.
Abbreviation Equivalent Abbreviation Equivalent
- ------------ ---------- ------------ ----------
JT TEN As joint tenants, TEN IN COM As tenants in common
with right of TEN BY ENT As tenants by the
survivorship and entireties
not as tenants UNIF TRANSFERS Uniform Transfers to
in common MIN ACT Minors Act
Abbreviation Equivalent Abbreviation Equivalent
- ------------ ----------- ------------ -----------
ADM Administrator(s) FDN Foundation
Administratrix PL Public Law
AGMT Agreement TR (As) trustees(s),
for, of
CUST Custodian for UA Under Agreement
EST Estate, Of estate of UW Under will of, Of
will of,
EX Executor(s), Executrix Under last will &
FBO For the benefit of Testament
Additional abbreviations may also be used though not in the above list.
---------------------------------------------------------------------------
TRANSFER FORM
FOR VALUE RECEIVED, _________________________________ hereby sell,
assign and transfer unto (I/We)
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -------------------------------------------
- -------------------------------------------
- ------------------------------------------------------------------
Please print or typewrite name and address (including postal zip
code of assignee)
___________________________________________________________________Shares
represented by this Certificate and do hereby irrevocably constitute and appoint
_____________________________________________________________________Attorney,
to transfer said shares on the books of the Trust with full
<PAGE> 3
power of substitution in the premises.
Dated:
SIGNATURE GUARANTEED BY Signature(s)_________________________________
(The signature to this assignment must
correspond with the name as
written upon the face of this
Certificate in every
particular, without alteration or
enlargement or any change
whatsoever. If more than one owner,
all must sign.)
- -------------------------------------------------------------------------
(Signature must be guaranteed by a commercial bank or trust company or
member firm of any national stock exchange.)
IMPORTANT NOTICE:
When you sign your name to the Transfer Form without filling in the name of
your "Assignee" this certificate becomes fully negotiable, similar to a check
endorsed in blank. Therefore, to safeguard a signed certificate, it is
recommended that you fill in the name of the new owner in the "Assignee" space.
Alternatively, instead of using this Transfer Form, you may sign a separate
"stock power" form and then mail the unsigned certificate and the signed "stock
power" in separate envelopes. For added protection, use registered mail for a
certificate.
<PAGE> 1
Exhibit (d)(3)
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED
SHARE(S) OF BENEFICIAL INTEREST, SERIES W
Number
U NO PAR VALUE
$25,000 Liquidation Preference per Share
THIS CERTIFICATE IS TRANSFERABLE
IN BOSTON OR IN NEW YORK CITY CUSIP
SEE REVERSE FOR
CERTAIN DEFINITIONS
COLONIAL HIGH INCOME MUNICIPAL TRUST
SHARE CERTIFICATE
S P E C I M E N
THIS
CERTIFIES
THAT Cede & Co.
IS THE
OWNER OF *Two Thousand Four Hundred* (2,400)
FULLY PAID AND NON-ASSESSABLE MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
OF BENEFICIAL INTEREST, SERIES W, NO PAR VALUE, $25,000 LIQUIDATION
PREFERENCE PER SHARE, OF
Colonial High Income Municipal Trust, the said shares being issued, received and
held under and subject to the terms and provisions of the Agreement and
Declaration of Trust dated as of January 9, 1989, establishing Colonial High
Income Municipal Trust, and all amendments thereto, copies of which are on file
with the Secretary of the Commonwealth of Massachusetts, and to the terms and
provisions of the Amended and Restated By-Laws of Colonial High Income Municipal
Trust, copies of which are on file with the Secretary of the Trust. The said
owner by accepting this certificate agrees to and is bound by all of the said
terms and provisions. The shares represented hereby are only transferable in
writing by the owner thereof in person or by attorney upon surrender of this
certificate to the Trustees properly endorsed for transfer. This certificate is
executed on behalf of the Trustees of the Trust as Trustees and not individually
and the obligations hereof are not binding upon any of the Trustees, officers or
shareholders of the Trust individually but are binding only upon the assets and
property of the Trust. This certificate is not valid until countersigned and
registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Trust and the facsimile signatures of its
duly authorized officers.
Dated:
Countersigned and Registered:
<PAGE> 2
BANKERS TRUST COMPANY
(Boston, Massachusetts) Transfer Agent
and Registrar
BY
Authorized Signature. TREASURER PRESIDENT
EXPLANATION OF ABBREVIATIONS
The following abbreviations when used in the form of ownership on the
face of this certificate shall be construed as though they were written out in
full according to applicable laws or regulations.
Abbreviations in addition to those appearing below, may be used.
Abbreviation Equivalent Abbreviation Equivalent
- ------------ ---------- ------------ ----------
JT TEN As joint tenants, TEN IN COM As tenants in common
with right of TEN BY ENT As tenants by the
survivorship and entireties
not as tenants UNIF TRANSFERS Uniform Transfers to
in common MIN ACT Minors Act
Abbreviation Equivalent Abbreviation Equivalent
- ------------ ----------- ------------ -----------
ADM Administrator(s) FDN Foundation
Administratrix PL Public Law
AGMT Agreement TR (As) trustees(s),
for, of
CUST Custodian for UA Under Agreement
EST Estate, Of estate of UW Under will of, Of
will of,
EX Executor(s), Executrix Under last will &
FBO For the benefit of Testament
Additional abbreviations may also be used though not in the above list.
---------------------------------------------------------------------------
TRANSFER FORM
FOR VALUE RECEIVED, _________________________________ hereby sell,
assign and transfer unto (I/We)
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -------------------------------------------
- -------------------------------------------
- ------------------------------------------------------------------
Please print or typewrite name and address (including postal zip
code of assignee)
___________________________________________________________________Shares
represented by this Certificate and do hereby irrevocably constitute and appoint
_____________________________________________________________________Attorney,
to transfer said shares on the books of the Trust with full
<PAGE> 3
power of substitution in the premises.
Dated:
SIGNATURE GUARANTEED BY Signature(s)_________________________________
(The signature to this assignment must
correspond with the name as
written upon the face of this
Certificate in every
particular, without alteration or
enlargement or any change
whatsoever. If more than one owner,
all must sign.)
- -------------------------------------------------------------------------
(Signature must be guaranteed by a commercial bank or trust company or
member firm of any national stock exchange.)
IMPORTANT NOTICE:
When you sign your name to the Transfer Form without filling in the name of
your "Assignee" this certificate becomes fully negotiable, similar to a check
endorsed in blank. Therefore, to safeguard a signed certificate, it is
recommended that you fill in the name of the new owner in the "Assignee" space.
Alternatively, instead of using this Transfer Form, you may sign a separate
"stock power" form and then mail the unsigned certificate and the signed "stock
power" in separate envelopes. For added protection, use registered mail for a
certificate.
<PAGE> 1
Exhibit (h)(1)
Municipal Auction Rate Cumulative Preferred Shares
COLONIAL HIGH INCOME MUNICIPAL TRUST
2,400 Shares, Series T
Liquidation Preference $25,000 Per Share
UNDERWRITING AGREEMENT
August __, 1999
SALOMON SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Colonial High Income Municipal Trust, a Massachusetts business trust (the
"Trust"), proposes, upon the terms and conditions set forth herein, to issue and
sell an aggregate of 2,400 shares of its Municipal Auction Rate Cumulative
Preferred Shares, Series T (the "Series T Municipal Preferred"), each with a
liquidation preference of $25,000 per share (the shares of Series T Municipal
Preferred to be sold hereby are referred to herein, collectively, as the
"Shares"). Concurrently with the offering of the Series T Municipal Preferred,
the Trust is offering an additional 2,400 shares of Series W Municipal
Preferred. The shares of Series T Municipal Preferred and Series W Municipal
Preferred will be authorized by, and subject to the terms and conditions of, the
Amended and Restated By-Laws of the Trust in the form filed as an exhibit to the
Registration Statement referred to in Section 1 of this agreement. The Trust and
its investment adviser, Colonial Management Associates, Inc., (the "Advisor"),
wish to confirm as follows their agreement with Salomon Smith Barney Inc. (the
"Underwriter") in connection with the purchase of the Shares by the Underwriter.
Collectively, (i) the Management Agreement, dated as of March 27, 1995,
between the Trust and the Advisor (the "Management Agreement"), (ii) the
Custodian Agreement, dated as of August 17, 1997, between the Trust and The
Chase Manhattan Bank, as amended, (iii) the Auction Agency Agreement, to be
dated as of August __, 1999, between the Trust and Bankers Trust Company and
(iv) the Broker-Dealer Agreement, to be dated as of August __, 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
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 (File No. 333-81129 and
811-5754), under the 1933 Act and the 1940 Act (the "registration statement"),
including a prospectus relating to the Shares, and has filed the registration
statement and prospectus in accordance with the 1933 Act and 1940 Act. The Trust
also has filed a notification of registration of the Trust as an investment
company under the 1940 Act on Form N-8A (the "1940 Act Notification"). The term
"Registration Statement" as used in this Agreement means the registration
statement (including all financial schedules and exhibits), as amended at the
time it becomes effective under the 1933 Act or, if the registration statement
became effective under the 1933 Act prior to the execution of this Agreement, as
amended or supplemented at the time it became effective, prior to the execution
of this Agreement. If it is contemplated, at the time this Agreement is
executed, that a post-effective amendment to the registration statement will be
filed under the 1933 Act and must be declared effective before the offering of
the Shares may commence, the term "Registration Statement" as used in this
Agreement means the registration statement as amended by said post-effective
amendment. If the Trust has filed an abbreviated registration statement to
register an additional amount of Shares pursuant to Rule 462(b) under the 1933
Act (the "Rule 462 Registration Statement"), then any reference herein to the
term "Registration Statement" shall include such Rule 462 Registration
Statement. The term "Prospectus" as used in this Agreement means the prospectus
and statement of additional information in the forms included in the
Registration Statement or, if the prospectus and statement of additional
information included in the Registration Statement omit information in reliance
on Rule 430A under the 1933 Act Rules and Regulations and such information is
included in a prospectus and statement of additional information filed with the
Commission pursuant to Rule 497 under the 1933 Act, the term "Prospectus" as
used in this Agreement means the prospectus and statement of additional
information in the forms included in the Registration Statement as supplemented
by the addition of the information contained in the prospectus filed with the
Commission pursuant to Rule 497. The term "Prepricing Prospectus" as used in
this Agreement means the prospectus and statement of additional information
subject to completion in the forms included in the registration statement at the
time of filing of amendment no.1 to the registration statement with the
Commission on August __, 1999, and as such prospectus and statement of
additional information shall have been amended from time to time prior to the
date of the Prospectus, together with any other prospectus and statement of
additional information relating to the Trust other than the Prospectus approved
in writing by or directly or indirectly prepared by the Trust or the Advisor; it
being understood that the definition of Prepricing Prospectus above shall not
include any Prepricing Prospectus prepared by the Underwriter unless approved in
writing by the Trust or the Advisor. The terms "Registration Statement",
"Prospectus" and "Prepricing Prospectus" shall also include any financial
statements incorporated by reference therein.
<PAGE> 3
3
The Trust has furnished the Underwriter with copies of such registration
statement, each amendment to such registration statement filed with the
Commission and each Prepricing Prospectus.
2. AGREEMENTS TO SELL AND PURCHASE. The Trust hereby agrees, subject to
all the terms and conditions set forth herein, to issue and sell to the
Underwriter and, upon the basis of the representations, warranties and
agreements of the Trust and the Advisor herein contained and subject to all the
terms and conditions set forth herein, the Underwriter agrees to purchase from
the Trust, at a purchase price of $[ ] per Share, the number of shares of series
T Municipal Preferred set forth opposite the name of the Underwriter in Schedule
I hereto.
3. TERMS OF PUBLIC OFFERING. The Trust and the Advisor have been advised
by the Underwriter that the Underwriter proposes to make a public offering of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in the Underwriter's judgment is advisable and initially to
offer the Shares upon the terms set forth in the Prospectus.
4. DELIVERY OF THE SHARES AND PAYMENT THEREFOR. Delivery to the
Underwriter of and payment for the Shares shall be made at the office of Simpson
Thacher & Bartlett, 425 Lexington Avenue, New York, NY 10017, at 9:30 A.M., New
York City time, on August __, 1999 (the "Closing Date"). The place of closing
for the Shares and the Closing Date may be varied by agreement between the
Underwriter and the Trust.
Certificates for the Shares shall be registered in such names and in such
denominations as the Underwriter shall request prior to 9:30 A.M., New York City
time, on the second business day preceding the Closing Date. Such certificates
shall be made available to the Underwriter in New York City for inspection not
later than 9:30 A.M., New York City time, on the business day next preceding the
Closing Date. The certificates evidencing the Shares shall be delivered to the
Underwriter on the Closing Date, through the facilities of The Depository Trust
Company, against payment of the purchase price therefor in immediately available
funds.
5. AGREEMENTS OF THE TRUST AND THE ADVISOR. The Trust and the Advisor,
jointly and severally, agree with the Underwriter as follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective under the 1933 Act before the offering of the Shares
may commence, the Trust will endeavor to cause the Registration Statement or
such post-effective amendment to become effective under the 1933 Act as soon as
possible and will advise the Underwriter promptly and, if requested by the
Underwriter, will confirm such advice in writing when the Registration Statement
or such post-effective amendment has become effective.
(b) The Trust will advise the Underwriter promptly and, if requested by
the Underwriter, will confirm such advice in writing: (i) of any request made by
the Commission for amendment of or a supplement to the Registration Statement,
any Prepricing Prospectus or the Prospectus (or any amendment or supplement to
any of the foregoing) or for additional
<PAGE> 4
4
information, (ii) of the issuance by the Commission, the National Association of
Securities Dealers, Inc. (the "NASD"), any state securities commission, any
national securities exchange, any arbitrator, any court or any other
governmental, regulatory, self-regulatory or administrative agency or any
official of any order suspending the effectiveness of the Registration
Statement, prohibiting or suspending the use of the Prospectus or any Prepricing
Prospectus, or any sales material, of any notice pursuant to Section 8(e) of the
1940 Act, of the suspension of qualification of the Shares for offering or sale
in any jurisdiction, or the initiation of any proceeding for any such purposes,
(iii) of receipt by the Trust, the Advisor, any affiliate of the Trust or the
Advisor or any representative or attorney of the Trust or the Advisor of any
other material communication from the Commission, the NASD, any state securities
commission, any national securities exchange, any arbitrator, any court or any
other governmental, regulatory, self-regulatory or administrative agency or any
official relating to the Trust (if such communication relating to the Trust is
received by such person within three years after the date of this Agreement),
the Registration Statement, the 1940 Act Notification, the Prospectus, any
Prepricing Prospectus, any sales material (or any amendment or supplement to any
of the foregoing) or this Agreement or any of the Trust Agreements and (iv)
within the period of time referred to in paragraph (f) below, of any material
adverse change in the condition (financial or other), business, prospects,
properties, net assets or results of operations of the Trust or the Advisor or
of the happening of any other event which makes any statement of a material fact
made in the Registration Statement or the Prospectus or any sales material (or
any amendment or supplement to any of the foregoing) untrue or which requires
the making of any additions to or changes in the Registration Statement or the
Prospectus, or any Prepricing Prospectus or any sales materials (as herein
defined) (or any amendment or supplement to any of the foregoing) in order to
state a material fact required by the 1933 Act, the 1940 Act or the Rules and
Regulations to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading or of the necessity to amend or supplement the Registration
Statement, the Prospectus, or any Prepricing Prospectus or any sales material
(as herein defined) (or any amendment or supplement to any of the foregoing) to
comply with the 1933 Act, the 1940 Act, the Rules and Regulations or any other
law or order of any court or regulatory body. If at any time the Commission, the
NASD, any state securities commission, any national securities exchange, any
arbitrator, any court or any other governmental, regulatory, self-regulatory or
administrative agency or any official shall issue any order suspending the
effectiveness of the Registration Statement, prohibiting or suspending the use
of the Prospectus or any sales material (as herein defined) (or any amendment or
supplement to any of the foregoing) or suspending the qualification of the
Shares for offering or sale in any jurisdiction, the Trust will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible time.
(c) The Trust will furnish to the Underwriter, without charge, three
signed copies of the Registration Statement as originally filed with the
Commission and of each amendment thereto, including financial statements and all
exhibits thereto, and will also furnish to the Underwriter, without charge, such
number of conformed copies of the Registration Statement as originally filed and
of each amendment thereto, but without exhibits, as the Underwriter may request.
<PAGE> 5
5
(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 (and of any amendment or supplement thereto) as
the Underwriter may reasonably request. The Trust consents to the use of the
Prospectus (and of any amendment or supplement thereto) in accordance with the
provisions of the 1933 Act and with the state securities or blue sky laws of the
jurisdictions in which the Shares are offered by the Underwriter and by all
dealers to whom Shares may be sold, both in connection with the offering and
sale of the Shares and for such period of time thereafter as the Prospectus is
required by the 1933 Act to be delivered in connection with sales by the
Underwriter or any dealer. If during such period of time any event shall occur
that in the judgment of the Trust or in the opinion of counsel for the
Underwriter is required to be set forth in the Registration Statement or the
Prospectus (as then amended or supplemented) or should be set forth therein in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary to supplement or
amend the Registration Statement or the Prospectus to comply with the 1933 Act,
the 1940 Act, the Rules and Regulations or any other federal law, rule or
regulation, or any state securities or blue sky disclosure laws, rules or
regulations, the Trust will forthwith prepare and, subject to the provisions of
paragraph (d) above, promptly file with the Commission an appropriate supplement
or amendment thereto, and will expeditiously furnish to the Underwriter and
dealers, without charge, a reasonable number of copies thereof. In the event
that the Trust and the Underwriter agree that the Registration Statement or the
Prospectus should be amended or supplemented, the Trust, if requested by the
Underwriter, will promptly issue a press release announcing or disclosing the
matters to be covered by the proposed amendment or supplement.
(g) The Trust will make generally available to its security holders an
earnings statement, which need not be audited, covering a twelve-month period
ending not later than 15
<PAGE> 6
6
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 Advisor to comply with the terms or
fulfill any of the conditions of this Agreement, the Trust and the Advisor,
jointly and severally, agree to reimburse the Underwriter for all out-of-pocket
expenses (including reasonable fees and expenses of counsel for the Underwriter)
incurred by the Underwriter in connection herewith.
(j) The Trust will apply the net proceeds from the sale of the Shares
substantially in accordance with the description set forth in the Prospectus and
in such a manner as to comply with the investment objectives, policies and
restrictions of the Trust as described in the Prospectus.
(k) The Trust will timely file the requisite copies of the Prospectus with
the Commission pursuant to Rule 497(c) or Rule 497(h) of the 1933 Act Rules and
Regulations, whichever is applicable or, if applicable, will timely file the
certification permitted by Rule 497(j) of the 1933 Act Rules and Regulations and
will advise the Underwriter of the time and manner of such filing.
(l) Except as provided in this Agreement, the Trust will not sell,
contract to sell, or otherwise dispose of any senior securities (as defined in
the 1940 Act) of the Trust, or grant any options or warrants to purchase senior
securities of the Trust, for a period of 120 days after the date of the
Prospectus, without the prior written consent of the Underwriter.
(m) Except as stated in this Agreement and in the Prepricing Prospectus
and Prospectus, neither the Trust nor the Advisor has taken, nor will it take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of any
securities issued by the Trust to facilitate the sale or resale of the Shares.
(n) The Trust will use its best efforts to cause the Series T Municipal
Preferred, prior to the Closing Date, to be assigned a rating of 'aaa' by
Moody's Investors Service, Inc. ("Moody's") and AAA by Standard & Poor's Ratings
Services ("S&P" and, together with Moody's, the "Rating Agencies").
<PAGE> 7
7
(o) The Trust and the Advisor will use their best efforts to perform all
of the agreements required of them and discharge all conditions to closing as
set forth in this Agreement.
6. REPRESENTATIONS AND WARRANTIES OF THE TRUST AND THE ADVISOR. The Trust
and the Advisor, jointly and severally, represent and warrant to the Underwriter
that:
(a) Each Prepricing Prospectus included as part of the registration
statement as originally filed or as part of any amendment or supplement thereto,
or filed pursuant to Rule 497 of the 1933 Act Rules and Regulations, complied
when so filed in all material respects with the provisions of the 1933 Act, the
1940 Act and the Rules and Regulations. The Commission has not issued any order
preventing or suspending the use of any Prepricing Prospectus.
(b) The registration statement in the form in which it became or becomes
effective and also in such form as it may be when any post-effective amendment
thereto shall become effective and the Prospectus and any supplement or
amendment thereto when filed with the Commission under Rule 497 of the 1933 Act
Rules and Regulations and the 1940 Act Notification when originally filed with
the Commission and any amendment or supplement thereto when filed with the
Commission, complied or will comply in all material respects with the provisions
of the 1933 Act, the 1940 Act and the Rules and Regulations and did not or will
not at any such times contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, except that this representation and warranty
does not apply to statements in or omissions from the registration statement or
the Prospectus made in reliance upon and in conformity with information relating
to the Underwriter furnished to the Trust in writing by or on behalf of the
Underwriter expressly for use therein.
(c) All the outstanding Common Shares (as defined in the Prospectus) of
the Trust have been duly authorized and validly issued, are fully paid and
nonassessable and are free of any preemptive or similar rights; the Shares have
been duly authorized and, when issued and delivered to the Underwriter against
payment therefor in accordance with the terms hereof, will be validly issued,
fully paid and nonassessable and free of any preemptive or similar rights and
will conform to the description thereof in the Registration Statement and the
Prospectus (and any amendment or supplement to either of them); and the
capitalization of the Trust conforms to the description thereof in the
Registration Statement and the Prospectus (and any amendment or supplement to
either of them).
(d) The Trust is a business trust duly organized and validly existing in
good standing under the laws of the Commonwealth of Massachusetts with full
business trust power and authority to own, lease and operate its properties and
to conduct its business as described in the Registration Statement and the
Prospectus (and any amendment or supplement to either of them), and is duly
registered and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
so to register or qualify does not have a
<PAGE> 8
8
material adverse effect on the condition (financial or other), business,
prospects, properties, net assets or results of operations of the Trust; and the
Trust has no subsidiaries.
(e) There are no legal or governmental proceedings pending or, to the
knowledge of the Trust, threatened, against the Trust, or to which the Trust or
any of its properties is subject, that are required to be described in the
Registration Statement or the Prospectus (and any amendment or supplement to
either of them) but are not described as required, and there are no agreements,
contracts, indentures, leases or other instruments that are required to be
described in the Registration Statement or the Prospectus (and any amendment or
supplement to either of them) or to be filed as an exhibit to the Registration
Statement that are not described or filed as required by the 1933 Act, the 1940
Act or the Rules and Regulations.
(f) The Trust is not in violation of its Declaration of Trust (the
"Declaration") or its amended and restated bylaws (the "Bylaws") or other
organizational documents (together with the Declaration and Bylaws, the
"Organizational Documents"), or of any law, ordinance, administrative or
governmental rule or regulation applicable to the Trust or of any decree of the
Commission, the NASD, any state securities commission, any national securities
exchange, any arbitrator, any court or governmental agency, body or official
having jurisdiction over the Trust, or in default in any material respect in the
performance of any obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness or in any material
agreement, indenture, lease or other instrument to which the Trust is a party or
by which it or any of its properties may be bound.
(g) Neither the issuance and sale of the Shares, the execution, delivery
or performance of this Agreement or any of the Trust Agreements by the Trust,
nor the consummation by the Trust of the transactions contemplated hereby or
thereby (i) requires any consent, approval, authorization or other order of or
registration or filing with, the Commission, the NASD, any state securities
commission, any national securities exchange, any arbitrator, any court,
regulatory body, administrative agency or other governmental body, agency or
official (except such as may have been obtained prior to the date hereof and
such as may be required for compliance with the state securities or blue sky
laws of various jurisdictions which have been or will be effected in accordance
with this Agreement) or conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the Organizational Documents of the
Trust or (ii) conflicts or will conflict with or constitutes or will constitute
a breach of, or a default under, any agreement, indenture, lease or other
instrument to which the Trust is a party or by which it or any of its properties
may be bound, or violates or will violate any statute, law, regulation or
judgment, injunction, order or decree applicable to the Trust or any of its
properties, or will result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Trust pursuant to the terms of
any agreement or instrument to which it is a party or by which it may be bound
or to which any of its property or assets is subject. The Trust is not subject
to any order of any court or of any arbitrator, governmental authority or
administrative agency.
(h) The accountants, PricewaterhouseCoopers LLP, who have certified or
shall certify the financial statements included or incorporated by reference in
the Registration
<PAGE> 9
9
Statement and the Prospectus (or any amendment or supplement to either of them)
are independent public accountants as required by the 1933 Act, the 1940 Act and
the Rules and Regulations.
(i) The financial statements, together with related schedules and notes,
included or incorporated by reference in the Registration Statement and the
Prospectus (and any amendment or supplement to either of them), present fairly
the financial position, results of operations and changes in financial position
of the Trust on the basis stated or incorporated by reference in the
Registration Statement at the respective dates or for the respective periods to
which they apply; such statements and related schedules and notes have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
therein; and the other financial and statistical information and data included
in the Registration Statement and the Prospectus (and any amendment or
supplement to either of them) are accurately presented and prepared on a basis
consistent with such financial statements and the books and records of the
Trust.
(j) The execution and delivery of, and the performance by the Trust of its
obligations under, this Agreement and the Trust Agreements have been duly and
validly authorized by the Trust, and this Agreement and the Trust Agreements
have been duly executed and delivered by the Trust and assuming due
authorization, execution and delivery by the other parties thereto, constitute
the valid and legally binding agreements of the Trust, enforceable against the
Trust in accordance with their terms (subject to the qualification that the
enforceability of the Trust's obligations thereunder may be limited by
bankruptcy, insolvency, reorganization, moratorium, and similar laws of general
applicability relating to or affecting creditors' rights, and to general
principles of equity regardless of whether enforceability is considered in a
proceeding in equity or at law), except as rights to indemnity and contribution
hereunder and thereunder may be limited by federal or state securities laws.
(k) Except as disclosed in the Registration Statement and the Prospectus
(or any amendment or supplement to either of them), subsequent to the respective
dates as of which such information is given in the Registration Statement and
the Prospectus (or any amendment or supplement to either of them), the Trust has
not incurred any liability or obligation, direct or contingent, or entered into
any transaction, not in the ordinary course of business, that is material to the
Trust, and there has not been any change in the capitalization, or material
increase in the short-term debt or long-term debt, of the Trust, or any material
adverse change, or any development involving or which may reasonably be expected
to involve, a prospective material adverse change, in the condition (financial
or other), business, prospects, properties, net assets or results of operations
of the Trust, whether or not arising in the ordinary course of business (a
"Material Adverse Effect").
(l) The Trust has not distributed and, prior to the later to occur of (i)
the Closing Date and (ii) completion of the distribution of the Shares, will not
distribute any offering material in connection with the offering and sale of the
Shares other than the Registration Statement, the Prepricing Prospectus, the
Prospectus or other materials, if any, permitted by the 1933 Act, the 1940 Act
or the Rules and Regulations.
<PAGE> 10
10
(m) (i) The Trust has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits") as are
necessary to own its properties and to conduct its business in the manner
described in the Prospectus (and any amendment or supplement thereto), subject
to such qualifications as may be set forth in the Prospectus; (ii) the Trust has
fulfilled and performed all its material obligations with respect to such
permits and no event has occurred which allows, or after notice or lapse of time
would allow, revocation or termination thereof or results in any other material
impairment of the rights of the Trust under any such permit, subject in each
case to such qualification as may be set forth in the Prospectus (and any
amendment or supplement thereto); and (iii) except as described in the
Prospectus (and any amendment or supplement thereto), none of such permits
contains any restriction that is materially burdensome to the Trust, except
where the failure of (i), (ii) or (iii) to be accurate would not, individually
or in the aggregate, have a Material Adverse Effect on the Trust.
(n) The Trust maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization and with the
applicable requirements of the 1940 Act, the 1940 Act Rules and Regulations and
the Internal Revenue Code of 1986, as amended (the "Code"); (ii) transactions
are recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets and to maintain compliance with the books and records
requirements under the 1940 Act and the 1940 Act Rules and Regulations; (iii)
access to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(o) The Trust has filed all tax returns required to be filed, which
returns are complete and correct in all material respects, and the Trust is not
in material default in the payment of any taxes which were payable pursuant to
said returns or any assessments with respect thereto.
(p) No holder of any security of the Trust has any right to require
registration of shares of beneficial interest, shares of Series T Municipal
Preferred or any other security of the Trust because of the filing of the
registration statement or consummation of the transactions contemplated by this
Agreement.
(q) The conduct by the Trust of its business (as described in the
Prospectus) does not require it to be the owner, possessor or licensee of any
patents, patent licenses, trademarks, service marks or trade names which it does
not own, possess or license.
(r) The Trust is registered under the 1940 Act as a closed-end
non-diversified management investment company and the 1940 Act Notification has
been duly filed with the Commission and, at the time of filing thereof and any
amendment or supplement thereto, conformed in all material respects with all
applicable provisions of the 1940 Act and the Rules and Regulations. The Trust
is, and at all times through the completion of the transactions contemplated
hereby, will be, in compliance in all material respects with the terms and
<PAGE> 11
11
conditions of the 1933 Act and the 1940 Act. No person is serving or acting as
an officer, director or investment Advisor of the Trust except in accordance
with the provisions of the 1940 Act and the 1940 Act Rules and Regulations and
the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and the
rules and regulations of the Commission promulgated under the Advisers Act (the
"Advisers Act Rules and Regulations").
(s) Except as stated in this Agreement and in the Prospectus (and any
amendment or supplement thereto), the Trust has not taken, nor will it take,
directly or indirectly, any action designed to or which might reasonably be
expected to cause or result in stabilization or manipulation of the price of any
securities issued by the Trust to facilitate the sale or resale of the Shares,
and the Trust is not aware of any such action taken or to be taken by any
affiliates of the Trust.
(t) The Trust has filed in a timely manner each document or report
required to be filed by it pursuant to the 1934 Act and the rules and
regulations of the Commission promulgated thereunder (the "1934 Act Rules and
Regulations"); each such document or report at the time it was filed conformed
to the requirements of the 1934 Act and the 1934 Act Rules and Regulations; and
none of such documents or reports contained an untrue statement of any material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
(u) All advertising, sales literature or other promotional material
(including "prospectus wrappers," "broker kits," "road show slides" and "road
show scripts") authorized in writing by or prepared by the Trust or the Advisor
for use in connection with the offering and sale of the Shares (collectively
"sales material") complied and comply in all material respects with the
applicable requirements of the 1933 Act, the 1940 Act, the Rules and Regulations
and the rules and interpretations of the NASD and no such sales material
contained or contains an untrue statement of a material fact or omitted or omits
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(v) Each of the Trust Agreements and the Trust's and the Advisor's
obligations under this Agreement and each of the Trust Agreements comply in all
material respects with all applicable provisions of the 1940 Act, the 1940 Act
Rules and Regulations, the Advisers Act and the Advisers Act Rules and
Regulations.
(w) The Trust currently complies with all requirements under the Code to
qualify as a regulated investment company under Subchapter M of the Code.
(x) Except as disclosed in the Registration Statement and the Prospectus
(or any amendment or supplement to either of them), no director of the Trust is
an "interested person" (as defined in the 1940 Act) of the Trust or an
"affiliated person" (as defined in the 1940 Act) of the Underwriter.
(y) The Trust's Common Shares are duly listed on the NYSE.
<PAGE> 12
12
(z) The Advisor has considered, and is taking actions to address, the
possible adverse effects of the Year 2000 on the critical computer systems used
by the Advisor and its affiliates on behalf of the Trust. Testing and
remediation of those systems is complete and the Advisor has determined that
recognition and execution of date-sensitive functions involving certain dates
prior to and after December 31, 1999 (the "Year 2000 Problem") will not pose
significant problems for the computer systems used by the Advisor on behalf of
the Trust. The Advisor believes, after reasonable inquiry, that suppliers,
vendors, or financial service organizations used in the operation of the Trust
have remedied or will remedy the Year 2000 Problem and that those suppliers,
vendors or financial service organizations believe that their modifications will
be completed on a timely basis, except to the extent that a failure to remedy by
any such supplier, vendor, or financial service organization would not have a
material adverse effect on the operations of the Trust. The Trust is in
compliance with the Commission's Release No. 33-7558 related to Year 2000
compliance, as amended to date.
(aa) The proxy statement and all related materials distributed to holders
of Common Shares of the Trust in connection with the shareholder meeting held on
May 20, 1999, as adjourned to _______ __, 1999 (the "Shareholder Meeting") did
not, as of its date or the date of the Shareholder Meeting, contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
the holders of the Common Shares duly approved all of the items proposed at such
meeting, in accordance with the Organizational Documents of the Trust and
applicable law.
7. REPRESENTATIONS AND WARRANTIES OF THE ADVISOR. The Advisor represents
and warrants to the Underwriter as follows:
(a) The Advisor is a corporation duly incorporated and validly existing in
good standing under the laws of the Commonwealth of Massachusetts, with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus (and any amendment or supplement to either of them), and is duly
registered and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
so to register or to qualify does not have a material adverse effect on the
condition (financial or other), business, prospects, properties, net assets or
results of operations of the Advisor or on the ability of the Advisor to perform
its obligations under this Agreement and the Management Agreement.
(b) The Advisor is duly registered with the Commission as an investment
advisor under the Advisers Act and is not prohibited by the Advisers Act, the
Advisers Act Rules and Regulations, the 1940 Act or the 1940 Act Rules and
Regulations from acting under the Management Agreement for the Trust as
contemplated by the Prospectus (or any amendment or supplement thereto). There
does not exist any proceeding or any facts or circumstances the existence of
which could lead to any proceeding which might adversely affect the registration
of the Advisor with the Commission.
<PAGE> 13
13
(c) There are no legal or governmental proceedings pending or, to the
knowledge of the Advisor, threatened against the Advisor, or to which the
Advisor or any of its properties is subject, that are required to be described
in the Registration Statement or the Prospectus (or any amendment or supplement
to either of them) but are not described as required or that may reasonably be
expected to involve a prospective material adverse change, in the condition
(financial or other), business, prospects, properties, net assets or results of
operations of the Advisor or on the ability of the Advisor to perform its
obligations under this Agreement and the Management Agreement.
(d) Neither the execution, delivery or performance of this Agreement or
the performance of the Management Agreement by the Advisor, nor the consummation
by the Advisor of the transactions contemplated hereby or thereby (A) requires
the Advisor to obtain any consent, approval, authorization or other order of or
registration or filing with, the Commission, the NASD, any state securities
commission, any national securities exchange, any arbitrator, any court,
regulatory body, administrative agency or other governmental body, agency or
official or conflicts or will conflict with or constitutes or will constitute a
breach of or a default under, the certificate of incorporation or by-laws, or
other organizational documents, of the Advisor or (B) conflicts or will conflict
with or constitutes or will constitute a breach of or a default under, any
agreement, indenture, lease or other instrument to which the Advisor is a party
or by which it or any of its properties may be bound, or violates or will
violate any statute, law, regulation or filing or judgment, injunction, order or
decree applicable to the Advisor or any of its properties or will result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Advisor pursuant to the terms of any agreement or instrument to
which it is a party or by which it may be bound or to which any of the property
or assets of the Advisor is subject. The Advisor is not subject to any order of
any court or of any arbitrator, governmental authority or administrative agency.
(e) The execution and delivery of, and the performance by the Advisor of
its obligations under, this Agreement and the Management Agreement have been
duly and validly authorized by the Advisor, and this Agreement and the
Management Agreement have been duly executed and delivered by the Advisor and
each constitutes the valid and legally binding agreement of the Advisor,
enforceable against the Advisor in accordance with its terms (subject to the
qualification that the enforceability of the Advisor's obligations thereunder
may be limited by bankruptcy, insolvency, reorganization, moratorium and similar
laws of general applicability relating to or affecting creditors' rights, and to
general principles of equity regardless of whether enforceability is considered
in a proceeding in equity or at law), except as rights to indemnity and
contribution hereunder may be limited by federal or state securities laws.
(f) The description of the Advisor in the Registration Statement and the
Prospectus (and any amendment or supplement thereto) complied and comply in all
material respects with the provisions of the 1933 Act, the 1940 Act, the
Advisers Act, the Rules and Regulations and the Advisers Act Rules and
Regulations and did not and will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
<PAGE> 14
14
(g) Except as disclosed in the Registration Statement and the Prospectus
(or any amendment or supplement to either of them), subsequent to the respective
dates as of which such information is given in the Registration Statement and
the Prospectus (or any amendment or supplement to either of them), the Advisor
has not incurred any liability or obligation, direct or contingent, or entered
into any transaction, not in the ordinary course of business, that is material
to the Advisor or the Trust and that is required to be disclosed in the
Registration Statement or the Prospectus and there has not been any material
adverse change, or any development involving or which may reasonably be expected
to involve, a prospective material adverse change, in the condition (financial
or other), business, prospects, properties, net assets or results of operations
of the Advisor, whether or not arising in the ordinary course of business, or
which, in each case, could have a material adverse effect on the ability of the
Advisor to perform its obligations under this Agreement and the Management
Agreement.
(h) (i) The Advisor has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits") as are
necessary to own its properties and to conduct its business in the manner
described in the Prospectus (and any amendment thereto); (ii) the Advisor has
fulfilled and performed all its material obligations with respect to such
permits and no event has occurred which allows, or after notice or lapse of time
would allow, revocation or termination thereof or results in any other material
impairment of the rights of the Advisor under any such permit; and (iii) except
as described in the Prospectus (and any amendment or supplement thereto), none
of such permits contains any restriction that is materially burdensome to the
Advisor, except where the failure of (i), (ii), or (iii) to be accurate would
not, individually or in the aggregate, have a Material Adverse Effect on the
Advisor.
8. INDEMNIFICATION AND CONTRIBUTION. (a) The Trust and the Advisor,
jointly and severally, agree to indemnify and hold harmless each of the
Underwriter and each person, if any, who controls the Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act from and
against any and all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation), joint or several, arising out of or based
upon any untrue statement or alleged untrue statement of a material fact
contained in any Prepricing Prospectus or in the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or arising out of or based
upon any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities or expenses arise
out of or are based upon any untrue statement or omission or alleged untrue
statement or omission which has been made therein or omitted therefrom in
reliance upon and in conformity with the information relating to the Underwriter
furnished in writing to the Trust by or on behalf of the Underwriter expressly
for use in connection therewith; provided, however, that the indemnification
contained in this paragraph (a) with respect to any Prepricing Prospectus shall
not inure to the benefit of the Underwriter (or to the benefit of any person
controlling the Underwriter) on account of any such loss, claim, damage,
liability or expense arising from the sale of the Shares by the Underwriter to
any person if a copy of the Prospectus shall not have been delivered or sent to
such person within the time required by the 1933 Act and the 1933 Act Rules and
Regulations, and the untrue statement or alleged untrue statement or omission or
alleged omission of a material fact contained in such Prepricing Prospectus was
corrected in the
<PAGE> 15
15
Prospectus, provided that the Trust has delivered the Prospectus to the
Underwriter in requisite quantity on a timely basis to permit such delivery or
sending. The foregoing indemnity agreement shall be in addition to any liability
which the Trust or the Advisor may otherwise have.
(b) Any party that proposes to assert the right to be indemnified under
this Section 8 will, promptly after receipt of notice of commencement of any
action against such party in respect of which a claim is to be made against an
indemnifying party or parties under this Section 8, notify each such
indemnifying party of the commencement of such action, enclosing a copy of all
papers served, but the omission to so notify such indemnifying party (i) will
not relieve it from any liability that it may have to any indemnified party
under the foregoing provision of this Section 8 unless, and only to the extent
that, such omission results in the forfeiture of substantive rights or defenses
by the indemnifying party and (ii) will not, in any event, relieve such
indemnifying party from any other obligation (other than pursuant to the
foregoing provision of this Section 8) it may have under this Agreement. If any
action, suit or proceeding shall be brought against the Underwriter or any
person controlling the Underwriter in respect of which indemnity may be sought
against the Trust or the Advisor, the Underwriter or such controlling person
shall promptly notify the Trust or the Advisor, and the Trust or the Advisor
may, at its option and upon notice to the Underwriter assume the defense
thereof, including the employment of counsel and payment of all fees and
expenses. The Underwriter or any such controlling person shall have the right to
employ separate counsel in any such action, suit or proceeding and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of the Underwriter or such controlling person unless (i)
the Trust or the Advisor has agreed in writing to pay such fees and expenses,
(ii) the Trust and the Advisor have failed to assume the defense and employ
counsel, or (iii) the named parties to any such action, suit or proceeding
(including any impleaded parties) include both the Underwriter or such
controlling person and the Trust or the Advisor and the Underwriter or such
controlling person shall have been advised by its counsel that representation of
such indemnified party and the Trust or the Advisor by the same counsel would be
inappropriate under applicable standards of professional conduct (whether or not
such representation by the same counsel has been proposed) due to actual or
potential differing interests between them (in which case the Trust and the
Advisor shall not have the right to assume the defense of such action, suit or
proceeding on behalf of the Underwriter or such controlling person). It is
understood, however, that the Trust and the Advisor shall, in connection with
any one such action, suit or proceeding or separate but substantially similar or
related actions, suits or proceedings in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable fees
and expenses of only one separate firm of attorneys (in addition to any local
counsel) at any time for the Underwriter and controlling persons not having
actual or potential differing interests with you or among themselves, which firm
shall be designated in writing by the Underwriter, and that all such fees and
expenses shall be reimbursed as they are incurred. The Trust and the Advisor
shall not be liable for any settlement of any such action, suit or proceeding
effected without its written consent (which shall not be unreasonably withheld),
but if settled with such written consent, or if there be a final judgment for
the plaintiff in any such action, suit or proceeding, the Trust and the Advisor
agree to indemnify and hold harmless the Underwriter, to the extent provided in
the
<PAGE> 16
16
preceding paragraph, and any such controlling person from and against any loss,
claim, damage, liability or reasonable expense by reason of such settlement or
judgment.
(c) The Underwriter agrees to indemnify and hold harmless the Trust and
the Advisor, their directors, trustees and officers who sign the Registration
Statement, and any person who controls the Trust or the Advisor within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, to the same
extent as the foregoing indemnity from the Trust and the Advisor to the
Underwriter, but only with respect to information relating to the Underwriter
furnished in writing by or on behalf of the Underwriter expressly for use in the
Registration Statement, the Prospectus or any Prepricing Prospectus, or any
amendment or supplement thereto. If any action, suit or proceeding shall be
brought against the Trust or the Advisor, any of their directors, any such
officer, or any such controlling person based on the Registration Statement, the
Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto,
and in respect of which indemnity may be sought against the Underwriter pursuant
to this paragraph (c), the Underwriter shall have the rights and duties given to
the Trust and the Advisor by paragraph (b) above (except that if the Trust or
the Advisor shall have assumed the defense thereof the Underwriter shall not be
required to do so, but may employ separate counsel therein and participate in
the defense thereof, but the fees and expenses of such counsel shall be at the
Underwriter's expense), and the Trust and the Advisor, their directors, trustees
and any such officer, and any such controlling person shall have the rights and
duties given to the Underwriter by paragraph (b) above. The foregoing indemnity
agreement shall be in addition to any liability which the Underwriter may
otherwise have.
(d) If the indemnification provided for in this Section 8 is unavailable
to an indemnified party under paragraphs (a) or (c) hereof in respect of any
losses, claims, damages, liabilities or expenses referred to therein, then an
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or reasonable expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Trust and the Advisor on the one hand (treated jointly for this purpose as one
person) and the Underwriter on the other hand from the offering of the Shares,
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Trust and the Advisor on the one hand (treated jointly for this purpose as
one person) and the Underwriter on the other in connection with the statements
or omissions that resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations with respect to
the offering of the Shares. The relative benefits received by the Trust and the
Advisor on the one hand (treated jointly for this purpose as one person) and the
Underwriter on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by the
Trust bear to the total underwriting discounts and commissions received by the
Underwriter, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Trust and the Advisor on the one hand
(treated jointly for this purpose as one person) and the Underwriter on the
other hand shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by
<PAGE> 17
17
the Trust and the Advisor on the one hand (treated jointly for this purpose as
one person) or by the Underwriter on the other hand and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action against such party in
respect of which a claim for contribution may be made under this Section 8(d),
notify such party or parties from whom contribution may be sought, but the
omission so to notify (i) will not relieve the party or parties from whom
contribution may be sought from any other obligation it or they may have under
this Section 8(d), unless such omission results in the forfeiture of substantive
rights or defenses by the party or parties from whom contribution is being
sought and (ii) will not, in any event, relieve the party or parties from whom
contribution may be sought from any other obligation (other than pursuant to
this Section 8(d)) it or they may have under this Agreement. Except for a
settlement entered into pursuant to the last sentence of Section 8(b) hereof, no
party will be liable for contribution with respect to any action or claim
settled without its written consent (which consent shall not be unreasonably
withheld).
(e) The Trust, the Advisor and the Underwriter agree that it would not be
just and equitable if contribution pursuant to this Section 8 were determined by
a pro rata allocation or by any other method of allocation that does not take
account of the equitable considerations referred to in paragraph (d) above. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in paragraph (d) above
shall be deemed to include, subject to the limitations set forth above, any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating any claim or defending any such action, suit or
proceeding. Notwithstanding the provisions of this Section 8, the Underwriter
shall not be required to contribute any amount in excess of the amount by which
the total price of the Shares underwritten by it and distributed to the public
exceeds the amount of any damages which the Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation.
(f) No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened action,
suit or proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such action, suit or proceeding.
(g) Notwithstanding any other provisions in this Section 8, no party shall
be entitled to the benefit of any provision under this Agreement which protects
or purports to protect such person against any liability to the Trust or its
security holders to which such person would otherwise be subject by reason of
such person's willful misfeasance, bad faith, or gross negligence, in the
performance of such person's duties hereunder, or by reason of such person's
reckless disregard of such person's obligations and duties hereunder.
<PAGE> 18
18
(h) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Trust and the Advisor set forth in this
Agreement shall remain operative and in full force and effect, regardless of (i)
any investigation made by or on behalf of the Underwriter or any person
controlling the Underwriter, the Trust, the Advisor, their directors or
officers, or any person controlling the Trust or the Advisor, (ii) acceptance of
any Shares and payment therefor hereunder, and (iii) any termination of this
Agreement. A successor to the Underwriter or any person controlling the
Underwriter, or to the Trust, the Advisor, their directors or officers, or any
person controlling the Trust or the Advisor, shall be entitled to the benefits
of the indemnity, contribution, and reimbursement agreements contained in this
Section 8.
9. CONDITIONS OF UNDERWRITER'S OBLIGATIONS. The obligation of the
Underwriter to purchase the Shares hereunder are subject to the following
conditions:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
registration statement or such post-effective amendment shall have become
effective not later than 5:30 P.M., New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by the
Underwriter, and all filings, if any, required by Rules 497 and 430A under the
1933 Act and the 1933 Act Rules and Regulations shall have been timely made; no
stop order suspending the effectiveness of the Registration Statement or order
pursuant to Section 8(e) of the 1940 Act shall have been issued and no
proceeding for those purposes shall have been instituted or, to the knowledge of
the Trust, the Advisor or the Underwriter, threatened by the Commission, and any
request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been complied
with to the Underwriter's reasonable satisfaction.
(b) Subsequent to the effective date of this Agreement, there shall not
have occurred (i) any change or any development involving a prospective change
in or affecting the condition (financial or other), business, prospects,
properties, net assets, or results of operations of the Trust or the Advisor not
contemplated by the Prospectus, which in the Underwriter's reasonable opinion
would materially and adversely affect the market for the Shares, or (ii) any
event or development relating to or involving the Trust or the Advisor or any
officer or director of the Trust or the Advisor which makes any statement made
in the Prospectus untrue or which, in the reasonable opinion of the Trust and
its counsel or the Underwriter and its counsel, requires the making of any
addition to or change in the Prospectus in order to state a material fact
required by the 1933 Act, the 1940 Act or the Rules and Regulations or any other
law to be stated therein or necessary in order to make the statements therein
not misleading, if amending or supplementing the Prospectus to reflect such
event or development would, in the Underwriter's opinion, materially adversely
affect the market for the Shares.
<PAGE> 19
19
(c) The Trust shall have furnished to the Underwriter a report showing
compliance with the asset coverage requirements of the 1940 Act and a Basic
Maintenance Report (as defined in the By-laws), each dated the Closing Date and
in form and substance satisfactory to the Underwriter. 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
Ropes & Gray, counsel for the Trust, dated the Closing Date and addressed to the
Underwriter, in form and substance satisfactory to the Underwriter and to the
effect set forth in Exhibit A hereto.
(e) The Underwriter shall have received on the Closing Date an opinion of
the General Counsel for the Advisor, dated the Closing Date and addressed to the
Underwriter, in form and substance satisfactory to the Underwriter and to the
effect set forth in Exhibit B hereto.
(f) The Underwriter shall have received on the Closing Date an opinion of
Simpson Thacher & Bartlett, counsel for the Underwriter, dated the Closing Date
and addressed to the Underwriter, with respect to such matters as the
Underwriter may reasonably request.
(g) The Underwriter shall have received letters addressed to the
Underwriter and dated the date hereof and the Closing Date from
PricewaterhouseCoopers LLP, independent certified public accountants,
substantially in the forms heretofore approved by the Underwriter.
(h) (i) No order suspending the effectiveness of the Registration
Statement or prohibiting or suspending the use of the Prospectus (or any
amendment or supplement thereto) or any Prepricing Prospectus or any sales
material shall have been issued and no proceedings for such purpose or for the
purpose of commencing an enforcement action against the Trust, the Advisor or,
with respect to the transactions contemplated by the Prospectus (or any
amendment or supplement thereto) and this Agreement, the Underwriter, may be
pending before or, to the knowledge of the Trust, the Advisor or the Underwriter
or in the reasonable view of counsel to the Underwriter, shall be threatened or
contemplated by the Commission at or prior to the Closing Date and that any
request for additional information on the part of the Commission (to be included
in the Registration Statement, the Prospectus or otherwise) be complied with to
the satisfaction of the Underwriter; (ii) there shall not have been any change
in the shares of beneficial interest of the Trust nor any material increase in
the short-term or long-term debt of the Trust (other than in the ordinary course
of business) from that set forth or contemplated in the Registration Statement
or the Prospectus (or any amendment or supplement thereto); (iii) there shall
not have been, subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus (or any amendment or
supplement thereto), except as may otherwise be stated in the Registration
Statement and Prospectus (or any amendment or supplement thereto), any material
adverse change in the condition (financial or other), business, prospects,
properties, net assets or results of operations of the Trust or the Advisor;
(iv) the Trust shall not have any liabilities or obligations, direct or
contingent (whether or not in the ordinary course of business), that are
material to the Trust, other than those reflected in the Registration
<PAGE> 20
20
Statement or the Prospectus (or any amendment or supplement to either of them);
and (v) all the representations and warranties of the Trust and the Advisor
contained in this Agreement shall be true and correct on and as of the date
hereof and on and as of the Closing Date as if made on and as of the Closing
Date, and the Underwriter shall have received a certificate of the Trust and the
Advisor, dated the Closing Date and signed by the chief executive officer and
the chief financial officer of each of the Trust and the Advisor (or such other
officers as are acceptable to the Underwriter), to the effect set forth in this
Section 9(h) and in Section 9(i) hereof.
(i) Neither the Trust nor the Advisor shall have failed at or prior to the
Closing Date to have performed or complied in all material respects with any of
its agreements herein contained and required to be performed or complied with by
it hereunder at or prior to the Closing Date.
(j) The Trust shall have delivered and the Underwriter shall have received
evidence satisfactory to the Underwriter that the Shares are rated 'aaa' by
Moody's and AAA by S&P as of the Closing Date, and there shall not have been
given any notice of any intended or potential downgrading, or of any review for
a potential downgrading, in the rating accorded to the shares of Series T
Municipal Preferred by any Rating Agency.
(k) The Trust and the Advisor shall have furnished or caused to be
furnished to the Underwriter such further certificates and documents as the
Underwriter shall have reasonably requested.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
in form and substance to the Underwriter and the Underwriter's counsel.
Any certificate or document signed by any officer of the Trust or the
Advisor and delivered to the Underwriter, or to counsel for the Underwriter,
shall be deemed a representation and warranty by the Trust or the Advisor to the
Underwriter as to the statements made therein.
10. EXPENSES. The Trust agrees to pay the following costs and expenses and
all other costs and expenses incident to the performance by it of its
obligations hereunder: (i) the preparation, printing or reproduction, and filing
with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the 1940 Act
Notification, the Prospectus and each amendment or supplement to any of them
(including, without limitation, the filing fees prescribed by the 1933 Act, the
1940 Act and the Rules and Regulations); (ii) the printing (or reproduction) and
delivery (including postage, air freight charges and charges for counting and
packaging) of such copies of the Registration Statement, each Prepricing
Prospectus, the Prospectus, any sales material and all amendments or supplements
to any of them as may be reasonably requested for use in connection with the
offering and sale of the Shares; (iii) the preparation, printing,
authentication, issuance and delivery of certificates for the Shares, including
any stamp taxes in connection with the original issuance and sale of the Shares;
(iv) the reproduction and delivery of this Agreement, any dealer agreements, the
preliminary blue sky memorandum, if any, and all other agreements or
<PAGE> 21
21
documents reproduced and delivered in connection with the offering of the
Shares; (v) the registration of the Shares under the 1934 Act; (vi) the
reasonable fees, expenses and disbursements of counsel for the Underwriter
relating to the preparation, reproduction, and delivery of any preliminary blue
sky memorandum; (vii) fees paid to the Rating Agencies; (viii) the
transportation and other expenses incurred by or on behalf of Trust
representatives in connection with presentations to prospective purchasers of
the Shares; and (ix) the fees and expenses of the Trust's accountants and the
fees and expenses of counsel (including local and special counsel) for the
Trust; provided, that (a) the Trust, the Advisor and the Underwriter shall pay
its own costs and expenses in attending any information meeting relating to the
Trust, (b) the Underwriter shall pay the costs and expenses of any sales
material prepared by it in connection with the public offering of the Shares,
(c) the Underwriter shall pay the costs and expenses of any "tombstone"
advertisements, and (d) except as provided in this Section and in Section 5
hereof, the Underwriter shall pay its own costs and expenses, including the fees
and expenses of their counsel.
11. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become effective:
(i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at
the time this Agreement is executed and delivered, it is necessary for the
registration statement or a post-effective amendment thereto to be declared
effective before the offering of the Shares may commence, when notification of
the effectiveness of the registration statement or such post-effective amendment
has been released by the Commission. Until such time as this Agreement shall
have become effective, it may be terminated by the Trust, by notifying the
Underwriter, or by the Underwriter, by notifying the Trust. Any notice under
this Section 11 may be given by telegram, telecopy or telephone but shall be
subsequently confirmed by letter.
12. TERMINATION OF AGREEMENT. This Agreement shall be subject to
termination in the Underwriter's absolute discretion, without liability on the
part of the Underwriter to the Trust or the Advisor, by notice to the Trust, if
prior to the Closing Date (i) trading in securities generally on the NYSE 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 last paragraph on the cover page and the statements in the first and fourth
sentences of the third paragraph and in the fifth paragraph under the caption
"Underwriting" in any Prepricing Prospectus and in the Prospectus, constitute
the only information furnished by or on behalf of the Underwriter as such
information is referred to in Sections 6(b) and 8 hereof.
<PAGE> 22
22
14. MISCELLANEOUS. Except as otherwise provided in Sections 5, 11 and 12
hereof, notice given pursuant to any provision of this Agreement shall be in
writing and shall be delivered (i) if to the Trust or the Advisor, at the office
of the Trust at One Financial Center, Boston, MA 02111, Attention: Secretary; or
(ii) if to the Underwriter, to Salomon Smith Barney Inc., 388 Greenwich Street,
New York, New York 10013, Attention: Manager, Investment Banking Division.
15. DISCLAIMER. A copy of the document establishing the Trust is filed
with the Secretary of the Commonwealth of Massachusetts. This Agreement is
executed by officers not as individuals and is not binding upon any of the
Trustees, officers, or shareholders of the Trust individually but only upon the
assets of the Trust.
This Agreement has been and is made solely for the benefit of the
Underwriter, the Trust, the Advisor, their directors and officers, and the other
controlling persons referred to in Section 8 hereof and their respective
successors and assigns, to the extent provided herein, and no other person shall
acquire or have any right under or by virtue of this Agreement. Neither the term
"successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from the Underwriter of any of the Shares in his
status as such purchaser.
16. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
[End of Text]
<PAGE> 23
Please confirm that the foregoing correctly sets forth the agreement among
the Trust, the Advisor and the Underwriter.
Very truly yours,
COLONIAL HIGH INCOME MUNICIPAL TRUST
By:
--------------------------------------
COLONIAL MANAGEMENT ASSOCIATES, INC.
By:
--------------------------------------
Confirmed as of the date first
above mentioned.
SALOMON SMITH BARNEY INC.
By:
-------------------------------
Managing Director
<PAGE> 24
SCHEDULE I
COLONIAL HIGH INCOME MUNICIPAL TRUST
<TABLE>
<CAPTION>
Number of
Shares of
Series T
Municipal
Underwriter Preferred
----------- ---------
<S> <C>
Salomon Smith Barney Inc. ........................... 2,400
-----
Total ............................................... 2,400
</TABLE>
<PAGE> 25
EXHIBIT A
FORM OF OPINION OF ROPES & GRAY
The Underwriter shall have received on the Closing Date an opinion of
Ropes & Gray, counsel for the Trust, dated the Closing Date and addressed to the
Underwriter, in form and substance satisfactory to the Underwriter and to the
effect that:
a. The Trust is a business trust duly organized and validly existing
in good standing under the laws of the Commonwealth of
Massachusetts with full power and authority to own, lease and
operate its properties and to conduct its business as described
in the Registration Statement and the Prospectus and to issue and
sell the Shares as contemplated by the Underwriting Agreement;
b. The Shares have been duly authorized and, when issued and
delivered to the Underwriter against payment therefor in
accordance with the terms of the Underwriting Agreement, will be
validly issued, fully paid and nonassessable and free of any
preemptive or similar rights and will conform to the description
thereof in the Registration Statement and the Prospectus; the
Certificate evidencing the Shares complies with all requirements
of Massachusetts law; and the relative rights, interests, powers
and preferences of the Shares, and the obligation of the Trust to
redeem such Shares upon the terms and conditions set forth in the
By-Laws, are legal, valid, binding and enforceable under
Massachusetts law;
c. The Shares conform in all material respects with the statements
concerning them contained in the Prospectus, and the authorized
and outstanding shares of beneficial interest of the Trust are as
set forth in the Prospectus;
d. The Registration Statement is effective under the 1933 Act and
the 1940 Act; any required filing of the Prospectus pursuant to
Rule 497 of the 1933 Act Rules and Regulations has been made
within the time periods required by Rule 497(b) or (h), as the
case may be; to the best knowledge of such counsel, no stop order
suspending its effectiveness or order pursuant to Section 8(e) of
the 1940 Act relating to the Trust has been issued and no
proceeding for any such purpose is pending or threatened by the
Commission;
e. The Registration Statement and the Prospectus comply as to form
in all material respects with the provisions of the 1933 Act, the
1940 Act and the Rules and Regulations (except that no opinion
need be expressed as to the financial statements or other
financial data contained therein);
f. The statements made in the Prospectus (including the Statement of
Additional Information) under the captions "The Auction" and
"Description of Municipal
<PAGE> 26
2
Preferred", insofar as they purport to summarize the provisions
of the Bylaws or other documents or agreements specifically
referred to therein, constitute accurate summaries of the terms
of any such documents;
g. The statements made in the Prospectus (including the Statement of
Additional Information) under the captions "Tax Matters", insofar
as they constitute matters of law or legal conclusions, have been
reviewed by such counsel and constitute accurate statements of
any such matters of law or legal conclusions in all material
respects, and fairly present the information called for with
respect thereto by Form N-2 under the 1940 Act;
h. To such counsel's knowledge (but without a search of the dockets
of any court, administrative body or filing office in any
jurisdiction), there are no legal or governmental proceedings
pending or threatened against the Trust, or to which the Trust or
any of its properties is subject, that are required to be
described in the Registration Statement or the Prospectus but are
not described as required;
i. To the best of such counsel's knowledge after reasonable inquiry,
there are no agreements, contracts, indentures, leases or other
instruments that are required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement that are not described or filed as
required by the 1933 Act, the 1940 Act or the Rules and
Regulations;
j. Neither the issuance and sale of the Shares, the execution,
delivery or performance of the Underwriting Agreement or any of
the Trust Agreements by the Trust, nor the consummation by the
Trust of the transactions contemplated thereby (A) requires any
consent, approval, authorization or other order of or
registration or filing by the Trust with the Commission, the
NASD, any national securities exchange, any arbitrator, any
court, regulatory body, administrative agency or other
governmental body, agency or official (except such as may have
been obtained prior to the date hereof and such as may be
required for compliance with state securities and blue sky laws)
or conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the Declaration, the
By-Laws or other organizational documents of the Trust or (B) (i)
conflicts or will conflict with or constitutes or will constitute
a breach of, or a default under, any agreement, indenture, lease
or other instrument to which the Trust is a party or by which it
or any of its properties may be bound and that is identified, in
an officer's certificate of the Trust, as material to the
business, financial condition, operations, properties or
prospects of the Trust (the "Agreements and Instruments"), (ii)
violates or will violate any statute, law or regulation (assuming
compliance with state securities and blue sky laws), (iii)
violates or will violate any judgment, injunction, order or
decree that is applicable to the Trust or any of its properties
and that is known to such counsel, or (iv) will result in the
creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Trust pursuant to the terms of the
Agreements and Instruments;
<PAGE> 27
3
k. The Underwriting Agreement and the Trust Agreements have been
duly authorized, executed and delivered by the Trust and each
complies with all applicable provisions of the 1940 Act; assuming
due authorization, execution and delivery by the other parties
thereto, each Trust Agreement constitutes the valid and binding
obligation of the Trust enforceable in accordance with its terms,
except as rights to indemnity and contribution in the
Underwriting Agreements and Trust Agreements may be limited by
Federal or state securities laws, subject as to enforcement to
bankruptcy, insolvency, reorganization and other laws of general
applicability relating to or affecting creditors' rights and to
general equity principles;
l. The Trust is duly registered under the 1940 Act as a closed-end
non-diversified management investment company;
m. The provisions of the Declaration and By-Laws of the Trust and
the investment policies and restrictions described in the
Prospectus (including the Statement of Additional Information)
under the captions "Investment Objectives and Policies" and
"Miscellaneous Investment Practices" comply with the requirements
of the 1940 Act and the 1940 Act Rules and Regulations; and
n. The portions of the proxy statement and all related materials
distributed to holders of Common Shares of the Trust in
connection with the shareholder meeting held on May 20, 1999, as
adjourned to ________ __, 1999 (the "Shareholder Meeting"), and
in connection with amending the Declaration to permit the
issuance of preferred shares (the "Preferred Share Proxy
Materials") did not, as of its date or the date of the
Shareholder Meeting, contain an untrue statement of a material
fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading, and the Preferred Share Proxy Materials complied as
to form, as of its date and as of the date of the Shareholder
Meeting, in all material respects with the provisions of the 1934
Act, the 1940 Act and the Rules and Regulations.
Such counsel shall also have furnished to the Underwriter a statement,
addressed to the Underwriter, dated the Closing Date, to the effect that such
counsel has acted for the Trust in connection with the preparation of the
Registration Statement, and based on the foregoing, while such counsel has not
themselves independently verified the accuracy or completeness of or otherwise
verified and is not passing upon and assumes no responsibility for the
Registration Statement or the Prospectus (other than as set forth in (f), (g)
and (m) above) in the course of their review of the Registration Statement and
Prospectus and discussion of the contents of the Registration Statement and
Prospectus with certain officers and employees of the Trust and its independent
accountants, no facts have come to the attention of such counsel which would
lead them to believe that the Registration Statement (excluding the financial
statements, including the notes and schedules thereto, or other financial data
contained or referred to therein, as to which such counsel need express no
belief), as of its effective date, contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
<PAGE> 28
4
necessary in order to make the statements therein not misleading or that the
Prospectus (except for the financial statements, including the notes and
schedules thereto, or other financial data contained or referred to therein, as
to which such counsel need express no belief) contains any untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
Such counsel may also state that they do not express any opinion
concerning any law other than the law of the Commonwealth of Massachusetts and
the federal law of the United States.
<PAGE> 29
EXHIBIT B
FORM OF OPINION OF GENERAL COUNSEL OF ADVISER
The Underwriter shall have received on the Closing Date an opinion of
the General Counsel of the Advisor, addressed to the Underwriter and dated the
Closing Date, in form and substance satisfactory to the Underwriter and to the
effect that:
a. The Advisor is a corporation duly incorporated and validly
existing and in good standing under the laws of The Commonwealth
of Massachusetts, with full corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Registration Statement and the Prospectus;
b. The Underwriting Agreement and the Management Agreement have been
duly authorized, executed and delivered by the Advisor and each
complies with all applicable provisions of the Advisers Act and
the Management Agreement constitutes the valid and binding
obligation of the Advisor enforceable in accordance with its
terms, subject as to enforcement to bankruptcy, insolvency,
reorganization and other laws of general applicability relating
to or affecting creditors' rights and to general equity
principles;
c. The Advisor is duly registered with the Commission as an
investment adviser under the Advisers Act and is not prohibited
by the Advisers Act, the Advisers Act Rules and Regulations, the
1940 Act or the 1940 Act Rules and Regulations from acting under
the Management Agreement for the Trust as contemplated by the
Prospectus;
d. To the best of such counsel's knowledge after reasonable inquiry,
there are no legal or governmental proceedings pending or
threatened against the Advisor, or to which the Advisor or any of
its properties is subject, that are required to be described in
the Registration Statement or the Prospectus but are not
described as required;
e. To the best of such counsel's knowledge after reasonable inquiry,
the Advisor is not in violation of its corporate charter or
by-laws, nor is the Advisor in default under any material
agreement, indenture or instrument or in breach or violation of
any judgment, decree, order, rule or regulation of any court or
governmental or self-regulatory agency or body;
f. Neither the execution, delivery or performance of the
Underwriting Agreement nor the consummation by the Advisor of the
transactions contemplated hereby or thereby (A) requires the
Advisor to obtain any consent, approval, authorization or other
order of or registration or filing with, the Commission, the
NASD, any national securities exchange, any arbitrator, any
court, regulatory body, administrative agency or other
governmental body, agency or official (except such as may have
been obtained prior to the date hereof and such as may be
required for compliance with state securities or blue sky laws)
or conflicts or will conflict with or constitutes or will
constitute a breach of, or
<PAGE> 30
a default under, the certificate of incorporation or by-laws, or
other organizational documents, of the Advisor or (B) (i)
conflicts or will conflict with or constitutes or will constitute
a breach of, or a default under, any material agreement,
indenture, lease or other instrument to which the Trust is a
party or by which it or any of its properties may be bound (the
"Agreements and Instruments") or any other Agreements and
Instruments known to such counsel after due inquiry, (ii)
violates or will violate any statute, law or regulation (assuming
compliance with state securities and blue sky laws), (iii)
violates or will violate any judgment, injunction, order or
decree that is applicable to the Advisor or any of its properties
and that is known to such counsel, or (iv) will result in the
creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Advisor pursuant to the terms of
the Agreements and Instruments; and
g. The description of the Advisor in the Registration Statement and
the Prospectus does not contain an untrue statement of a material
fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
<PAGE> 1
Exhibit 99(h)(2)
Municipal Auction Rate Cumulative Preferred Shares
COLONIAL HIGH INCOME MUNICIPAL TRUST
2,400 Shares, Series W
Liquidation Preference $25,000 Per Share
UNDERWRITING AGREEMENT
August __, 1999
SALOMON SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Colonial High Income Municipal Trust, a Massachusetts business trust (the
"Trust"), proposes, upon the terms and conditions set forth herein, to issue and
sell an aggregate of 2,400 shares of its Municipal Auction Rate Cumulative
Preferred Shares, Series W (the "Series W Municipal Preferred"), each with a
liquidation preference of $25,000 per share (the shares of Series W Municipal
Preferred to be sold hereby are referred to herein, collectively, as the
"Shares"). Concurrently with the offering of the Series W Municipal Preferred,
the Trust is offering an additional 2,400 shares of Series T Municipal
Preferred. The shares of Series W Municipal Preferred and Series T Municipal
Preferred will be authorized by, and subject to the terms and conditions of, the
Amended and Restated By-Laws of the Trust in the form filed as an exhibit to the
Registration Statement referred to in Section 1 of this agreement. The Trust and
its investment adviser, Colonial Management Associates, Inc., (the "Advisor"),
wish to confirm as follows their agreement with Salomon Smith Barney Inc. (the
"Underwriter") in connection with the purchase of the Shares by the Underwriter.
Collectively, (i) the Management Agreement, dated as of March 27, 1995,
between the Trust and the Advisor (the "Management Agreement"), (ii) the
Custodian Agreement, dated as of August 17, 1997, between the Trust and The
Chase Manhattan Bank, as amended, (iii) the Auction Agency Agreement, to be
dated as of August __, 1999, between the Trust and Bankers Trust Company and
(iv) the Broker-Dealer Agreement, to be dated as of August __, 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
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 (File No. 333-81129 and
811-5754), under the 1933 Act and the 1940 Act (the "registration statement"),
including a prospectus relating to the Shares, and has filed the registration
statement and prospectus in accordance with the 1933 Act and 1940 Act. The Trust
also has filed a notification of registration of the Trust as an investment
company under the 1940 Act on Form N-8A (the "1940 Act Notification"). The term
"Registration Statement" as used in this Agreement means the registration
statement (including all financial schedules and exhibits), as amended at the
time it becomes effective under the 1933 Act or, if the registration statement
became effective under the 1933 Act prior to the execution of this Agreement, as
amended or supplemented at the time it became effective, prior to the execution
of this Agreement. If it is contemplated, at the time this Agreement is
executed, that a post-effective amendment to the registration statement will be
filed under the 1933 Act and must be declared effective before the offering of
the Shares may commence, the term "Registration Statement" as used in this
Agreement means the registration statement as amended by said post-effective
amendment. If the Trust has filed an abbreviated registration statement to
register an additional amount of Shares pursuant to Rule 462(b) under the 1933
Act (the "Rule 462 Registration Statement"), then any reference herein to the
term "Registration Statement" shall include such Rule 462 Registration
Statement. The term "Prospectus" as used in this Agreement means the prospectus
and statement of additional information in the forms included in the
Registration Statement or, if the prospectus and statement of additional
information included in the Registration Statement omit information in reliance
on Rule 430A under the 1933 Act Rules and Regulations and such information is
included in a prospectus and statement of additional information filed with the
Commission pursuant to Rule 497 under the 1933 Act, the term "Prospectus" as
used in this Agreement means the prospectus and statement of additional
information in the forms included in the Registration Statement as supplemented
by the addition of the information contained in the prospectus filed with the
Commission pursuant to Rule 497. The term "Prepricing Prospectus" as used in
this Agreement means the prospectus and statement of additional information
subject to completion in the forms included in the registration statement at the
time of filing of amendment no.1 to the registration statement with the
Commission on August __, 1999, and as such prospectus and statement of
additional information shall have been amended from time to time prior to the
date of the Prospectus, together with any other prospectus and statement of
additional information relating to the Trust other than the Prospectus approved
in writing by or directly or indirectly prepared by the Trust or the Advisor; it
being understood that the definition of Prepricing Prospectus above shall not
include any Prepricing Prospectus prepared by the Underwriter unless approved in
writing by the Trust or the Advisor. The terms "Registration Statement",
"Prospectus" and "Prepricing Prospectus" shall also include any financial
statements incorporated by reference therein.
<PAGE> 3
3
The Trust has furnished the Underwriter with copies of such registration
statement, each amendment to such registration statement filed with the
Commission and each Prepricing Prospectus.
2. AGREEMENTS TO SELL AND PURCHASE. The Trust hereby agrees, subject to
all the terms and conditions set forth herein, to issue and sell to the
Underwriter and, upon the basis of the representations, warranties and
agreements of the Trust and the Advisor herein contained and subject to all the
terms and conditions set forth herein, the Underwriter agrees to purchase from
the Trust, at a purchase price of $[ ] per Share, the number of shares of Series
W Municipal Preferred set forth opposite the name of the Underwriter in Schedule
I hereto.
3. TERMS OF PUBLIC OFFERING. The Trust and the Advisor have been advised
by the Underwriter that the Underwriter proposes to make a public offering of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in the Underwriter's judgment is advisable and initially to
offer the Shares upon the terms set forth in the Prospectus.
4. DELIVERY OF THE SHARES AND PAYMENT THEREFOR. Delivery to the
Underwriter of and payment for the Shares shall be made at the office of Simpson
Thacher & Bartlett, 425 Lexington Avenue, New York, NY 10017, at 9:30 A.M., New
York City time, on August __, 1999 (the "Closing Date"). The place of closing
for the Shares and the Closing Date may be varied by agreement between the
Underwriter and the Trust.
Certificates for the Shares shall be registered in such names and in such
denominations as the Underwriter shall request prior to 9:30 A.M., New York City
time, on the second business day preceding the Closing Date. Such certificates
shall be made available to the Underwriter in New York City for inspection not
later than 9:30 A.M., New York City time, on the business day next preceding the
Closing Date. The certificates evidencing the Shares shall be delivered to the
Underwriter on the Closing Date, through the facilities of The Depository Trust
Company, against payment of the purchase price therefor in immediately available
funds.
5. AGREEMENTS OF THE TRUST AND THE ADVISOR. The Trust and the Advisor,
jointly and severally, agree with the Underwriter as follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective under the 1933 Act before the offering of the Shares
may commence, the Trust will endeavor to cause the Registration Statement or
such post-effective amendment to become effective under the 1933 Act as soon as
possible and will advise the Underwriter promptly and, if requested by the
Underwriter, will confirm such advice in writing when the Registration Statement
or such post-effective amendment has become effective.
(b) The Trust will advise the Underwriter promptly and, if requested by
the Underwriter, will confirm such advice in writing: (i) of any request made by
the Commission for amendment of or a supplement to the Registration Statement,
any Prepricing Prospectus or the Prospectus (or any amendment or supplement to
any of the foregoing) or for additional
<PAGE> 4
4
information, (ii) of the issuance by the Commission, the National Association of
Securities Dealers, Inc. (the "NASD"), any state securities commission, any
national securities exchange, any arbitrator, any court or any other
governmental, regulatory, self-regulatory or administrative agency or any
official of any order suspending the effectiveness of the Registration
Statement, prohibiting or suspending the use of the Prospectus or any Prepricing
Prospectus, or any sales material, of any notice pursuant to Section 8(e) of the
1940 Act, of the suspension of qualification of the Shares for offering or sale
in any jurisdiction, or the initiation of any proceeding for any such purposes,
(iii) of receipt by the Trust, the Advisor, any affiliate of the Trust or the
Advisor or any representative or attorney of the Trust or the Advisor of any
other material communication from the Commission, the NASD, any state securities
commission, any national securities exchange, any arbitrator, any court or any
other governmental, regulatory, self-regulatory or administrative agency or any
official relating to the Trust (if such communication relating to the Trust is
received by such person within three years after the date of this Agreement),
the Registration Statement, the 1940 Act Notification, the Prospectus, any
Prepricing Prospectus, any sales material (or any amendment or supplement to any
of the foregoing) or this Agreement or any of the Trust Agreements and (iv)
within the period of time referred to in paragraph (f) below, of any material
adverse change in the condition (financial or other), business, prospects,
properties, net assets or results of operations of the Trust or the Advisor or
of the happening of any other event which makes any statement of a material fact
made in the Registration Statement or the Prospectus or any sales material (or
any amendment or supplement to any of the foregoing) untrue or which requires
the making of any additions to or changes in the Registration Statement or the
Prospectus, or any Prepricing Prospectus or any sales materials (as herein
defined) (or any amendment or supplement to any of the foregoing) in order to
state a material fact required by the 1933 Act, the 1940 Act or the Rules and
Regulations to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading or of the necessity to amend or supplement the Registration
Statement, the Prospectus, or any Prepricing Prospectus or any sales material
(as herein defined) (or any amendment or supplement to any of the foregoing) to
comply with the 1933 Act, the 1940 Act, the Rules and Regulations or any other
law or order of any court or regulatory body. If at any time the Commission, the
NASD, any state securities commission, any national securities exchange, any
arbitrator, any court or any other governmental, regulatory, self-regulatory or
administrative agency or any official shall issue any order suspending the
effectiveness of the Registration Statement, prohibiting or suspending the use
of the Prospectus or any sales material (as herein defined) (or any amendment or
supplement to any of the foregoing) or suspending the qualification of the
Shares for offering or sale in any jurisdiction, the Trust will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible time.
(c) The Trust will furnish to the Underwriter, without charge, three
signed copies of the Registration Statement as originally filed with the
Commission and of each amendment thereto, including financial statements and all
exhibits thereto, and will also furnish to the Underwriter, without charge, such
number of conformed copies of the Registration Statement as originally filed and
of each amendment thereto, but without exhibits, as the Underwriter may request.
<PAGE> 5
5
(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 (and of any amendment or supplement thereto) as
the Underwriter may reasonably request. The Trust consents to the use of the
Prospectus (and of any amendment or supplement thereto) in accordance with the
provisions of the 1933 Act and with the state securities or blue sky laws of the
jurisdictions in which the Shares are offered by the Underwriter and by all
dealers to whom Shares may be sold, both in connection with the offering and
sale of the Shares and for such period of time thereafter as the Prospectus is
required by the 1933 Act to be delivered in connection with sales by the
Underwriter or any dealer. If during such period of time any event shall occur
that in the judgment of the Trust or in the opinion of counsel for the
Underwriter is required to be set forth in the Registration Statement or the
Prospectus (as then amended or supplemented) or should be set forth therein in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary to supplement or
amend the Registration Statement or the Prospectus to comply with the 1933 Act,
the 1940 Act, the Rules and Regulations or any other federal law, rule or
regulation, or any state securities or blue sky disclosure laws, rules or
regulations, the Trust will forthwith prepare and, subject to the provisions of
paragraph (d) above, promptly file with the Commission an appropriate supplement
or amendment thereto, and will expeditiously furnish to the Underwriter and
dealers, without charge, a reasonable number of copies thereof. In the event
that the Trust and the Underwriter agree that the Registration Statement or the
Prospectus should be amended or supplemented, the Trust, if requested by the
Underwriter, will promptly issue a press release announcing or disclosing the
matters to be covered by the proposed amendment or supplement.
(g) The Trust will make generally available to its security holders an
earnings statement, which need not be audited, covering a twelve-month period
ending not later than 15
<PAGE> 6
6
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 Advisor to comply with the terms or
fulfill any of the conditions of this Agreement, the Trust and the Advisor,
jointly and severally, agree to reimburse the Underwriter for all out-of-pocket
expenses (including reasonable fees and expenses of counsel for the Underwriter)
incurred by the Underwriter in connection herewith.
(j) The Trust will apply the net proceeds from the sale of the Shares
substantially in accordance with the description set forth in the Prospectus and
in such a manner as to comply with the investment objectives, policies and
restrictions of the Trust as described in the Prospectus.
(k) The Trust will timely file the requisite copies of the Prospectus with
the Commission pursuant to Rule 497(c) or Rule 497(h) of the 1933 Act Rules and
Regulations, whichever is applicable or, if applicable, will timely file the
certification permitted by Rule 497(j) of the 1933 Act Rules and Regulations and
will advise the Underwriter of the time and manner of such filing.
(l) Except as provided in this Agreement, the Trust will not sell,
contract to sell, or otherwise dispose of any senior securities (as defined in
the 1940 Act) of the Trust, or grant any options or warrants to purchase senior
securities of the Trust, for a period of 120 days after the date of the
Prospectus, without the prior written consent of the Underwriter.
(m) Except as stated in this Agreement and in the Prepricing Prospectus
and Prospectus, neither the Trust nor the Advisor has taken, nor will it take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of any
securities issued by the Trust to facilitate the sale or resale of the Shares.
(n) The Trust will use its best efforts to cause the Series W Municipal
Preferred, prior to the Closing Date, to be assigned a rating of 'aaa' by
Moody's Investors Service, Inc. ("Moody's") and AAA by Standard & Poor's Ratings
Services ("S&P" and, together with Moody's, the "Rating Agencies").
<PAGE> 7
7
(o) The Trust and the Advisor will use their best efforts to perform all
of the agreements required of them and discharge all conditions to closing as
set forth in this Agreement.
6. REPRESENTATIONS AND WARRANTIES OF THE TRUST AND THE ADVISOR. The Trust
and the Advisor, jointly and severally, represent and warrant to the Underwriter
that:
(a) Each Prepricing Prospectus included as part of the registration
statement as originally filed or as part of any amendment or supplement thereto,
or filed pursuant to Rule 497 of the 1933 Act Rules and Regulations, complied
when so filed in all material respects with the provisions of the 1933 Act, the
1940 Act and the Rules and Regulations. The Commission has not issued any order
preventing or suspending the use of any Prepricing Prospectus.
(b) The registration statement in the form in which it became or becomes
effective and also in such form as it may be when any post-effective amendment
thereto shall become effective and the Prospectus and any supplement or
amendment thereto when filed with the Commission under Rule 497 of the 1933 Act
Rules and Regulations and the 1940 Act Notification when originally filed with
the Commission and any amendment or supplement thereto when filed with the
Commission, complied or will comply in all material respects with the provisions
of the 1933 Act, the 1940 Act and the Rules and Regulations and did not or will
not at any such times contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, except that this representation and warranty
does not apply to statements in or omissions from the registration statement or
the Prospectus made in reliance upon and in conformity with information relating
to the Underwriter furnished to the Trust in writing by or on behalf of the
Underwriter expressly for use therein.
(c) All the outstanding Common Shares (as defined in the Prospectus) of
the Trust have been duly authorized and validly issued, are fully paid and
nonassessable and are free of any preemptive or similar rights; the Shares have
been duly authorized and, when issued and delivered to the Underwriter against
payment therefor in accordance with the terms hereof, will be validly issued,
fully paid and nonassessable and free of any preemptive or similar rights and
will conform to the description thereof in the Registration Statement and the
Prospectus (and any amendment or supplement to either of them); and the
capitalization of the Trust conforms to the description thereof in the
Registration Statement and the Prospectus (and any amendment or supplement to
either of them).
(d) The Trust is a business trust duly organized and validly existing in
good standing under the laws of the Commonwealth of Massachusetts with full
business trust power and authority to own, lease and operate its properties and
to conduct its business as described in the Registration Statement and the
Prospectus (and any amendment or supplement to either of them), and is duly
registered and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
so to register or qualify does not have a
<PAGE> 8
8
material adverse effect on the condition (financial or other), business,
prospects, properties, net assets or results of operations of the Trust; and the
Trust has no subsidiaries.
(e) There are no legal or governmental proceedings pending or, to the
knowledge of the Trust, threatened, against the Trust, or to which the Trust or
any of its properties is subject, that are required to be described in the
Registration Statement or the Prospectus (and any amendment or supplement to
either of them) but are not described as required, and there are no agreements,
contracts, indentures, leases or other instruments that are required to be
described in the Registration Statement or the Prospectus (and any amendment or
supplement to either of them) or to be filed as an exhibit to the Registration
Statement that are not described or filed as required by the 1933 Act, the 1940
Act or the Rules and Regulations.
(f) The Trust is not in violation of its Declaration of Trust (the
"Declaration") or its amended and restated bylaws (the "Bylaws") or other
organizational documents (together with the Declaration and Bylaws, the
"Organizational Documents"), or of any law, ordinance, administrative or
governmental rule or regulation applicable to the Trust or of any decree of the
Commission, the NASD, any state securities commission, any national securities
exchange, any arbitrator, any court or governmental agency, body or official
having jurisdiction over the Trust, or in default in any material respect in the
performance of any obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness or in any material
agreement, indenture, lease or other instrument to which the Trust is a party or
by which it or any of its properties may be bound.
(g) Neither the issuance and sale of the Shares, the execution, delivery
or performance of this Agreement or any of the Trust Agreements by the Trust,
nor the consummation by the Trust of the transactions contemplated hereby or
thereby (i) requires any consent, approval, authorization or other order of or
registration or filing with, the Commission, the NASD, any state securities
commission, any national securities exchange, any arbitrator, any court,
regulatory body, administrative agency or other governmental body, agency or
official (except such as may have been obtained prior to the date hereof and
such as may be required for compliance with the state securities or blue sky
laws of various jurisdictions which have been or will be effected in accordance
with this Agreement) or conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the Organizational Documents of the
Trust or (ii) conflicts or will conflict with or constitutes or will constitute
a breach of, or a default under, any agreement, indenture, lease or other
instrument to which the Trust is a party or by which it or any of its properties
may be bound, or violates or will violate any statute, law, regulation or
judgment, injunction, order or decree applicable to the Trust or any of its
properties, or will result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Trust pursuant to the terms of
any agreement or instrument to which it is a party or by which it may be bound
or to which any of its property or assets is subject. The Trust is not subject
to any order of any court or of any arbitrator, governmental authority or
administrative agency.
(h) The accountants, PricewaterhouseCoopers LLP, who have certified or
shall certify the financial statements included or incorporated by reference in
the Registration
<PAGE> 9
9
Statement and the Prospectus (or any amendment or supplement to either of them)
are independent public accountants as required by the 1933 Act, the 1940 Act and
the Rules and Regulations.
(i) The financial statements, together with related schedules and notes,
included or incorporated by reference in the Registration Statement and the
Prospectus (and any amendment or supplement to either of them), present fairly
the financial position, results of operations and changes in financial position
of the Trust on the basis stated or incorporated by reference in the
Registration Statement at the respective dates or for the respective periods to
which they apply; such statements and related schedules and notes have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
therein; and the other financial and statistical information and data included
in the Registration Statement and the Prospectus (and any amendment or
supplement to either of them) are accurately presented and prepared on a basis
consistent with such financial statements and the books and records of the
Trust.
(j) The execution and delivery of, and the performance by the Trust of its
obligations under, this Agreement and the Trust Agreements have been duly and
validly authorized by the Trust, and this Agreement and the Trust Agreements
have been duly executed and delivered by the Trust and assuming due
authorization, execution and delivery by the other parties thereto, constitute
the valid and legally binding agreements of the Trust, enforceable against the
Trust in accordance with their terms (subject to the qualification that the
enforceability of the Trust's obligations thereunder may be limited by
bankruptcy, insolvency, reorganization, moratorium, and similar laws of general
applicability relating to or affecting creditors' rights, and to general
principles of equity regardless of whether enforceability is considered in a
proceeding in equity or at law), except as rights to indemnity and contribution
hereunder and thereunder may be limited by federal or state securities laws.
(k) Except as disclosed in the Registration Statement and the Prospectus
(or any amendment or supplement to either of them), subsequent to the respective
dates as of which such information is given in the Registration Statement and
the Prospectus (or any amendment or supplement to either of them), the Trust has
not incurred any liability or obligation, direct or contingent, or entered into
any transaction, not in the ordinary course of business, that is material to the
Trust, and there has not been any change in the capitalization, or material
increase in the short-term debt or long-term debt, of the Trust, or any material
adverse change, or any development involving or which may reasonably be expected
to involve, a prospective material adverse change, in the condition (financial
or other), business, prospects, properties, net assets or results of operations
of the Trust, whether or not arising in the ordinary course of business (a
"Material Adverse Effect").
(l) The Trust has not distributed and, prior to the later to occur of (i)
the Closing Date and (ii) completion of the distribution of the Shares, will not
distribute any offering material in connection with the offering and sale of the
Shares other than the Registration Statement, the Prepricing Prospectus, the
Prospectus or other materials, if any, permitted by the 1933 Act, the 1940 Act
or the Rules and Regulations.
<PAGE> 10
10
(m) (i) The Trust has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits") as are
necessary to own its properties and to conduct its business in the manner
described in the Prospectus (and any amendment or supplement thereto), subject
to such qualifications as may be set forth in the Prospectus; (ii) the Trust has
fulfilled and performed all its material obligations with respect to such
permits and no event has occurred which allows, or after notice or lapse of time
would allow, revocation or termination thereof or results in any other material
impairment of the rights of the Trust under any such permit, subject in each
case to such qualification as may be set forth in the Prospectus (and any
amendment or supplement thereto); and (iii) except as described in the
Prospectus (and any amendment or supplement thereto), none of such permits
contains any restriction that is materially burdensome to the Trust, except
where the failure of (i), (ii) or (iii) to be accurate would not, individually
or in the aggregate, have a Material Adverse Effect on the Trust.
(n) The Trust maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization and with the
applicable requirements of the 1940 Act, the 1940 Act Rules and Regulations and
the Internal Revenue Code of 1986, as amended (the "Code"); (ii) transactions
are recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets and to maintain compliance with the books and records
requirements under the 1940 Act and the 1940 Act Rules and Regulations; (iii)
access to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(o) The Trust has filed all tax returns required to be filed, which
returns are complete and correct in all material respects, and the Trust is not
in material default in the payment of any taxes which were payable pursuant to
said returns or any assessments with respect thereto.
(p) No holder of any security of the Trust has any right to require
registration of shares of beneficial interest, shares of Series W Municipal
Preferred or any other security of the Trust because of the filing of the
registration statement or consummation of the transactions contemplated by this
Agreement.
(q) The conduct by the Trust of its business (as described in the
Prospectus) does not require it to be the owner, possessor or licensee of any
patents, patent licenses, trademarks, service marks or trade names which it does
not own, possess or license.
(r) The Trust is registered under the 1940 Act as a closed-end
non-diversified management investment company and the 1940 Act Notification has
been duly filed with the Commission and, at the time of filing thereof and any
amendment or supplement thereto, conformed in all material respects with all
applicable provisions of the 1940 Act and the Rules and Regulations. The Trust
is, and at all times through the completion of the transactions contemplated
hereby, will be, in compliance in all material respects with the terms and
<PAGE> 11
11
conditions of the 1933 Act and the 1940 Act. No person is serving or acting as
an officer, director or investment Advisor of the Trust except in accordance
with the provisions of the 1940 Act and the 1940 Act Rules and Regulations and
the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and the
rules and regulations of the Commission promulgated under the Advisers Act (the
"Advisers Act Rules and Regulations").
(s) Except as stated in this Agreement and in the Prospectus (and any
amendment or supplement thereto), the Trust has not taken, nor will it take,
directly or indirectly, any action designed to or which might reasonably be
expected to cause or result in stabilization or manipulation of the price of any
securities issued by the Trust to facilitate the sale or resale of the Shares,
and the Trust is not aware of any such action taken or to be taken by any
affiliates of the Trust.
(t) The Trust has filed in a timely manner each document or report
required to be filed by it pursuant to the 1934 Act and the rules and
regulations of the Commission promulgated thereunder (the "1934 Act Rules and
Regulations"); each such document or report at the time it was filed conformed
to the requirements of the 1934 Act and the 1934 Act Rules and Regulations; and
none of such documents or reports contained an untrue statement of any material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
(u) All advertising, sales literature or other promotional material
(including "prospectus wrappers," "broker kits," "road show slides" and "road
show scripts") authorized in writing by or prepared by the Trust or the Advisor
for use in connection with the offering and sale of the Shares (collectively
"sales material") complied and comply in all material respects with the
applicable requirements of the 1933 Act, the 1940 Act, the Rules and Regulations
and the rules and interpretations of the NASD and no such sales material
contained or contains an untrue statement of a material fact or omitted or omits
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(v) Each of the Trust Agreements and the Trust's and the Advisor's
obligations under this Agreement and each of the Trust Agreements comply in all
material respects with all applicable provisions of the 1940 Act, the 1940 Act
Rules and Regulations, the Advisers Act and the Advisers Act Rules and
Regulations.
(w) The Trust currently complies with all requirements under the Code to
qualify as a regulated investment company under Subchapter M of the Code.
(x) Except as disclosed in the Registration Statement and the Prospectus
(or any amendment or supplement to either of them), no director of the Trust is
an "interested person" (as defined in the 1940 Act) of the Trust or an
"affiliated person" (as defined in the 1940 Act) of the Underwriter.
(y) The Trust's Common Shares are duly listed on the NYSE.
<PAGE> 12
12
(z) The Advisor has considered, and is taking actions to address, the
possible adverse effects of the Year 2000 on the critical computer systems used
by the Advisor and its affiliates on behalf of the Trust. Testing and
remediation of those systems is complete and the Advisor has determined that
recognition and execution of date-sensitive functions involving certain dates
prior to and after December 31, 1999 (the "Year 2000 Problem") will not pose
significant problems for the computer systems used by the Advisor on behalf of
the Trust. The Advisor believes, after reasonable inquiry, that suppliers,
vendors, or financial service organizations used in the operation of the Trust
have remedied or will remedy the Year 2000 Problem and that those suppliers,
vendors or financial service organizations believe that their modifications will
be completed on a timely basis, except to the extent that a failure to remedy by
any such supplier, vendor, or financial service organization would not have a
material adverse effect on the operations of the Trust. The Trust is in
compliance with the Commission's Release No. 33-7558 related to Year 2000
compliance, as amended to date.
(aa) The proxy statement and all related materials distributed to holders
of Common Shares of the Trust in connection with the shareholder meeting held on
May 20, 1999, as adjourned to _______ __, 1999 (the "Shareholder Meeting") did
not, as of its date or the date of the Shareholder Meeting, contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
the holders of the Common Shares duly approved all of the items proposed at such
meeting, in accordance with the Organizational Documents of the Trust and
applicable law.
7. REPRESENTATIONS AND WARRANTIES OF THE ADVISOR. The Advisor represents
and warrants to the Underwriter as follows:
(a) The Advisor is a corporation duly incorporated and validly existing in
good standing under the laws of the Commonwealth of Massachusetts, with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus (and any amendment or supplement to either of them), and is duly
registered and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
so to register or to qualify does not have a material adverse effect on the
condition (financial or other), business, prospects, properties, net assets or
results of operations of the Advisor or on the ability of the Advisor to perform
its obligations under this Agreement and the Management Agreement.
(b) The Advisor is duly registered with the Commission as an investment
advisor under the Advisers Act and is not prohibited by the Advisers Act, the
Advisers Act Rules and Regulations, the 1940 Act or the 1940 Act Rules and
Regulations from acting under the Management Agreement for the Trust as
contemplated by the Prospectus (or any amendment or supplement thereto). There
does not exist any proceeding or any facts or circumstances the existence of
which could lead to any proceeding which might adversely affect the registration
of the Advisor with the Commission.
<PAGE> 13
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(c) There are no legal or governmental proceedings pending or, to the
knowledge of the Advisor, threatened against the Advisor, or to which the
Advisor or any of its properties is subject, that are required to be described
in the Registration Statement or the Prospectus (or any amendment or supplement
to either of them) but are not described as required or that may reasonably be
expected to involve a prospective material adverse change, in the condition
(financial or other), business, prospects, properties, net assets or results of
operations of the Advisor or on the ability of the Advisor to perform its
obligations under this Agreement and the Management Agreement.
(d) Neither the execution, delivery or performance of this Agreement or
the performance of the Management Agreement by the Advisor, nor the consummation
by the Advisor of the transactions contemplated hereby or thereby (A) requires
the Advisor to obtain any consent, approval, authorization or other order of or
registration or filing with, the Commission, the NASD, any state securities
commission, any national securities exchange, any arbitrator, any court,
regulatory body, administrative agency or other governmental body, agency or
official or conflicts or will conflict with or constitutes or will constitute a
breach of or a default under, the certificate of incorporation or by-laws, or
other organizational documents, of the Advisor or (B) conflicts or will conflict
with or constitutes or will constitute a breach of or a default under, any
agreement, indenture, lease or other instrument to which the Advisor is a party
or by which it or any of its properties may be bound, or violates or will
violate any statute, law, regulation or filing or judgment, injunction, order or
decree applicable to the Advisor or any of its properties or will result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Advisor pursuant to the terms of any agreement or instrument to
which it is a party or by which it may be bound or to which any of the property
or assets of the Advisor is subject. The Advisor is not subject to any order of
any court or of any arbitrator, governmental authority or administrative agency.
(e) The execution and delivery of, and the performance by the Advisor of
its obligations under, this Agreement and the Management Agreement have been
duly and validly authorized by the Advisor, and this Agreement and the
Management Agreement have been duly executed and delivered by the Advisor and
each constitutes the valid and legally binding agreement of the Advisor,
enforceable against the Advisor in accordance with its terms (subject to the
qualification that the enforceability of the Advisor's obligations thereunder
may be limited by bankruptcy, insolvency, reorganization, moratorium and similar
laws of general applicability relating to or affecting creditors' rights, and to
general principles of equity regardless of whether enforceability is considered
in a proceeding in equity or at law), except as rights to indemnity and
contribution hereunder may be limited by federal or state securities laws.
(f) The description of the Advisor in the Registration Statement and the
Prospectus (and any amendment or supplement thereto) complied and comply in all
material respects with the provisions of the 1933 Act, the 1940 Act, the
Advisers Act, the Rules and Regulations and the Advisers Act Rules and
Regulations and did not and will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
<PAGE> 14
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(g) Except as disclosed in the Registration Statement and the Prospectus
(or any amendment or supplement to either of them), subsequent to the respective
dates as of which such information is given in the Registration Statement and
the Prospectus (or any amendment or supplement to either of them), the Advisor
has not incurred any liability or obligation, direct or contingent, or entered
into any transaction, not in the ordinary course of business, that is material
to the Advisor or the Trust and that is required to be disclosed in the
Registration Statement or the Prospectus and there has not been any material
adverse change, or any development involving or which may reasonably be expected
to involve, a prospective material adverse change, in the condition (financial
or other), business, prospects, properties, net assets or results of operations
of the Advisor, whether or not arising in the ordinary course of business, or
which, in each case, could have a material adverse effect on the ability of the
Advisor to perform its obligations under this Agreement and the Management
Agreement.
(h) (i) The Advisor has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits") as are
necessary to own its properties and to conduct its business in the manner
described in the Prospectus (and any amendment thereto); (ii) the Advisor has
fulfilled and performed all its material obligations with respect to such
permits and no event has occurred which allows, or after notice or lapse of time
would allow, revocation or termination thereof or results in any other material
impairment of the rights of the Advisor under any such permit; and (iii) except
as described in the Prospectus (and any amendment or supplement thereto), none
of such permits contains any restriction that is materially burdensome to the
Advisor, except where the failure of (i), (ii), or (iii) to be accurate would
not, individually or in the aggregate, have a Material Adverse Effect on the
Advisor.
(8) INDEMNIFICATION AND CONTRIBUTION. (a) The Trust and the Advisor,
jointly and severally, agree to indemnify and hold harmless each of the
Underwriter and each person, if any, who controls the Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act from and
against any and all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation), joint or several, arising out of or based
upon any untrue statement or alleged untrue statement of a material fact
contained in any Prepricing Prospectus or in the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or arising out of or based
upon any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities or expenses arise
out of or are based upon any untrue statement or omission or alleged untrue
statement or omission which has been made therein or omitted therefrom in
reliance upon and in conformity with the information relating to the Underwriter
furnished in writing to the Trust by or on behalf of the Underwriter expressly
for use in connection therewith; provided, however, that the indemnification
contained in this paragraph (a) with respect to any Prepricing Prospectus shall
not inure to the benefit of the Underwriter (or to the benefit of any person
controlling the Underwriter) on account of any such loss, claim, damage,
liability or expense arising from the sale of the Shares by the Underwriter to
any person if a copy of the Prospectus shall not have been delivered or sent to
such person within the time required by the 1933 Act and the 1933 Act Rules and
Regulations, and the untrue statement or alleged untrue statement or omission or
alleged omission of a material fact contained in such Prepricing Prospectus was
corrected in the
<PAGE> 15
15
Prospectus, provided that the Trust has delivered the Prospectus to the
Underwriter in requisite quantity on a timely basis to permit such delivery or
sending. The foregoing indemnity agreement shall be in addition to any liability
which the Trust or the Advisor may otherwise have.
(b) Any party that proposes to assert the right to be indemnified under
this Section 8 will, promptly after receipt of notice of commencement of any
action against such party in respect of which a claim is to be made against an
indemnifying party or parties under this Section 8, notify each such
indemnifying party of the commencement of such action, enclosing a copy of all
papers served, but the omission to so notify such indemnifying party (i) will
not relieve it from any liability that it may have to any indemnified party
under the foregoing provision of this Section 8 unless, and only to the extent
that, such omission results in the forfeiture of substantive rights or defenses
by the indemnifying party and (ii) will not, in any event, relieve such
indemnifying party from any other obligation (other than pursuant to the
foregoing provision of this Section 8) it may have under this Agreement. If any
action, suit or proceeding shall be brought against the Underwriter or any
person controlling the Underwriter in respect of which indemnity may be sought
against the Trust or the Advisor, the Underwriter or such controlling person
shall promptly notify the Trust or the Advisor, and the Trust or the Advisor
may, at its option and upon notice to the Underwriter assume the defense
thereof, including the employment of counsel and payment of all fees and
expenses. The Underwriter or any such controlling person shall have the right to
employ separate counsel in any such action, suit or proceeding and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of the Underwriter or such controlling person unless (i)
the Trust or the Advisor has agreed in writing to pay such fees and expenses,
(ii) the Trust and the Advisor have failed to assume the defense and employ
counsel, or (iii) the named parties to any such action, suit or proceeding
(including any impleaded parties) include both the Underwriter or such
controlling person and the Trust or the Advisor and the Underwriter or such
controlling person shall have been advised by its counsel that representation of
such indemnified party and the Trust or the Advisor by the same counsel would be
inappropriate under applicable standards of professional conduct (whether or not
such representation by the same counsel has been proposed) due to actual or
potential differing interests between them (in which case the Trust and the
Advisor shall not have the right to assume the defense of such action, suit or
proceeding on behalf of the Underwriter or such controlling person). It is
understood, however, that the Trust and the Advisor shall, in connection with
any one such action, suit or proceeding or separate but substantially similar or
related actions, suits or proceedings in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable fees
and expenses of only one separate firm of attorneys (in addition to any local
counsel) at any time for the Underwriter and controlling persons not having
actual or potential differing interests with you or among themselves, which firm
shall be designated in writing by the Underwriter, and that all such fees and
expenses shall be reimbursed as they are incurred. The Trust and the Advisor
shall not be liable for any settlement of any such action, suit or proceeding
effected without its written consent (which shall not be unreasonably withheld),
but if settled with such written consent, or if there be a final judgment for
the plaintiff in any such action, suit or proceeding, the Trust and the Advisor
agree to indemnify and hold harmless the Underwriter, to the extent provided in
the
<PAGE> 16
16
preceding paragraph, and any such controlling person from and against any loss,
claim, damage, liability or reasonable expense by reason of such settlement or
judgment.
(c) The Underwriter agrees to indemnify and hold harmless the Trust and
the Advisor, their directors, trustees and officers who sign the Registration
Statement, and any person who controls the Trust or the Advisor within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, to the same
extent as the foregoing indemnity from the Trust and the Advisor to the
Underwriter, but only with respect to information relating to the Underwriter
furnished in writing by or on behalf of the Underwriter expressly for use in the
Registration Statement, the Prospectus or any Prepricing Prospectus, or any
amendment or supplement thereto. If any action, suit or proceeding shall be
brought against the Trust or the Advisor, any of their directors, any such
officer, or any such controlling person based on the Registration Statement, the
Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto,
and in respect of which indemnity may be sought against the Underwriter pursuant
to this paragraph (c), the Underwriter shall have the rights and duties given to
the Trust and the Advisor by paragraph (b) above (except that if the Trust or
the Advisor shall have assumed the defense thereof the Underwriter shall not be
required to do so, but may employ separate counsel therein and participate in
the defense thereof, but the fees and expenses of such counsel shall be at the
Underwriter's expense), and the Trust and the Advisor, their directors, trustees
and any such officer, and any such controlling person shall have the rights and
duties given to the Underwriter by paragraph (b) above. The foregoing indemnity
agreement shall be in addition to any liability which the Underwriter may
otherwise have.
(d) If the indemnification provided for in this Section 8 is unavailable
to an indemnified party under paragraphs (a) or (c) hereof in respect of any
losses, claims, damages, liabilities or expenses referred to therein, then an
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or reasonable expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Trust and the Advisor on the one hand (treated jointly for this purpose as one
person) and the Underwriter on the other hand from the offering of the Shares,
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Trust and the Advisor on the one hand (treated jointly for this purpose as
one person) and the Underwriter on the other in connection with the statements
or omissions that resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations with respect to
the offering of the Shares. The relative benefits received by the Trust and the
Advisor on the one hand (treated jointly for this purpose as one person) and the
Underwriter on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by the
Trust bear to the total underwriting discounts and commissions received by the
Underwriter, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Trust and the Advisor on the one hand
(treated jointly for this purpose as one person) and the Underwriter on the
other hand shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by
<PAGE> 17
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the Trust and the Advisor on the one hand (treated jointly for this purpose as
one person) or by the Underwriter on the other hand and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action against such party in
respect of which a claim for contribution may be made under this Section 8(d),
notify such party or parties from whom contribution may be sought, but the
omission so to notify (i) will not relieve the party or parties from whom
contribution may be sought from any other obligation it or they may have under
this Section 8(d), unless such omission results in the forfeiture of substantive
rights or defenses by the party or parties from whom contribution is being
sought and (ii) will not, in any event, relieve the party or parties from whom
contribution may be sought from any other obligation (other than pursuant to
this Section 8(d)) it or they may have under this Agreement. Except for a
settlement entered into pursuant to the last sentence of Section 8(b) hereof, no
party will be liable for contribution with respect to any action or claim
settled without its written consent (which consent shall not be unreasonably
withheld).
(e) The Trust, the Advisor and the Underwriter agree that it would not be
just and equitable if contribution pursuant to this Section 8 were determined by
a pro rata allocation or by any other method of allocation that does not take
account of the equitable considerations referred to in paragraph (d) above. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in paragraph (d) above
shall be deemed to include, subject to the limitations set forth above, any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating any claim or defending any such action, suit or
proceeding. Notwithstanding the provisions of this Section 8, the Underwriter
shall not be required to contribute any amount in excess of the amount by which
the total price of the Shares underwritten by it and distributed to the public
exceeds the amount of any damages which the Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation.
(f) No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened action,
suit or proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such action, suit or proceeding.
(g) Notwithstanding any other provisions in this Section 8, no party shall
be entitled to the benefit of any provision under this Agreement which protects
or purports to protect such person against any liability to the Trust or its
security holders to which such person would otherwise be subject by reason of
such person's willful misfeasance, bad faith, or gross negligence, in the
performance of such person's duties hereunder, or by reason of such person's
reckless disregard of such person's obligations and duties hereunder.
<PAGE> 18
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(h) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Trust and the Advisor set forth in this
Agreement shall remain operative and in full force and effect, regardless of (i)
any investigation made by or on behalf of the Underwriter or any person
controlling the Underwriter, the Trust, the Advisor, their directors or
officers, or any person controlling the Trust or the Advisor, (ii) acceptance of
any Shares and payment therefor hereunder, and (iii) any termination of this
Agreement. A successor to the Underwriter or any person controlling the
Underwriter, or to the Trust, the Advisor, their directors or officers, or any
person controlling the Trust or the Advisor, shall be entitled to the benefits
of the indemnity, contribution, and reimbursement agreements contained in this
Section 8.
9. CONDITIONS OF UNDERWRITER'S OBLIGATIONS. The obligation of the
Underwriter to purchase the Shares hereunder are subject to the following
conditions:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
registration statement or such post-effective amendment shall have become
effective not later than 5:30 P.M., New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by the
Underwriter, and all filings, if any, required by Rules 497 and 430A under the
1933 Act and the 1933 Act Rules and Regulations shall have been timely made; no
stop order suspending the effectiveness of the Registration Statement or order
pursuant to Section 8(e) of the 1940 Act shall have been issued and no
proceeding for those purposes shall have been instituted or, to the knowledge of
the Trust, the Advisor or the Underwriter, threatened by the Commission, and any
request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been complied
with to the Underwriter's reasonable satisfaction.
(b) Subsequent to the effective date of this Agreement, there shall not
have occurred (i) any change or any development involving a prospective change
in or affecting the condition (financial or other), business, prospects,
properties, net assets, or results of operations of the Trust or the Advisor not
contemplated by the Prospectus, which in the Underwriter's reasonable opinion
would materially and adversely affect the market for the Shares, or (ii) any
event or development relating to or involving the Trust or the Advisor or any
officer or director of the Trust or the Advisor which makes any statement made
in the Prospectus untrue or which, in the reasonable opinion of the Trust and
its counsel or the Underwriter and its counsel, requires the making of any
addition to or change in the Prospectus in order to state a material fact
required by the 1933 Act, the 1940 Act or the Rules and Regulations or any other
law to be stated therein or necessary in order to make the statements therein
not misleading, if amending or supplementing the Prospectus to reflect such
event or development would, in the Underwriter's opinion, materially adversely
affect the market for the Shares.
<PAGE> 19
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(c) The Trust shall have furnished to the Underwriter a report showing
compliance with the asset coverage requirements of the 1940 Act and a Basic
Maintenance Report (as defined in the By-laws), each dated the Closing Date and
in form and substance satisfactory to the Underwriter. 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
Ropes & Gray, counsel for the Trust, dated the Closing Date and addressed to the
Underwriter, in form and substance satisfactory to the Underwriter and to the
effect set forth in Exhibit A hereto.
(e) The Underwriter shall have received on the Closing Date an opinion of
the General Counsel for the Advisor, dated the Closing Date and addressed to the
Underwriter, in form and substance satisfactory to the Underwriter and to the
effect set forth in Exhibit B hereto.
(f) The Underwriter shall have received on the Closing Date an opinion of
Simpson Thacher & Bartlett, counsel for the Underwriter, dated the Closing Date
and addressed to the Underwriter, with respect to such matters as the
Underwriter may reasonably request.
(g) The Underwriter shall have received letters addressed to the
Underwriter and dated the date hereof and the Closing Date from
PricewaterhouseCoopers LLP, independent certified public accountants,
substantially in the forms heretofore approved by the Underwriter.
(h) (i) No order suspending the effectiveness of the Registration
Statement or prohibiting or suspending the use of the Prospectus (or any
amendment or supplement thereto) or any Prepricing Prospectus or any sales
material shall have been issued and no proceedings for such purpose or for the
purpose of commencing an enforcement action against the Trust, the Advisor or,
with respect to the transactions contemplated by the Prospectus (or any
amendment or supplement thereto) and this Agreement, the Underwriter, may be
pending before or, to the knowledge of the Trust, the Advisor or the Underwriter
or in the reasonable view of counsel to the Underwriter, shall be threatened or
contemplated by the Commission at or prior to the Closing Date and that any
request for additional information on the part of the Commission (to be included
in the Registration Statement, the Prospectus or otherwise) be complied with to
the satisfaction of the Underwriter; (ii) there shall not have been any change
in the shares of beneficial interest of the Trust nor any material increase in
the short-term or long-term debt of the Trust (other than in the ordinary course
of business) from that set forth or contemplated in the Registration Statement
or the Prospectus (or any amendment or supplement thereto); (iii) there shall
not have been, subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus (or any amendment or
supplement thereto), except as may otherwise be stated in the Registration
Statement and Prospectus (or any amendment or supplement thereto), any material
adverse change in the condition (financial or other), business, prospects,
properties, net assets or results of operations of the Trust or the Advisor;
(iv) the Trust shall not have any liabilities or obligations, direct or
contingent (whether or not in the ordinary course of business), that are
material to the Trust, other than those reflected in the Registration
<PAGE> 20
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Statement or the Prospectus (or any amendment or supplement to either of them);
and (v) all the representations and warranties of the Trust and the Advisor
contained in this Agreement shall be true and correct on and as of the date
hereof and on and as of the Closing Date as if made on and as of the Closing
Date, and the Underwriter shall have received a certificate of the Trust and the
Advisor, dated the Closing Date and signed by the chief executive officer and
the chief financial officer of each of the Trust and the Advisor (or such other
officers as are acceptable to the Underwriter), to the effect set forth in this
Section 9(h) and in Section 9(i) hereof.
(i) Neither the Trust nor the Advisor shall have failed at or prior to the
Closing Date to have performed or complied in all material respects with any of
its agreements herein contained and required to be performed or complied with by
it hereunder at or prior to the Closing Date.
(j) The Trust shall have delivered and the Underwriter shall have received
evidence satisfactory to the Underwriter that the Shares are rated 'aaa' by
Moody's and AAA by S&P as of the Closing Date, and there shall not have been
given any notice of any intended or potential downgrading, or of any review for
a potential downgrading, in the rating accorded to the shares of Series W
Municipal Preferred by any Rating Agency.
(k) The Trust and the Advisor shall have furnished or caused to be
furnished to the Underwriter such further certificates and documents as the
Underwriter shall have reasonably requested.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
in form and substance to the Underwriter and the Underwriter's counsel.
Any certificate or document signed by any officer of the Trust or the
Advisor and delivered to the Underwriter, or to counsel for the Underwriter,
shall be deemed a representation and warranty by the Trust or the Advisor to the
Underwriter as to the statements made therein.
10. EXPENSES. The Trust agrees to pay the following costs and expenses and
all other costs and expenses incident to the performance by it of its
obligations hereunder: (i) the preparation, printing or reproduction, and filing
with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the 1940 Act
Notification, the Prospectus and each amendment or supplement to any of them
(including, without limitation, the filing fees prescribed by the 1933 Act, the
1940 Act and the Rules and Regulations); (ii) the printing (or reproduction) and
delivery (including postage, air freight charges and charges for counting and
packaging) of such copies of the Registration Statement, each Prepricing
Prospectus, the Prospectus, any sales material and all amendments or supplements
to any of them as may be reasonably requested for use in connection with the
offering and sale of the Shares; (iii) the preparation, printing,
authentication, issuance and delivery of certificates for the Shares, including
any stamp taxes in connection with the original issuance and sale of the Shares;
(iv) the reproduction and delivery of this Agreement, any dealer agreements, the
preliminary blue sky memorandum, if any, and all other agreements or
<PAGE> 21
21
documents reproduced and delivered in connection with the offering of the
Shares; (v) the registration of the Shares under the 1934 Act; (vi) the
reasonable fees, expenses and disbursements of counsel for the Underwriter
relating to the preparation, reproduction, and delivery of any preliminary blue
sky memorandum; (vii) fees paid to the Rating Agencies; (viii) the
transportation and other expenses incurred by or on behalf of Trust
representatives in connection with presentations to prospective purchasers of
the Shares; and (ix) the fees and expenses of the Trust's accountants and the
fees and expenses of counsel (including local and special counsel) for the
Trust; provided, that (a) the Trust, the Advisor and the Underwriter shall pay
its own costs and expenses in attending any information meeting relating to the
Trust, (b) the Underwriter shall pay the costs and expenses of any sales
material prepared by it in connection with the public offering of the Shares,
(c) the Underwriter shall pay the costs and expenses of any "tombstone"
advertisements, and (d) except as provided in this Section and in Section 5
hereof, the Underwriter shall pay its own costs and expenses, including the fees
and expenses of their counsel.
11. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become effective:
(i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at
the time this Agreement is executed and delivered, it is necessary for the
registration statement or a post-effective amendment thereto to be declared
effective before the offering of the Shares may commence, when notification of
the effectiveness of the registration statement or such post-effective amendment
has been released by the Commission. Until such time as this Agreement shall
have become effective, it may be terminated by the Trust, by notifying the
Underwriter, or by the Underwriter, by notifying the Trust. Any notice under
this Section 11 may be given by telegram, telecopy or telephone but shall be
subsequently confirmed by letter.
12. TERMINATION OF AGREEMENT. This Agreement shall be subject to
termination in the Underwriter's absolute discretion, without liability on the
part of the Underwriter to the Trust or the Advisor, by notice to the Trust, if
prior to the Closing Date (i) trading in securities generally on the NYSE 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 last paragraph on the cover page and the statements in the first and fourth
sentences of the third paragraph and in the fifth paragraph under the caption
"Underwriting" in any Prepricing Prospectus and in the Prospectus, constitute
the only information furnished by or on behalf of the Underwriter as such
information is referred to in Sections 6(b) and 8 hereof.
<PAGE> 22
22
14. MISCELLANEOUS. Except as otherwise provided in Sections 5, 11 and 12
hereof, notice given pursuant to any provision of this Agreement shall be in
writing and shall be delivered (i) if to the Trust or the Advisor, at the office
of the Trust at One Financial Center, Boston, MA 02111, Attention: Secretary; or
(ii) if to the Underwriter, to Salomon Smith Barney Inc., 388 Greenwich Street,
New York, New York 10013, Attention: Manager, Investment Banking Division.
15. DISCLAIMER. A copy of the document establishing the Trust is filed
with the Secretary of the Commonwealth of Massachusetts. This Agreement is
executed by officers not as individuals and is not binding upon any of the
Trustees, officers, or shareholders of the Trust individually but only upon the
assets of the Trust.
This Agreement has been and is made solely for the benefit of the
Underwriter, the Trust, the Advisor, their directors and officers, and the other
controlling persons referred to in Section 8 hereof and their respective
successors and assigns, to the extent provided herein, and no other person shall
acquire or have any right under or by virtue of this Agreement. Neither the term
"successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from the Underwriter of any of the Shares in his
status as such purchaser.
16. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
[End of Text]
<PAGE> 23
Please confirm that the foregoing correctly sets forth the agreement among
the Trust, the Advisor and the Underwriter.
Very truly yours,
COLONIAL HIGH INCOME MUNICIPAL TRUST
By:
-------------------------------------
COLONIAL MANAGEMENT ASSOCIATES, INC.
By:
-------------------------------------
Confirmed as of the date first
above mentioned.
SALOMON SMITH BARNEY INC.
By:
--------------------------------
Managing Director
<PAGE> 24
SCHEDULE I
COLONIAL HIGH INCOME MUNICIPAL TRUST
<TABLE>
<CAPTION>
Number of
Shares of
Series W
Municipal
Underwriter Preferred
----------- ---------
<S> <C>
Salomon Smith Barney Inc. 2,400
-------
Total 2,400
</TABLE>
<PAGE> 25
EXHIBIT A
FORM OF OPINION OF ROPES & GRAY
The Underwriter shall have received on the Closing Date an opinion of
Ropes & Gray, counsel for the Trust, dated the Closing Date and addressed to the
Underwriter, in form and substance satisfactory to the Underwriter and to the
effect that:
a. The Trust is a business trust duly organized and validly existing
in good standing under the laws of the Commonwealth of
Massachusetts with full power and authority to own, lease and
operate its properties and to conduct its business as described
in the Registration Statement and the Prospectus and to issue and
sell the Shares as contemplated by the Underwriting Agreement;
b. The Shares have been duly authorized and, when issued and
delivered to the Underwriter against payment therefor in
accordance with the terms of the Underwriting Agreement, will be
validly issued, fully paid and nonassessable and free of any
preemptive or similar rights and will conform to the description
thereof in the Registration Statement and the Prospectus; the
Certificate evidencing the Shares complies with all requirements
of Massachusetts law; and the relative rights, interests, powers
and preferences of the Shares, and the obligation of the Trust to
redeem such Shares upon the terms and conditions set forth in the
By-Laws, are legal, valid, binding and enforceable under
Massachusetts law;
c. The Shares conform in all material respects with the statements
concerning them contained in the Prospectus, and the authorized
and outstanding shares of beneficial interest of the Trust are as
set forth in the Prospectus;
d. The Registration Statement is effective under the 1933 Act and
the 1940 Act; any required filing of the Prospectus pursuant to
Rule 497 of the 1933 Act Rules and Regulations has been made
within the time periods required by Rule 497(b) or (h), as the
case may be; to the best knowledge of such counsel, no stop order
suspending its effectiveness or order pursuant to Section 8(e) of
the 1940 Act relating to the Trust has been issued and no
proceeding for any such purpose is pending or threatened by the
Commission;
e. The Registration Statement and the Prospectus comply as to form
in all material respects with the provisions of the 1933 Act, the
1940 Act and the Rules and Regulations (except that no opinion
need be expressed as to the financial statements or other
financial data contained therein);
f. The statements made in the Prospectus (including the Statement of
Additional Information) under the captions "The Auction" and
"Description of Municipal
<PAGE> 26
2
Preferred", insofar as they purport to summarize the provisions
of the Bylaws or other documents or agreements specifically
referred to therein, constitute accurate summaries of the terms
of any such documents;
g. The statements made in the Prospectus (including the Statement of
Additional Information) under the captions "Tax Matters", insofar
as they constitute matters of law or legal conclusions, have been
reviewed by such counsel and constitute accurate statements of
any such matters of law or legal conclusions in all material
respects, and fairly present the information called for with
respect thereto by Form N-2 under the 1940 Act;
h. To such counsel's knowledge (but without a search of the dockets
of any court, administrative body or filing office in any
jurisdiction), there are no legal or governmental proceedings
pending or threatened against the Trust, or to which the Trust or
any of its properties is subject, that are required to be
described in the Registration Statement or the Prospectus but are
not described as required;
i. To the best of such counsel's knowledge after reasonable inquiry,
there are no agreements, contracts, indentures, leases or other
instruments that are required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement that are not described or filed as
required by the 1933 Act, the 1940 Act or the Rules and
Regulations;
j. Neither the issuance and sale of the Shares, the execution,
delivery or performance of the Underwriting Agreement or any of
the Trust Agreements by the Trust, nor the consummation by the
Trust of the transactions contemplated thereby (A) requires any
consent, approval, authorization or other order of or
registration or filing by the Trust with the Commission, the
NASD, any national securities exchange, any arbitrator, any
court, regulatory body, administrative agency or other
governmental body, agency or official (except such as may have
been obtained prior to the date hereof and such as may be
required for compliance with state securities and blue sky laws)
or conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the Declaration, the
By-Laws or other organizational documents of the Trust or (B) (i)
conflicts or will conflict with or constitutes or will constitute
a breach of, or a default under, any agreement, indenture, lease
or other instrument to which the Trust is a party or by which it
or any of its properties may be bound and that is identified, in
an officer's certificate of the Trust, as material to the
business, financial condition, operations, properties or
prospects of the Trust (the "Agreements and Instruments"), (ii)
violates or will violate any statute, law or regulation (assuming
compliance with state securities and blue sky laws), (iii)
violates or will violate any judgment, injunction, order or
decree that is applicable to the Trust or any of its properties
and that is known to such counsel, or (iv) will result in the
creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Trust pursuant to the terms of the
Agreements and Instruments;
<PAGE> 27
3
k. The Underwriting Agreement and the Trust Agreements have been
duly authorized, executed and delivered by the Trust and each
complies with all applicable provisions of the 1940 Act; assuming
due authorization, execution and delivery by the other parties
thereto, each Trust Agreement constitutes the valid and binding
obligation of the Trust enforceable in accordance with its terms,
except as rights to indemnity and contribution in the
Underwriting Agreements and Trust Agreements may be limited by
Federal or state securities laws, subject as to enforcement to
bankruptcy, insolvency, reorganization and other laws of general
applicability relating to or affecting creditors' rights and to
general equity principles;
l. The Trust is duly registered under the 1940 Act as a closed-end
non-diversified management investment company;
m. The provisions of the Declaration and By-Laws of the Trust and
the investment policies and restrictions described in the
Prospectus (including the Statement of Additional Information)
under the captions "Investment Objectives and Policies" and
"Miscellaneous Investment Practices" comply with the requirements
of the 1940 Act and the 1940 Act Rules and Regulations; and
n. The portions of the proxy statement and all related materials
distributed to holders of Common Shares of the Trust in
connection with the shareholder meeting held on May 20, 1999, as
adjourned to ________ __, 1999 (the "Shareholder Meeting"), and
in connection with amending the Declaration to permit the
issuance of preferred shares (the "Preferred Share Proxy
Materials") did not, as of its date or the date of the
Shareholder Meeting, contain an untrue statement of a material
fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading, and the Preferred Share Proxy Materials complied as
to form, as of its date and as of the date of the Shareholder
Meeting, in all material respects with the provisions of the 1934
Act, the 1940 Act and the Rules and Regulations.
Such counsel shall also have furnished to the Underwriter a statement,
addressed to the Underwriter, dated the Closing Date, to the effect that such
counsel has acted for the Trust in connection with the preparation of the
Registration Statement, and based on the foregoing, while such counsel has not
themselves independently verified the accuracy or completeness of or otherwise
verified and is not passing upon and assumes no responsibility for the
Registration Statement or the Prospectus (other than as set forth in (f), (g)
and (m) above) in the course of their review of the Registration Statement and
Prospectus and discussion of the contents of the Registration Statement and
Prospectus with certain officers and employees of the Trust and its independent
accountants, no facts have come to the attention of such counsel which would
lead them to believe that the Registration Statement (excluding the financial
statements, including the notes and schedules thereto, or other financial data
contained or referred to therein, as to which such counsel need express no
belief), as of its effective date, contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
<PAGE> 28
4
necessary in order to make the statements therein not misleading or that the
Prospectus (except for the financial statements, including the notes and
schedules thereto, or other financial data contained or referred to therein, as
to which such counsel need express no belief) contains any untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
Such counsel may also state that they do not express any opinion
concerning any law other than the law of the Commonwealth of Massachusetts and
the federal law of the United States.
<PAGE> 29
EXHIBIT B
FORM OF OPINION OF GENERAL COUNSEL OF ADVISER
The Underwriter shall have received on the Closing Date an opinion of
the General Counsel of the Advisor, addressed to the Underwriter and dated the
Closing Date, in form and substance satisfactory to the Underwriter and to the
effect that:
a. The Advisor is a corporation duly incorporated and validly
existing and in good standing under the laws of The Commonwealth
of Massachusetts, with full corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Registration Statement and the Prospectus;
b. The Underwriting Agreement and the Management Agreement have been
duly authorized, executed and delivered by the Advisor and each
complies with all applicable provisions of the Advisers Act and
the Management Agreement constitutes the valid and binding
obligation of the Advisor enforceable in accordance with its
terms, subject as to enforcement to bankruptcy, insolvency,
reorganization and other laws of general applicability relating
to or affecting creditors' rights and to general equity
principles;
c. The Advisor is duly registered with the Commission as an
investment adviser under the Advisers Act and is not prohibited
by the Advisers Act, the Advisers Act Rules and Regulations, the
1940 Act or the 1940 Act Rules and Regulations from acting under
the Management Agreement for the Trust as contemplated by the
Prospectus;
d. To the best of such counsel's knowledge after reasonable inquiry,
there are no legal or governmental proceedings pending or
threatened against the Advisor, or to which the Advisor or any of
its properties is subject, that are required to be described in
the Registration Statement or the Prospectus but are not
described as required;
e. To the best of such counsel's knowledge after reasonable inquiry,
the Advisor is not in violation of its corporate charter or
by-laws, nor is the Advisor in default under any material
agreement, indenture or instrument or in breach or violation of
any judgment, decree, order, rule or regulation of any court or
governmental or self-regulatory agency or body;
f. Neither the execution, delivery or performance of the
Underwriting Agreement nor the consummation by the Advisor of the
transactions contemplated hereby or thereby (A) requires the
Advisor to obtain any consent, approval, authorization or other
order of or registration or filing with, the Commission, the
NASD, any national securities exchange, any arbitrator, any
court, regulatory body, administrative agency or other
governmental body, agency or official (except such as may have
been obtained prior to the date hereof and such as may be
required for compliance with state securities or blue sky laws)
or conflicts or will conflict with or constitutes or will
constitute a breach of, or
<PAGE> 30
2
a default under, the certificate of incorporation or by-laws, or
other organizational documents, of the Advisor or (B) (i)
conflicts or will conflict with or constitutes or will constitute
a breach of, or a default under, any material agreement,
indenture, lease or other instrument to which the Trust is a
party or by which it or any of its properties may be bound (the
"Agreements and Instruments") or any other Agreements and
Instruments known to such counsel after due inquiry, (ii)
violates or will violate any statute, law or regulation (assuming
compliance with state securities and blue sky laws), (iii)
violates or will violate any judgment, injunction, order or
decree that is applicable to the Advisor or any of its properties
and that is known to such counsel, or (iv) will result in the
creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Advisor pursuant to the terms of
the Agreements and Instruments; and
g. The description of the Advisor in the Registration Statement and
the Prospectus does not contain an untrue statement of a material
fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
<PAGE> 1
Exhibit (k)(1)
COLONIAL AUCTION AGENCY AGREEMENT
Basic Terms for Acting as Auction Agent
July 20, 1999
These basic terms ("Basic Terms") set forth the general terms and
conditions pursuant to which a bank or trust company identified in a Request and
Acceptance Letter will act as auction agent (an "Auction Agent") for Municipal
Auction Rate Cumulative Preferred Shares ("Municipal Preferred") issued by an
investment company registered under the Investment Company Act of 1940, as
amended, as further identified by such Request and Acceptance Letter (a
"Trust"), for which Colonial Management Associates, Inc. is the investment
adviser.
- --------------------------------------------------------------------------------
The Trust proposes to issue shares of Municipal Preferred pursuant
to its Agreement, Declaration of Trust and Bylaws. The Trust desires that the
Auction Agent perform certain duties in connection with the Municipal Preferred
upon the terms and subject to the conditions of the Agreement.
1. Definitions and Rules of Construction.
1.1 Terms Defined By Reference to Bylaws.
Capitalized terms not defined herein shall have the respective
meanings specified in the Bylaws.
1.2 Terms Defined Herein.
As used herein and in the Settlement Procedures, the following terms
shall have the following meanings, unless the context otherwise requires:
(a) "Agent Member" of any Person shall mean the member of, or
participant in, the Securities Depository that will act on behalf of a
Bidder.
(b) "Agreement" shall mean the Basic Terms, together with the
Request and Acceptance Letter relating to one or more series of Municipal
Preferred.
(c) "Auction" shall have the meaning specified in Section 2.1
hereof.
(d) "Auction Procedures" shall mean the auction procedures
constituting Part II of Section 12.1 of the Bylaws of any Trust as of the
adoption thereof.
(e) "Authorized Officer" of the Auction Agent shall mean each Senior
Vice President, Vice President, Assistant Vice President and Associate
<PAGE> 2
2
of the Auction Agent assigned to its Corporate Trust and Agency Group and
every other officer or employee of the Auction Agent designated as an
"Authorized Officer" for purposes hereof in a communication to the Trust.
(f) "Broker-Dealer Agreement" shall mean each agreement among the
Trust, the Auction Agent and a Broker-Dealer substantially in the form
attached hereto as Exhibit A.
(g) "By-Laws," with respect to any Trust, shall mean the By-Laws, as
amended and restated, of such Trust, a copy of which will be attached to
the Request and Acceptance Letter of such Trust.
(h) "Declaration" means the Agreement and Declaration of Trust of
any Trust, as the same may be amended, supplemented or modified.
(i) "Municipal Preferred" shall mean the preferred shares, no par
value, of any Trust designated as its "Municipal Auction Rate Cumulative
Preferred Shares" and bearing such further designation as to series as the
Board of Trustees of such Trust or any committee thereof shall specify, as
set forth in the Request Letter.
(j) "Request and Acceptance Letter" shall mean the letter from the
Trust to the Auction Agent pursuant to which the Trust appoints the
Auction Agent and the Auction Agent accepts its appointment as auction
agent for the Municipal Preferred.
(k) "Settlement Procedures" shall mean the Settlement Procedures
attached hereto as Exhibit B.
(l) "Trust Officer" shall mean the Chairman of the Board of
Trustees, each Vice Chairman of the Board of Trustees (whether or not
designated by a number or word or words added before or after the title
"Vice Chairman"), the President, each Vice President (whether or not
designated by a number or word or words added before or after the title
"Vice President"), the Secretary, the Treasurer, each Assistant Vice
President and each Associate of the Trust and every other officer or
employee of the Trust designated as a "Trust Officer" for purposes hereof
in a notice to the Auction Agent.
1.3 Rules of Construction.
Unless the context or use indicates another or different meaning or
intent, the following rules shall apply to the construction of the Agreement:
(a) Words importing the singular number shall include the plural
number and vice versa.
<PAGE> 3
3
(b) The captions and headings herein are solely for convenience of
reference and shall not constitute a part of the Agreement nor shall they
affect its meaning, construction or effect.
(c) The words "hereof", "herein", "hereto" and other words of
similar import refer to the Agreement as a whole.
(d) All references herein to a particular time of day shall be to
New York City time.
2. The Auction.
2.1 Purpose; Incorporation by Reference of
Auction Procedures and Settlement Procedures.
(a) The Bylaws for each series of Municipal Preferred will provide
that the Applicable Rate for such series for each Subsequent Rate Period
thereof shall, except under certain conditions, be the rate per annum that
a bank or trust company appointed by the Trust advises results from
implementation of the Auction Procedures for such series. The Board of
Directors or Board of Trustees, as the case may be, of the Trust has
adopted a resolution appointing the Auction Agent as auction agent for
purposes of the Auction Procedures for each series of Municipal Preferred.
The Auction Agent accepts such appointment and agrees to follow the
procedures set forth in this Section 2 and the Auction Procedures for the
purpose of determining the Applicable Rate for each series of Municipal
Preferred for each Subsequent Rate Period thereof for which the Applicable
Rate is to be determined by an Auction. Each periodic implementation of
such procedures is hereinafter referred to as an "Auction."
(b) All of the provisions contained in the Auction Procedures and
the Settlement Procedures are incorporated herein by reference in their
entirety and shall be deemed to be a part hereof to the same extent as if
such provisions were fully set forth herein.
2.2 Preparation for Each Auction; Maintenance
of Registry of Beneficial Owners.
(a) Not later than seven days prior to the first Auction Date for
the first series of Municipal Preferred subject to an Auction, the Trust
shall provide the Auction Agent with a list of the Broker-Dealers. Not
later than seven days prior to any Auction Date for any series of
Municipal Preferred for which any change in such list of Broker-Dealers is
to be effective, the Trust will notify the Auction Agent in writing of
such change and, if any such change involves the addition of a
Broker-Dealer to such list, shall cause to be delivered to the Auction
Agent for execution by the Auction Agent a Broker-Dealer Agreement signed
by such Broker-Dealer;
<PAGE> 4
4
provided, however, that if the Trust proposes to designate any Special
Rate Period of any series of Municipal Preferred pursuant to Section 4 of
Part I of Section 12.1 of the Bylaws, not later than 11:00 A.M., New York
City time, on the Business Day next preceding the Auction next preceding
the first day of such Rate Period or by such later time or date, or both,
as may be agreed to by the Auction Agent, the Trust shall provide the
Auction Agent with a list of the Broker-Dealers for such series and a
manually signed copy of each Broker-Dealer Agreement or a new Schedule A
to a Broker-Dealer Agreement (which Schedule A shall replace and supersede
any previous Schedule A to such Broker-Dealer Agreement) with each
Broker-Dealer for such series. The Auction Agent and the Trust shall have
entered into a Broker-Dealer Agreement with each Broker-Dealer prior to
the participation of any such Broker-Dealer in any Auction.
(b) In the event that any Auction Date for any series of Municipal
Preferred shall be changed after the Auction Agent shall have given the
notice referred to in clause (vi) of paragraph (a) of the Settlement
Procedures, or after the notice referred to in Section 2.5(a) hereof, if
applicable, the Auction Agent, by such means as the Auction Agent deems
practicable, shall give notice of such change to the Broker-Dealers for
such series not later than the earlier of 9:15 A.M., New York City time,
on the new Auction Date or 9:15 A.M., New York City time, on the old
Auction Date.
(c) (i) The Auction Agent shall maintain a registry of the
beneficial owners of the shares of Municipal Preferred of each series who
shall constitute Existing Holders of shares of Municipal Preferred of such
series for purposes of Auctions and shall indicate thereon the identity of
the respective Broker-Dealer of each Existing Holder, if any, on whose
behalf such Broker-Dealer submitted the most recent Order in any Auction
which resulted in such Existing Holder continuing to hold or purchasing
shares of Municipal Preferred of such series. The Auction Agent shall keep
such registry current and accurate. The Trust shall provide or cause to be
provided to the Auction Agent at or prior to the Date of Original Issue of
the shares of Municipal Preferred of each series a list of the initial
Existing Holders of the shares of each such series of Municipal Preferred,
the number of shares purchased by each such Existing Holder and the
respective Broker-Dealer of each such Existing Holder or the affiliate
thereof through which each such Existing Holder purchased such shares. The
Auction Agent shall advise the Trust in writing whenever the number of
Existing Holders is 500 or more. The Auction Agent may rely upon, as
conclusive evidence of the identities of the Existing Holders of shares of
Municipal Preferred of any series (A) such list, (B) the results of
Auctions, (C) notices from any Broker-Dealer as described in the first
sentence of Section 2.2(c)(iii) hereof and (D) the results of any
procedures approved by the Trust that have been devised for the purpose of
determining the identities of Existing Holders in situations where shares
of Municipal Preferred may have been transferred without compliance with
any restriction on the transfer thereof set forth in the Auction
Procedures.
<PAGE> 5
5
(ii) In the event of any partial redemption of any series of
Municipal Preferred, the Auction Agent shall, at least two Business Days
prior to the next Auction for such series, request each Broker-Dealer to
provide the Auction Agent with a list of Persons who such Broker-Dealer
believes should remain Existing Holders after such redemption based upon
inquiries of those Persons such Broker-Dealer believes are Beneficial
Owners as a result of the most recent Auction and with respect to each
such Person, the number of shares of Municipal Preferred of such series
such Broker-Dealer believes are owned by such Person after such
redemption. In the absence of receiving any such information from any
Broker-Dealer, the Auction Agent may continue to treat the Persons listed
in its registry of Existing Holders as the beneficial owner of the number
of shares of Municipal Preferred of such series shown in such registry.
(iii) The Auction Agent shall be required to register a
transfer of shares of Municipal Preferred of any series from an Existing
Holder of such shares of Municipal Preferred only if such transfer is to
another Existing Holder, or other Person if permitted by the Trust, and
only if such transfer is made (A) pursuant to an Auction, (B) the Auction
Agent has been notified in writing (I) in a notice substantially in the
form of Exhibit C to the Broker-Dealer Agreements by a Broker-Dealer of
such transfer or (II) in a notice substantially in the form of Exhibit D
to the Broker-Dealer Agreements by the Broker-Dealer of any Existing
Holder, or other Person if permitted by the Trust, that purchased or sold
such shares of Municipal Preferred in an Auction of the failure of such
shares of Municipal Preferred to be transferred as a result of such
Auction or (C) pursuant to procedures approved by the Trust that have been
devised for the purpose of determining the identities of Existing Holders
in situations where shares of Municipal Preferred may have been
transferred without compliance with any restriction on the transfer
thereof set forth in the Auction Procedures. The Auction Agent is not
required to accept any such notice for an Auction unless it is received by
the Auction Agent by 3:00 P.M., New York City time, on the Business Day
preceding such Auction.
(d) The Auction Agent may request the Broker-Dealers, as set forth
in the Broker-Dealer Agreements, to provide the Auction Agent with a list
of Persons who such Broker-Dealer believes should be Existing Holders
based upon inquiries of those Persons such Broker-Dealer believes are
Beneficial Owners as a result of the most recent Auction and with respect
to each such Person, the number of shares of such series of Municipal
Preferred such Broker-Dealer believes to be owned by such Person. The
Auction Agent shall keep confidential such registry of Existing Holders
and shall not disclose the identities of the Existing Holders of such
shares of Municipal Preferred to any Person other than the Trust and the
Broker-Dealer that provided such information.
<PAGE> 6
6
2.3 Information Concerning Rates.
(a) The Rate Multiple on the date of the Agreement is set forth in
the Request and Acceptance Letter. If there is any change in the credit
rating of Municipal Preferred by either of the rating agencies (or
substitute or successor rating agencies) referred to in the definition of
"Rate Multiple" resulting in any change in the Rate Multiple for Municipal
Preferred after the date of the Request and Acceptance Letter, the Trust
shall notify the Auction Agent in writing of such change in the Rate
Multiple prior to 12:00 Noon, New York City time, on the Business Day
prior to the next Auction Date for any series of Municipal Preferred
succeeding such change. If the Trust designates all or a portion of any
dividend on shares of any series of Municipal Preferred to consist of net
capital gains or other income taxable for Federal income tax purposes, it
will indicate, in its notice in the form of Exhibit I hereto to the
Auction Agent pursuant to Section 2.6 hereof, the Rate Multiple for such
series to be in effect for the Auction Date on which the dividend rate for
such dividend is to be fixed. In determining the Maximum Rate for any
series of Municipal Preferred on any Auction Date as set forth in Section
2.3(b)(i) hereof, the Auction Agent shall be entitled to rely on the last
Rate Multiple for Municipal Preferred of which it has most recently
received notice from the Trust (or, in the absence of such notice, the
percentage set forth in the Request and Acceptance Letter), except that if
the Trust shall have notified the Auction Agent of a Rate Multiple to be
in effect for an Auction Date in accordance with the preceding sentence,
the Rate Multiple in effect for the next succeeding Auction Date of any
series of Municipal Preferred shall be, unless the Trust notifies the
Auction Agent of a change in the Rate Multiple for such succeeding Auction
Date pursuant to this Section 2.3(a), the Rate Multiple that was in effect
on the first preceding Auction Date for Municipal Preferred with respect
to which the dividend, the rate for which was fixed on such Auction Date,
did not include any net capital gains or other income taxable for Federal
income tax purposes.
(b) (i) On each Auction Date for any series of Municipal
Preferred, the Auction Agent shall determine the Maximum Rate for such
series. The Maximum Rate for any series of Municipal Preferred on any
Auction Date shall be:
(A) in the case of any Auction Date which is not the Auction
Date immediately prior to the first day of any proposed Special Rate
Period designated by the Trust pursuant to Section 4 of Part I of Section
12.1 of the Bylaws, the product of (1) the Reference Rate on such Auction
Date for the next Rate Period of such series and (2) the Rate Multiple on
such Auction Date, unless such series has or had a Special Rate Period
(other than a Special Rate Period of 28 Rate Period Days or fewer) and an
Auction at which Sufficient Clearing Bids existed has not yet occurred for
a Minimum Rate Period of such series after such Special Rate Period, in
which case the higher of:
<PAGE> 7
7
(1) the dividend rate on shares of such series for the
then-ending Rate Period; and
(2) the product of (x) the higher of (I) the Reference
Rate on such Auction Date for a Rate Period equal in length to
the then-ending Rate Period of such series, if such then
ending Rate Period was 364 Rate Period Days or fewer, or the
Treasury Note Rate on such Auction Date for a Rate Period
equal in length to the then-ending Rate Period of such series,
if such then ending Rate Period was more than 364 Rate Period
Days, and (II) the Reference Rate on such Auction Date for a
Rate Period equal in length to such Special Rate Period of
such series, if such Special Rate Period was 364 Rate Period
Days or fewer, or the Treasury Note Rate on such Auction Date
for a Rate Period equal in length to such Special Rate Period,
if such Special Rate Period was more than 364 Rate Period Days
and (y) the Rate Multiple on such Auction Date; or
(B) in the case of any Auction Date which is the Auction Date
immediately prior to the first day of any proposed Special Rate Period
designated by the Trust pursuant to Section 4 of Part I of Section 12.1 of
the Bylaws, the product of (1) the highest of (x) the Reference Rate on
such Auction Date for a Rate-Period equal in length to the then-ending
Rate Period of such series, if such then-ending Rate Period was 364 Rate
Period Days or fewer, or the Treasury Note Rate on such Auction Date for a
Rate Period equal in length to the then-ending Rate Period of such Rate
Period, if such then-ending Rate Period was more than 364 Rate Period
Days, (y) the Reference Rate on such Auction Date for the Special Rate
Period for which the Auction is being held if such Special Rate Period is
364 Rate Period Days or fewer or the Treasury Note Rate on such Auction
Date for the Special Rate Period for which the Auction is being held if
such Special Rate Period is more than 364 Rate Period Days, and (z) the
Reference Rate on such Auction Date for Minimum Rate Periods and (2) the
Rate Multiple on such Auction Date.
Not later than 9:30 A.M. on each Auction Date the Auction Agent shall notify the
Trust and the Broker-Dealers of the Maximum Rate so determined and the "AA"
Composite Commercial Paper Rate(s), the Taxable Equivalent of the Short-Term
Municipal Bond Rate(s), Treasury Note Rate(s) and Treasury Bill Rate(s), as the
case may be, used to make such determination.
(ii) From and after a Failure to Deposit by the Trust during
any Rate Period of any series of Municipal Preferred, until such failure
is cured and a Late Charge (as defined in paragraph (a) of Section 2.7),
is paid, in accordance with subparagraph (e)(i) of Section 2 of Part I of
Section 12.1 of the Bylaws, on the first day of each Rate Period of such
series the Auction Agent shall determine the Treasury Note Rate for such
Rate Period of more than 364 Rate Period Days and the Reference Rate for
Rate Periods of 364 Rate Period Days or fewer. Not later
<PAGE> 8
8
than 9:30 A.M. on each such first day, the Auction Agent shall notify the
Trust of the applicable Reference Rate and Treasury Note Rate.
(iii) If any "AA" Composite Commercial Paper Rate, Taxable
Equivalent of the Short-Term Municipal Bond Rate, Treasury Note Rate or
Treasury Bill Rate, as the case may be, is not quoted on an interest or
bond equivalent, as the case may be, basis, the Auction Agent shall
convert the quoted rate to the interest or bond equivalent thereof as set
forth in the definition of such rate in the Bylaws if the rate obtained by
the Auction Agent is quoted on a discount basis, or if such rate is quoted
on a basis other than an interest or bond equivalent or discount basis the
Auction Agent shall convert the quoted rate to an interest or bond
equivalent rate after consultation with the Trust as to the method of such
conversion.
(iv) If any "AA" Composite Commercial Paper Rate is to be
based on rates supplied by Commercial Paper Dealers and one or more of the
Commercial Paper Dealers shall not provide a quotation for the
determination of such "AA" Composite Commercial Paper Rate, the Auction
Agent shall immediately notify the Trust so that the Trust can determine
whether to select a Substitute Commercial Paper Dealer or Substitute
Commercial Paper Dealers to provide the quotation or quotations not being
supplied by any Commercial Paper Dealer or Commercial Paper Dealers. The
Trust shall promptly advise the Auction Agent of any such selection.
(v) If any Treasury Note Rate or Treasury Bill Rate is to be
based on rates supplied by U.S. Government Securities Dealers and one or
more of the U.S. Government Securities Dealers shall not provide a
quotation for the determination of such Treasury Rate, the Auction Agent
shall immediately notify the Trust so that the Trust can determine whether
to select a Substitute U.S. Government Securities Dealer or Substitute
U.S. Government Securities Dealers to provide the quotation or quotations
not being supplied by any U.S. Government Securities Dealer or U.S.
Government Securities Dealers. The Trust shall promptly advise the Auction
Agent of any such selection.
(c) The maximum marginal tax rate referred to in the definition of
"Rate Multiple" in the Bylaws is referred to in this Agreement as the
"Highest Marginal Rate." The Highest Marginal Rate on the date of the
Agreement is set forth in the Request and Acceptance Letter. If there is
any change in the Highest Marginal Rate, the Trust shall notify the
Auction Agent in writing of such change prior to 12:00 Noon, New York City
time, on the Business Day prior to the next Auction Date for Municipal
Preferred succeeding such change. In determining the Maximum Rate for any
series of Municipal Preferred on any Auction Date, the Auction Agent shall
be entitled to rely on the Highest Marginal Rate of which it has most
recently received notice from the Trust (or, in the absence of such
notice, the percentage set forth in the Request and Acceptance Letter).
<PAGE> 9
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2.4 Auction Schedule.
The Auction Agent shall conduct Auctions in accordance with the
schedule set forth below. Such schedule may be changed by the Auction Agent with
the consent of the Trust, which consent shall not be unreasonably withheld. The
Auction Agent shall give written notice of any such change to each
Broker-Dealer. Such notice shall be given prior to the close of business on the
Business Day next preceding the first Auction Date on which any such change
shall be effective.
Time Event
By 9:30 A.M. Auction Agent advises the Trust and Broker-
Dealers of the applicable Maximum Rate and
the Reference Rate(s) and Treasury Note
Rate(s), as the case may be, used in
determining such Maximum Rate as set forth
in Section 2.3(b)(i) hereof.
9:30 A.M. - 1:30 P.M. Auction Agent assembles information
communicated to it by Broker-Dealers as
provided in Section 2(a) of the Auction
Procedures. Submission Deadline is 1:30
P.M.
Not earlier than 1:30 P.M. Auction Agent makes determinations pursuant
to Section 3(a) of the Auction Procedures.
By approximately 3:00 P.M. Auction Agent advises Trust of results of
Auction as provided in Section 3(b) of the
Auction Procedures.
Submitted Bids and Submitted Sell Orders are accepted and rejected and shares of
Municipal Preferred are allocated as provided in Section 4 of the Auction
Procedures. The Auction Agent gives notice of the Auction results as set forth
in paragraph (a) of the Settlement Procedures.
The Auction Agent shall follow the notification procedures set forth in
paragraph (a) of the Settlement Procedures.
2.5 Designation of Special Rate Period.
(a) The Bylaws will provide that, subject to the Trust's option to
designate a Special Rate Period as referred to in paragraph (b) of this
Section 2.5, (i) each Rate Period of any series of Municipal Preferred
will be a Minimum Rate
<PAGE> 10
10
Period (a duration of seven days, subject to certain exceptions) and (ii)
each Rate Period following a Rate Period of any series of Municipal
Preferred that is other than a Minimum Rate Period will be a Minimum Rate
Period. Not less than 10 nor more than 20 days prior to the last day of
any such Rate Period that is not a Minimum Rate Period, (i) the Trust
shall deliver to the Auction Agent a notice of the Auction Date of the
next succeeding Auction for such series in the form of Exhibit C hereto
and (ii) the Auction Agent shall deliver such notice by first-class mail,
postage prepaid, to each Existing Holder of shares of such series at the
address set forth for such Existing Holder in the records of the Auction
Agent and to the Broker-Dealers for such series as promptly as practicable
after its receipt of such notice from the Trust.
(b) Pursuant to the Bylaws, the Trust may, at its option, designate
a Special Rate Period for any series of Municipal Preferred in the manner
described in Section 4 of Part I of Section 12.1 of the Bylaws.
(i) If the Board of Trustees proposes to designate any
succeeding Subsequent Rate Period of any series of Municipal Preferred as
a Special Rate Period, (A) the Trust shall deliver to the Auction Agent a
notice of such proposed Special Rate Period in the form of Exhibit D
hereto not less than 20 (or such lesser number of days as may be agreed to
from time to time by the Auction Agent) nor more than 30 days prior to the
first day of such proposed Special Rate Period and (B) the Auction Agent
on behalf of the Trust shall deliver such notice by first-class mail,
postage prepaid, to each Existing Holder of shares of such series of
Municipal Preferred at the address set forth for such Existing Holder in
the records of the Auction Agent and to the Broker-Dealers for such series
as promptly as practicable after its receipt of such notice from the
Trust.
(ii) If the Board of Trustees determines to designate such
succeeding Subsequent Rate Period as a Special Rate Period, (A) the Trust
shall deliver to the Auction Agent a notice of such determination in the
form of Exhibit E hereto not later than 11:00 A.M., New York City time, on
the second Business Day next preceding the first day of such proposed
Special Rate Period (or such later time or date, or both, as may be agreed
to by the Auction Agent) and (B) the Auction Agent shall deliver such
notice to the Broker-Dealers for such series not later than 3:00 P.M., New
York City time, on such second Business Day (or, if the Auction Agent has
agreed to a later time or date, as promptly as practicable thereafter).
(iii) If the Trust shall deliver to the Auction Agent a notice
not later than 11:00 A.M., New York City time, on the second Business Day
next preceding the first day of such proposed Special Rate Period (or such
later time or date, or both, as may be agreed to by the Auction Agent)
stating that the Trust has determined not to exercise its option to
designate such succeeding Subsequent Rate Period as a Special Rate Period,
in the form of Exhibit F hereto, or shall fail to timely deliver either
such notice or a notice in the form of Exhibit E hereto, the
<PAGE> 11
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Auction Agent shall deliver a notice in the form of Exhibit F hereto to
the Broker-Dealers for such series not later than 3:00 P.M., New York City
time, on such second Business Day (or, if the Auction Agent has agreed to
a later time or date, as promptly as practicable thereafter).
Such change in the length of any Rate Period shall not occur if (1) an Auction
for shares of such series shall not be held on such Auction Date for any reason
or (2) an Auction for shares of such series shall be held on such Auction Date
but Sufficient Clearing Bids for shares of such series shall not exist in such
Auction.
2.6 Allocation of Taxable Income.
The Trust shall, in the case of a Minimum Rate Period or a Special
Rate Period of 28 Rate Period Days or fewer, and may, in the case of any other
Special Rate Period, designate all or a portion of any dividend on shares of any
series of Municipal Preferred to consist of net capital gains or other income
taxable for Federal income tax purposes by delivering to the Auction Agent a
notice in the form of Exhibit I hereto of such designation not later than the
Dividend Payment Date for such series next preceding the Auction Date on which
the dividend rate for such dividend is to be fixed. The Auction Agent will
deliver such notice to the Broker-Dealers for such series on the Business Day
following its receipt of such notice from the Trust. Within two Business Days
after any Auction Date involving the allocation of income taxable for Federal
income tax purposes, the Auction Agent shall notify each Broker-Dealer for the
related series as to the dollar amount per share of such taxable income and
income exempt from Federal income taxation included in the related dividend.
2.7 Failure to Deposit.
(a) If:
(i) any Failure to Deposit shall have occurred with respect to
shares of Municipal Preferred during any Rate Period thereof (other than
any Special Rate Period of more than 364 Rate Period Days or any Rate
Period succeeding any Special Rate Period of more than 364 Rate Period
Days during which a Failure to Deposit occurred that has not been cured),
but, prior to 12:00 Noon, New York City time, on the third Business Day
next succeeding the date on which such Failure to Deposit occurred, such
Failure to Deposit shall have been cured in accordance with Section 2.7(c)
hereof and the Trust shall have paid to the Auction Agent a late charge (a
"Late Charge") equal to the sum of (1) if such Failure to Deposit
consisted of the failure timely to pay to the Auction Agent the full
amount of dividends with respect to any Dividend Period on such shares, an
amount computed by multiplying (x) 200% of the Reference Rate for the Rate
Period during which such Failure to Deposit occurs on the Dividend Payment
Date for such Dividend Period by (y) a fraction, the numerator of which
shall be the number of days for which such Failure to Deposit has not been
cured in accordance with
<PAGE> 12
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Section 2.7(c) hereof (including the day such Failure to Deposit occurs
and excluding the day such Failure to Deposit is cured) and the
denominator of which shall be 360, and applying the rate obtained against
the aggregate liquidation preference of the outstanding shares of
Municipal Preferred and (2) if such Failure to Deposit consisted of the
failure timely to pay to the Auction Agent the Redemption Price of the
shares of Municipal Preferred, if any, for which Notice of Redemption has
been given by the Trust, an amount computed by multiplying (x) 200% of the
Reference Rate for the Rate Period during which such Failure to Deposit
occurs on the redemption date by (y) a fraction, the numerator of which
shall be the number of days for which such Failure to Deposit is not cured
in accordance with Section 2.7(c) hereof (including the day such Failure
to Deposit occurs and excluding the day such Failure to Deposit is cured)
and the denominator of which shall be 360, and applying the rate obtained
against the aggregate liquidation preference of the outstanding shares of
Municipal Preferred to be redeemed,
then the Auction Agent shall deliver a notice in the form of Exhibit G hereto by
first-class mail, postage prepaid, to the Broker-Dealers for such series not
later than one Business Day after its receipt of the payment from the Trust
curing such Failure to Deposit and such Late Charge.
(b) If:
(i) any Failure to Deposit shall have occurred with respect to
shares of Municipal Preferred during any Rate Period thereof (other than
any Special Rate Period of more than 364 Rate Period Days or any Rate
Period succeeding any Special Rate Period of more than 364 Rate Period
Days during which a Failure to Deposit occurred but has not been cured),
and, prior to 12:00 Noon, New York City time, on the third Business Day
next succeeding the date on which such Failure to Deposit occurred, such
Failure to Deposit shall not have been cured in accordance with Section
2.7(c) hereof or the Trust shall not have paid the applicable Late Charge
to the Auction Agent; or
(ii) any Failure to Deposit shall have occurred with respect
to shares of Municipal Preferred during a Special Rate Period thereof of
more than 364 Rate Period Days, or during any Rate Period thereof
succeeding any Special Rate Period of more than 364 Rate Period Days
during which a Failure to Deposit occurred that has not been cured, and,
prior to 12:00 Noon, New York City time, on the fourth Business Day
preceding the Auction Date for the Rate Period subsequent to such Rate
Period, such Failure to Deposit shall not have been cured in accordance
with Section 2.7(c) hereof or the Trust shall not have paid the applicable
Late Charge to the Auction Agent in accordance with Section 2(e)(i)(D) of
Section 12.1 of the Bylaws (such Late Charge, for purposes of this clause
(b)(ii) of this Section 2.7, to be calculated by using, as the Reference
Rate, the Reference Rate applicable to a Rate Period (x) consisting of
more than 182 Rate Period Days and
<PAGE> 13
13
(y) commencing on the date on which the Rate Period during which Failure
to Deposit occurs commenced);
then the Auction Agent shall deliver a notice in the form of Exhibit H hereto to
the Broker-Dealers for such series not later than one Business Day after the
receipt of the payment from the Trust curing such Failure to Deposit and such
Late Charge.
(c) A Failure to Deposit with respect to shares of Municipal
Preferred shall have been cured (if such Failure to Deposit is not solely
due to the willful failure to the Trust to make the required payment to
the Auction Agent) with respect to any Rate Period if, within the
respective time periods described immediately above, the Trust shall have
paid to the Auction Agent (i) all accumulated and unpaid dividends on the
shares of Municipal Preferred and (ii) without duplication, the Redemption
Price for the shares of Municipal Preferred, if any, for which Notice of
Redemption has been mailed; provided, however, that the foregoing clause
(ii) shall not apply to the Trust's failure to pay the Redemption Price in
respect of shares of Municipal Preferred when the related Notice of
Redemption provides that redemption of such shares is subject to one or
more conditions precedent and each such condition precedent shall not have
been satisfied at the time or times and in the manner specified in such
Notice of Redemption.
2.8 Broker-Dealers.
(a) Not later than 12:00 Noon, New York City time, on each Auction
Date for any series of Municipal Preferred, the Trust shall pay to the
Auction Agent an amount in cash equal to the aggregate fees payable to the
Broker-Dealers for such series pursuant to Section 2.8 of the
Broker-Dealer Agreements for such series. The Auction Agent shall apply
such moneys as set forth in Section 2.8 of each such Broker-Dealer
Agreement.
(b) The Trust shall obtain the consent of the Auction Agent prior to
selecting any Person to act as a Broker-Dealer, which consent shall not be
unreasonably withheld.
(c) The Auction Agent shall terminate any Broker-Dealer Agreement as
set forth therein if so directed by the Trust, provided that at least one
Broker-Dealer Agreement would be in effect for each series of Municipal
Preferred after such termination.
(d) Subject to the Auction Agent's having consented to the selection
of the relevant Broker-Dealer pursuant to Section 2.8(b) hereof, the
Auction Agent shall from time to time enter into such Broker-Dealer
Agreements with one or more Broker-Dealers as the Trust shall request, and
shall enter into such schedules to any such Broker-Dealer Agreements as
the Trust shall request, which schedules, among
<PAGE> 14
14
other things, shall set forth the series of Municipal Preferred to which
such Broker-Dealer Agreement relates.
2.9 Ownership of Shares of Municipal Preferred.
The Trust shall notify the Auction Agent if the Trust or any
affiliate of the Trust acquires any shares of Municipal Preferred of any series.
Neither the Trust nor any affiliate of the Trust shall submit any Order in any
Auction for Municipal Preferred, except as set forth in the next sentence. Any
Broker-Dealer that is an affiliate of the Trust may submit Orders in Auctions,
but only if such Orders are not for its own account. For purposes of this
Section 2.9, a Broker-Dealer shall not be deemed to be an affiliate of the Trust
solely because one or more of the directors or executive officers of such
Broker-Dealer or of any Person controlled by, in control of or under common
control with such Broker-Dealer is also a director of the Trust. The Auction
Agent shall have no duty or liability with respect to enforcement of this
Section 2.9.
2.10 Access to and Maintenance of Auction Records.
The Auction Agent shall, upon the receipt of prior written notice
from the Trust, afford to the Trust access at reasonable times during normal
business hours to all books, records, documents and other information concerning
the conduct and results of Auctions. The Auction Agent shall maintain records
relating to any Auction for a period of six years after such Auction, and such
records shall, in reasonable detail, accurately and fairly reflect the actions
taken by the Auction Agent hereunder.
3. The Auction Agent as Dividend and
Redemption Price Disbursing Agent.
The Auction Agent, as dividend and redemption price disbursing
agent, shall pay to the Holders of shares of Municipal Preferred of any series
(i) on each Dividend Payment Date for such series, dividends on the shares of
Municipal Preferred of such series, (ii) on any date fixed for redemption of
shares of Municipal Preferred of any series, the Redemption Price of any shares
of such series called for redemption and (iii) any Late Charge related to any
payment of dividends or Redemption Price, in each case after receipt of the
necessary Trusts from the Trust with which to pay such dividends, Redemption
Price or Late Charge. The amount of dividends for any Rate Period for any series
of Municipal Preferred to be paid by the Auction Agent to the Holders of such
shares of such series will be determined by the Trust as set forth in Section 2
of Part I of Section 12.1 of the Bylaws with respect to such series. The
Redemption Price of any shares to be paid by the Auction Agent to the Holders
will be determined by the Trust as set forth in Section 11 of Part I of Section
12.1 of the Bylaws with respect to such series. The Trust shall notify the
Auction Agent in writing of a decision to redeem shares of any series of
Municipal Preferred at least five days prior to the date a Notice of Redemption
is required to be mailed to the Holders of the shares to be redeemed by
paragraph (c) of Section 11 of Part I of Section 12.1 of the
<PAGE> 15
15
Bylaws. Such notice by the Trust to the Auction Agent shall contain
the information required by paragraph (c) of Section 11 of Part I of Section
12.1 of the Bylaws to be stated in the Notice of Redemption required to be
mailed by the Trust to such Holders.
4. The Auction Agent as Transfer Agent and Registrar.
4.1 Issue of Stock or Shares Certificates.
Upon the Date of Original Issue of each series of Municipal
Preferred, one or more certificates representing all of the shares of such
series issued on such date shall be issued by the Trust and, at the request of
the Trust, registered in the name of Cede & Co. and countersigned by the Auction
Agent.
4.2 Registration of Transfer of Shares.
Shares of each series of Municipal Preferred shall be registered
solely in the name of the Securities Depository or its nominee.
4.3 Removal of Legend on Restricted Shares.
All requests for removal of legends on shares of Municipal Preferred
of any series indicating restrictions on transfer shall be accompanied by an
opinion of counsel stating that such legends may be removed and such shares
freely transferred, such opinion to be delivered under cover of a letter from a
Trust Officer authorizing the Auction Agent to remove the legend on the basis of
said opinion.
4.4 Lost Stock or Share Certificates.
The Auction Agent shall issue and register replacement certificates
for certificates represented to have been lost, stolen or destroyed upon the
fulfillment of such requirements as shall be deemed appropriate by the Trust and
the Auction Agent, subject at all times to provisions of law, the Bylaws of the
Trust governing such matters and resolutions adopted by the Trust with respect
to lost securities. The Auction Agent may issue new certificates in exchange for
and upon the cancellation of mutilated certificates. Any request by the Trust to
the Auction Agent to issue a replacement or new certificate pursuant to this
Section 4.4 shall be deemed to be a representation and warranty by the Trust to
the Auction Agent that such issuance will comply with such provisions of law and
the Bylaws and resolutions of the Trust.
<PAGE> 16
16
4.5 Disposition of Cancelled Certificates;
Record Retention.
The Auction Agent shall retain all stock or share certificates which
have been cancelled in transfer or exchange and all accompanying documentation
in accordance with applicable rules and regulations of the Securities and
Exchange Commission for two calendar years. Upon the expiration of this two-year
period, the Auction Agent shall deliver to the Trust the cancelled certificates
and accompanying documentation. The Trust shall also undertake to furnish to the
Securities and Exchange Commission and to the Board of Governors of the Federal
Reserve System, upon demand, at either the principal office or at any regional
office, complete, correct and current hard copies of any and all such records.
Thereafter such records shall not be destroyed by the Trust without the
concurrence of the Auction Agent.
4.6 Stock or Record Books.
For so long as the Auction Agent is acting as the transfer agent for
any series of Municipal Preferred pursuant to the Agreement, it shall maintain a
stock or record book containing a list of the Holders of the shares of Municipal
Preferred of each such series. In case of any request or demand for the
inspection of the stock or record books of the Trust or any other books in the
possession of the Auction Agent, the Auction Agent will notify the Trust and
secure instructions as to permitting or refusing such inspection. The Auction
Agent reserves the right, however, to exhibit the stock or record books or other
books to any Person in case it is advised by its counsel that its failure to do
so would be unlawful.
4.7 Return of Funds.
Any funds deposited with the Auction Agent hereunder by the Trust
for any reason, including but not limited to redemption of shares of Municipal
Preferred of any series, that remain unpaid after ninety days shall be repaid to
the Trust upon the written request of the Trust, together with interest, if any,
earned thereon.
5. Representations and Warranties of the Trust.
The Trust represents and warrants to the Auction Agent that:
(a) the Trust is a duly organized and existing business trust in
good standing under the laws of the State of its incorporation or
organization and has full corporate power or all requisite power to
execute and deliver the Agreement and to authorize, create and issue the
shares of Municipal Preferred of each series, and the shares of Municipal
Preferred of each series when issued, will be duly authorized, validly
issued, fully paid and nonassessable;
(b) the Agreement has been duly and validly authorized, executed and
delivered by the Trust and constitutes the legal, valid and binding
obligation of the Trust;
<PAGE> 17
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(c) the form of the certificate evidencing the shares of Municipal
Preferred of each series complies or will comply with all applicable laws
of the State of its incorporation or organization;
(d) when issued, the shares of Municipal Preferred of each series
will have been duly registered under the Securities Act of 1933, as
amended, and no further action by or before any governmental body or
authority of the United States or of any state thereof is required in
connection with the execution and delivery of the Agreement or will have
been required in connection with the issuance of the shares of Municipal
Preferred of each series;
(e) the execution and delivery of the Agreement and the issuance and
delivery of the shares of Municipal Preferred of each series do not and
will not conflict with, violate or result in a breach of the terms,
conditions or provisions of, or constitute a default under, the Agreement
and Declaration of Trust (as amended to date) or the Bylaws of the Trust,
any law or regulation, any order or decree of any court or public
authority having jurisdiction, or any mortgage, indenture, contract,
agreement or undertaking to which the Trust is a party or by which it is
bound the effect of which conflict, violation, default or breach would be
material to the Trust or the Trust and its subsidiaries taken as a whole;
and
(f) no taxes are payable upon or in respect of the execution of the
Agreement or the issuance of the shares of Municipal Preferred of any
series.
6. The Auction Agent.
6.1 Duties and Responsibilities.
(a) The Auction Agent is acting solely as agent for the Trust
hereunder and owes no fiduciary duties to any Person, other than the
Trust, by reason of the Agreement.
(b) The Auction Agent undertakes to perform such duties and only
such duties as are specifically set forth in the Agreement, and no implied
covenants or obligations shall be read into the Agreement against the
Auction Agent.
(c) In the absence of bad faith or negligence on its part, the
Auction Agent shall not be liable for any action taken, suffered, or
omitted or for any error of judgment made by it in the performance of its
duties under the Agreement. The Auction Agent shall not be liable for any
error of judgment made in good faith unless the Auction Agent shall have
been negligent in ascertaining the pertinent facts.
<PAGE> 18
18
6.2 Rights of the Auction Agent.
(a) The Auction Agent may rely and shall be protected in acting or
refraining from acting upon any communication authorized hereby and upon
any written instruction, notice, request, direction, consent, report,
certificate, share certificate or other instrument, paper or document
believed in good faith by it to be genuine. The Auction Agent shall not be
liable for acting upon any telephone communication authorized hereby which
the Auction Agent believes in good faith to have been given by the Trust
or by a Broker-Dealer. The Auction Agent may record telephone
communications with the Trust or with the Broker-Dealers or both.
(b) The Auction Agent may consult with counsel of its choice and the
advice of such counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in reliance thereon.
(c) The Auction Agent shall not be required to advance, expend or
risk its own funds or otherwise incur or become exposed to financial
liability in the performance of its duties hereunder.
(d) The Auction Agent may perform its duties and exercise its rights
hereunder either directly or by or through agents or attorneys and shall
not be responsible for any misconduct or negligence on the part of any
agent or attorney appointed by it with due care hereunder.
6.3 Auction Agent's Disclaimer.
The Auction Agent makes no representation as to the validity or
adequacy of the Agreement, the Broker-Dealer Agreements or the shares of
Municipal Preferred of any series except that the Auction Agent hereby
represents that the Agreement has been duly authorized, executed and delivered
by the Auction Agent and constitutes a legal and binding obligation of the
Auction Agent.
6.4 Compensation, Expenses and Indemnification.
(a) The Trust shall pay the Auction Agent from time to time
reasonable compensation for all services rendered by it under the
Agreement and the Broker-Dealer Agreements.
(b) The Trust shall reimburse the Auction Agent upon its request for
all reasonable out-of-pocket expenses, disbursements and advances incurred
or made by the Auction Agent in accordance with any provision of the
Agreement and the Broker-Dealer Agreements (including the reasonable
compensation and the
<PAGE> 19
19
expenses and disbursements of its agents and counsel), except any expense
or disbursement attributable to its negligence or bad faith.
(c) The Trust shall indemnify the Auction Agent for and hold it
harmless against any loss, liability or expense incurred without
negligence or bad faith on its part, arising out of or in connection with
its agency under the Agreement and the Broker-Dealer Agreements, including
the costs and expenses of defending itself against any such claim or
liability in connection with its exercise or performance of any of its
duties hereunder and thereunder.
7. Miscellaneous.
7.1 Term of Agreement.
(a) The term of the Agreement is unlimited unless it shall be
terminated as provided in this Section 7.1. The Trust may terminate the
Agreement at any time by so notifying the Auction Agent, provided that the
Trust has entered into an agreement in substantially the form of the
Agreement with a successor Auction Agent. The Auction Agent may terminate
the Agreement upon written notice to the Trust on the date specified in
such notice, which date shall be no earlier than 45 days after the date of
delivery of such notice.
(b) Except as otherwise provided in this paragraph (b), the
respective rights and duties of the Trust and the Auction Agent under the
Agreement with respect to any series of Municipal Preferred shall cease
upon termination of the Agreement with respect to such series. The Trust's
representations, warranties, covenants and obligations to the Auction
Agent under Sections 5 and 6.4 hereof shall survive the termination of the
Agreement with respect to any series of Municipal Preferred. Upon
termination of the Agreement with respect to any series of Municipal
Preferred, the Auction Agent shall, at the Trust's request, promptly
deliver to the Trust copies of all books and records maintained by it with
respect to Municipal Preferred in connection with its duties hereunder.
7.2 Communications.
Except for (i) communications authorized to be by telephone pursuant
to the Agreement or the Auction Procedures and (ii) communications in connection
with Auctions (other than those expressly required to be in writing), all
notices, requests and other communications to any party hereunder shall be in
writing (including telecopy or similar writing) and shall be given to such
party, addressed to it, at its address or telecopy number set forth below:
If to the Trust, [Name of Trust]
One Financial Center
<PAGE> 20
20
Boston, MA 02111
Attention:
Telecopier No.: (617) 345-0919
Telephone No.: (617) 426-3750
If to the Auction Agent, to the address or telecopy
number set forth in the
Request and Acceptance Letter,
or such other address or telecopy number as such party may hereafter specify for
such purpose by notice to the other party. Each such notice, request or
communication shall be effective when delivered at the address specified herein.
Communications shall be given on behalf of the Trust by a Trust Officer and on
behalf of the Auction Agent by telephone (confirmed by telecopy or in writing)
by an Authorized Officer.
7.3 Entire Agreement.
The Agreement contains the entire agreement between the parties
relating to, and superseding any prior agreement between the parties relating
to, the subject matter hereof, and there are no other representations,
endorsements, promises, agreements or understandings, oral, written or implied,
between the parties relating to the subject matter hereof except for agreements
relating to the compensation of the Auction Agent.
7.4 Benefits.
Nothing herein, express or implied, shall give to any Person, other
than the Trust, the Auction Agent and their respective successors and assigns,
any benefit of any legal or equitable right, remedy or claim hereunder.
7.5 Amendment; Waiver.
(a) The Agreement shall not be deemed or construed to be modified,
amended, rescinded, cancelled or waived, in whole or in part, except by a
written instrument signed by a duly authorized representative of the party
to be charged.
(b) Failure of either party hereto to exercise any right or remedy
hereunder in the event of a breach hereof by the other party shall not
constitute a waiver of any such right or remedy with respect to any
subsequent breach.
7.6 Successors and Assigns.
The Agreement shall be binding upon, inure to the benefit of, and be
enforceable by, the respective successors and assigns of each of the Trust and
the Auction Agent.
<PAGE> 21
21
7.7 Severability.
If any clause, provision or section hereof shall be ruled invalid or
unenforceable by any court of competent jurisdiction, the invalidity or
unenforceability of such clause, provision or section shall not affect any of
the remaining clauses, provisions or sections hereof.
7.8 Governing Law.
The Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
If the Trust is a Massachusetts business trust, the following
provision is deemed to be included in the Basic Terms:
7.9 Declaration of Trust.
The Trust's Agreement and Declaration of Trust (as amended) is on
file with the Secretary of the Commonwealth of Massachusetts. This Agreement has
been executed on behalf of the Trust by the Vice President and Treasurer of the
Trust acting in such capacity and not individually, and the obligations of the
Trust set forth in this Agreement are not binding upon any of the Trust's
trustees, officers or shareholders individually, but are binding only upon the
assets and property of the Trust.
<PAGE> 22
EXHIBIT A
FORM OF
BROKER-DEALER AGREEMENT
<PAGE> 23
EXHIBIT B
SETTLEMENT PROCEDURES
<PAGE> 24
EXHIBIT C
[NAME OF TRUST]
NOTICE OF AUCTION DATE FOR
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
("Municipal Preferred")
NOTICE IS HEREBY GIVEN that the Auction Date of the next Auction for
Series __ of the Trust's Municipal Preferred is scheduled to be ____________,
19__ and the next Dividend Payment Date for Series __ of the Trust's Municipal
Preferred will be _____________, 19__.
[A Failure to Deposit in respect of the Series __ Municipal Preferred
currently exists. If, prior to 12:00 noon, New York City time, on the fourth
Business Day preceding the next scheduled Auction Date of the Series __
Municipal Preferred, such Failure to Deposit is not cured or the applicable Late
Charge is not paid, the next Auction will not be held. Notice of the next
Auction for the Series __ Municipal Preferred will be delivered when such
Failure to Deposit is cured and the applicable Late Charge is paid.(1)]
[NAME OF TRUST]
- --------
(1) Include this language if a Failure to Deposit exists.
<PAGE> 25
EXHIBIT D
[NAME OF TRUST]
NOTICE OF PROPOSED CHANGE OF
LENGTH OF RATE PERIOD OF
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED STOCK [SHARES]
("Municipal Preferred")
[Name of Trust] (the "Trust") may exercise its option to designate the
Rate Period of its Series __ Municipal Preferred commencing [the first day of
the Special Rate Period] as a Special Rate Period.
By 11:00 A.M., New York City time, on the second Business Day preceding
the first day of such proposed Special Rate Period, the Trust will notify of
either (a) its determination to exercise such option, designating the length of
such Special Rate Period for such series or (b) its determination not to
exercise such option.
[NAME OF TRUST]
Dated: _____ , 19__
<PAGE> 26
EXHIBIT E
[NAME OF TRUST]
NOTICE OF CHANGE OF LENGTH OF RATE PERIOD
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
("Municipal Preferred")
NOTICE IS HEREBY GIVEN that [NAME OF TRUST] (the "Trust") has
determined to designate the Rate Period of its Series __ Municipal Preferred
commencing on [the first day of the Special Rate Period] as a Special Rate
Period.
The Special Rate Period will be __________ [Rate Period Days].
The Auction Date for the Special Rate Period is [the Business Day next
preceding the first day of such Special Rate Period].
As a result of the Special Rate Period designation, the amount of
dividends payable on Series __ Municipal Preferred during the Special Rate
Period will be based on a 360-day year.
The Special Rate Period shall not commence if (a) an Auction for shares
of Municipal Preferred shall not be held on such Auction Date for any reason or
(b) an Auction for shares of Municipal Preferred shall be held on such Auction
Date but Sufficient Clearing Bids for such shares shall not exist in such
Auction.
The scheduled Dividend Payment Dates for such series of Municipal
Preferred during such Special Rate Period will be ____________ .
[Special Redemption Provisions, if any]
Attached hereto is a Municipal Preferred Basic Maintenance Report
showing that, as of the third Business Day next preceding such proposed Special
Rate Period, Moody's Eligible Assets (if Moody's is rating such shares of
Municipal Preferred) and S&P Eligible Assets (if S&P is rating such shares of
Municipal Preferred) each have an aggregate Discounted Value at least equal to
the Municipal Preferred Basic Maintenance Amount as of such Business Day
(assuming for purposes of the foregoing calculation that (i) the Maximum Rate is
the Maximum Rate on such Business Day as if such Business Day were the Auction
Date for the proposed Special Rate Period, and (ii) the Moody's Discount
<PAGE> 27
2
Factors applicable to Moody's Eligible Assets are determined by reference to the
first Moody's Exposure Period longer than the Moody's Exposure Period then
applicable to the Trust.)
[NAME OF TRUST]
Dated: ______ , 19__
<PAGE> 28
EXHIBIT F
[NAME OF TRUST]
NOTICE OF DETERMINATION NOT TO CHANGE
LENGTH OF RATE PERIOD OF
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
("Municipal Preferred")
NOTICE IS HEREBY GIVEN that [NAME OF TRUST] (the "Trust") has
determined not to exercise its option to designate a Special Rate Period of its
Series __ Municipal Preferred and the next succeeding Rate Period of such series
will be a Minimum Rate Period of ___ Rate Period Days.
[NAME OF TRUST]
Dated: ______ , 19__
<PAGE> 29
EXHIBIT G
[NAME OF TRUST]
NOTICE OF CURE OF
FAILURE TO DEPOSIT ON
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
("Municipal Preferred")
NOTICE IS HEREBY GIVEN that [NAME OF TRUST] (the "Trust") has cured its
Failure to Deposit and paid the applicable Late Charge with respect to its
Series __ Municipal Preferred. The dividend rate on the shares of Series __
Municipal Preferred for the current Dividend Period is % per annum, the
Dividend Payment Date for the current Dividend Period is scheduled to
be_________, 19__ and the next Auction Date is scheduled to be __________, 19__.
[NAME OF TRUST]
Dated: _______ , 19__
<PAGE> 30
EXHIBIT H
[NAME OF TRUST]
NOTICE OF CURE OF
FAILURE TO DEPOSIT ON
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
("Municipal Preferred")
NOTICE IS HEREBY GIVEN that [NAME OF TRUST] (the "Trust") has
cured its Failure to Deposit and paid the applicable Late Charge with respect to
its Series __ Municipal Preferred. The next Auction Date for the Series __
Municipal Preferred is scheduled to be _________ on 19__.
[NAME OF TRUST]
Dated: ________, 19__
<PAGE> 31
EXHIBIT I
[NAME OF TRUST]
NOTICE OF
[CAPITAL GAINS] [AND] [TAXABLE ORDINARY INCOME](1)
DIVIDEND FOR
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
("Municipal Preferred")
NOTICE IS HEREBY GIVEN that the amount of the dividend payable on
_______________, 19__ for Series __ of the Trust's Municipal Preferred will be
determined by the Auction to be held on _____________, 19__. Up to [$ A ](2) [$
B ](3) per share of the dividend payable on such date as determined by such
Auction will consist of [capital gains](2) [ordinary income taxable for Federal
income tax purposes](3). If the dividend amount payable on such date as
determined by such Auction is less than [$ A ](2) [$ B ](3) per share, the
entire amount of the dividend will consist of [capital gains](2) [ordinary
income taxable for Federal income tax purposes](3). [To the extent such dividend
amount exceeds [$ A ] per share, any excess up to [$ B ] per share will consist
of ordinary income taxable for Federal income tax purposes.](4)/ Accordingly,
the aforementioned composition of the dividend payable on _______________, 19__
should be considered in determining Orders to be submitted with respect to the
Auction to be held on _______________, 19___. The Rate Multiple in effect for
such Auction will be %.
[NAME OF TRUST]
- --------
(1) Include language with respect to capital gains, taxable ordinary income or
both, depending on the character of the designation to be made with
respect to the dividend(s).
(2) Include bracketed material if a portion of the dividend will be designated
capital gains.
(3) Include bracketed material if a portion of the dividend will be designated
ordinary income taxable for Federal income tax purposes and no portion of
the dividend will be designated capital gains.
(4) Include bracketed material if a portion of the dividend will be designated
capital gains and a portion will be designated ordinary income taxable for
Federal income tax purposes.
<PAGE> 32
2
(Footnotes continued)
A = the maximum amount of capital gains allocated to such series of Municipal
Preferred to be included in such dividend, divided by the number of shares
of Municipal Preferred.
B = the maximum amount of ordinary income taxable for Federal income tax
purposes allocated to such series of Municipal Preferred to be included in
such dividend, divided by the number of shares in such series.
<PAGE> 1
Exhibit (k)(2)
COLONIAL
Broker-Dealer Agreement
Basic Terms for Acting as a Broker-Dealer
-----------------------------------
July 20, 1999
These basic terms ("Basic Terms") set forth the general terms and
conditions pursuant to which a broker-dealer identified in an Acceptance Letter
(together with its successors and assigns, a "BD") will act as a broker-dealer
for Municipal Auction Rate Cumulative Preferred ("Municipal Preferred") shares
issued by investment companies, now or hereafter organized, registered under the
Investment Company Act of 1940, as amended, as further identified by the Request
Letters (the "Trusts"), for which Colonial Management Associates, Inc.
("Adviser") is the investment adviser.
- --------------------------------------------------------------------------------
Each Trust has issued or may issue shares of Municipal Preferred,
pursuant to its Declaration of Trust and By-Laws. A bank or trust company
specified in the Request Letter will act as the auction agent (the "Auction
Agent") of such Trust pursuant to authority granted it in the Auction Agency
Agreement.
The By-Laws of each Trust shall provide that, for each Subsequent
Rate Period of any series of Municipal Preferred of such Trust then outstanding,
the Applicable Rate for such series for such Subsequent Rate Period shall,
except under certain conditions, be the rate per annum that the Auction Agent of
such Trust advises results from implementation of the Auction Procedures for
such series. The Board of Trustees of each Trust shall adopt a resolution
appointing the Auction Agent as auction agent for purposes of the Auction
Procedures for each series of Municipal Preferred of such Trust.
The Auction Procedures of each Trust will require the participation
of one or more Broker-Dealers for each series of Municipal Preferred of such
Trust. BD will act as a Broker-Dealer for each series of Municipal Preferred of
each Trust identified in a Request Letter.
1. Definitions and Rules of Construction.
1.1. Terms Defined by Reference to By-Laws.
Capitalized terms not defined herein shall have the respective
meanings specified in the By-Laws of the relevant Trust.
<PAGE> 2
2
1.2. Terms Defined Herein.
As used herein and in the Settlement Procedures, the following terms
shall have the following meanings, unless the context otherwise requires:
(a) "Acceptance Letter" shall mean the letter from Adviser to BD
pursuant to which the Adviser appoints BD as a Broker Dealer for each
series of Municipal Preferred issued by any Trust that has executed a
Request Letter.
(b) "Agreement", with respect to any Trust, shall mean the Basic
Terms, together with the Acceptance Letter and the Request Letter relating
to one or more series of Municipal Preferred of such Trust and any other
substantially similar agreement among such Trust, the Adviser, any Auction
Agent for such Trust and/or BD.
(c) "Auction" shall have the meaning specified in Section 2.1
hereof.
(d) "Auction Agency Agreement", with respect to any Trust, shall
mean the Auction Agency Agreement between such Trust and the Auction Agent
relating to one or more series of Municipal Preferred of such Trust.
(e) "Auction Procedures", with respect to any Trust, shall mean the
auction procedures constituting Part II of Section 12.1 of the By-Laws of
such Trust as of the date of issuance of the Municipal Preferred shares of
such Trust.
(f) "Authorized Officer" of an Auction Agent shall mean each Senior
Vice President, Vice President, Assistant Vice President, Assistant
Treasurer and Assistant Secretary of such Auction Agent assigned to its
Corporate Trust and Agency Group and every other officer or employee of
such Auction Agent designated as an "Authorized Officer" for purposes of
the Agreement in a communication to BD.
(g) "BD Officer" shall mean each officer or employee of BD
designated as a "BD Officer" for purposes of the Agreement in a
communication to any Auction Agent.
(h) "By-Laws", with respect to any Trust, shall mean the By-Laws, as
amended and restated, of such Trust, a copy of which will be attached to
the Request Letter of such Trust.
(i) "Municipal Preferred" shall mean the preferred shares, no par
value, of any Trust designated as its "Municipal Auction Rate Cumulative
Preferred Shares" and bearing such further designation as to series as the
Board of Trustees of such Trust or any committee thereof shall specify, as
set forth in a Request Letter.
<PAGE> 3
3
(j) "Request Letter", with respect to any Trust, shall mean the
letter from such Trust to the Adviser and the Auction Agent for such Trust
pursuant to which such Trust appoints BD as a Broker-Dealer for each
series of Municipal Preferred of such Trust.
(k) "Settlement Procedures" shall mean the Settlement Procedures
attached hereto as Exhibit A.
1.3. Rules of Construction.
Unless the context or use indicates another or different meaning or
intent, the following rules shall apply to the construction of each Agreement:
(a) Words importing the singular number shall include the plural
number and vice versa.
(b) The captions and headings herein are solely for convenience of
reference and shall not constitute a part of such Agreement nor shall they
affect its meaning, construction or effect.
(c) The words "hereof", "herein", "hereto", and other words of
similar import refer to such Agreement as a whole.
(d) All references herein to a particular time of day shall be to
New York City time.
2. The Auction.
2.1. Purpose; Incorporation by Reference of Auction Procedures and
Settlement Procedures.
(a) The provisions of the Auction Procedures of any Trust will be
followed by the Auction Agent of such Trust for the purpose of determining the
Applicable Rate for any Subsequent Rate Period of any series of Municipal
Preferred of such Trust for which the Applicable Rate is to be determined by an
Auction. Each periodic operation of such procedures is hereinafter referred to
as an "Auction."
(b) All of the provisions contained in the Auction Procedures and
the Settlement Procedures are incorporated herein by reference in their entirety
and shall be deemed to be a part hereof to the same extent as if such provisions
were fully set forth herein.
(c) BD agrees to act as, and assumes the obligations of, and
limitations and restrictions placed upon, a Broker-Dealer under each Agreement
for each series of Municipal Preferred. BD understands that other Persons
meeting the requirements specified in the definition of "Broker-Dealer"
contained in the Auction Procedures may execute Agreements and participate as
Broker-Dealers in Auctions.
<PAGE> 4
4
2.2. Preparation for Each Auction.
(a) Not later than 9:30 A.M. on each Auction Date for any series of
Municipal Preferred, the Auction Agent for such series shall advise the
Broker-Dealers for such series by telephone of the Maximum Rate therefor and the
Reference Rate(s) and Treasury Note Rate(s), as the case may be, used in
determining such Maximum Rate.
(b) In the event that any Auction Date for any series of Municipal
Preferred shall be changed after the Auction Agent for such series has given the
notice referred to in clause (vi) of paragraph (a) of the Settlement Procedures,
or after the notice referred to in Section 2.5(a) hereof, if applicable, such
Auction Agent, by such means as such Auction Agent deems practicable, shall give
notice of such change to BD, if it is a Broker-Dealer for such series, not later
than the earlier of 9:15 A.M. on the new Auction Date or 9:15 A.M. on the old
Auction Date.
(c) For purposes of maintaining its list of Existing Holders, the
Auction Agent for any series of Municipal Preferred from time to time may
request any Broker-Dealer to provide such Auction Agent with a list of Persons
who such Broker-Dealer believes should be Existing Holders based upon inquiries
of those Persons such Broker-Dealer believes are Beneficial Owners as a result
of the most recent Auction and with respect to each such Person, the number of
shares of such series of Municipal Preferred such Broker-Dealer believes are
owned by such Person. BD shall comply with any such request relating to a series
of Municipal Preferred in respect of which BD was named a Broker-Dealer, and the
Auction Agent shall keep confidential any such information so provided by BD and
shall not disclose any information so provided by BD to any Person other than
the Trust and BD.
(d) BD agrees to maintain a list of customers relating to a series
of Municipal Preferred and to use its best efforts, subject to existing laws and
regulations, to contact the customers on such list whom BD believes may be
interested in participating in the Auction on each Auction Date, as a Potential
Holder or a Potential Beneficial Owner, for the purposes set forth in the
Auction Procedures. Nothing herein shall require BD to submit an Order for any
customer in any Auction.
(e) The Auction Agent's registry of Existing Holders of shares of a
series of Municipal Preferred shall be conclusive and binding on BD. BD may
inquire of the Auction Agent between 3:00 P.M. on the Business Day preceding an
Auction for shares of a series of Municipal Preferred and 9:30 A.M. on the
Auction Date for such Auction to ascertain the number of shares of such series
in respect of which the Auction Agent has determined BD to be an Existing
Holder. If BD believes it is the Existing Holder of fewer shares of such series
than specified by the Auction Agent in response to BD's inquiry, BD may so
inform the Auction Agent of that belief. BD shall not, in its capacity as
Existing Holder of shares of such series, submit Orders in such Auction in
respect of shares of such series covering in the aggregate more than the number
of shares of such series specified by the Auction Agent in response to BD's
inquiry.
<PAGE> 5
5
2.3. Auction Schedule; Method of Submission of Orders.
(a) Each Trust and the Auction Agent for such Trust shall conduct
Auctions for Municipal Preferred in accordance with the schedule set forth
below. Such schedule with respect to any series of Municipal Preferred of any
Trust may be changed by the Auction Agent for such series with the consent of
such Trust, which consent shall not be unreasonably withheld. Such Auction Agent
shall give written notice of any such change to each Broker-Dealer of such
series. Such notice shall be given prior to the close of business on the
Business Day next preceding the first Auction Date on which such change shall be
effective.
<TABLE>
<CAPTION>
Time Event
---- -----
<S> <C>
By 9:30 A.M. Auction Agent for such series advises such Trust
and the Broker-Dealers for such series of the
applicable Maximum Rate and the Reference Rate(s)
and Treasury Note Rate(s), as the case may be,
used in determining such Maximum Rate as set forth
in Section 2.2(a) hereof.
9:30 A.M. - 1:30 P.M. Auction Agent assembles information communicated
to it by Broker-Dealers as provided in Section
2(a) of the Auction Procedures of such Trust.
Submission Deadline is 1:30 P.M.
Not earlier than 1:30 P.M. Auction Agent makes determinations pursuant to
Section 3(a) of the Auction Procedures of such
Trust.
By approximately 3:00 P.M. Auction Agent advises Trust of results of Auction
as provided in Section 3(b) of the Auction
Procedures of such Trust.
Submitted Bids and Submitted Sell Orders are
accepted and rejected and shares of such series of
Municipal Preferred allocated as provided in
Section 4 of the Auction Procedures of such Trust.
Auction Agent gives notice of Auction results as
set forth in Section 2.4(a) hereof.
</TABLE>
(b) BD shall submit Orders to the appropriate Auction Agent in
writing substantially in the form attached hereto as Exhibit B. BD shall submit
a separate Order to such Auction Agent for each Potential Holder or Existing
Holder with respect to whom BD is submitting an Order and shall not otherwise
net or aggregate such Orders prior to their submission to such Auction Agent.
(c) BD shall deliver to the appropriate Auction Agent (i) a written
notice in substantially the form attached hereto as Exhibit C of transfers of
shares of Municipal Preferred to
<PAGE> 6
6
BD from another Person other than pursuant to an Auction and (ii) a written
notice substantially in the form attached hereto as Exhibit D, of the failure of
any shares of Municipal Preferred to be transferred to or by any Person that
purchased or sold shares of Municipal Preferred through BD pursuant to an
Auction. Such Auction Agent is not required to accept any such notice described
in clause (i) for an Auction unless it is received by the Auction Agent by 3:00
P.M. on the Business Day preceding such Auction.
(d) BD and other Broker-Dealers may submit Orders in Auctions for
their own accounts (including Orders for their own accounts where the Order is
placed beneficially for a customer) unless the relevant Trust shall have
notified BD and all other Broker-Dealers that they may no longer do so, in which
case Broker-Dealers may continue to submit Hold Orders and Sell Orders for their
own accounts.
(e) BD agrees to handle its customers' orders in accordance with its
duties under applicable securities laws and rules.
(f) To the extent that pursuant to Section 4 of the Auction
Procedures of any Trust, BD continues to hold, sells, or purchases a number of
shares that is fewer than the number of shares in an Order submitted by BD to
the Auction Agent in which BD designated itself as an Existing Holder or
Potential Holder in respect of customer Orders, BD shall make appropriate pro
rata allocations among its customers for which it submitted Orders of similar
tenor. If as a result of such allocations, any Beneficial Owner would be
entitled or required to sell, or any Potential Beneficial Owner would be
entitled or required to purchase, a fraction of a share of Municipal Preferred
on any Auction Date, BD shall, in such manner as it shall determine in its sole
discretion, round up or down the number of shares of Municipal Preferred to be
purchased or sold on such Auction Date by any Beneficial Owner or Potential
Beneficial Owner on whose behalf BD submitted an Order so that the number of
shares so purchased or sold by each such Beneficial Owner or Potential
Beneficial Owner on such Auction Date shall be whole shares of Municipal
Preferred.
2.4. Notices.
(a) On each Auction Date for any series of Municipal Preferred, the
Auction Agent for such series shall notify BD, if BD is a Broker-Dealer of such
series, by telephone of the results of the Auction as set forth in paragraph (a)
of the Settlement Procedures. By approximately 11:30 A.M. on the Business Day
next succeeding such Auction Date, the relevant Auction Agent shall confirm to
BD in writing the disposition of all Orders submitted by BD in such Auction.
(b) BD shall notify each Existing Holder, Potential Holder,
Beneficial Owner or Potential Beneficial Owner of shares of Municipal Preferred
with respect to whom BD has submitted an Order as set forth in paragraph (b) of
the Settlement Procedures and take such other action as is required of BD
pursuant to the Settlement Procedures.
<PAGE> 7
7
2.5. Designation of Special Rate Period.
(a) If any Trust delivers to its Auction Agent a notice of the
Auction Date for any series of Municipal Preferred of such Trust for a Rate
Period thereof that next succeeds a Rate Period that is not a Minimum Rate
Period in the form of Exhibit C to the Auction Agency Agreement, and BD is a
Broker-Dealer of such series, the Auction Agent shall deliver such notice to BD
as promptly as practicable after its receipt of such notice from such Trust.
(b) If the Board of Trustees of any Trust proposes to designate any
succeeding Subsequent Rate Period of any series of Municipal Preferred of such
Trust as a Special Rate Period and such Trust delivers to its Auction Agent a
notice of such proposed Special Rate Period in the form of Exhibit D to the
Auction Agency Agreement, and BD is a Broker-Dealer for such series, such
Auction Agent shall deliver such notice to BD as promptly as practicable after
its receipt of such notice from the Trust.
(c) If the Board of Trustees of any Trust determines to designate
such succeeding Subsequent Rate Period as a Special Rate Period, and such Trust
delivers to its Auction Agent a notice of such Special Rate Period in the form
of Exhibit E to the Auction Agency Agreement not later than 11:00 A.M. on the
second Business Day next preceding the first day of such Rate Period (or by such
later time or date, or both, as may be agreed to by such Auction Agent), and BD
is a Broker-Dealer for such series, such Auction Agent shall deliver such notice
to BD not later than 3:00 P.M. on such second Business Day (or, if such Auction
Agent has agreed to a later time or date, as promptly as practicable
thereafter).
(d) If any Trust shall deliver to its Auction Agent a notice not
later than 11:00 A.M. on the second Business Day next preceding the first day of
any Rate Period (or by such later time or date, or both, as may be agreed to by
such Auction Agent) stating that such Trust has determined not to exercise its
option to designate such succeeding Subsequent Rate Period as a Special Rate
Period, in the form of Exhibit F to the Auction Agency Agreement, or shall fail
to timely deliver either such notice or a notice in the form of Exhibit E to the
Auction Agency Agreement], and BD is a Broker-Dealer for such series, such
Auction Agent shall deliver a notice in the form of Exhibit F to the Auction
Agency Agreement to BD not later than 3:00 P.M. on such second Business Day (or,
if such Auction Agent has agreed to a later time or date, as promptly as
practicable thereafter).
2.6. Allocation of Taxable Income.
If any Trust delivers to its Auction Agent a notice in the form of
Exhibit I to the Auction Agency Agreement designating all or a portion of any
dividend on shares of any series of Municipal Preferred of such Trust to consist
of net capital gains or other income taxable for Federal income tax purposes,
and BD is a Broker-Dealer for such series, such Auction Agent shall deliver such
notice to BD on the Business Day following its receipt of such notice from such
Trust. On or prior to the Auction Date referred to in such notice, BD will
contact each of its customers that is a Beneficial Owner of shares of such
series of Municipal Preferred or a Potential Beneficial Owner of shares of such
series of Municipal Preferred interested in submitting an Order in the Auction
to be held on such Auction Date, and BD will notify such Beneficial Owners and
<PAGE> 8
8
Potential Beneficial Owners of the contents of such notice. BD will be deemed to
have notified such Beneficial Owners and Potential Beneficial Owners if, for
each of them, (i) BD makes a reasonable effort to contact such Beneficial Owner
or Potential Beneficial Owner by telephone, and (ii) upon failing to contact
such Beneficial Owner or Potential Beneficial Owner by telephone BD mails
written notification to such Beneficial Owner or Potential Beneficial Owner at
the mailing address indicated in the account records of BD.
The Auction Agent for any series of Municipal Preferred shall be
required to notify BD if it is a Broker-Dealer for such series within two
Business Days after each Auction of such series that involves an allocation of
income taxable for Federal income tax purposes as to the dollar amount per share
of such taxable income and income exempt from Federal income taxation included
in the related dividend.
2.7. Failure to Deposit.
(a) If:
(i) any Failure to Deposit shall have occurred with respect to
shares of any series of Municipal Preferred of any Trust during any Rate
Period thereof (other than any Special Rate Period of more than 364 Rate
Period Days or any Rate Period succeeding any Special Rate Period of more
than 364 Rate Period Days during which a Failure to Deposit occurred that
has not been cured), but, prior to 12:00 Noon, New York City time, on the
third Business Day next succeeding the date on which such Failure to
Deposit occurred, such Failure to Deposit shall have been cured in
accordance with Section 2.7 of the Auction Agency Agreement and such Trust
shall have paid to the Auction Agent for such series the applicable Late
Charge as described in Section 2.7 of the Auction Agency Agreement,
then, if BD is a Broker-Dealer for such series, such Auction Agent shall deliver
a notice in the form of Exhibit G to the Auction Agency Agreement by first-class
mail, postage prepaid, to BD not later than one Business Day after its receipt
of the payment from such Trust curing such Failure to Deposit and such Late
Charge.
(b) If:
(i) any Failure to Deposit shall have occurred with respect to
shares of any series of Municipal Preferred of any Trust during any Rate
Period thereof (other than any Special Rate Period of more than 364 Rate
Period Days or any Rate Period succeeding any Special Rate Period of more
than 364 Rate Period Days during which a Failure to Deposit occurred but
has not been cured), and, prior to 12:00 Noon, New York City time, on the
third Business Day next succeeding the date on which such Failure to
Deposit occurred, such Failure to Deposit shall not have been cured as
described in Section 2.7 of the Auction Agency Agreement or such Trust
shall not have paid to the Auction Agent for such series the applicable
Late Charge described in Section 2.7 of the Auction Agency Agreement; or
<PAGE> 9
9
(ii) any Failure to Deposit shall have occurred with respect to
shares of any series of Municipal Preferred of any Trust during a Special
Rate Period thereof of more than 364 Rate Period Days, or during any Rate
Period thereof succeeding any Special Rate Period of more than 364 Rate
Period Days during which a Failure to Deposit occurred that has not been
cured, and, prior to 12:00 noon, New York City time, on the fourth
Business Day preceding the Auction Date for the Rate Period subsequent to
such Rate Period, such Failure to Deposit shall not have been cured as
described in Section 2.7 of the Auction Agency Agreement or such Trust
shall not have paid to the Auction Agent for such series the applicable
Late Charge described in Section 2.7 of the Auction Agency Agreement;
then such Auction Agent shall deliver a notice in the form of Exhibit H to the
Auction Agency Agreement to the Broker-Dealers for such series not later than
one Business Day after the receipt of the payment from such Trust curing such
Failure to Deposit and such Late Charge.
2.8. Service Charge to be Paid to BD.
On the Business Day next succeeding each Auction Date for any series
of Municipal Preferred specified in, or on Exhibit A to, the Request Letter of
any Trust, the Auction Agent for such series shall pay to BD from moneys
received from such Trust an amount equal to the product of (a) (i) in the case
of any Auction Date immediately preceding a Rate Period of such series
consisting of 364 Rate Period Days or fewer, 1/4 of 1%, or (ii) in the case of
any Auction Date immediately preceding a Rate Period of such series consisting
of more than 364 Rate Period Days, such percentage as may be agreed upon by such
Trust and BD with respect to such Rate Period, times (b) a fraction, the
numerator of which is the number of Rate Period Days in the Rate Period therefor
beginning on such Business Day and the denominator of which is 365 if such Rate
Period consists of 7 Rate Period Days and 360 for all other Rate Periods, times
(c) $25,000 times (d) the sum of (i) the aggregate number of shares of such
series placed by BD in such Auction that were (A) the subject of Submitted Bids
of Existing Holders submitted by BD and continued to be held as a result of such
submission and (B) the subject of Submitted Bids of Potential Holders submitted
by BD and purchased as a result of such submission plus (ii) the aggregate
number of shares of such series subject to valid Hold Orders (determined in
accordance with paragraph (d) of Section 2 of the Auction Procedures) submitted
to the Auction Agent by BD plus (iii) the number of shares of Municipal
Preferred deemed to be subject to Hold Orders of Existing Holders pursuant to
paragraph (c) of Section 2 of the Auction Procedures of such Trust that were
acquired by BD for its own account or were acquired by BD for its customers who
are Beneficial Owners.
For purposes of subclause (d)(iii) of the foregoing paragraph, if
any Existing Holder or Beneficial Owner who acquired shares of any series of
Municipal Preferred through BD transfers those shares to another Person other
than pursuant to an Auction, then the Broker-Dealer for the shares so
transferred shall continue to be BD; provided, however, that if the transfer was
effected by, or if the transferee is, a Broker-Dealer other than BD, then such
Broker-Dealer shall be the Broker-Dealer for such shares.
<PAGE> 10
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2.9. Settlement.
(a) If any Existing Holder or Beneficial Owner with respect to whom
BD has submitted a Bid or Sell Order for shares of Municipal Preferred of any
series that was accepted in whole or in part fails to instruct its Agent Member
to deliver the shares of Municipal Preferred subject to such Bid or Sell Order
against payment therefor, BD, if it knows the identity of such Agent Member,
shall instruct such Agent Member to deliver such shares against payment therefor
and, if such Agent Member fails to comply with such instructions, BD may deliver
to the Potential Holder or Potential Beneficial Owner with respect to whom BD
submitted a Bid for shares of Municipal Preferred of such series that was
accepted in whole or in part a number of shares of Municipal Preferred of such
series that is less than the number of shares of Municipal Preferred of such
series specified in such Bid to be purchased by such Potential Holder or
Potential Beneficial Owner.
(b) Neither the Auction Agent nor the Trust shall have any
responsibility or liability with respect to the failure of an Existing Holder,
Beneficial Owner, Potential Holder or Potential Beneficial Owner or its
respective Agent Member to deliver shares of Municipal Preferred of any series
or to pay for shares of Municipal Preferred of any series sold or purchased
pursuant to the Auction Procedures or otherwise.
(c) Notwithstanding any provision of the Auction Procedures or the
Settlement Procedures to the contrary, in the event BD is an Existing Holder
with respect to shares of a series of Municipal Preferred and the Auction
Procedures provide that BD shall be deemed to have submitted a Sell Order in an
Auction with respect to such shares if BD fails to submit an Order in that
Auction with respect to such shares, BD shall have no liability to any Person
for failing to sell such shares pursuant to such a deemed Sell Order if (i) such
shares were transferred by the beneficial owner thereof without notification of
such transfer in compliance with the Auction Procedures or (ii) BD has indicated
to the Auction Agent pursuant to Section 2.2(e) of this Agreement that,
according BD's records, BD is not the Existing Holder of such shares.
(d) Notwithstanding any provision of the Auction Procedures or the
Settlement Procedures to the contrary, in the event an Existing Holder or
Beneficial Owner of shares of a series of Municipal Preferred with respect to
whom a Broker-Dealer submitted a Bid to the Auction Agent for such shares that
was accepted in whole or in part, or submitted or is deemed to have submitted a
Sell Order for such shares that was accepted in whole or in part, fails to
instruct its Agent Member to deliver such shares against payment therefor,
partial deliveries of shares of Municipal Preferred that have been made in
respect of Potential Holders' or Potential Beneficial Owners' Submitted Bids for
shares of such series that have been accepted in whole or in part shall
constitute good delivery to such Potential Holders and Potential Beneficial
Owners.
(e) Notwithstanding the foregoing terms of this Section, any
delivery or non-delivery of shares of Municipal Preferred of any series which
represents any departure from the results of an Auction for shares of such
series, as determined by the Auction Agent, shall be of no effect for purposes
of the registry of Existing Holders maintained by the Auction Agent pursuant to
the Auction Agency Agreement unless and until the Auction Agent shall have been
notified of such delivery or non-delivery.
<PAGE> 11
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(f) The Auction Agent shall have no duty or liability with respect
to enforcement of this Section 2.9.
3. The Auction Agent.
3.1. Duties and Responsibilities.
(a) Each Auction Agent is acting solely as agent for the Trusts with
whom such Auction Agent has entered into Request Letters and owes no fiduciary
duties to any other Person, other than such Trusts, by reason of the Agreements
to which such Auction Agent is a party.
(b) Each Auction Agent undertakes to perform such duties and only
such duties as are specifically set forth in the Agreements to which it is a
party, and no implied covenants or obligations shall be read into such
Agreements against such Auction Agent.
(c) In the absence of bad faith or negligence on its part, each
Auction Agent shall not be liable for any action taken, suffered, or omitted or
for any error of judgment made by it in the performance of its duties under the
Agreements to which it is a party. Each Auction Agent shall not be liable for
any error of judgment made in good faith unless such Auction Agent shall have
been negligent in ascertaining the pertinent facts.
3.2. Rights of the Auction Agents.
(a) Each Auction Agent may rely and shall be protected in acting or
refraining from acting upon any communication authorized hereby and upon any
written instruction, notice, request, direction, consent, report, certificate,
share certificate or other instrument, paper or document believed in good faith
by it to be genuine. Each Auction Agent shall not be liable for acting upon any
telephone communication authorized by the Agreements to which it is a party that
such Auction Agent believes in good faith to have been given by the appropriate
Trust, by the Adviser or by a Broker-Dealer. Each Auction Agent may record
telephone communications with the Broker-Dealers.
(b) Each Auction Agent may consult with counsel of its choice and
the advice of such counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it hereunder
in good faith and in reliance thereon.
(c) Each Auction Agent shall not be required to advance, expend or
risk its own funds or otherwise incur or become exposed to financial liability
in the performance of its duties hereunder.
3.3. Auction Agents' Disclaimers.
Each Auction Agent makes no representation as to the validity or
adequacy of the Agreements to which it is a party, the Auction Agency Agreements
to which it is a party or the shares of Municipal Preferred of any series.
<PAGE> 12
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4. Miscellaneous.
4.1. Termination.
Any party to any Agreement may terminate such Agreement at any time
on five days' notice to the other parties to such Agreement, provided that the
Trust party to such Agreement shall not terminate the Agreement unless at least
one Broker-Dealer Agreement would be in effect for each series of Municipal
Preferred of such Trust after such termination. Each Agreement shall
automatically terminate with respect to any series of Municipal Preferred with
respect to which the relevant Auction Agency Agreement has terminated.
4.2. Participant in Securities Depository; Payment of Dividends in
Same-Day Funds.
(a) BD is, and shall remain for the term of the Agreements, a member
of, or participant in, the Securities Depository (or an affiliate of such a
member or participant).
(b) BD represents that it (or if BD does not act as Agent Member,
one of its affiliates) shall make all dividend payments on the Municipal
Preferred available in same-day funds on each Dividend Payment Date to customers
that use BD or affiliate as Agent Member.
4.3. Communications.
Except for (i) communications authorized to be by telephone by the
Agreement of any Trust or the Auction Procedures of such Trust and (ii)
communications in connection with Auctions (other than those expressly required
to be in writing), all notices, requests and other communications to any party
under such Agreement shall be in writing (including telecopy or similar writing)
and shall be given to such party, addressed to it, at its address or telecopy
number set forth below:
If to a Trust, [Name of Trust]
addressed: One Financial Center
Boston, MA 02111
Attention: Secretary
Telecopier No.: (617) 345-0919
Telephone No.: (617) 426-3750
If to the Adviser, Colonial Management Associates, Inc.
addressed: One Financial Center
Boston, MA 02111
Attention: Secretary
If to BD, to the address or telecopy number as set forth in the Acceptance
Letter.
<PAGE> 13
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If to an Auction Agent, to the address or telecopy number as set forth in
the Request Letter, or such other address or telecopy number as such party may
hereafter specify for such purpose by notice to the other parties. Each such
notice, request or communication shall be effective when delivered at the
address specified herein. Communications shall be given on behalf of BD by a BD
Officer and on behalf of an Auction Agent by an Authorized Officer of such
Auction Agent. BD may record telephone communications with any Auction Agent.
4.4. Entire Agreement.
Each Agreement contains the entire agreement among the parties
thereto relating to the subject matter thereof, and there are no other
representations, endorsements, promises, agreements or understandings, oral,
written or implied, among the parties thereto relating to the subject matter
thereof. Each Agreement supersedes any prior agreement to which BD was a party
in respect of any Trust.
4.5. Benefits.
Nothing in any Agreement, express or implied, shall give to any
person, other than the Trust party to such Agreement, the Adviser, the Auction
Agent party to such Agreement and BD and their respective successors and
assigns, any benefit or any legal or equitable right, remedy or claim under such
Agreement.
4.6. Amendment; Waiver.
(a) Each Agreement shall not be deemed or construed to be modified,
amended, rescinded, canceled or waived, in whole or in part, except by a written
instrument signed by a duly authorized representative of the party to be
charged.
(b) Failure of any party to any Agreement to exercise any right or
remedy thereunder in the event of a breach thereof by any other party shall not
constitute a waiver of any such right or remedy with respect to any subsequent
breach.
4.7. Successors and Assigns.
Each Agreement shall be binding upon, inure to the benefit of, and
be enforceable by, the respective successors and assigns of the Trust party to
such Agreement, the Adviser, the Auction Agent party to such Agreement and BD.
4.8. Severability.
If any clause, provision or section hereof shall be ruled invalid or
unenforceable by any court of competent jurisdiction, the invalidity or
unenforceability of such clause, provision or section shall not affect any of
the remaining clauses, provisions or sections hereof.
<PAGE> 14
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4.9. Governing Law.
EACH AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK.
4.10. Declaration of Trust.
The Declaration of each Trust is on file with the Secretary of State
of the Commonwealth of Massachusetts. Each Agreement to which a Trust that is a
Massachusetts business trust is a party has been duly executed on behalf of such
Trust by an officer of such Trust acting in such capacity and not individually,
and the obligations of such Trust set forth in such Agreement are not binding
upon any of such Trust's trustees, officers or shareholders individually, but
are binding only upon the assets and property of such Trust.
<PAGE> 1
Exhibit (l)(1)
August 20, 1999
Colonial High Income Municipal Trust
One Financial Center
Boston, Massachusetts 02111
Ladies and Gentlemen:
We have acted as counsel to Colonial High Income Municipal Trust (the
"Trust") in connection with the Registration Statement of the Trust on Form N-2
(File No. 333-81129) under the Securities Act of 1933 and the Investment
Company Act of 1940 (File No. 811-05754) (the "Registration Statement") as
amended (the "Acts"), relating to the proposed sale of an aggregate of 2,400
Municipal Auction Rate Cumulative Preferred Shares, Series T, and an aggregate
of 2,400 Municipal Auction Rate Cumulative Preferred Shares, Series W, each
with a liquidation preference of $25,000 per share plus accumulated but unpaid
dividends, if any, thereon (whether or not earned or declared) (the "Preferred
Shares"). The Preferred Shares are to be sold pursuant to the Underwriting
Agreements substantially in the form filed as exhibits to the Registration
Statement (the "Underwriting Agreements") among the Trust, Colonial Management
Associates, Inc., and Salomon Smith Barney Inc.
We have examined the Trust's Agreement and Declaration of Trust on file in
the office of the Secretary of State of the Commonwealth of Massachusetts, as
amended (the "Declaration of Trust") and the Trust's Amended and Restated
By-Laws (the "Amended By-Laws") and are familiar with the actions taken by the
Trust in connection with the issuance and sale of the Preferred Shares. We have
also examined such other documents and records as we have deemed necessary for
the purposes of this opinion.
Based upon the foregoing, we are of the opinion that:
1. The Trust is a duly organized and validly existing unincorporated
association under the laws of the Commonwealth of Massachusetts.
<PAGE> 2
Colonial High Income Municipal Trust -2- August 20, 1999
2. The Preferred Shares have been duly authorized and, when issued and
paid for in accordance with the Underwriting Agreements, will be validly issued,
fully paid and nonassessable by the Trust.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that a notice of such disclaimer be given
in each note, bond, contract, instrument, certificate or undertaking entered
into or executed by the Trust or its Trustees. The Declaration of Trust provides
for indemnification out of the property of the Trust for all loss and expense of
any shareholder of the Trust held personally liable solely by reason of his
being or having been a shareholder. Thus, the risk of a shareholder's incurring
financial loss on account of being a shareholder is limited to circumstances in
which the Trust itself would be unable to meet its obligations.
We understand that this opinion is to be used in connection with the
registration of the Preferred Shares for offering and sale pursuant to the Act.
We consent to the filing of this opinion with and as part of the Registration
Statement and to the references to our firm in the related prospectus under the
captions "Tax Matters" and "Legal Opinions" in the Prospectus contained in the
Registration Statement.
Very truly yours,
/s/ Ropes & Gray
----------------------------
Ropes & Gray
<PAGE> 1
Exhibit (n)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-Effective Amendment No. 2 to the registration
statement on Form N-2 (the "Registration Statement") of our report dated
February 11, 1999, relating to the financial statements and financial highlights
of Colonial High Income Municipal Trust, which appears in such Statement of
Additional Information, and to the incorporation by reference of our report into
the Prospectus which constitutes part of this Registration Statement. We also
consent to the references to us under the heading "Independent Accountants" in
such Statement of Additional Information and to the references to us under the
headings "Financial Highlights" and "Experts" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
August 20, 1999
