<PAGE> 1
AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON JUNE 18, 1999
SECURITIES ACT FILE NO. 333-
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. [ ]
-----------
Post-Effective Amendment No. [ ]
-----------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 7 [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)
Name and Address of
Agent for Service Copy to
William J. Ballou, Esq. John M. Loder, Esq.
Colonial Management Associates, Inc. Ropes & Gray
One Financial Center One International Place
Boston, Massachusetts 02111-2621 Boston, Massachusetts 02110-2624
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
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED (1) UNIT (1) PRICE (1) REGISTRATION FEE (2)
- ---------------------- -------------------- --------------------- --------------------- --------------------
<S> <C> <C> <C> <C>
Municipal Auction 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) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA.
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 MUNICIPAL INCOME TRUST
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
CROSS REFERENCE SHEET
ITEMS REQUIRED BY FORM N-2
PART A
<TABLE>
<CAPTION>
ITEM NO. ITEM CAPTION PROSPECTUS CAPTION
- -------- ------------ -------------------
<S> <C> <C>
1 Outside Front Cover Front Cover Page
2 Inside Front and Outside Front and Back Cover Page
Back Cover Page
3 Fee Table and Synopsis Not Applicable
4 Financial Highlights Financial Highlights
5 Plan of Distribution Underwriting
6 Selling Shareholders Not Applicable
7 Use of Proceeds Use of Proceeds
8 General Description of the Prospectus Summary; The
Trust; Management of the
Trust; Investment
Objectives and Policies;
Risk Factors and Special
Considerations
9 Management Management of the Trust;
Custodian, Transfer Agent,
Dividend Disbursing Agent
and Registrar
10 Capital Stock, Long-Term Debt, Capitalization at May 31,
Other Securities 1999; and Description
of Municipal Preferred;
Description of Common
Shares; Certain Provisions
in the Agreement and
Declaration of Trust
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
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
- --------- ------------ ------------------------
<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 _________, 1999
PROSPECTUS $____________
COLONIAL HIGH INCOME MUNICIPAL TRUST
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED ("MUNICIPAL PREFERRED") SHARES
_____ SHARES, SERIES __
LIQUIDATION PREFERENCE $25,000 PER SHARE
-------------------------
Colonial High Income Municipal Trust is selling __ Series __ 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 exempt from federal income tax. The Trust's
secondary investment objective is to seek total return. The bonds and notes
purchased by the Trust generally are issued by or on behalf of state and local
governmental units, whose interest is exempt from federal income tax. Under
normal circumstances, the Trust will invest at least 80% of its assets in debt
securities that are consistent with its objectives of high current income and
total return. Typically, these investments include tax-exempt bonds that are
rated to be of medium and lower quality or, if unrated, are considered by the
Trust's investment advisor to be of comparable quality. The Trust's investments
in medium and lower quality bonds and notes involve special risks. An investment
in the Trust is not appropriate for all investors.
Investors in Municipal Preferred shares will be entitled to receive
cash dividends at an annual rate that may vary for the successive dividend
periods for such shares. The dividend rate on the Municipal Preferred shares for
the period between the date of issue and ___________ __, 1999 will be __% per
year. For each subsequent period, the auction agent will determine the dividend
rate for a particular period by an auction conducted on the business day prior
to that period. Investors in shares of Municipal Preferred may participate in
auctions through their broker-dealers in accordance with the procedures
specified herein. The Trust may redeem shares of Municipal Preferred as
described under "Description of the 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 40 of this Prospectus for a table of contents of the Statement of
Additional Information.
------------------------
INVESTING IN THE SHARES OF MUNICIPAL PREFERRED INVOLVES CERTAIN RISKS.
SEE THE "RISK FACTORS AND SPECIAL CONSIDERATIONS" SECTION BEGINNING ON PAGE 5 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.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public Price $25,000 $______
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 on or about , 1999.
-------------------
____________ ___, 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
PAGE
PROSPECTUS SUMMARY..................................................... 1
RISK FACTORS AND SPECIAL CONSIDERATIONS................................ 5
FINANCIAL HIGHLIGHTS................................................... 9
THE TRUST.............................................................. 10
USE OF PROCEEDS........................................................ 10
CAPITALIZATION AT MAY 31, 1999......................................... 11
PORTFOLIO COMPOSITION.................................................. 11
INVESTMENT OBJECTIVES AND POLICIES..................................... 12
MANAGEMENT OF THE TRUST................................................ 20
THE AUCTION............................................................ 21
DETERMINATION OF NET ASSET VALUE....................................... 24
DESCRIPTION OF MUNICIPAL PREFERRED..................................... 24
RATING AGENCY GUIDELINES............................................... 30
DESCRIPTION OF COMMON SHARES........................................... 31
CERTAIN PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST........... 31
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND............... 32
TAX MATTERS............................................................ 33
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR..... 36
UNDERWRITING........................................................... 36
LEGAL OPINIONS......................................................... 36
REPORTS TO SHAREHOLDERS................................................ 36
EXPERTS .............................................................. 37
FURTHER INFORMATION.................................................... 37
GLOSSARY .............................................................. 38
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION............... 42
<PAGE> 6
PROSPECTUS SUMMARY
This summary highlights some information from this Prospectus. It may
not contain all of the information that is important to you. To understand the
offering of the Municipal Preferred shares fully, you should read this entire
Prospectus carefully, including the risk factors. You should also refer to the
Glossary, which defines certain terms used in this Prospectus. This summary is
qualified in its entirety by reference to the detailed information included in
this Prospectus and the Statement of Additional Information.
THE OFFERING Colonial High Income Municipal Trust (the "Trust") is
offering a total of ____ shares of Series __
Municipal Preferred at a purchase price of $25,000
per share plus dividends, if any, that have
accumulated from the date the Trust first issues the
shares. _______________ is offering the shares as
underwriter.
The Municipal Preferred shares will be preferred
shares of the Trust that entitle their holders to
receive cash dividends at an annual rate that may
vary for the successive dividend periods for such
shares. In general, except as described under
"--Dividends and Dividend Periods" and "Description
of the Municipal Preferred--Dividends and Dividend
Periods", each dividend period will be seven days. An
auction agent will determine the dividend rate for a
particular period by an auction conducted on the
business day immediately prior to the start of that
dividend period.
Investors and potential investors in the Municipal
Preferred shares may participate in auctions for the
Municipal Preferred shares through their
broker-dealers.
Generally, investors in Municipal Preferred shares
will not receive certificates representing ownership
of their shares. The securities depository (The
Depository Trust Company or any successor) or its
nominee for the account of the investor's agent
member (generally the investor's broker-dealer) will
maintain ownership of the Municipal Preferred shares
in book-entry form. An investor's agent member, in
turn, will maintain records of that investor's
beneficial ownership of Municipal Preferred shares.
THE TRUST Colonial 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, as amended. The
Trust's common shares of beneficial interest are
traded on the New York Stock Exchange under the
symbol "CXE."
DIVIDENDS AND
DIVIDEND PERIODS Dividends on Municipal Preferred shares are
cumulative from the date the shares are first issued.
The Trust will pay dividends on the shares of
Municipal Preferred, out of legally available funds,
beginning on ________ ___, 1999.
After the initial dividend period, each dividend
period for the shares of Municipal Preferred will
generally consist of seven days; provided, however,
that before any auction, the Trust may decide,
subject to certain limitations and only if it gives
certain notices, to declare a special dividend period
of up to five years. Accordingly, in the case of
dividend periods that are not special
<PAGE> 7
dividend periods, dividends generally will be payable
on each succeeding _____. The Trust may specify
different dividend payment dates for certain special
dividend periods.
The Trust will pay dividends through the securities
depository (the Depository Trust Company) on each
dividend payment date.
The dividend rate on the shares of Municipal
Preferred for the period between the date of issue
and ________ ___, 1999 will be ___% per year. For
each subsequent dividend period, the auction agent
(____________) will determine the dividend rate on
the shares of Municipal Preferred through an auction.
MAXIMUM DIVIDEND
RATE Generally, the rate at which the Trust pays dividends
on shares of Municipal Preferred may not exceed the
maximum dividend rate. The maximum dividend rate may
vary for different dividend periods. It is determined
by the current credit rating assigned to the shares
of Municipal Preferred and an independent reference
rate that may vary over time.
If the number of shares of Municipal Preferred
available during an auction exceeds the total number
of shares sought in the bids for that auction, then
the dividend rate for the subsequent dividend period
will be the maximum dividend rate. In addition, if
the Trust fails to pay a dividend on shares of
Municipal Preferred, or if the Trust fails to pay the
full redemption price for shares of Municipal
Preferred, then the dividend rate for the subsequent
dividend period will be the maximum dividend rate.
If, however, the Trust cures its failure to pay a
dividend or to pay the full redemption price, then
the maximum dividend rate will not apply.
ASSET MAINTENANCE Under the Trust's Amended and Restated By-Laws, which
establish and fix the rights and preferences of the
shares of Municipal Preferred, the Trust must
maintain
- asset coverage of the Municipal Preferred
shares as required by the rating agency or
agencies rating the Municipal Preferred
shares, and
- asset coverage of the Municipal Preferred
shares of at least 200% as required by the
Investment Company Act of 1940.
Based on the composition of the Trust's portfolio and
market conditions as of _______ __, 1999, the asset
coverage of the Municipal Preferred shares as
required by the Investment Company Act of 1940 would
be approximately ___% if the Trust were to issue all
Municipal Preferred shares offered in this
Prospectus, representing approximately ___% of the
Trust's capital.
MANDATORY REDEMPTION If the Trust does not maintain its required asset
coverage, it must redeem shares of Municipal
Preferred at $25,000 per share plus any dividends
that accumulate and remain unpaid up to the date
fixed for redemption. The Trust will limit redemption
to the number of Municipal Preferred shares, together
with all other preferred shares of the Trust,
necessary to restore the required asset coverage. The
Trust may avoid mandatory redemption by restoring its
required asset coverage pursuant to rating agency
guidelines. The provisions of the Investment Company
Act of 1940 may restrict the Trust's ability to make
a mandatory redemption, in connection with a failure
to comply with the rating agencies' asset coverage
requirements.
OPTIONAL REDEMPTION The Trust, at its option and subject to certain
conditions, may choose to
-2-
<PAGE> 8
redeem all or a portion of the shares of Municipal
Preferred generally on the second business day
preceding any dividend payment date at the price of
$25,000 per share plus accumulated but unpaid
dividends, if any, whether or not earned or declared
to (but not including) the date fixed for redemption,
and, during certain special dividend rate periods,
any applicable premium.
LIQUIDATION PREFERENCE The liquidation preference (that is, the amount the
Trust must pay to Municipal Preferred shareholders if
the Trust is liquidated) for shares of Municipal
Preferred will be $25,000 per share plus accumulated
but unpaid dividends, if any, whether or not earned
or declared.
VOTING RIGHTS The Investment Company Act of 1940 requires that the
holders of Municipal Preferred shares, and the
holders of any other preferred shares of the Trust,
voting as a separate class, have the right to
- elect at least two trustees at all times,
and
- elect a majority of the trustees at any time
when dividends on the Municipal Preferred
shares, or any other preferred shares of the
Trust, are unpaid for two full years.
In each case, the holders of common shares, Municipal
Preferred shares, and any other preferred stock of
the Trust, voting together as a single class, will
elect the remaining trustees. The holders of
Municipal Preferred shares, and the holders of any
other preferred shares of the Trust, will vote as a
separate class or classes on certain other matters as
required under the Trust's Agreement and Declaration
of Trust, the Investment Company Act of 1940, and
Massachusetts law. Each common share, each Municipal
Preferred share, and each share of any other class of
preferred shares of the Trust is entitled to one vote
per share.
TAXATION Dividends on shares of Municipal Preferred will be
exempt from regular Federal income tax in the hands
of owners of such shares to the extent such dividends
are payable from tax-exempt income earned on the
Trust's investments. All or a portion of the Trust's
dividends may be subject to the Federal alternative
minimum tax. The Trust is currently required to
allocate net capital gain and other income taxable
for Federal income tax purposes, if any,
proportionately between common shares of beneficial
interest and shares of Municipal Preferred. The Trust
shall, in the case of a seven-day dividend period or
a special dividend period of 28 days or fewer for the
shares of Municipal Preferred, and may, in the case
of any other special dividend period for such shares,
give notice of the amount of any income taxable for
Federal income tax purposes to be included in a
dividend on shares of Municipal Preferred in advance
of the related auction. The amount of taxable income
allocable to shares of Municipal Preferred will
depend upon the amount of such income realized by the
Trust, but is not generally expected to be
significant.
INVESTMENT OBJECTIVES The Trust's primary investment objective is to
provide high current income generally exempt from
Federal income taxes. The Trust's secondary objective
is to seek total return.
-3-
<PAGE> 9
INVESTMENT STRATEGIES The interest on the instruments in which the Trust
primarily invests is exempt from federal income tax
(other than the possible incidence of any alternative
minimum tax).
Under normal circumstances, the Trust will invest at
least 80% of its assets in debt securities that are
consistent with its objectives of seeking high
current income and total return. Typically, the
Trust's investments include municipal obligations
rated Baa 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 Trust may invest in bonds in the lowest rating
categories (bonds rated C by Moody's or D by Standard
& Poor's), but will do so only when the Trust's
investment advisor believes the true quality of the
credit of the issuer of such bonds is stronger than
the rating indicates. The Trust may invest in bonds
on which the issuer has defaulted or failed to pay
principal or interest when due.
The Trust may also invest in higher quality issues,
particularly when the difference in returns between
quality classifications is very narrow or when
management expects interest rates to change.
In addition to investing in municipal obligations,
the Trust may hedge against changes in interest rates
by engaging in the following:
- interest rate futures contracts,
- index futures, and
- options on interest rate futures
contracts, tax-exempt indices, and
index futures.
INVESTMENT ADVISOR Colonial Management Associates, Inc., an investment
advisor registered under the Investment Advisers Act
of 1940, as amended, has served as the Trust's
investment advisor since the Trust's inception. The
investment advisor is a wholly owned subsidiary of
Liberty Funds Group LLC, which is an indirect wholly
owned subsidiary of Liberty Mutual Insurance Company.
RATINGS The Trust will not issue shares of Municipal
Preferred unless such shares have a rating of Aaa
from Moody's and AAA from Standard & Poor's.
SECONDARY MARKET
TRADING Broker-dealers may, but are not obligated to,
maintain a secondary market in shares of Municipal
Preferred outside of auctions. There can be no
assurance that a secondary market will develop or, if
it does develop, that it will provide owners with
liquidity of investment. Shares of Municipal
Preferred may be transferred outside of auctions only
to a broker-dealer or such other persons who may be
permitted by the Trust.
-4-
<PAGE> 10
RISK FACTORS AND SPECIAL CONSIDERATIONS
You should consider the following risk factors and other special
considerations in deciding whether to invest in shares of Municipal Preferred:
LOWER-RATED SECURITIES. 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 involve 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
securities creates, in part, this risk of principal and interest and may result
in nonpayment of principal or interest or restructuring of the debt obligation
and, possibly, a reduction in the Trust's 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;
- its sensitivity to economic conditions and trends;
- any operating history of and the community support for the
facility financed by the issue;
- the ability of the issuer's management; and
- regulatory matters.
The Trust may 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 Corporation
("Standard & Poor's")), and in municipal obligations that are deemed by the
Trust's investment advisor, Colonial Management Associates, Inc. (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
-5-
<PAGE> 11
- 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.
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 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."
The Advisor may attempt to reduce the credit 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 in response to changes in the
economy or the financial markets. The Advisor may attempt to reduce the risks
of investing in medium or lower rated or unrated municipal obligations to the
greatest extent practicable through the use of credit analysis. In addition, the
Trust may invest a substantial portion of its assets in small issues of medium
and lower quality tax-exempt bonds and notes, 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. 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." 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
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." 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 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.
-6-
<PAGE> 12
PRIVATE ACTIVITY BONDS. The Trust may invest in certain tax-exempt
securities classified as "private activity bonds." These bonds may subject
certain investors in the Trust to the alternative minimum tax. The Trust may
invest all or any part of its assets in such private activity bonds.
OPTIONS AND FUTURES TRANSACTIONS. The Trust may seek to hedge its
portfolio against changes in interest rates using options, index options and
futures and financial futures contracts. The Trust may write covered call and
put options and purchase call and put options on debt securities, including
options not traded on national securities exchanges. For hedging purposes the
Trust may purchase or sell: (1) interest rate and tax-exempt bond index futures
contracts, and (2) puts and call options on such contracts and indices. The
Trust may not purchase or sell futures contracts or purchase related options if
immediately thereafter the sum of the amount of deposits for initial margin or
premiums on the existing futures and related option positions would exceed 5% of
the market value of the Trust's total assets.
The Trust's hedging transactions are designed to reduce volatility but
come at some cost. For example, the Trust may try to limit its risk of loss from
a decline in price of a portfolio security by purchasing a put option. However,
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 and
may not do so.
ANTITAKEOVER PROVISIONS. The Trust's Agreement and Declaration of Trust
includes provisions that could limit the ability of other entities or persons to
acquire control of the Trust or to change the composition of its Board of
Trustees. Such provisions could discourage a third party from seeking to obtain
control of the Trust.
INVESTMENT CONSIDERATIONS. Investors in the shares of Municipal
Preferred should consider the following factors:
- The credit ratings of the shares of Municipal
Preferred could be reduced while an investor holds
such shares.
- Neither broker-dealers nor the Trust are obligated to
purchase shares of the Municipal Preferred in an
auction or otherwise nor is the Trust required to
redeem shares of the Municipal Preferred in the event
of a failed auction.
- If sufficient bids do not exist in an auction, the
applicable dividend rate will be the maximum
applicable dividend rate, and in such event, owners
of the shares of Municipal Preferred wishing to sell
will not be able to sell all, and may not be able to
sell any, of such shares in the auction. As a result,
investors may not have liquidity of investment.
SECONDARY MARKET. The broker-dealers intend to maintain a secondary
trading market in the shares of Municipal Preferred outside of auctions;
however, they have no obligation to do so and there can be no assurance that a
secondary market for the Municipal Preferred will develop or, if it does
develop, that it will provide holders with a liquid trading market. The shares
of Municipal Preferred will not be registered on any stock exchange or on any
automated quotation system. An increase in the level of interest rates likely
will have an adverse effect on the secondary market price of the shares of
Municipal Preferred, and a selling shareholder may have to sell Municipal
Preferred between auctions at a price per share of less than $25,000. You may
transfer shares outside of auctions only to broker-dealers or such other persons
as may be permitted by the Trust.
YEAR 2000 COMPLIANCE. Like other investment companies, financial and
business organizations and individuals around the world, the Trust could be
adversely affected if the computer systems used by the Advisor, other service
providers and the issuers in which the Trust invests do not properly process and
calculate date-related information and data from and after January 1, 2000. This
is commonly known as the "Year 2000 Problem." The Advisor is taking steps that
it believes are reasonably designed to address the Year 2000 Problem, including
communicating with vendors who provide services, software and systems to the
Trust to provide that date-related information and data can be properly
processed and calculated on and after January 1,
-7-
<PAGE> 13
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 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 certain specified information for a 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 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 Year Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value --
beginning of period $ 8.560 $ 8.340 $ 8.550 $ 7.960 $ 8.670
------------ ------------ ------------ ------------ ------------
Net investment income 0.519 0.552 0.566 0.597 0.616
Net realized and unrealized
gain (loss) (0.066) 0.214 (0.193) 0.583 (0.716)
------------ ------------ ------------ ------------ ------------
Total from investment
operations 0.453 0.766 0.373 1.180 (0.100)
------------ ------------ ------------ ------------ ------------
Distributions:
From net investment
income (0.523) (0.546) (0.583) (0.590) (0.610)
From net realized
gains -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total distributions (0.523) (0.546) (0.583) (0.590) (0.610)
Expenses incurred from
initial public offering -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Net asset value -- end of
period $ 8.490 $ 8.560 $ 8.340 $ 8.550 $ 7.960
============ ============ ============ ============ ============
Per share market value:
End of Period $ 8.312 $ 8.630 $ 8.250 $ 7.380 $ 6.880
============ ============ ============ ============ ============
Total return based on
net asset value (c) 5.45% 9.57% 4.71% 15.70% (0.75%)
============ ============ ============ ============ ============
Total return based on
market value (e) 2.47% 11.60% 20.09% 15.65% (9.83%)
============ ============ ============ ============ ============
Ratio of operating
expenses to average net
assets (f) 0.93% 0.96% 1.00% 1.06% 1.03%
Ratio of net investment
income to average net
assets (f) 6.02% 6.54% 6.74% 7.15% 7.44%
Portfolio turnover rate 29% 17% 15% 23% 20%
Net assets at end of period (000) $ 263,705 $ 265,190 $ 257,768 $ 264,467 $ 245,967
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
1993 1992 1991 1990 1989(a)
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
Net asset value --
beginning of period $ 8.780 $ 8.910 $ 9.000 $ 9.350 $ 9.300
------------ ------------ ------------ ------------ ------------
Net investment income 0.671 0.694 0.742 0.784 0.624
Net realized and unrealized
gain (loss) (0.106) (0.140) (0.074) (0.276) 0.012
------------ ------------ ------------ ------------ ------------
Total from investment
operations 0.565 0.554 0.668 0.508 0.636
------------ ------------ ------------ ------------ ------------
Distributions:
From net investment
income (0.675) (0.684) (0.758) (0.827) (0.565)
From net realized
gains -- -- -- (0.031) --
------------ ------------ ------------ ------------ ------------
Total distributions (0.675) (0.684) (0.758) (0.858) (0.565)
Expenses incurred from
initial public offering -- -- -- -- (0.021)
------------ ------------ ------------ ------------ ------------
Net asset value -- end of
period $ 8.670 $ 8.780 $ 8.910 $ 9.000 $ 9.350
============ ============ ============ ============ ============
Per share market value:
End of Period $ 8.250 $ 8.250 $ 8.625 (b) (b)
============ ============ ============ ============ ============
Total return based on
net asset value (c) 6.57% 6.61% 7.71% 5.65% (c)
============ ============ ============ ============ ============
Total return based on
market value (d) 7.96% 3.51% 5.76% 3.90% (0.45%) (e)
============ ============ ============ ============ ============
Ratio of operating
expenses to average net
assets (f) 0.97% 0.96% 0.97% 0.96% 0.90% (g)
Ratio of net investment
income to average net
assets (f) 7.58% 7.86% 8.30% 8.56% 7.71% (g)
Portfolio turnover rate 29% 15% 17% 23% 58% (g)
Net assets at end of
period (000) $ 268,130 $ 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 taxes (other than the possible incidence of
any alternative minimum tax) ("Municipal Obligations"). The Trust's secondary
investment objective is to seek total return. 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, as amended
(the "1940 Act"). 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 ________________ (the "Underwriter") and
offering costs.
The net proceeds of the offering will be invested in accordance with
the Trust's investment objectives and policies. It is presently anticipated that
the Trust will be able to invest substantially all of the net proceeds in
Municipal Obligations that meet the Trust's investment objectives at or shortly
(within six to eight weeks) after the completion of the offering. To the extent
that all of the proceeds cannot be so invested, pending such investment, the
Trust will invest such proceeds initially in high-quality, short-term tax-exempt
money market securities, the income on which will be exempt from Federal income
taxes, or in high-quality Municipal Obligations with relatively low volatility
(such as pre-refunded and intermediate-term securities), to the extent such
securities are available. If necessary to invest fully the net proceeds of the
offerings immediately, the Trust may also purchase, as temporary investments,
short-term taxable investments of the type described under "Investment
Objectives and Policies--Temporary and Defensive Investments," the income on
which is subject to Federal income taxes.
-10-
<PAGE> 16
CAPITALIZATION
AT MAY 31, 1999
The following table sets forth the unaudited capitalization of the
Trust at May 31, 1999 and as adjusted to give effect to the issuance of the
shares of Series __ Municipal Preferred offered hereby.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
------ -----------
Shareholders' Equity:
<S> <C> <C>
Preferred Shares, no par value per share; ______ shares authorized (no
shares issued; _____ shares of Municipal Auction Rate Cumulative
Preferred Shares issued, as adjusted, at $25,000 per share
liquidation preference) ........................................... $ -- $
Common Shares, no par value per share; unlimited shares
authorized; 31,059,357 shares outstanding * ....................... 287,856,448.39 --
Paid-in surplus ...................................................... 0
Undistributed net investment income .................................. (424,306.76)
Net realized gain from investment transactions ....................... (33,127,329.53)
Net unrealized appreciation of investments ........................... 3,767,848.59
--------------- -----------
Net Assets ........................................................ $258,072,660.69 $
=============== ===========
</TABLE>
- ---------------
*None of these outstanding shares are held by or for the account of the Trust.
PORTFOLIO COMPOSITION
As of May 31, 1999, approximately 98.4% of the market value of the Trust's
portfolio was invested in long and intermediate-term Municipal Obligations and
approximately 1.6% of the market value of the Trust's portfolio was invested in
short-term securities. The following table sets forth certain information with
respect to the composition of the Trust's investment portfolio (excluding
short-term investments) as of May 31, 1999.
<TABLE>
<CAPTION>
STANDARD & NUMBER OF MARKET NUMBER OF MARKET
POOR'S* ISSUES VALUE PERCENT MOODY'S* ISSUES VALUE PERCENT
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AAA 19 $ 37,799,970.35 14.24% Aaa 23 $ 37,700,624.70 14.20%
AA 4 7,543,150.00 2.84 Aa 5 8,059,752.55 3.04
A 12 14,548,938.20 5.48 A 3 3,707,268.00 1.40
BBB 43 55,143,374.85 20.77 Baa 33 48,822,022.55 18.39
BB 7 9,403,100.00 3.54 Ba 9 9,488,312.50 3.57
B 2 1,147,125.00 0.43 B 1 748,125.00 0.28
NR** 127 139,922,321.27 52.70 NR** 140 156,981,874.37 59.13
- -------------------------------------------------------------------------------------------------------------------
Total 214 $265,507,979.67 100.00% Total 214 $265,507,979.67 100.00%
===================================================================================================================
</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 $119,297,853, which represents
45.0% of the Trust.
-11-
<PAGE> 17
INVESTMENT OBJECTIVES AND POLICIES
The Trust's investment objective is to provide high current income
exempt from federal income tax. The Trust's secondary objective is to seek total
return.
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 "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 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 consideration
may limit the availability of such securities for the Trust to purchase and may
also limit the ability of the Trust to sell such securities at their fair value
in response to changes in the economy or the financial markets. In addition, 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. There is no limit on the portion of the Trust's assets which may
be invested in such small issues. It is expected 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." There is no
limit on the portion of the Trust's assets which may be invested in illiquid
securities.
-12-
<PAGE> 18
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 (see
below) 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" in the Statement of Additional Information.
It is a fundamental policy of the Trust, which may not be changed
without approval of the holders of a majority of the Trust's outstanding voting
securities (as defined under "Investment Objectives and Policies -- Fundamental
Investment Policies" in the Statement of Additional Information), to invest,
under normal circumstances, at least 80% of its assets in Municipal Obligations.
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 investments
objectives, may be changed without shareholder approval.
In addition to investing in Municipal Obligations, the Trust may engage
in transactions involving interest rate futures contracts ("financial futures"),
tax-exempt bonds, index futures and options on financial futures, tax-exempt
indices and index futures, and tax-exempt bonds and indices, as a hedge against
changes in interest rates. See "Investment Objectives and Policies--Hedging
Activities." The costs of and possible losses incurred from such transactions
may reduce the Trust's current return.
The Trust may also purchase securities on a "when-issued" basis, enter
into repurchase agreements and invest in other taxable instruments, subject to
certain limitations. See "Investment Objectives and Policies--Forward
Commitments," "Investment Objectives and Policies--Repurchase Agreements" and
"Investment Objectives and Policies--Temporary and Defensive Investments."
DESCRIPTION OF MUNICIPAL OBLIGATIONS
As used in this Prospectus, the term "Municipal Obligations" refers to
debt obligations the interest on which was at the time of issuance, in the
opinion of bond counsel to the issuer, exempt from Federal income tax (other
than the possible applicability of any Federal alternative minimum tax). (For a
description of the Federal alternative minimum tax, see "Tax Matters--Federal
Taxation of Shareholders.") Therefore, for purposes of the Trust's policy to
invest, under normal circumstances, at least 80% of its assets in Municipal
Obligations, no bond or note will be considered to be "tax-exempt" unless the
bond or note was, at the time of issuance, accompanied by an opinion of bond
counsel to the issuer to the effect that the interest thereon was exempt from
Federal income tax (other than the possible applicability of any Federal
alternative minimum tax). 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. Other public purposes for which
Municipal Obligations may be issued include refunding outstanding obligations,
obtaining funds for general operating expenses and obtaining funds to lend to
other public institutions and facilities. In addition, categories of debt
obligations known as industrial development bonds and private activity bonds
have been or may be issued by or on behalf of public authorities to obtain funds
to provide certain privately-operated facilities, including housing facilities,
sports facilities, convention or trade show facilities, airport, mass transit,
port or parking facilities, air or water pollution control facilities and
certain local facilities for water supply, gas, electricity or sewage or solid
waste disposal. Such obligations are included within the term Municipal
Obligations if the interest paid thereon is exempt from Federal income tax
(other than the possible applicability of any alternative minimum tax). 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
-13-
<PAGE> 19
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." 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 applicability of any Federal
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 generally are
revenue bonds and thus not payable from the unrestricted revenues of the issuer.
The credit and 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 are 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 legislators 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.
-14-
<PAGE> 20
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.
The Trust may purchase and sell financial futures and tax-exempt bond
index futures contracts ("index futures") to hedge against changes, caused by
changing interest rates, in the market value of Municipal Obligations in its
portfolio or that it intends to acquire. In order to hedge, the Trust may also
purchase and write put and call options on financial futures, tax-exempt bond
indices and index futures. The costs of and possible losses incurred from these
transactions may reduce the Trust's current return.
Income earned by the Trust from its hedging activities will be treated
as capital gain and, if not offset by net realized capital loss, will be
distributed to shareholders in taxable distributions. See "Tax Matters--Federal
Taxation of Shareholders."
The Trust will not engage in transactions in futures contracts or
related options for speculative purposes but only as a hedge against changes
resulting from market conditions in the values of securities in its portfolio or
that it intends to acquire. In addition, the Trust will not purchase or sell
futures contracts or purchase or sell related options if immediately thereafter
the sum of the amount of its initial margin deposits on its existing futures and
related options positions and premiums paid for related options would exceed 5%
of its total assets (taken at current value). In instances involving the
purchase of futures contracts or call options thereon or the writing of put
options thereon by the Trust, an amount of cash and cash equivalents, equal to
the underlying commodity value of the futures contracts and options (less any
related margin deposits) will be deposited in a segregated account with the
Trust's custodian to collateralize the position and thereby ensure that the use
of such futures contracts and options is unleveraged.
Financial Futures. In connection with its hedging activities, the Trust
may engage in transactions involving financial futures. A financial future is a
contract that obligates the seller to deliver and the purchaser to take delivery
of a specified type of financial instrument at a specified future time and at a
specified price. Although financial futures contracts by their terms require
actual delivery and acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract purchase or sale is effected by
entering into an offsetting transaction. Financial futures trade on boards of
trade that have been designated "contracts markets" by the Commodity Futures
Trading Commission. Financial futures trade on these markets in a manner that is
similar to the way a stock trades on a stock exchange. The boards of trade,
through their clearing corporations, guarantee performance of the contracts.
Currently, there are financial futures based on long-term U.S. Treasury bonds,
U.S. Treasury notes, Government National Mortgage Association ("GNMA")
certificates, three-month U.S. Treasury bills and three-month domestic bank
certificates of 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.
-15-
<PAGE> 21
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 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
-16-
<PAGE> 22
securities being hedged and movements in the price of related financial futures,
the Trust may sell financial futures in a greater or lesser dollar amount than
the dollar amount of the securities being hedged.
The market prices of financial futures may be affected by several
factors other than interest rates. First, all participants in the futures market
are subject to margin deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors may close financial futures
through offsetting transactions, which could distort the normal relationship
between the debt securities and futures markets. Second, from the point of view
of speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause temporary
price distortions. Due to the possibility of price distortions in the futures
market and the imperfect correlation between movements in the prices of debt
securities and movements in the prices of related financial futures, a correct
forecast of interest rate trends by the Trust's investment advisor may still not
result in a successful hedging transaction.
Positions in futures contracts may be closed out only on an exchange or
board of trade that provides a secondary market for such futures. Although the
Trust intends to engage in futures transactions only on exchanges or boards of
trade where there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange or board of trade will
exist for any particular contract or at any particular time. If there is not a
liquid secondary market at a particular time, it may not be possible to close a
futures position at such time, and in the event of adverse price movements, the
Trust would continue to be required to make daily cash payments of maintenance
margin. However, in the event financial futures are used to hedge portfolio
securities, such securities will not be sold until the financial futures can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the financial futures.
Options on Financial Futures. The Trust may also purchase put and call
options on financial futures which are traded on a U.S. exchange or board of
trade and enter into closing transactions with respect to such options to
terminate an existing position. The purchase of put options on financial futures
is analogous to the sale of futures so as to hedge the Trust's portfolio of debt
securities against the risk of rising interest rates. The purchase of call
options on financial futures is analogous to the purchase of futures contracts
and represents a means of obtaining temporary exposure to market appreciation at
limited risk. Such options may be used to protect against a market advance when
the Trust is not fully invested.
The Trust may write call options on futures contracts, which
constitutes a partial hedge against any declining price of long-term debt
securities. If the futures price at expiration is below the exercise price, the
Trust will retain the full amount of the option premium, which provides a
partial hedge against any decline that may have occurred in the Trust's holdings
of debt securities. If the futures price at expiration exceeds the exercise
price, the Trust will ordinarily realize a loss equal to the amount of such
excess.
The Trust may write put options on futures contracts, which constitutes
a partial hedge against an increase in the price of long-term debt securities
when the Trust is not fully invested. If the futures price at expiration is
above the exercise price, the Trust will retain the full amount of the option
premium, which provides a partial hedge against any increase in the market price
of long-term debt securities. If the futures price at expiration is less than
the exercise price, the Trust will ordinarily realize a loss equal to the
difference between the futures price and the exercise price.
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will 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
-17-
<PAGE> 23
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 any close out positions on such options will be subject to
the maintenance of a liquid secondary market. Compared to the sale of financial
futures, the purchase of put options on financial futures involves less
potential risk to the Trust because the maximum amount at risk is the premium
paid for the options (plus transaction costs). However, there may be
circumstances when the purchase of a put option on a financial future would
result in a loss to the Trust when the sale of a financial future would not,
such as when there is no movement in the price of debt securities.
An option position may be closed out only on an exchange or board of
trade that provides a secondary market for an option of the same series.
Although the Trust generally will purchase only those options for which there
appears to be an active secondary market, there is no assurance that a liquid
secondary market on an exchange or board of trade will exist for any particular
option, or at any particular time, and for some options, no secondary market on
an exchange or board of trade may exist. In such event, it might not be possible
to effect closing transactions in particular options, with the result that the
Trust would have to exercise its options in order to realize any profit and
would incur transaction costs upon closing out the futures positions acquired
pursuant to the exercise of such option.
Reasons for the absence of a liquid secondary market on an exchange or
board of trade include the following:
- there may be insufficient trading interest in certain options;
- restrictions may be imposed by an exchange or board of trade
on opening transactions or closing transactions or both;
- trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of
options;
- unusual or unforeseen circumstances may interrupt normal
operations on an exchange or board of trade;
- the facilities of an exchange or board of trade or the Options
Clearing Corporation (the "Clearing Corporation") may not at
all times be adequate to handle current trading volume; or
- one or more exchanges or boards of trade could, for economic
or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class
or series of options), in which event the secondary market on
that exchange or board of trade (or in that class or series of
options) would cease to exist, although outstanding options on
that exchange or board of trade which had been issued by the
Clearing Corporation as a result of trades on that exchange or
board of trade could continue to be exercisable in accordance
with their terms.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Clearing Corporation inadequate, and thereby result in the institution by an
exchange or board of trade of special procedures that may interfere with the
timely execution of customers' orders.
Tax-Exempt Bond Index Transactions. The Trust anticipates utilizing
tax-exempt bond index futures as a hedge against changes in the market value of
the Municipal Obligations in its portfolio or which it 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
-18-
<PAGE> 24
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 respecting to financial futures, except that the correlation between
movements in the price of a futures contract and movements in the price of the
Trust's portfolio securities is likely to be higher for index futures than for
financial futures.
The Trust may also purchase and write put and call options on
tax-exempt bond indices and on tax-exempt bond index futures and enter into
closing transactions with respect to such options. An option on an index gives
the holder the right to receive cash upon exercise of the option in an amount
equal to a specified multiple times the amount by which the fixed exercise price
of the option exceeds, in the case of a put, or is less than, in the case of a
call, the closing value of the underlying index on the date of exercise. An
option on an index future gives the purchaser the right, in return for the
premium paid, to assume a position in an index contract rather than to sell (in
the case of a put option) or buy (in the case of a call option) a debt
instrument at a specified exercise price at any time during the period of the
option. Upon exercise of the put option, the delivery of the futures position by
the holder of the option to the writer of the option will be accompanied by
delivery of the accumulated balance of the writer's futures margin account,
which represents the amount by which the market price of the index futures
contract, at exercise, is less than the exercise price of the put option on the
index future.
FORWARD COMMITMENTS
New issues of Municipal Obligations are often purchased on a
"when-issued" or delayed delivery basis. The payment obligations and the
interest rate that will be received on the securities are fixed at the time the
buyer enters into the commitment. The Trust will not begin earning interest on
such securities, however, until the securities are scheduled for settlement. The
Trust may enter into such "forward commitments" if it holds and maintains until
the settlement date, in a segregated account, cash or short-term debt
obligations in an amount sufficient to meet the purchase price provided such
obligations are rated A-1+ or SP-1+ by Standard & Poor's or the long-term debt
of the issuers of such obligations is rated AAA by Standard & Poor's. Forward
commitments involve a risk of loss if the value of the Municipal Obligation to
be purchased declines prior to the settlement date. Such a decline in value
could result from, among other things, changes in the level of interest rates or
other market factors. This risk is in addition to the risk of decline in the
value of the Trust's other assets. Although the Trust generally will enter into
forward commitments with the intention of acquiring Municipal Obligations for
its portfolio, the Trust may dispose of a commitment prior to settlement if the
Advisor deems it appropriate to do so. The Trust may realize capital gain or
loss upon the sale of forward commitments. Any such gains, if not offset by net
realized capital losses, will be distributed to shareholders in taxable
distributions.
REPURCHASE AGREEMENTS
The Trust may purchase U.S. Government securities and concurrently
enter into so-called "repurchase agreements" with the seller, usually a bank or
broker-dealer, whereby the seller agrees to repurchase such securities at the
Trust's cost plus interest within a specified time (normally one day). While
repurchase agreements involve certain risks not associated with direct
investments in U.S. Government securities, the Trust will follow procedures
designed to minimize such risks. These procedures include effecting repurchase
transactions only with the member banks of the Federal Reserve System and
registered broker-dealers having creditworthiness substantially equivalent to
that of the issuers of investment grade debt securities. In addition, the
Trust's repurchase agreements will always be at least equal to the repurchase
price, including any accrued interest earned on the repurchase agreement. In the
event of a default or bankruptcy by a seller, the Trust will seek to liquidate
such collateral. However, the exercise of the Trust's right to liquidate such
collateral could involve certain costs or delays and, to the extent that
proceeds from any sale upon a default of the obligation to repurchase were less
than the repurchase price, the Trust could suffer a loss.
-19-
<PAGE> 25
ZERO COUPON SECURITIES (ZEROS)
The Trust may invest in zero coupon securities, which are securities
issued at a significant discount from face value and pay interest only at
maturity rather than at intervals during the life of the security and in
certificates representing undivided interests in the interest or principal of
mortgage-backed securities (interest only/principal only), which tend to be more
volatile than other types of securities. The Trust will accrue and distribute
income from zero coupon and stripped securities and certificates on a current
basis and may have to sell securities to generate cash for distributions.
TEMPORARY AND DEFENSIVE INVESTMENTS
A portion of the Trust's assets will be held in cash or invested in
short-term securities for day-to-day operating purposes. It is the intention of
the Trust that short-term investments will also be in tax-exempt securities.
However, if suitable short-term tax-exempt securities are not available or if
short-term tax-exempt securities are available only on a when-issued basis, the
Trust may invest up to 20% of its assets in short-term obligations of the U.S.
Government or in repurchase agreements, or short-term notes and obligations
rated A-1+, of banks that have or whose parent holding companies have long-term
debt ratings of AAA or of corporations with long-term debt ratings of AAA, the
interest on all of which is not exempt from Federal income taxes.
Notwithstanding the foregoing, the Trust may temporarily invest more than 20% of
its assets in such taxable obligations for defensive purposes. The ability of
the Trust to invest in securities other than tax-exempt securities (as well as
its ability to enter into repurchase agreements) is limited, however, by a
requirement of the Code that at least 50% of its total assets be invested in
tax-exempt securities at the end of each quarter in order to pass through to
shareholders the Federal income tax exemption for dividends derived from net
investment income on tax-exempt securities. See "Tax Matters--Federal Taxation
of Shareholders."
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Board of Trustees is responsible for the general supervision of the
Trust, including general supervision of the duties performed by the Advisor
under its Management Agreement (as defined below) with the Trust. There are 13
trustees of the Trust, two of whom are "interested persons" (as defined in the
1940 Act). 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 subsidiaries of Liberty Mutual Insurance Company ("Liberty"), an
underwriter of workers' compensation insurance and a property and casualty
insurer in the U.S. The Advisor has been an investment advisor since 1931. As of
the date of this Prospectus, the Advisor serves as investment advisor or
sub-advisor for 34 open-end and 5 closed-end management investment companies and
managed over $16 billion in assets.
The Advisor's investment advisory business is managed together with the
mutual funds and institutional investment advisory businesses of its affiliate,
Stein Roe & Farnham Incorporated (Stein Roe), by a combined management team of
employees from both companies. Stein Roe also shares personnel, facilities and
systems with Colonial that may be used in providing administrative services to
the Trust. Both the Advisor and Stein Roe are subsidiaries of Liberty Financial
Companies, Inc.
-20-
<PAGE> 26
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
Colonial tax-exempt funds 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 1940 Act, the Advisor
is responsible for the actual management of the Trust's portfolio. The
responsibility for making decisions to buy, sell or hold a particular investment
rests with the Advisor, subject to review by the Board of Trustees of the Trust
and compliance with the applicable provisions of the 1940 Act.
The Advisor provides the Trust with accounting, bookkeeping and pricing
services and other services and office facilities (the expenses of which are
borne by the Trust as specified below), except to the extent these services are
provided by an administrator or an accounting firm hired by the Trust.
Under the Management Agreement with the Trust, the Advisor receives a
monthly advisory fee at the annual rate of 0.65% of the average weekly net
assets of the Trust. Since the Advisor's fee is based on the average weekly net
assets of the Trust, the Advisor will benefit from the increase in the Trust's
net assets resulting from the offering of the shares of Municipal Preferred. It
is not possible to state precisely the amount of additional compensation the
Advisor will receive as a result of the offering because the proceeds of the
offering will be invested in additional portfolio securities which will
fluctuate in value. However, based on the estimated proceeds from the offering,
assuming all the shares of Municipal Preferred offered hereby are purchased, the
Advisor would receive additional annual advisory fees of approximately ______ 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.
THE AUCTION
GENERAL
The proposed provisions of the Amended and Restated By-Laws of the
Trust (the "By-Laws") provide that, except as otherwise described herein, the
Applicable Rate with respect to shares of Municipal Preferred for each Rate
Period after the Initial Rate Period thereof shall be equal to the rate per
annum that the Auction Agent advises has resulted on the Business Day preceding
the first day of such Subsequent Rate Period (an "Auction Date") from
implementation of the auction procedures (the "Auction Procedures") set forth in
the By-Laws and summarized below, in which persons determine to hold or offer to
sell or, based on dividend rates bid by them, offer to purchase or sell such
shares. Each periodic implementation of the Auction Procedures is referred to
herein as an "Auction."
Certain defined terms used in this section and under "Description of
the Municipal Preferred" are defined in the Glossary.
AUCTION PROCEDURES
Prior to the Submission Deadline on each Auction Date for shares of
Municipal Preferred, each customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or, if applicable, the Auction Agent) as a holder
-21-
<PAGE> 27
of shares of Municipal Preferred (a" Beneficial Owner") may submit orders
("Orders") to that Broker-Dealer as follows:
- Hold Order - indicating its desire to hold shares of Municipal
Preferred without regard to the Applicable Rate for the next
Rate Period.
- Bid - indicating its desire to sell shares of Municipal
Preferred at $25,000 per share if the Applicable Rate for the
next Rate Period is less than the rate specified in such Bid
(also known as a hold-at-a rate order).
- Sell Order - indicating its desire to sell shares of Municipal
Preferred at $25,000 per share without regard to the
Applicable Rate for the next Rate Period.
A Beneficial Owner may submit different types of Orders to its Broker-Dealer
with respect to shares of Municipal Preferred then held by such Beneficial
Owner. A Beneficial Owner that submits a Bid to its Broker-Dealer having a rate
higher than the Maximum Rate on the Auction Date will be treated as having
submitted a Sell Order to its Broker-Dealer. A Beneficial Owner that fails to
submit an Order to its Broker-Dealer will be deemed to have submitted a Hold
Order to its Broker-Dealer; provided, however, that if a Beneficial Owner fails
to submit an Order to its Broker-Dealer for an Auction relating to a Rate Period
for Municipal Preferred of more than 28 Rate Period Days, such Beneficial Owner
will be deemed to have submitted a Sell Order to its Broker-Dealer. A Sell Order
shall constitute an irrevocable offer to sell the shares of Municipal Preferred
subject thereto. A Beneficial Owner that offers to become the Beneficial Owner
of additional shares of Municipal Preferred is, for purposes of such offer, a
Potential Beneficial Owner of additional shares of Municipal Preferred as
discussed below.
A customer of a Broker-Dealer that is not a Beneficial Owner of shares
of Municipal Preferred but that wishes to purchase shares, or that is a
Beneficial Owner that wishes to purchase additional shares (in each case, a
"Potential Beneficial Owner"), may submit Bids to its Broker-Dealer in which it
offers to purchase shares of Municipal Preferred at $25,000 per share if the
Applicable Rate for the next Rate Period is not less than the rate specified in
such Bid. A Bid placed by a Potential Beneficial Owner specifying a rate higher
than the Maximum Rate on the Auction Date will not be accepted.
The Broker-Dealers in turn will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves (unless otherwise permitted by the Trust)
as Existing Holders in respect of shares subject to Orders submitted or deemed
submitted to them by Beneficial Owners and as Potential Holders in respect of
shares subject to Orders submitted to them by Potential Beneficial Owners.
However, neither the Trust nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing. Any Order placed with the
Auction Agent by a Broker-Dealer as or on behalf of an Existing Holder or a
Potential Holder will be treated in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or Potential Beneficial Owner. Similarly,
any failure by a Broker-Dealer to submit to the Auction Agent an Order in
respect of any shares of Municipal Preferred held by it or customers who are
Beneficial Owners will be treated in the same manner as a Beneficial Owner's
failure to submit to its Broker-Dealer an Order in respect of shares of
Municipal Preferred held by it. A Broker-Dealer may also submit Orders to the
Auction Agent for its own account as an Existing Holder or Potential Holder,
provided it is not an affiliate of the Trust. The Auction Agent after each
Auction for shares of Municipal Preferred will pay to each Broker-Dealer, from
funds provided by the Trust, a service charge at the annual rate of 1/4 of 1% in
the case of any Auction immediately preceding a Rate Period of less than one
year, or a percentage agreed to by the Trust and the Broker-Dealers in the case
of any Auction immediately preceding a Rate Period of one year or longer, of the
purchase price of shares of Municipal Preferred placed by such Broker-Dealer at
such Auction. See "The Auction--Broker-Dealers" in the Statement of Additional
Information.
If Sufficient Clearing Bids exist (that is, the number of shares of
Municipal Preferred subject to Bids submitted or deemed submitted to the Auction
Agent by Broker-Dealers as or on behalf of Potential Holders with rates equal to
or lower than the Maximum Rate is at least equal to the number of shares of
Municipal Preferred subject to Sell Orders submitted or deemed submitted to the
Auction Agent by Broker-Dealers as or on behalf of Existing
-22-
<PAGE> 28
Holders), the Applicable Rate for the next succeeding Rate Period will be the
lowest rate specified in the Submitted Bids which, taking into account such rate
and all lower rates bid by Brokers-Dealers as or on behalf of Existing Holders
and Potential Holders, would result in Existing Holders and Potential Holders
owning all the shares of Municipal Preferred available for purchase in the
Auction. If Sufficient Clearing Bids do not exist, the Applicable Rate for the
next succeeding Rate Period will be the Maximum Rate on the Auction Date. In
such event, Beneficial Owners that have submitted or are deemed to have
submitted Sell Orders may not be able to sell in such Auction all shares of
Municipal Preferred subject to such Sell Orders. If Broker-Dealers submit or are
deemed to have submitted to the Auction Agent Hold Orders with respect to all
Existing Holders, the Applicable Rate for the next succeeding Rate Period will
be the All Hold Order Rate.
The Auction Procedures include a pro rata allocation of shares for
purchase and sale, which may result in an Existing Holder continuing to hold or
selling, or a Potential Holder purchasing, a number of shares of Municipal
Preferred that is fewer than the number of shares of Municipal Preferred
specified in its Order. To the extent the allocation procedures have that
result, Broker-Dealers that have designated themselves as Existing Holders or
Potential Holders in respect of customer Orders will be required to make
appropriate pro rata allocations among their respective customers.
Settlement of purchases and sales with respect to shares of Municipal
Preferred will be made on the next Business Day (also a Dividend Payment Date)
after the Auction Date through the Securities Depository. Purchasers will make
payment through their Agent Members in same-day funds to the Securities
Depository against delivery to their respective Agent Member. The Securities
Depository will make payment to the Sellers' Agent Members in accordance with
Securities Depository's normal procedures, which now provide for payment against
delivery by their Agent Members in same-day funds. The settlement procedures to
be used with respect to Auctions for shares of Municipal Preferred are set forth
in Appendix C to the Statement of Additional Information.
The first Auction for shares of Municipal Preferred will be held on
________, _________ __, 1999, the Business Day preceding the Dividend Payment
Date for the Initial Rate Period thereof. Thereafter, except during Special Rate
Periods, Auctions will normally be held every ________, and each Subsequent Rate
Period will normally begin on the following ________.
Whenever the Trust intends to include any net capital gain or other
income taxable for Federal income tax purposes in any dividend on shares of
Municipal Preferred, the Trust shall, in the case of Minimum Rate Periods or
Special Rate Periods of 28 Rate Period Days or fewer, and may, in the case of
any other Special Rate Period, notify the Auction Agent of the amount to be so
included not later than the Dividend Payment Date next preceding the Auction
Date on which the Applicable Rate for such dividend is to be established.
Whenever the Auction Agent receives such notice from the Trust, it will be
required in turn to notify each Broker-Dealer, who, on or prior to such Auction
Date, in accordance with its Broker-Dealer Agreement, will be required to notify
its customers who are Beneficial Owners and Potential Beneficial Owners believed
by it to be interested in submitting an Order in the Auction to be held on such
Auction Date.
SECONDARY MARKET TRADING AND TRANSFER OF MUNICIPAL PREFERRED
The Broker-Dealers (including the Underwriter) expect, but are not
obligated, to maintain a secondary trading market in shares of Municipal
Preferred outside of Auctions. There can be no assurance that a secondary
trading market for shares of Municipal Preferred will develop or, if it does
develop, that it will provide owners with liquidity of investment. The shares of
Municipal Preferred will not be registered on any stock exchange or on the
National Association of Securities Dealers Automated Quotations System.
Investors who purchase shares of Municipal Preferred in an Auction for a Special
Rate Period should note that because the dividend rate on such shares will be
fixed for the length of such Rate Period, the value of such shares may fluctuate
in response to the changes in interest rates, and may be more or less than their
original cost if sold on the open market in advance of the next Auction thereof,
depending on market conditions.
-23-
<PAGE> 29
A Beneficial Owner or an Existing Holder may sell, transfer, or
otherwise dispose of shares of Municipal Preferred only in whole shares and only
(1) pursuant to a Bid or Sell Order placed with the Auction Agent in accordance
with the Auction Procedures, (2) to a Broker-Dealer or (3) to such other persons
as may be permitted by the Trust; provided, however, that (a) a sale, transfer
or other disposition of shares of Municipal Preferred from a customer of a
Broker-Dealer who is listed on the records of that Broker-Dealer as the holder
of such shares to that Broker-Dealer or another customer of that Broker-Dealer
shall not be deemed to be a sale, transfer or other disposition for purposes of
the foregoing if such Broker-Dealer remains the Existing Holder of the shares so
sold, transferred or disposed of immediately after such sale, transfer or
disposition and (b) in the case of all transfers other than pursuant to
Auctions, the Broker-Dealer (or other person, if permitted by the Trust) to whom
such transfer is made shall advise the Auction Agent of such transfer.
DETERMINATION OF NET ASSET VALUE
Net asset value of the Trust will be determined as of the close of
regular trading on the New York Stock Exchange (the "Exchange") (generally 4:00
p.m. New York City time) on the last Business Day of each week (generally
Friday), and at such other times as the Trust may authorize. The net asset value
of the Trust equals the value of the Trust's assets less the Trust's
liabilities. 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.
DESCRIPTION OF MUNICIPAL PREFERRED
GENERAL
The Agreement and Declaration of Trust of the Trust (the "Declaration")
provides that the Trust may authorize separate classes of shares of beneficial
interest. The By-Laws of the Trust will, at the time they are amended and
restated, authorize the issuance of ___ 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 __
shares of Series __ Municipal Preferred. Shares of Municipal Preferred carry one
vote per share. Shares of Municipal Preferred will, when issued, be fully paid
and, subject to matters discussed in "Certain Provisions in the Agreement and
Declaration of Trust," nonassessable, and will have no pre-emptive or conversion
rights or rights to cumulative voting.
DIVIDENDS AND DIVIDEND PERIODS
General. The Initial Rate Period for shares of Municipal Preferred is a
period consisting of 7 days. Any Subsequent Rate Period will be a Minimum Rate
Period (7 Rate Period Days) unless the Trust, subject to certain conditions,
designates such Subsequent Rate Period as a Special Rate Period. See
"Designation of Special Rate Periods" below.
Dividends on the shares of Municipal Preferred will be payable, when,
as and if declared by the Board of Trustees out of funds legally available
therefor in accordance with the Declaration, the By-Laws and applicable law on
__________, _____________, 1999, and thereafter on each _______________;
provided, however, that (1) if the ________ on which dividends would otherwise
be payable is not a Business Day, then dividends shall be payable instead on the
first Business Day that falls prior to such _____________ and (2) the Trust may
specify different Dividend Payment Dates in respect of any Special Rate Period
of such shares of more than 28 Rate Period Days.
The amount of dividends per share payable on shares of Municipal
Preferred on any date on which dividends shall be payable on such shares shall
be computed by multiplying the Applicable Rate in effect for such Dividend
Period or Dividend Periods or part thereof for which dividends have not been
paid by a fraction, the numerator of
-24-
<PAGE> 30
which shall be the number of days in such Dividend Period or Dividend Periods or
part thereof and the denominator of which shall be 365 if such Dividend Period
consists of 7 Rate Period Days and 360 for all other Dividend Periods, and
applying the rate obtained against $25,000.
Dividends will be paid through the Securities Depository on each
Dividend Payment Date in accordance with its normal procedures, which now
provide for it to distribute dividends in next-day funds to Agent Members, who
in turn are expected to distribute such dividend payments to the persons for
whom they are acting as agents. Each of the initial Broker-Dealers, however, has
indicated to the Trust that such Broker-Dealer or the Agent Member designated by
such Broker-Dealer will make such dividend payments available in same-day funds
on each Dividend Payment Date to customers that use such Broker-Dealer or its
designee as Agent Member.
Dividends on shares of Municipal Preferred shall accumulate from the
Date of Original Issue. The dividend rate for the Initial Rate Period will be
_____% per annum. For each Subsequent Rate Period, the dividend rate will be the
Applicable Rate that the Auction Agent advises the Trust results from an
Auction, except as provided below.
The Applicable Rate that results from an Auction will not be greater
than the Maximum Rate which is:
(i) in the case of any Auction Date which is not the Auction Date immediately
prior to the first day of any proposed Special Rate Period, the product of (1)
the Reference Rate on such Auction Date for the next Rate Period and (2) the
Rate Multiple on such Auction Date, unless such shares have or had a Special
Rate Period (other than a Special Rate Period of 28 Rate Period Days or fewer)
and an Auction at which Sufficient Clearing Bids existed has not yet occurred
for a Minimum Rate Period after such Special Rate Period, in which case the
higher of:
(A) the dividend rate on such shares of the then-ending Rate Period;
and
(B) the product of (x) the higher of (I) the Reference Rate on such
Auction Date for a Rate Period equal in length to the then-ending Rate
Period, if such then-ending Rate Period was 364 Rate Period Days or
fewer, or the Treasury Note Rate on such Auction Date for a Rate Period
equal in length to the then-ending Rate Period, if such then-ending
Rate Period was more than 364 Rate Period Days, and (II) the Reference
Rate on such Auction Date for a Rate Period equal in length to such
Special Rate Period, if such Special Rate Period was 364 Rate Period
Days or fewer, or the Treasury Note Rate on such Auction Date for a
Rate Period equal in length to such Special Rate Period, if such
Special Rate Period was more than 364 Rate Period Days and (y) the Rate
Multiple on such Auction Date; or
(ii) in the case of any Auction Date which is the Auction Date immediately prior
to the first day of any proposed Special Rate Period, the product of (1) the
highest or (x) the Reference Rate on such Auction Date for a Rate Period equal
in length to the then-ending Rate Period, if such then-ending Rate Period was
364 Rate Period Days or fewer, or the Treasury Note Rate on such Auction Date
for a Rate Period equal in length to the then-ending Rate Period, if such
then-ending Rate Period was more than 364 Rate Period Days, (y) the Reference
Rate on such Auction Date for the Special Rate Period for which the Auction is
being held if such Special Rate Period is 364 Rate Period Days or fewer or the
Treasury Note Rate on such Auction Date for the Special Rate Period for which
the Auction is being held if such Special Rate Period is more than 364 Rate
Period Days, and (z) the Reference Rate on such Auction Date for Minimum Rate
Periods and (2) the Rate Multiple on such Auction Date.
If any Auction for any Subsequent Rate Period is not held for any
reason other than as described below, the dividend rate for such Subsequent Rate
Period will be the Maximum Rate on the Auction Date for such Subsequent Rate
Period.
If the Trust fails to pay in a timely manner to the Auction Agent the
full amount of any dividend on, or the redemption price of, shares of Municipal
Preferred during any Rate Period thereof (other than any Special Rate Period of
more than 364 Rate Period Days or any Rate Period succeeding any Special Rate
Period of more than 364 Rate Period Days during which such a failure occurred
that has not been cured), and, prior to 12:00 Noon on the third Business Day
next succeeding the date such failure occurred, such failure shall have been
cured and the Trust shall
-25-
<PAGE> 31
have paid a late charge, each as described more fully in the Statement of
Additional Information, no Auction will be held for the Subsequent Rate Period
thereof and the dividend rate for shares of Municipal Preferred for such
Subsequent Rate Period will be the Maximum Rate on the Auction Date for such
Subsequent Rate Period.
If the Trust fails to pay in a timely manner to the Auction Agent the
full amount of any dividend on, or the redemption price of, any shares of
Municipal Preferred during any Rate Period (other than any Special Rate Period
of more than 364 Rate Period Days or any Rate Period succeeding any Special Rate
Period of more than 364 Rate Period Days during which such a failure occurred
that has not been cured), and, prior to 12:00 Noon on the third Business Day
next succeeding the date on which such failure occurred, such failure shall not
have been cured or the Trust shall not have paid a late charge, each as
described more fully in the Statement of Additional Information, no Auction will
be held in respect of such shares for the first Subsequent Rate Period thereof
thereafter (or for any Rate Period thereof thereafter to and including the Rate
Period during which such failure is so cured and such late charge so paid (such
late charge to be paid only in the event Moody's is rating such shares at the
time the Trust cures such failure)), and the dividend rate for such shares for
each such Subsequent Rate Period shall be a rate per annum equal to the Maximum
Rate on the Auction Date for each such Subsequent Rate Period (but with the
prevailing rating for such shares, for purposes of determining such Maximum
Rate, being deemed to be "Below 'Ba3'/BB-").
If the Trust fails to pay in a timely manner to the Auction Agent the
full amount of any dividend on, or the redemption price of, any shares of
Municipal Preferred during a Special Rate Period of more than 364 Rate Period
Days, or during any Rate Period succeeding any Special Rate Period of more than
364 Rate Period Days during which such a failure occurred that has not been
cured, and such failure shall not have been cured or, in the event Moody's is
then rating such shares, the Trust shall not have paid a late charge, in each
case prior to 12:00 Noon on the fourth Business Day preceding the Auction Date
for the Rate Period subsequent to such Rate Period and as more fully described
in the Statement of Additional Information, no Auction will be held for such
Subsequent Rate Period thereof (or for any Rate Period thereof thereafter to and
including the Rate Period during which such failure is so cured and such late
charge is so paid (such late charge to be paid only in the event that Moody's is
rating the shares at the time and the Trust cures such failure)), and the
dividend rate for each such Subsequent Rate Period shall be a rate per annum
equal to the Maximum Rate on the Auction Date for each such Subsequent Rate
Period (but with the prevailing rating for such shares, for purposes of
determining such Maximum Rate, being deemed to be "Below 'Ba3'/BB-").
A failure to pay dividends on or the redemption price of shares of
Municipal Preferred shall have been cured with respect to any Rate Period if,
within the respective time periods described above, the Trust shall have paid to
the Auction Agent (i) all accumulated and unpaid dividends on the shares of
Municipal Preferred and (ii) without duplication, the redemption price for the
shares of Municipal Preferred, if any, for which notice of redemption has been
mailed by the Trust; provided, however, that the foregoing clause (ii) shall not
apply to the Trust's failure to pay the redemption price in respect of shares of
Municipal Preferred when the related notice of redemption provides that
redemption of such shares is subject to one or more conditions precedent and any
such condition precedent shall not have been satisfied at the time or times and
in the manner specified in such notice of redemption.
Gross-up Payments. Holders of shares of Municipal Preferred shall be
entitled to receive, when, as and if declared by the Board of Trustees, out of
funds legally available therefor in accordance with the Declaration, the ByLaws
and applicable law, dividends in an amount equal to the aggregate Gross-up
Payment in accordance with the following:
If, in the case of any Minimum Rate Period or any Special Rate Period
of 28 Rate Period Days or fewer, the Trust allocates any net capital gain or
other income taxable for Federal income tax purposes to a dividend paid on
shares of Municipal Preferred without having given advance notice thereof to the
Auction Agent as described above under "The Auction--Auction Procedures" (a
"Taxable Allocation") solely by reason of the fact that such allocation is made
retroactively as a result of the redemption of all or a portion of the
outstanding shares of Municipal Preferred or the liquidation of the Trust, the
Trust will, prior to the end of the calendar year in which such dividend was
paid, provide notice thereof to the Auction Agent and direct the Trust's
dividend disbursing agent to send such notice with a Gross-up Payment to each
holder of shares (initially Cede & Co., as nominee of the Securities Depository)
that was
-26-
<PAGE> 32
entitled to such dividend payment with respect to shares of Municipal Preferred
during such calendar year at such holder's address as the same appears or last
appeared on the record books of the Trust.
If, in the case of any Special Rate Period of more than 28 Rate Period
Days, the Trust makes a Taxable Allocation to a dividend paid on shares of
Municipal Preferred, the Trust shall, prior to the end of the calendar year in
which such dividend was paid, provide notice thereof to the Auction Agent and
direct the Trust's dividend disbursing agent to send such notice with a Gross-up
Payment to each holder of such shares that was entitled to such dividend payment
during such calendar year at such holder's address as the same appears or last
appeared on the record books of the Trust.
The Trust shall not be required to make Gross-up Payments with respect
to any net capital gain or other taxable income determined by the Internal
Revenue Service to be allocable in a manner different from that allocated by the
Trust.
A "Gross-up Payment" in respect of any dividend means payment to a
holder of shares of Municipal Preferred of an amount which, giving effect to the
Taxable Allocations made with respect to such dividend, would cause such
holder's after-tax returns (taking into account both the Taxable Allocations and
the Gross-up Payment) to be equal to the after-tax return the holder would have
received if no such Taxable Allocations had occurred. Such Gross-up Payment
shall be calculated: (i) without consideration being given to the time value of
money; (ii) assuming that no holder of shares of Municipal Preferred is subject
to the Federal alternative minimum tax with respect to dividends received from
the Trust; and (iii) assuming that each holder of shares of Municipal Preferred
is taxable at the maximum marginal regular Federal individual income tax rate
applicable to ordinary income or net capital gain, as applicable, or the maximum
marginal regular Federal corporate income tax rate applicable to ordinary income
or net capital gain, as applicable, whichever is greater, in effect at the time
such Gross-up Payment is made.
Restrictions on Dividends and Other Distributions. For so long as any
shares of Municipal Preferred are outstanding, the Trust may not declare, pay or
set apart for payment any dividend or other distribution (other than a dividend
or distribution paid in shares of, or in options, warrants or rights to
subscribe for or purchase, Common Shares) in respect of Common Shares or call
for redemption, redeem, purchase or otherwise acquire for consideration any
Common Shares (except by conversion into or exchange for shares of the Trust
ranking junior to the shares of Municipal Preferred as to the payment of
dividends and the distribution of assets upon liquidation), unless (1) full
cumulative dividends on shares of Municipal Preferred through their most
recently ended Dividend Period shall have been paid or shall have been declared
and sufficient funds for the payment thereof deposited with the Auction Agent;
(2) the Trust has redeemed the full number of shares of Municipal Preferred
required to be redeemed by any provision for mandatory redemption pertaining
thereto; and (3) immediately after such transaction the Discounted Value of the
Trust's portfolio would at least equal the Municipal Preferred Basic Maintenance
Amount in accordance with guidelines of the rating agency or agencies then
rating the shares of Municipal Preferred.
Except as set forth in the next sentence, no dividends shall be
declared or paid or set apart for payment on any class or series of shares of
beneficial interest of the Trust ranking, as to the payment of dividends, on a
parity with shares of Municipal Preferred for any period unless full cumulative
dividends have been or contemporaneously are declared and paid on the shares of
Municipal Preferred through their most recent Dividend Payment Date. When
dividends are not paid in full upon the shares of Municipal Preferred through
their most recent Dividend Payment Date or upon any other class or series of
shares ranking on a parity as to the payment of dividends with shares of
Municipal Preferred through their most recent respective dividend payment dates,
all dividends declared upon shares of Municipal Preferred and any other such
class or series of shares ranking on a parity as to the payment of dividends
with shares of Municipal Preferred shall be declared pro rata so that the amount
of dividends declared per share on shares of Municipal Preferred and such other
class or series of shares shall in all cases bear to each other the same ratio
that accumulated dividends per share on the shares of Municipal Preferred and
such other class or series of shares bear to each other.
-27-
<PAGE> 33
DESIGNATION OF SPECIAL RATE PERIODS
The Trust, at its option, may designate any succeeding Subsequent Rate
Period as a Special Rate Period consisting of a specified number of Rate Period
Days evenly divisible by seven and not more than 1,820 (approximately 5 years),
subject to certain adjustments. A designation of a Special Rate Period shall be
effective only if, among other things, (i) the Trust shall give certain notices
to the Auction Agent, (ii) an Auction for such shares shall have been held on
the Auction Date immediately preceding the first day of such proposed Special
Rate Period and Sufficient Clearing Bids for such shares shall have existed in
such Auction and (iii) if the Trust shall have mailed a notice of redemption
with respect to any shares of Municipal Preferred, the redemption price with
respect to such shares shall have been deposited with the Auction Agent.
VOTING RIGHTS
In addition to voting rights described below under "Certain Provisions
in the Agreement and Declaration of Trust" and in the Statement of Additional
Information under "Investment Objectives and Policies--Fundamental Investment
Policies," holders of shares of Municipal Preferred, voting as a separate class,
are entitled to elect (1) two trustees of the Trust at all times and (2) a
majority of the trustees if at any time dividends on shares of Municipal
Preferred shall be unpaid in an amount equal to two years dividends thereon, and
to continue to be so represented until all dividends in arrears shall have been
paid or otherwise provided for. In all other cases, trustees shall be elected by
holders of Common Shares and Preferred Shares (including Municipal Preferred),
voting together as a single class.
Subject to the voting rights described above and except as otherwise
specified under "Certain Provisions in the Agreement and Declaration of Trust,"
the Trust may not, among other things, without the approval of the holders of a
"majority of the outstanding" shares of Municipal Preferred, voting as a
separate class, approve any plan of reorganization adversely affecting shares of
Municipal Preferred. In addition, the Trust may not, without the affirmative
vote of the holders of at least a majority of the shares of Municipal Preferred
outstanding at the time, voting as a separate class: (a) authorize, create or
issue additional shares of Municipal Preferred or classes or series of Preferred
Shares ranking prior to or on a parity with shares of Municipal Preferred with
respect to the payment of dividends or the distribution of assets upon
liquidation or (b) amend, alter or repeal the provisions of the Declaration or
the By-Laws, whether by merger, consolidation or otherwise, so as to materially
affect any preference, right or power of such shares of Municipal Preferred or
the holders thereof; provided, however, that a division of a share of Municipal
Preferred shall be deemed to materially affect any such preference, right or
power only if the terms of such division adversely affect the holders of shares
of Municipal Preferred. The Trust may not, without the affirmative vote of the
holders of at least 66 2/3% of the shares of Municipal Preferred outstanding at
the time, voting as a separate class, file a voluntary application for relief
under Federal bankruptcy law or any similar application under state law for so
long as the Trust is solvent and does not foresee becoming insolvent.
Notwithstanding the first sentence of this paragraph, the Trust may, without the
vote of the holders of shares of Municipal Preferred, authorize, create or issue
additional shares of Municipal Preferred or classes or series of Preferred
Shares ranking on a parity with shares of Municipal Preferred with respect to
the payment of dividends and the distribution of assets upon liquidation if,
after giving effect thereto, the aggregate liquidation preference of all
Preferred Shares then outstanding, exclusive of accumulated and unpaid
dividends, would not exceed $__________; provided, however, that the Trust
obtains written confirmation from Moody's (if Moody's is then rating the shares
Municipal Preferred) and Standard & Poor's (if Standard & Poor's is then rating
the shares of Municipal Preferred) that the issuance of any such additional
shares or class or series of shares would not impair the rating then assigned by
such rating agency to shares of Municipal Preferred. Further, the Trust may,
without the vote of the holders of shares of Municipal Preferred, authorize,
create or issue additional shares of Municipal Preferred or classes or series of
Preferred Shares ranking on a parity with shares of Municipal Preferred with
respect to the payment of dividends and the distribution of assets upon
liquidation notwithstanding that, after giving effect thereto, the aggregate
liquidation preference of all Preferred Shares then outstanding would exceed
$__________; provided, however, that either Moody's or Standard & Poor's is
rating the shares of Municipal Preferred and the Trust obtains written
confirmation from Moody's (if Moody's is then rating the shares of Municipal
Preferred) and Standard & Poor's (if Standard & Poor's is then rating the shares
of Municipal Preferred) that the issuance of any such additional shares or class
or series of shares would not impair the rating then assigned by such rating
agency to shares of Municipal Preferred. If any action set forth in this
-28-
<PAGE> 34
paragraph would adversely affect the rights of one or more series (the "Affected
Series") of Municipal Preferred in a manner different from any other series of
Municipal Preferred, the Trust will not approve any such action without the
affirmative vote of the holders of at least a majority of the shares of each
such Affected Series outstanding at the time (each such Affected Series voting
as a separate class).
REDEMPTION
Mandatory Redemption. In the event the Trust does not timely cure a
failure to maintain (1) a Discounted Value of its portfolio equal to the
Municipal Preferred Basic Maintenance Amount or (2) the 1940 Act Municipal
Preferred Asset Coverage, in each case in accordance with the requirements of
the rating agency or agencies then rating the shares of Municipal Preferred,
shares of Municipal Preferred will be subject to mandatory redemption on a date
specified by the Board of Trustees, out of funds legally available therefor in
accordance with the Declaration, the By-Laws and applicable law, at the
redemption price of $25,000 per share plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption. Any such redemption will be limited to
the number of shares of Municipal Preferred necessary to restore the required
Discounted Value or the 1940 Act Municipal Preferred Asset Coverage, as the case
may be.
In determining the number of shares of Municipal Preferred required to
be redeemed in accordance with the foregoing, the Trust will allocate the number
of shares required to be redeemed to satisfy the Municipal Preferred Basic
Maintenance Amount or the 1940 Act Municipal Preferred Asset Coverage, as the
case may be, pro rata among shares of Municipal Preferred and other Preferred
Shares of the Trust, subject to redemption or retirement.
Optional Redemption. Shares of Municipal Preferred are redeemable, at
the option of the Trust:
(i) in whole or in part, on the second Business Day preceding
any Dividend Payment Date for such shares, out of funds legally
available therefor in accordance with the Declaration, the By-Laws and
applicable law, at the redemption price of $25,000 per share plus an
amount equal to accumulated but unpaid dividends thereon (whether or
not earned or declared) to (but not including) the date fixed for
redemption; provided, however, that (1) shares of Municipal Preferred
may not be redeemed in part if after such partial redemption fewer than
500 shares remain outstanding and (2) the notice establishing a Special
Rate Period of shares of Municipal Preferred, as delivered to the
Auction Agent and filed with the Secretary of the Trust, may provide
that such shares shall not be redeemable during the whole or any part
of such Special Rate Period (except as provided in (ii) below) or shall
be redeemable during the whole or any part of such Special Rate Period
only upon payment of such redemption premium or premiums as shall be
specified therein; and
(ii) as a whole but not in part, out of funds legally
available therefor in accordance with the Declaration, the By-Laws and
applicable law, on the first day following any Dividend Period included
in a Rate Period of more than 364 Rate Period Days if, on the date of
determination of the Applicable Rate for such Rate Period, such
Applicable Rate equaled or exceeded on such date of determination the
Treasury Note Rate for such Rate Period, at a redemption price of
$25,000 per share plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption.
Notwithstanding the foregoing, if any dividends on shares of Municipal
Preferred (whether or not earned or declared) are in arrears, no shares of
Municipal Preferred shall be redeemed unless all outstanding shares of Municipal
Preferred are simultaneously redeemed, and the Trust shall not purchase or
otherwise acquire any shares of Municipal Preferred; provided, however, that the
foregoing shall not prevent the purchase or acquisition of all outstanding
shares of Municipal Preferred pursuant to the successful completion of an
otherwise lawful purchase or exchange offer made on the same terms to, and
accepted by, holders of all outstanding shares of Municipal Preferred.
-29-
<PAGE> 35
LIQUIDATION
Subject to the rights of holders of any series or class or classes of
shares ranking on a parity with shares of Municipal Preferred with respect to
the distribution of assets upon liquidation of the Trust, upon a liquidation of
the Trust, whether voluntary or involuntary, the holders of shares of Municipal
Preferred then outstanding will be entitled to receive and to be paid out of the
assets of the Trust available for distribution to its shareholders, before any
payment or distribution shall be made on the Common Shares, an amount equal to
the liquidation preference with respect to such shares ($25,000 per share), plus
an amount equal to all dividends thereon (whether or not earned or declared)
accumulated but unpaid to (but not including) the date of final distribution in
same-day funds, together with any applicable Gross-up Payments in connection
with the liquidation of the Trust. After the payment to the holders of the
shares of Municipal Preferred of the full preferential amounts provided for a
described herein, the holders of Municipal Preferred as such shall have no right
or claim to any of the remaining assets of the Trust.
Neither the sale of all or substantially all the property or business
of the Trust, nor the merger or consolidation of the Trust into or with any
Massachusetts business trust or corporation nor the merger or consolidation of
any Massachusetts business trust or corporation into or with the Trust shall be
a liquidation, whether voluntary or involuntary, for the purposes of the
foregoing paragraph.
RATING AGENCY GUIDELINES
The Trust is required under Moody's and Standard & Poor's guidelines to
maintain assets having in the aggregate a Discounted Value at least equal to the
Municipal Preferred Basic Maintenance Amount. Moody's and Standard & Poor's have
each established separate guidelines for determining Discounted Value. To the
extent any particular portfolio holding does not satisfy the applicable rating
agency's guidelines, all or a portion of such holding's value will not be
included in the calculation of Discounted Value (as defined by such rating
agency). The Moody's and Standard & Poor's guidelines do not impose any
limitations on the percentage of Trust assets that may be invested in holdings
not eligible for inclusion in the calculation of the Discounted Value of the
Trust's portfolio. The amount of such assets included in the portfolio at any
time may vary depending upon the rating, diversification and other
characteristics of the eligible assets included in the portfolio. The Municipal
Preferred Basic Maintenance Amount includes the sum of (i) the aggregate
liquidation preference of shares of Municipal Preferred then outstanding and
(ii) certain accrued and projected payment obligations of the Trust.
The Trust is also required under rating agency guidelines to maintain,
with respect to the shares of Municipal Preferred, as of the last Business Day
of each month in which any shares of Municipal Preferred are outstanding, asset
coverage of at least 200% with respect to senior securities which are shares,
including shares of Municipal Preferred (or such other asset coverage as may in
the future be specified in or under the 1940 Act as the minimum asset coverage
for senior securities which are shares of a closed-end investment company as a
condition of declaring dividends on its common shares) ("1940 Act Municipal
Preferred Asset Coverage"). Based on the composition of the Trust's portfolio
and market conditions as of _____________, 1999, the 1940 Act Municipal
Preferred Asset Coverage with respect to shares of Municipal Preferred, assuming
the issuance on the date hereof of all shares of Municipal Preferred offered
hereby and after giving effect to the deduction of the sales load and offering
costs relating thereto estimated at $________, would be computed as follows:
Value of Trust assets less liabilities
not constituting senior securities $___________
= =______%
Senior securities representing $___________
indebtedness plus liquidation value
of the shares of Municipal Preferred
In the event the Trust does not timely cure a failure to maintain (1) a
Discounted Value of its portfolio equal to the Municipal Preferred Basic
Maintenance Amount or (2) the 1940 Act Municipal Preferred Asset Coverage, in
each case in accordance with the requirements of the rating agency or agencies
then rating the shares of Municipal
-30-
<PAGE> 36
Preferred, the Trust will be required to redeem shares of Municipal Preferred as
described above under "Description of Municipal Preferred--Redemption."
The Trust may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by Moody's or Standard & Poor's.
Failure to adopt any such modifications, however, may result in a change in the
ratings described above or a withdrawal of ratings altogether. In addition, any
rating agency providing a rating for the shares of Municipal Preferred may, at
any time, change or withdraw any such rating. The Board of Trustees may, without
shareholder approval, amend, alter or repeal any or all of the definitions and
related provisions which have been adopted by the Trust pursuant to the rating
agency guidelines in the event the Trust receives written confirmation from
Moody's or Standard & Poor's, or both, as appropriate, that any such change
would not impair the ratings then assigned by Moody's and Standard & Poor's to
shares of Municipal Preferred.
As described by Moody's and Standard & Poor's, a preferred share rating
is an assessment of the capacity and willingness of an issuer to pay preferred
share obligations. The ratings on the Municipal Preferred are not
recommendations to purchase, hold or sell shares of Municipal Preferred,
inasmuch as the ratings do not comment as to market price or suitability for a
particular investor. The rating agency guidelines described above also do not
address the likelihood that an owner of shares of Municipal Preferred will be
able to sell such shares in an Auction or otherwise. The ratings are based on
current information furnished to Moody's and Standard & Poor's by the Trust and
the Advisor, and information obtained from other sources. The ratings may be
changed, suspended or withdrawn as a result of changes in, or the unavailability
of, such information.
A rating agency's guidelines will apply to shares of Municipal
Preferred only so long as such rating agency is rating such shares. The Trust
will pay certain fees to Moody's or Standard & Poor's, or both, for rating
shares of Municipal Preferred.
DESCRIPTION OF COMMON SHARES
In addition to the shares of Municipal Preferred, the Declaration
authorizes the issuance of an unlimited number of Common Shares, no par value.
All Common Shares have equal noncumulative voting rights and equal rights with
respect to dividends, assets and liquidation. Common Shares are fully paid and
nonassessable when issued and have no preemptive, conversion or exchange rights.
So long as any shares of Municipal Preferred are outstanding, the Trust is not
permitted to declare dividends on, make any distributions with respect to, or
purchase its Common Shares unless, at the time of such declaration, distribution
or purchase, as applicable (and after giving effect thereto), all accumulated
dividends on any preferred shares of the Trust have been paid.
In the past, the Trust's Common Shares have traded at various times at
either a premium or a discount in relation to net asset value. Although the
Trust's Common Shares recently have been trading at a premium above net asset
value, there can be no assurance that this premium will continue after the
offering of the shares of Municipal Preferred or that the Common Shares will not
again trade at a discount. Shares of other closed-end investment companies
frequently trade at a discount from net asset value.
CERTAIN PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST
The Board of Trustees is divided into three classes, each having a term
of three years. Each year the term of one class expires. This may make it more
difficult to change the Trust's management and could have the effect of
depriving shareholders of an opportunity to sell their Common Shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Trust in a tender offer or similar transaction. In
addition, the Declaration provides that the affirmative vote or consent of
two-thirds of the outstanding Common Shares and any Preferred Shares of the
Trust (including shares of Municipal Preferred), voting together as a single
class, and of the Preferred Shares (including shares of Municipal Preferred)
voting together as a single class, would be required to authorize the conversion
of the Trust from a closed-end to an open-end investment company. This
two-thirds vote requirement is higher than the vote required under the 1940 Act.
-31-
<PAGE> 37
Reference should be made to the Declaration on file with the Commission
for the full text of these provisions.
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND
REPURCHASE OF SHARES
Shares of closed-end investment companies frequently trade at a
discount from net asset value. The Board of Trustees regularly monitors the
relationship between the Trust's market price and net asset value. If shares of
the Trust were to trade at a substantial discount to net asset value for an
extended period of time, the Board may consider the repurchase of its Common
Shares on the open market or the making of tender offers for such shares. Since
commencement of the Trust's operations, no such open market purchases or tender
offers have been made, and no assurances can be given that such actions will be
taken in the future. Subject to its investment restrictions, the Trust may
borrow money to finance the repurchase of shares, subject to compliance with the
1940 Act Municipal Preferred Asset Coverage, Section 18 of the 1940 Act and the
other limitations described under "Rating Agency Guidelines." Shares may not be
repurchased, however, (i) if applicable asset coverage requirements under the
1940 Act (i.e., 200% with respect to any preferred shares of the Trust,
including shares of Municipal Preferred) are not met or would not be met
following such repurchase or (ii) if otherwise prohibited by applicable law.
There can be no assurance that repurchases or tenders, if they were to
occur, would result in the shares trading at a price which is equal to their net
asset value. The Trust anticipates that the market price of the shares will
usually vary from net asset value. The market price of the shares will be
determined, among other things, by the relative demand for and supply of the
shares in the market, the Trust's investment performance, the Trust's dividends
and yield and investor perception of the Trust's overall attractiveness as an
investment as compared with other investment alternatives. It should be
recognized that any such acquisitions of shares would decrease the total assets
of the Trust and therefore have the effect of increasing the Trust's expense
ratio. Furthermore, any interest on borrowings to finance share repurchase
transactions would reduce the Trust's net income.
CONVERSION TO OPEN-END STATUS
The Trust's Board of Trustees may from time to time consider submitting
to the holders of the shares of beneficial interest of the Trust at any time a
proposal to convert the Trust to an open-end investment company. In determining
whether to exercise its discretion to submit this issue to shareholders, the
Board of Trustees would consider all factors then relevant, including the
relationship of the market price of the Common Shares to net asset value, the
extent to which the Trust's capital structure is leveraged and the possibility
of re-leveraging, the spread, if any, between yields on lower rated securities
in the Trust's portfolio and interest and dividend charges on senior securities
and general market and economic conditions. In addition to any vote required by
Massachusetts law, conversion of the Trust to an open-end investment company
would require the affirmative vote of two thirds of the Common Shares and any
Preferred Shares of the Trust (including shares of Municipal Preferred), voting
together as a single class, and of the Preferred Shares (including shares of
Municipal Preferred) voting together as a single class, entitled to be voted on
the matter. This two-thirds vote requirement is higher than the vote required
under the 1940 Act. Shareholders of an open-end investment company may require
the company to redeem their shares at any time (except in certain circumstances
as authorized by or under the 1940 Act) at their net asset value, less such
redemption charges, if any, as might be in effect at the time of redemption. If
the Trust converted to an open-end investment company, it would be required to
redeem all shares of Municipal Preferred then outstanding at the redemption
price specified under "Description of Municipal Preferred--Redemption--Optional
Redemption." In addition, the Trust could be required to liquidate portfolio
securities to meet required and requested redemptions, and its Common Shares
would no longer be listed on the Exchange. No assurance can be given that the
Board will, at any time in the future, decide to submit a proposal to convert to
open-end status to the shareholders of the Trust.
-32-
<PAGE> 38
TAX MATTERS
The following Federal tax discussion is based on the advice of Ropes &
Gray, counsel to the Trust, and reflects provisions of the Code, existing
Treasury regulations, rulings published by the Internal Revenue Service, and
other applicable authority, as of the date of this Prospectus. These authorities
are subject to change by legislative or administrative action. The following
discussion is only a summary of some of the important tax considerations
generally applicable to investments in the Trust. There may be other tax
considerations applicable to particular investors. In addition, income earned
through an investment in the Trust may be subject to foreign, state and local
taxes. Prospective shareholders are therefore urged to consult their tax
advisors with respect to the tax consequences to them of an investment in the
Trust. For more information on Federal income tax considerations, see "Tax
Matters" in the Statement of Additional Information.
FEDERAL TAXATION OF THE TRUST
The Trust intends to qualify each year for taxation as a regulated
investment company under Subchapter M of the Code. If the Trust so qualifies,
the Trust will not be subject to Federal income tax on income distributed in a
timely manner to Trust shareholders in the form of dividends or capital gain
distributions.
The Trust's investments and hedging activities are subject to certain
special Federal tax rules. Code rules governing the Trust's hedging transactions
(including hedging transactions in futures and options) may alter the character
of distributions to holders of shares of Municipal Preferred. Income earned as a
result of the Trust's hedging transactions will not be eligible to be treated as
"exempt-interest dividends" when distributed to shareholders. The Trust's
investment in securities issued at a discount will (and investments in
securities purchased at a discount may) require the Trust to accrue and
distribute income not yet received. Therefore, in order to generate sufficient
cash to make the requisite distributions, the Trust may be required to sell
securities in its portfolio that it otherwise would have continued to hold.
FEDERAL TAXATION OF SHAREHOLDERS
Dividends and Other Distributions. Assuming that the Trust qualifies
for taxation as a regulated investment company under Subchapter M of the Code
and that, at the close of each quarter of the Trust's taxable year, at least 50%
of the value of the Trust's total assets consists of obligations the interest on
which is exempt from Federal income tax under Code section 103(a), the Trust
will qualify to pay "exempt-interest dividends" to its shareholders to the
extent of its tax exempt interest income (less applicable expenses).
Distributions of net tax-exempt interest income that the Trust properly
designates as exempt-interest dividends are treated by shareholders as interest
excludable from their gross income for Federal income tax purposes but may be
taxable for Federal alternative minimum tax purposes (discussed below) and for
foreign, state and local tax purposes.
Under the Code, the interest on certain "private activity bonds" issued
after August 7, 1986 is treated as a preference item and is (after reduction by
applicable expenses) included in the Federal alternative minimum taxable income
of both individuals and corporations. The Trust will furnish to shareholders
annually a report indicating the percentage of Trust income treated as a
preference item for alternative minimum tax purposes. In addition, for
corporations, alternative minimum taxable income is increased by a percentage of
the amount by which an alternative measure of income that includes interest on
all tax-exempt securities exceeds the amount otherwise determined to be
alternative minimum taxable income. Accordingly, the portion of the Trust's
dividends that would otherwise be tax-exempt to shareholders may cause certain
shareholders to be subject to the Federal alternative minimum tax or may
increase the tax liability of a shareholder who is subject to such tax.
Investors should thus consider the possible effect of an investment in the Trust
on their Federal alternative minimum tax liability.
Exempt-interest dividends attributable to interest received on certain
private activity bonds and certain industrial development bonds will not be
tax-exempt to any shareholders who are, within the meaning of 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.
-33-
<PAGE> 39
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
the Shareholders" in the Statement of Additional Information.
Distributions of net investment income that do not qualify as
exempt-interest dividends (including the excess, if any, of net short-term
capital gain over net long-term capital loss), will be taxable to shareholders
as ordinary income, and will not qualify for the corporate dividends-received
deduction. Distributions of net capital gain will be taxable to shareholders as
long-term capital gain, without regard to how long a shareholder has held shares
of the Trust, and will not qualify for the corporate dividends-received
deduction.
Due to certain of the Trust's hedging and other investment activities,
the net investment income calculated for accounting purposes and distributed to
shareholders may in certain circumstances exceed or be less than the Trust's net
tax-exempt and taxable income. If the Trust distributes amounts in excess of the
Trust's "earnings and profits" (which provides the measure of the Trust's
dividend-paying capacity for tax purposes), such distributions to shareholders
will be treated as a return of capital to the extent of a shareholder's basis in
his or her shares of Municipal Preferred, and thereafter as gain from the sale
or exchange of a capital asset. A return of capital is not taxable to a
shareholder and has the effect of reducing a shareholder's basis in the relevant
shares, which basis reduction would cause shareholders of Municipal Preferred to
realize gain if their shares of Municipal Preferred were sold for an amount
equal to the liquidation price. Conversely, because Trust expenses attributable
to earning tax-exempt income do not reduce the Trust's current earnings and
profits, a portion of any distribution in excess of the Trust's net tax-exempt
and taxable income may be considered paid out of the Trust's earnings and
profits and may therefore be treated as a taxable dividend (even though that
portion economically represents a return of the Trust's capital).
The Internal Revenue Service has taken the position in a published
revenue ruling indicating that the Trust is required to designate distributions
paid with respect to its Common Shares and its Preferred Shares as consisting of
a portion of each type of income distributed by the Trust. The portion of each
type of income deemed received by the holders of each class of shares will be
equal to the portion of total Trust distributions received by such class. Thus,
the Trust will designate dividends paid as exempt-interest dividends in a manner
that allocates such dividends among the holders of the Common Shares, the shares
of Municipal Preferred, in proportion to the total dividends paid to each such
class during or with respect to the taxable year, or otherwise as required by
applicable law. Long-term capital gain distributions and other income subject to
regular Federal income tax will similarly be allocated among the two classes.
The amount of taxable income allocable to shares of Municipal Preferred will
depend on the amount of such income realized by the Trust, but generally is not
expected to be significant. No dividend that the Trust pays will be increased to
compensate for the fact that it may be subject to foreign, state or local taxes.
If for any reason it is determined after the payment of any dividend
that a portion of that dividend was subject to Federal income tax, the Trust
will not be required to pay any additional amount to compensate for any tax
payable on the dividend (other than Gross-up Payments (see "Description of
Municipal Preferred--Dividends--Gross-up Payments") payable under the
circumstances described in this Prospectus). 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
-34-
<PAGE> 40
as dividends "paid" during such prior taxable year for purposes of determining
each class's proportionate share of a particular type of income. The Trust
currently intends to treat such dividends as having been "paid" in the prior
taxable year for purposes of determining each class's proportionate share of a
particular type of income with respect to such prior taxable year. Existing
authorities also do not specifically address the allocation of taxable income
among the dividends paid to holders of a class of shares during or with respect
to a taxable year. It is possible that the Internal Revenue Service could
disagree with the Trust's position concerning the treatment of dividends paid
after the close of a taxable year or with the Trust's method of allocation, in
which case the Internal Revenue Service could attempt to recharacterize a
portion of the dividends paid to the holders of shares of Municipal Preferred
and designated by the Trust as exempt-interest dividends as consisting instead
of capital gain or other taxable income. If the Internal Revenue Service were to
prevail with respect to any such attempted recharacterization, holders of shares
of Municipal Preferred could be subject to tax on amounts so recharacterized and
the Trust could be subject to Federal income and excise tax. In such event, no
additional amounts (including Gross-up Payments) would be paid by the Trust with
respect to dividends so recharacterized to compensate for any additional tax
owed by holders of shares of Municipal Preferred. Gross-up Payments will not
include any amount to compensate for the fact that the Gross-up Payments or the
Taxable Allocations (see "Description of Municipal
Preferred--Dividends--Gross-up Payments") may themselves be subject to foreign,
state or local taxes. No provision will be made to compensate holders of shares
of Municipal Preferred for any alternative minimum tax liability in respect of
distributions on such shares of Municipal Preferred. The Trust believes that,
should the Internal Revenue Service attempt to so recharacterize amounts
allocated by the Trust to shares of Municipal Preferred, the Internal Revenue
Service would be unlikely to prevail.
Any dividend paid by the Trust during January of a given year generally
is deemed to have been received by shareholders on December 31 of the preceding
year, provided that the dividend actually was declared by the Trust in October,
November or December of such preceding year and payable to shareholders of
record on a date in such a month.
The Trust will notify shareholders each year of the amount and tax
status of dividends and other distributions, including the amount of any
distribution of net capital gain.
The Code provides that every shareholder required to file a tax return
must include for information purposes on such return the amount of
exempt-interest dividends received from all sources (including the Trust) during
the taxable year.
Sale or Redemption of Shares. In certain circumstances, the sale or
exchange of shares of Municipal Preferred may give rise to gain or loss. In
general, any gain or loss realized upon a taxable disposition of shares of
Municipal Preferred by a shareholder will be treated as long-term capital gain
or loss if the shares have been held for more than twelve months, and otherwise
as short-term capital gain or loss. However, if a shareholder buys shares of
Municipal Preferred and sells them at a loss within six months, any loss will be
disallowed for Federal income tax purposes to the extent of any exempt-interest
dividends received on such shares. In addition, any loss (not already disallowed
as provided in the preceding sentence) realized upon a taxable disposition of
shares of Municipal Preferred held for six months or less will be treated as
long-term, rather than short-term, capital loss to the extent of any net capital
gain distributions received by the shareholder with respect to those shares. All
or a portion of any loss realized upon a taxable disposition of shares of
Municipal Preferred will be disallowed if other shares of Municipal Preferred
are purchased within 30 days before or after the disposition. In such a case,
the basis of the newly purchased shares of Municipal Preferred will be adjusted
to reflect the disallowed loss.
Gain or loss, if any, resulting from a redemption of shares of
Municipal Preferred generally will be treated as gain or loss from the sale or
exchange of a capital asset under Code Section 302, rather than as a dividend,
but only if the redemption distribution (i) is deemed not to be essentially
equivalent to a dividend, (ii) is in complete redemption of an owner's interest
in the Trust, (iii) is substantially disproportionate with respect to the owner,
or (iv) with respect to non-corporate owners, is in partial liquidation of the
Trust. For purposes of (i), (ii) and (iii) above, an owner's common share
ownership will be taken into account.
-35-
<PAGE> 41
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 4 Chase MetroTech Center, Brooklyn, New York
11245, as custodian (the "Custodian") under a custodian contract.
State Street Bank and Trust Company, whose principal business address
is 225 Franklin Street, Boston, Massachusetts 02110, serves as dividend
disbursing agent, as agent under the Trust's Dividend Reinvestment Plan and as
transfer agent and registrar for the shares.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement
between ________________ (the "Underwriter") and the Trust (the "Underwriting
Agreement") dated the date hereof, the Underwriter has agreed to purchase, and
the Trust has agreed to sell ___ shares of Series __ Municipal Preferred offered
hereby.
The Underwriting Agreement provides that the obligations of the
Underwriter are subject to the approval of certain legal matters by counsel and
to certain conditions precedent, and that the Underwriter is obligated to
purchase all of the shares of Municipal Preferred if any are purchased. In the
Underwriting Agreement, the Trust and the Advisor have agreed to indemnify the
Underwriter with respect to certain liabilities, including liabilities arising
under the Securities Act of 1933, as amended, and to contribute in respect
thereof.
The Trust has been advised by the Underwriter that it proposes
initially to offer the shares of Municipal Preferred offered hereby to the
public at the price set forth on the cover page of this Prospectus and to
selected dealers at such price less a concession not to exceed $____ per share.
The underwriting commission to be paid by the Trust of $_____ per share is equal
to ___% of the initial offering price. After the initial public offering, the
public offering price and the concession may be changed by the Underwriters.
The Trust anticipates that the Underwriter may from time to time act as
a broker or dealer in connection with the execution of its portfolio
transactions after it has ceased to be an Underwriter. The Trust anticipates
that the Underwriter or one of its affiliates may, from time to time, act in
Auctions as Broker-Dealers as set forth under "The Auction--General" and will
receive the fees described under "The Auction--Broker-Dealers" in exchange for
so acting. The Underwriter is an active underwriter of, and dealer in,
securities and acts as a market maker in a number of such securities and
therefore can be expected to engage in portfolio transactions with the Trust.
The principal business address of __________________ is
_________________, __________, ___ ________.
LEGAL OPINIONS
Certain legal matters in connection with the Series ___ Municipal
Preferred offered hereby will be passed upon for the Trust by Ropes & Gray,
Boston, Massachusetts, and for the Underwriters by ______________________,
___________________, ____________________.
REPORTS TO SHAREHOLDERS
The Trust will send unaudited semiannual and audited annual reports to
its shareholders, including a list of investments held.
-36-
<PAGE> 42
EXPERTS
The Financial Statements included in the Statement of Additional
Information have been so included in the reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing. The address of
PricewaterhouseCoopers LLP is 160 Federal Street, Boston, Massachusetts 02110.
FURTHER INFORMATION
The Trust has filed with the Securities and Exchange Commission (the
"Commission"), Washington, DC 20549, a Registration Statement under the
Securities Act with respect to the shares of Municipal Preferred offered hereby.
Further information concerning these securities and the Trust may be found in
the Registration Statement, of which this Prospectus constitutes a part, on file
with the Commission. The Registration Statement may be inspected without charge
at the Commission's office in Washington, DC, and copies of all or any part
thereof may be obtained from such office after payment of the fees prescribed by
the Commission.
The Trust is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and the 1940 Act, and in accordance
therewith files reports and other information with the Commission. Such reports,
proxy and information statements and other information can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, DC 20549 and the Commission's regional offices,
including offices at Seven World Trade Center, New York, New York 10048. Call
1-800-SEC-0330 for information about the public reference facilities. Copies of
such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, DC 20549 at prescribed rates.
Such reports and other information concerning the Trust may also be inspected at
the offices of the Exchange. The Commission maintains a Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference into this Prospectus and the Statement of
Additional Information, and reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
In addition, reports, proxy and information statements and other information
concerning the Trust can be inspected at the offices of the Exchange, 20 Broad
Street, New York, New York 10005.
-37-
<PAGE> 43
GLOSSARY
"'AA' Composite Commercial Paper Rate," on any date for any Rate
Period, means: (i)(A) in the case of any Minimum Rate Period or any Special Rate
Period of fewer than 49 Rate Period Days, the interest equivalent of the 30-day
rate; provided, however, that if such Rate Period is a Minimum Rate Period and
the "AA" Composite Commercial Paper Rate is being used to determine the
Applicable Rate when all of the outstanding shares of Municipal Preferred are
subject to Submitted Hold Orders, then the interest equivalent of the seven-day
rate, and (B) in the case of any Special Rate Period of (1) 49 or more but fewer
than 70 Rate Period Days, the interest equivalent of the 60-day rate; (2) 70 or
more but fewer than 85 Rate Period Days, the arithmetic average of the interest
equivalent of the 60-day and 90-day rates; (3) 85 or more but fewer than 99 Rate
Period Days, the interest equivalent of the 90-day rate; (4) 99 or more but
fewer than 120 Rate Period Days, the arithmetic average of the interest
equivalent of the 90-day and 120-day rates; (5) 120 or more but fewer than 141
Rate Period Days, the interest equivalent of the 120-day rate; (6) 141 or more
but fewer than 162 Rate Period Days, the arithmetic average of the 120-day and
180-day rates; and (7) 162 or more but fewer than 183 Rate Period Days, the
interest equivalent of the 180-day rate, in each case on commercial paper placed
on behalf of issuers whose corporate bonds are rated "AA" by Standard & Poor's
or the equivalent of such rating by Standard & Poor's or another rating agency,
as made available on a discount basis or otherwise by the Federal Reserve Bank
of New York for the Business Day immediately preceding such date; or (ii) in the
event that the Federal Reserve Bank of New York does not make available any such
rate, then the arithmetic average of such rates, as quoted on a discount basis
or otherwise, by certain commercial paper dealers to the Auction Agent for the
close of business on the Business Day next preceding such date.
"Agent Member" means a member of or participant in the Securities
Depository that will act on behalf of a Bidder.
"All Hold Order Rate," with respect to a Rate Period for which an
Auction is held, means the lesser of the Kenny Index (if the Rate Period for
which the Auction is held consists of fewer than 183 Rate Period Days) or the
product of (i)(1) the "AA" Composite Commercial Paper Rate on the Auction Date
for such Rate Period, if such Rate Period consists of fewer than 183 Rate Period
Days, (2) the Treasury Bill Rate on such Auction Date for such Rate Period, if
such Rate Period consists of more than 182 but fewer than 365 Rate Period Days
or (3) the Treasury Note Rate on such Auction Date for such Rate Period, if such
Rate Period is more than 364 Rate Period Days (the rate described in the
foregoing clause (i)(1), (2) or (3), as applicable, being referred to herein as
the "Benchmark Rate"), and (ii) 1 minus the maximum marginal regular Federal
individual income tax rate applicable to ordinary income or the maximum marginal
regular Federal corporate income tax rate applicable to ordinary income,
whichever is greater; provided, however, that if the Fund has notified the
Auction Agent of its intent to allocate to shares of Municipal Preferred in such
Rate Period any net capital gains or other income taxable for Federal income tax
purposes ("Taxable Income"), the Applicable Rate on shares of Municipal
Preferred for such Rate Period will be (A) if the Taxable Yield Rate (as defined
below) is greater than the Benchmark Rate, then the Benchmark Rate, or (B) if
the Taxable Yield Rate is less than or equal to the Benchmark Rate, then the
rate equal to the sum of (x) the lesser of the Kenny Index (if such Rate Period
consists of fewer than 183 Rate Period Days) or the product of the Benchmark
Rate multiplied by the factor set forth in the preceding clause (ii) and (y) the
product of the maximum marginal regular Federal individual income tax rate
applicable to ordinary income or the maximum marginal regular Federal corporate
income tax rate applicable to ordinary income, whichever is greater, multiplied
by the Taxable Yield Rate. For purposes of the foregoing, Taxable Yield Rate
means the rate determined by (a) dividing the amount of Taxable Income available
for distribution per share of Municipal Preferred by the number of days in the
Dividend Period in respect of which such Taxable Income is contemplated to be
distributed, (b) multiplying the amount determined in (a) above by 365 (in the
case of a Dividend Period of 7 Rate Period Days) or 360 (in the case of any
other Dividend Period), and (c) dividing the amount determined in (b) above by
$25,000.
"Applicable Rate" means the rate per annum at which dividends are
payable on shares of Municipal Preferred for any Rate Period thereof.
-38-
<PAGE> 44
"Auction Agency Agreement" means an agreement between the Fund and the
Auction Agent which provides, among other things, that the Auction Agent will
follow the Auction Procedures for purposes of determining the Applicable Rate
for shares of Municipal Preferred so long as the Applicable Rate for such shares
is to be based on the results of an Auction.
"Auction Agent" means the entity appointed as such by a resolution of
the Board of Trustees.
"Bidder" means a Beneficial Owner or a Potential Beneficial Owner
placing an Order with its Broker-Dealer or an Existing Holder or Potential
Holder placing an order with the Auction Agent or on whose behalf an Order is
placed with an Auction Agent.
"Board of Trustees" means the Board of Trustees of the Trust or any
duly authorized committee thereof.
"Broker-Dealer" means any broker-dealer, commercial bank or other
entity permitted by law to perform the functions required of a Broker-Dealer,
that is a member of, or a participant in, the Securities Depository or is an
affiliate of such member or participant, has been selected by the Trust and has
entered into a Broker-Dealer Agreement that remains effective.
"Broker-Dealer Agreement" means an agreement among the Trust, the
Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to
follow the Auction Procedures.
"Business Day" shall mean a day on which the New York Stock Exchange is
open for trading, and which is neither a Saturday, Sunday nor any other day on
which banks in The City of New York, New York are authorized by law to close.
"Code" means the Internal Revenue Code of 1986, as amended.
"Date of Original Issue" means the date on which the Trust initially
issued shares of Municipal Preferred.
"Dividend Payment Date" means any date on which dividends on shares of
Municipal Preferred are payable as provided under "Description of Municipal
Preferred--Dividends and Dividend Periods."
"Dividend Period" means the period from and including the Date of
Original Issue of shares of Municipal Preferred to but excluding the initial
Dividend Payment Date for such shares and any period thereafter from and
including one Dividend Payment Date for such shares to but excluding the next
succeeding Dividend Payment Date for such shares.
"Existing Holder" means a Broker-Dealer (or any such other person as
may be permitted by the Trust) that is listed on the records of the Auction
Agent as a holder of shares of Municipal Preferred.
"Initial Rate Period" means the period from and including the Date of
Original Issue of shares of Municipal Preferred to but excluding _________ __,
1999.
"Kenny Index" has the meaning specified under "Taxable Equivalent of
the Short-Term Municipal Bond Rate."
"Minimum Rate Period" means any Rate Period consisting of 7 Rate Period
Days.
"Potential Holder" means a Broker-Dealer (or any such other person as
may be permitted by the Trust) that is not an Existing Holder of shares of
Municipal Preferred or that is an Existing Holder of such shares that wishes to
become the Existing Holder of additional shares.
-39-
<PAGE> 45
"Rate Multiple" means a percentage, determined as set forth below,
based on the prevailing rating of shares of Municipal Preferred in effect at the
close of business on the Business Day next preceding the relevant Auction Date:
<TABLE>
<CAPTION>
PREVAILING RATING PERCENTAGE
----------------- ----------
<S> <C>
"aa3"/AA- or higher................................110%
"a3"/A-............................................125%
"baa3"/BBB-........................................150%
"ba3"/BB-..........................................200%
Below "ba3"/BB-....................................250%
</TABLE>
provided, however, that in the event the Trust has notified the Auction Agent of
its intent to allocate income taxable for Federal income tax purposes to shares
of Municipal Preferred prior to the Auction establishing the Applicable Rate for
such shares, the applicable percentage in the foregoing table shall be divided
by the quantity 1 minus the maximum marginal regular Federal individual income
tax rate applicable to ordinary income or the maximum marginal regular Federal
corporate income tax rate applicable to ordinary income, whichever is greater.
If the ratings for shares of Municipal Preferred are split between two of the
foregoing categories, the lower rating will determine the prevailing rating. If
the shares of Municipal Preferred are rated by only one rating agency, such
rating will be the prevailing rating.
"Rate Period" means the Initial Rate Period of shares of Municipal
Preferred and any Subsequent Rate Period of such shares.
"Rate Period Days," for any Rate Period or Dividend Period, means the
number of days that would constitute such Rate Period or Dividend Period but for
either (i) the shortening or lengthening, as the case may be, of such Rate
Period or Dividend Period as set forth under "Description of Municipal
Preferred--Dividends and Dividend Periods" because the day on which dividends
would otherwise be payable is not a Business Day or (ii) the shortening of such
Rate Period pursuant to the provisions relating to the designation of Special
Rate Periods as set forth in the Statement of Additional Information under
"Description of Municipal Preferred--Dividends--Designation of Special Rate
Periods."
"Reference Rate" means (i) the higher of the Taxable Equivalent of the
Short-Term Municipal Bond Rate and the "AA" Composite Commercial Paper Rate in
the case of Minimum Rate Periods and Special Rate Periods of 28 Rate Period Days
or fewer; (ii) the "AA" Composite Commercial Paper Rate in the case of Special
Rate Periods of more than 28 Rate Period Days but fewer than 183 Rate Period
Days; and (iii) the Treasury Bill Rate in the case of Special Rate Periods of
more than 182 Rate Period Days but fewer than 365 Rate Period Days.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any other securities depository selected by the Trust
which agrees to follow the procedures required to be followed by such securities
depository in connection with shares of Municipal Preferred.
"Special Rate Period" means any Subsequent Rate Period commencing on
the date designated by the Trust, as set forth under "Description of Municipal
Preferred--Designation of Special Rate Periods," and ending on the last day of
the last Dividend Period thereof.
"Submission Deadline" means 1:30 P.M. New York City time, on any
Auction Date or such other time on any Auction Date by which Broker-Dealers are
required to submit Orders to the Auction Agent as specified by the Auction Agent
from time to time.
"Submitted Bid" means a valid Bid submitted or deemed submitted to the
Auction Agent by a Broker-Dealer by the Submission Deadline.
-40-
<PAGE> 46
"Submitted Hold Order" means a valid Hold Order submitted or deemed
submitted to the Auction Agent by a Broker-Dealer by the Submission Deadline.
"Subsequent Rate Period" means any period from and including the first
day following the Initial Rate Period of shares of Municipal Preferred to but
excluding the next Dividend Payment Date for such shares and any period
thereafter from and including one Dividend Payment Date for such shares to but
excluding the next succeeding Dividend Payment Date for such shares; provided,
however, that if any Subsequent Rate Period is also a Special Rate Period, such
term shall mean the period commencing on the first day of such Special Rate
Period and ending on the last day of the last Dividend Period thereof.
"Taxable Equivalent of the Short-Term Municipal Bond Rate," on any date
for any Minimum Rate Period or Special Rate Period of 28 Rate Period Days or
fewer, means 90% of the quotient of (A) the per annum rate expressed on an
interest equivalent basis equal to the Kenny S&P 30-day High Grade Index or any
successor index (the "Kenny Index") (provided, however, that any such successor
index must be approved by Moody's (if Moody's is then rating the shares of
Municipal Preferred) and Standard & Poor's (if Standard & Poor's is then rating
the shares of Municipal Preferred)), made available for the Business Day
immediately preceding such date but in any event not later than 8:30 A.M., New
York City time, on such date by Kenny S&P 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 Kenny S&P Evaluation
Services or any such successor from time to time in its discretion, which
component issuers shall include, without limitation, issuers of general
obligation bonds but shall exclude any bonds the interest on which constitutes
an item of tax preference under Section 57(a)(5) of the Code, or successor
provisions, for purposes of the "alternative minimum tax," divided by (B) 1.00
minus the maximum marginal regular Federal individual income tax rate applicable
to ordinary income or the maximum marginal regular Federal corporate income tax
rate applicable to ordinary income (in each case expressed as a decimal),
whichever is greater; provided, however, that if the Kenny Index is not made so
available by 8:30 A.M., New York City time, on such date by Kenny S&P Evaluation
Services or any successor, the Taxable Equivalent of the Short-Term Municipal
Bond Rate shall mean the quotient of (A) the per annum rate expressed on an
interest equivalent basis equal to the most recent Kenny Index so made available
for any preceding Business Day, divided by (B) 1.00 minus the maximum marginal
regular Federal individual income tax rate applicable to ordinary income or the
maximum marginal regular Federal corporate income tax rate applicable to
ordinary income (in each case expressed as a decimal), whichever is greater.
"Treasury Bill" means a direct obligation of the U.S. government having
a maturity at the time of issuance of 364 days or less.
"Treasury Bill Rate," on any date for any Rate Period, means: (i) the
bond equivalent yield, calculated in accordance with prevailing industry
convention, of the rate on the most recently auctioned Treasury Bill with a
remaining maturity closest to the length of such Rate Period, as quoted in The
Wall Street Journal on such date for the Business Day next preceding such date;
or (ii) in the event that any such rate is not published in The Wall Street
Journal, then the bond equivalent yield, calculated in accordance with
prevailing industry convention, as calculated by reference to the arithmetic
average of the bid price quotations of the most recently auctioned Treasury Bill
with a remaining maturity closest to the length of such Rate Period, as
determined by bid price quotations as of the close of business on the Business
Day immediately preceding such date obtained from certain U.S. government
securities dealers to the Auction Agent.
"Treasury Note" means a direct obligation of the U.S. government having
a maturity at the time of issuance of five years or less but more than 364 days.
"Treasury Note Rate," on any date for any Rate Period, means: (i) the
yield on the most recently auctioned Treasury Note with a remaining maturity
closest to the length of such Rate Period, as quoted in The Wall Street Journal
on such date for the Business Day next preceding such date; or (ii) in the event
that any such rate is not published in The Wall Street Journal, then the yield
as calculated by reference to the arithmetic average
-41-
<PAGE> 47
of the bid price quotations of the most recently auctioned Treasury Note with a
remaining maturity closest to the length of such Rate Period, as determined by
bid price quotations as of the close of business on the Business Day immediately
preceding such date obtained from certain U.S. government securities dealers to
the Auction Agent.
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
Use of Proceeds................................................. B-2
Investment Objectives and Policies.............................. B-2
Trust Charges and Expenses...................................... B-4
Management of the Trust......................................... B-4
Portfolio Transactions.......................................... B-11
Net Asset Value................................................. B-12
The Auction..................................................... B-12
Description of Municipal Preferred.............................. B-24
Repurchase of Common Shares..................................... B-41
Miscellaneous Investment Practices.............................. B-42
Tax Matters..................................................... B-51
Shareholder Liability........................................... B-54
Custodian....................................................... B-54
Independent Accountants......................................... B-54
Report of Independent Accountants............................... B-55
Financial Statements............................................ B-56
Glossary........................................................ B-85
Appendix A--Ratings of Investments.............................. B-92
Appendix B--Auction Procedures.................................. B-98
Appendix C--Settlement Procedures............................... B-107
-42-
<PAGE> 48
================================================================================
$_____________
COLONIAL HIGH INCOME
MUNICIPAL TRUST
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
__________ SHARES, SERIES _____
___________________________
PROSPECTUS
________________, 1999
___________________________
================================================================================
-43-
<PAGE> 49
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT
COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL
THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED _________, 1999
Colonial High Income Municipal Trust
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") relating to the Series __
Municipal Auction Rate Cumulative Preferred Shares ("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-4
PORTFOLIO TRANSACTIONS........................................................................................... B-11
NET ASSET VALUE.................................................................................................. B-12
THE AUCTION...................................................................................................... B-12
DESCRIPTION OF MUNICIPAL PREFERRED............................................................................... B-24
REPURCHASE OF COMMON SHARES...................................................................................... B-41
MISCELLANEOUS INVESTMENT PRACTICES............................................................................... B-42
TAX MATTERS...................................................................................................... B-51
SHAREHOLDER LIABILITY............................................................................................ B-54
CUSTODIAN........................................................................................................ B-54
INDEPENDENT ACCOUNTANTS.......................................................................................... B-54
REPORT OF INDEPENDENT ACCOUNTANTS................................................................................ B-55
FINANCIAL STATEMENTS............................................................................................. B-56
GLOSSARY......................................................................................................... B-85
APPENDIX A--Ratings of Investments............................................................................... B-92
APPENDIX B--Auction Procedures................................................................................... B-98
APPENDIX C--Settlement Procedures................................................................................ B-107
</TABLE>
<PAGE> 50
USE OF PROCEEDS
The net proceeds of the offering of shares of Municipal Preferred will be
approximately $_________ after payment of the sales load to Salomon Smith Barney
(the "Underwriter") and estimated offering costs. A portion of the offering
costs has been advanced by the Trust's investment advisor, Colonial Management
Associates, Inc. (the "Advisor").
The net proceeds of the offering will be invested in accordance with the
Trust's investment objectives and policies. It is presently anticipated that the
Trust will be able to invest substantially all of the net proceeds in Municipal
Obligations that meet the Trust's investment objectives at or shortly (within
six to eight weeks) after the completion of the offering. To the extent that all
of the proceeds cannot be so invested, pending such investment, they will be
invested initially in high-quality, short-term tax-exempt money market
securities, the income on which will be exempt from Federal income taxes, or in
high-quality Municipal Obligations with relatively low volatility (such as
pre-refunded and intermediate-term securities), to the extent such securities
are available. If necessary to invest fully the net proceeds of the offerings
immediately, the Trust may also purchase, as temporary investments, short-term
taxable investments of the type described under "Investment Objectives and
Policies--Temporary and Defensive Investments" in the Prospectus, the income on
which is subject to Federal income taxes.
INVESTMENT OBJECTIVES AND POLICIES
The Trust's Prospectus describes its investment objective and investment
policies. This SAI includes additional information concerning, among other
things, the investment policies of the Trust and information about certain
securities and investment techniques that are described or referred to in the
Prospectus or in which the Trust expects to engage. Except as indicated under
"Fundamental Investment Policies," the Trust's investment policies are not
fundamental and the Trustees may change the policies without shareholder
approval.
FUNDAMENTAL INVESTMENT POLICIES
The following fundamental restrictions are for the protection of the
Trust's shareholders and cannot be changed without the approval of the holders
of a "majority of the outstanding" Common Shares and Preferred Shares, including
shares of Municipal Preferred, voting together as a single class, and of the
holders of a "majority of the outstanding" Preferred Shares, including shares of
Municipal Preferred, voting as a separate class. A "majority of the outstanding"
shares means the lesser of (i) 67% of the shares represented at a meeting at
which more than 50% of the outstanding shares are represented or (ii) more than
50% of the outstanding shares.
The Trust may:
(1) issue senior securities or borrow money to the extent permitted by the
1940 Act;
(2) only own real estate acquired as a result of owning securities;
(3) purchase and sell futures contracts and related options;
(4) underwrite securities issued by others only when disposing of
portfolio securities;
(5) make loans through lending of securities, through the purchase of debt
instruments or similar evidences of indebtedness typically sold to
financial institutions and through repurchase agreements;
(6) not concentrate more than 25% of its total assets in any one industry,
or with respect to 75% of total assets purchase any security (other
than obligations of the U.S. Government and cash items including
B-2
<PAGE> 51
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; and
(7) and will, under normal circumstances, invest at least 80% of its total
assets in tax-exempt bonds and tax-exempt notes.
For the purpose of applying the limitation set forth above in subparagraph
(1), 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.
For the purpose of applying the limitation set forth above in subparagraph
(6), the Trust will treat each state and each separate political subdivision,
agency, authority or instrumentality of such state, each multistate agency or
authority, and each guarantor, if any, as separate issuers. In the utilities
category, gas, electric, water and telephone companies will be considered as
separate industries.
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 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) 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
(4) invest in interests in oil, gas or other mineral exploration or
development programs, including leases.
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
B-3
<PAGE> 52
changed by the Trust from time to time without shareholder approval; provided,
however, that if Moody's or Standard & Poor's, or both, are rating the shares of
Municipal Preferred, the Trust must receive written confirmation from Moody's or
Standard & Poor's, or both, as appropriate, that any such change would not
impair the ratings then assigned by Moody's and Standard & Poor's to shares of
Municipal Preferred. See also "Description of Municipal Preferred--Rating Agency
Guidelines" for a description of other rating agency restrictions, none of which
is a fundamental policy of the Trust and which may be changed by the Trust from
time to time without shareholder approval subject to the foregoing proviso.
TRUST CHARGES AND EXPENSES
Under the Trust's management agreement, the Trust pays the Advisor a
monthly fee based on the average weekly net assets of the Trust 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) (dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1998 1997 1996
------ ------ ------
<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
For the years ended December 31, 1996, 1997, and 1998, the Trust did not
pay any brokerage commissions on securities transactions.
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, Dechert Price
313 Bedford Road & Rhoads (law firm) from September, 1988 to December
Ridgewood, NJ 07450 1993; President, New York Stock Exchange from May,
1985 to June, 1988; President, American Stock
Exchange, Inc. from 1977 to May, 1985).
</TABLE>
B-4
<PAGE> 53
<TABLE>
<S> <C> <C>
Tom Bleasdale (68) Trustee Retired (formerly Chairman of the Board and Chief
11 Carriage Way Executive Officer, Shore Bank & Trust Company from
Danvers, MA 01923 1992 to 1993); Director of The Empire Company since
June, 1995.
John V. Carberry* (51) Trustee Senior Vice President of Liberty Financial
56 Woodcliff Road Companies, Inc. (formerly Managing Director, Salomon
Wellesley Hills, MA 02481 Brothers (investment banking) from January, 1988 to
January, 1998).
Lora S. Collins (63) Trustee Attorney (formerly Attorney, Kramer, Levin, Naftalis
1175 Hill Road & Frankel (law firm) from September, 1986 to
Southold, NY 11971 November, 1996).
James E. Grinnell (69) Trustee Private Investor since November, 1988.
22 Harbor Avenue
Marblehead, MA 01945
Richard W. Lowry (62) Trustee Private Investor since August, 1987.
10701 Charleston Drive
Vero Beach, FL 32963
Salvatore Macera (67) Trustee Private Investor (formerly Executive Vice President
26 Little Neck Lane of Itek Optical & Electronic Industries, Inc. New
Seabury, MA 02649 (electronics) from ____ to ____).
William E. Mayer* (58) Trustee Partner, Development Capital, LLC (venture capital)
500 Park Avenue, 5th Floor (formerly Dean, College of Business and Management,
New York, NY 10022 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, Hannaford
16 Running Tide Road Bros. Co. (food retailer) from May, 1984 to May,
Cape Elizabeth, ME 04107 1997, and Chief Executive Officer, Hannaford Bros.
Co. from May, 1973 to May, 1992).
John J. Neuhauser (55) Trustee Dean, Boston College School of Management since
140 Commonwealth Avenue September, 1977.
Chestnut Hill, MA 02167
Thomas E. Stitzel (58) Trustee Professor of Finance, College of Business, Boise
2208 Tawny Woods Place State University (higher education); Business
Boise, ID 83706 consultant and author.
</TABLE>
B-5
<PAGE> 54
<TABLE>
<S> <C> <C>
Robert L. Sullivan (70) Trustee Retired (formerly Partner, KPMG Peat Marwick LLP,
45 Sankaty Avenue from ____ to ____).
Siasconset, MA 02564
Anne-Lee Verville (53) Trustee Consultant (formerly General Manager, Global
359 Stickney Hill Road Education Industry from 1994 to 1997, and President,
Hopkinton, NH 03229 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; Director of the Advisor since 1996
(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 of the Trust
Accounting Officer and the Liberty Funds, except Liberty Funds Trust
IX, since February, 1998; Controller, Liberty Funds Trust
IX, since December, 1998; Vice President of the Advisor
since February, 1998 (formerly Senior Tax Manager, Coopers &
Lybrand, LLP from April, 1996 to January, 1998; Vice
President, 440 Financial Group/First Data Investor Services
Group from March, 1994 to April, 1996.
</TABLE>
B-6
<PAGE> 55
<TABLE>
<S> <C> <C>
Timothy J. Jacoby (45) Treasurer and Treasurer and Chief Financial Officer of the Trust and the
Chief Financial Liberty Funds, except Liberty Funds Trust IX, since October,
Officer 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; Assistant Treasurer
to the Fidelity Group of Trusts from August, 1990 to
September, 1993).
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); (formerly Partner, Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo (law firm) from June, 1990 to June, 1994).
</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 or the
Advisor. 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.
The business address of the officers of the Trust is One Financial Center,
Boston, MA 02111.
The Trustees of the Trust are also directors or trustees, as the case may be, of
Liberty Funds Trust I, Liberty Funds Trust II, Liberty Funds Trust III, Liberty
Funds Trust IV, Liberty Funds Trust V, Liberty Funds Trust VI, Liberty Funds
Trust VII, Liberty Funds Trust VIII (formerly known as LFC Utilities Trust),
Liberty Variable Investment Trust ("LVIT"), Colonial High Income Municipal
Trust, Colonial Investment Grade Municipal Trust, Colonial Intermediate High
Income Fund, and Colonial Intermarket Income Trust I, (collectively, each trust
or any series thereof termed the "Liberty Funds").
B-7
<PAGE> 56
At the next annual meeting of the Trust's shareholders, holders of
outstanding shares of Municipal Preferred, voting together as one separate
class, will elect two trustees, and holders of outstanding Common Shares and
shares of Municipal Preferred, voting together as a single class, will elect
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
Aggregate Compensation from the the Fund Complex Paid to the
Trust for the Fiscal Year Ended Trustees for the Calendar Year Ended
Trustee December 31, 1998 December 31, 1998 (b)
- ------- ------------------------------- ------------------------------------
<S> <C> <C>
Robert J. Birnbaum (c) $1,773 $ 99,429
Tom Bleasdale (c) 2,053 (d) 115,000 (e)
John V. Carberry (f) (g) N/A N/A
Lora S. Collins (c) 1,738 97,429
James E. Grinnell (c) 1,838 103,071
William D. Ireland, Jr. (h) 636 35,333
Richard W. Lowry (c) 1,751 98,214
Salvatore Macera (i) 0 25,250
William E. Mayer (c) 1,779 99,286
James L. Moody, Jr. (c) 1,887 (j) 105,857 (k)
John J. Neuhauser (c) 1,878 105,323
George L. Shinn (h) 564 31,334
Thomas E. Stitzel (i) 0 25,250
Robert L. Sullivan (c) 1,866 104,100
Anne-Lee Verville (c) (f) 1,644 (l) 23,445 (m)
Sinclair Weeks, Jr. (h) 617 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 $935 payable in later years as deferred compensation.
(e) Includes $52,000 payable in later years as deferred compensation.
B-8
<PAGE> 57
(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").
(h) Retired as a Trustee of the Trust on April 24, 1998.
(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 $1,887 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 $1,644 for the calendar 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 _________ ___, 1999, the Trust's officers and Trustees as a group owned
less than 1% of the outstanding Common Shares.
At _________, 1999, ______________________, [Address], owned of record
_________ shares, representing ____%, 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
B-9
<PAGE> 58
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.
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
51 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 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: 0.033% on the next $950 million; 0.016% on the next $1
billion; 0.010% on the next $1 billion; and 0.007% 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 options at about the same time, the purchases
and sales will normally be made as nearly as practicable on a pro rata basis in
B-10
<PAGE> 59
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> 60
NET ASSET VALUE
Net asset value of the Trust will be determined as of the close of regular
trading on the New York Stock Exchange (the "Exchange") (generally 4:00 p.m. New
York City time) on the last Business Day of each week (generally Friday), and at
such other times as the Trust may authorize. The net asset value of the Trust
equals the value of the Trust's assets less the Trust's liabilities. 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. The pricing service values portfolio
securities at the mean between the quoted bid and asked price or the yield
equivalent when quotations are readily available. 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.
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 of Municipal Preferred after the Initial Rate Period
therefor shall be equal to the rate per annum that the Auction Agent advises has
resulted on the Business Day preceding the first day of such Subsequent Rate
Period (an "Auction Date") from implementation of the auction procedures (the
"Auction Procedures") set forth in the By-Laws and summarized below, in which
persons determine to hold or offer to sell or, based on dividend rates bid by
them, offer to purchase or sell such shares. Each periodic implementation of the
Auction Procedures is referred to herein as an "Auction." The following summary
is qualified by reference to the Auction Procedures set forth in the By-Laws.
As used herein with respect to shares of Municipal Preferred, (i)
"Applicable Rate" means the rate per annum at which dividends are payable on
such shares for any Rate Period thereof, (ii) "Beneficial Owner" means a
customer of a Broker-Dealer who is listed on the records of that Broker-Dealer
(or, if applicable, the Auction Agent) as a holder of such shares, (iii)
"Business Day" means a day on which the New York Stock Exchange is open for
trading and is not a Saturday, Sunday or other day on which banks in New York
City are authorized by law to close, (iv) "Date of Original Issue" means the
date on which the Trust initially issued such shares, (v) "Dividend Payment
Date" means any date on which dividends on such shares are payable as provided
under "Description of Municipal Preferred--Dividends--General," (vi) "Dividend
Period" means the period from and including the Date of Original Issue of such
shares to but excluding the initial Dividend Payment Date for such shares and
any period thereafter from and including one Dividend Payment Date for such
shares to but excluding the next succeeding Dividend Payment Date for such
shares, (vii) "Existing Holder" means a Broker-Dealer (or any such other Person
as may be permitted by the Trust) that is listed on the records of the Auction
Agent as a holder of such shares, (viii) "Initial Rate Period" means the period
from and including the Date of Original Issue of such shares to but excluding
the initial Dividend Payment Date for such shares, (ix) "Potential Beneficial
Owner" means a customer of a Broker-Dealer that is not a Beneficial Owner of
such shares that wishes to purchase such shares, or that is a Beneficial Owner
that wishes to purchase additional such shares, (x) "Potential Holder" means a
Broker-Dealer (or any such other Person as may be permitted by the Trust) that
is not an Existing Holder of such shares or that is an Existing Holder of such
shares that wishes to become the Existing Holder of additional such shares, (xi)
"Rate Period" means the Initial Rate Period of such shares and any Subsequent
Rate Period, including any Special Rate Period, of such shares, (xii)
"Subsequent Rate Period"
B-12
<PAGE> 61
means any period from and including the first day following the Initial Rate
Period of such shares to but excluding the next Dividend Payment Date for such
shares and any period thereafter from and including one Dividend Payment Date
for such shares to but excluding the next succeeding Dividend Payment Date for
such shares; provided, however, that if any Subsequent Rate Period is also a
Special Rate Period, such term shall mean the period commencing on the first day
of such Special Rate Period and ending on the last day of the last Dividend
Period thereof, (xiii) "Minimum Rate Period" means any Rate Period consisting of
7 Rate Period Days and (xiv) "Special Rate Period" means any Subsequent Rate
Period commencing on the date designated by the Trust, as set forth under
"Description of Municipal Preferred--Dividends--Designation of Special Rate
Periods," and ending on the last day of the last Dividend Period thereof.
Auction Agency Agreement. The Trust will enter into an agreement (the
"Auction Agency Agreement") with ______________________________ (together with
any successor bank or trust company or other entity entering into a similar
agreement with the Trust, the "Auction Agent") which provides, among other
things, that the Auction Agent will follow the Auction Procedures for purposes
of determining the Applicable Rate for shares of Municipal Preferred so long as
the Applicable Rate for such shares is to be based on the results of an Auction.
Broker-Dealer Agreements. Each Auction requires the participation of one or
more broker-dealers. The Auction Agent will enter into agreements with Salomon
Smith Barney Inc. and ____________________, and may enter into similar
agreements (collectively, the "Broker-Dealer Agreements") with one or more
additional broker-dealers (collectively, the "Broker-Dealers") selected by the
Trust, which provide for the participation of Broker-Dealers in Auctions. See
"Broker-Dealers" below.
Securities Depository. The Depository Trust Company ("DTC," together with
any successor securities depository selected by the Trust, the "Securities
Depository") will act as the Securities Depository for the Agent Members with
respect to shares of Municipal Preferred. One certificate for all of the shares
of Municipal Preferred will be registered in the name of Cede & Co. ("Cede"), as
nominee of the Securities Depository. Such certificate will bear a legend to the
effect that such certificate is issued subject to the provisions restricting
transfers of shares of Municipal Preferred contained in the By-Laws. The Trust
will also issue stop-transfer instructions to the transfer agent for shares of
Municipal Preferred. Prior to the commencement of the right of holders of
Preferred Shares to elect a majority of the Trust's trustees, as described below
under "Description of Municipal Preferred--Voting Rights," Cede will be the
holder of record of all shares of Municipal Preferred, and owners of shares of
Municipal Preferred will not be entitled to receive certificates representing
their ownership interest in such shares.
DTC, a New York-chartered limited purpose trust company, performs services
for its participants (including the Agent Members), some of whom (and/or their
representatives) own DTC. DTC maintains lists of its participants and will
maintain the positions (ownership interests) held by each such participant (the
"Agent Member") in shares of Municipal Preferred, whether for its own account or
as a nominee for another person.
AUCTION DATES; ADVANCE NOTICE OF ALLOCATION OF TAXABLE INCOME
The first Auction for shares of Series __ Municipal Preferred will be held
on ________, __________, 1999, the Business Day preceding the Dividend Payment
Date for the Initial Rate Period of Municipal Preferred. See "Description of
Municipal Preferred--Dividends." Thereafter, Auctions will normally be held
every ________, and each Subsequent Rate Period will normally begin on the
following _______, unless the then-current Rate Period is a Special Rate Period
or, in certain circumstances, the day that would normally be the Auction Date or
the first day of such Subsequent Rate Period is not a Business Day. The Auction
Date and the first day of the related Rate Period (also a Dividend Payment Date)
must be Business Days but need not be consecutive days. See "Description of
Municipal Preferred--Dividends" for information concerning the circumstances
under which the first day of a Rate Period or the Auction Date, or both, may be
moved to a date other than such specified days.
Whenever the Trust intends to include any net capital gain or other income
taxable for Federal income tax purposes in any dividend on shares of Municipal
Preferred, the Trust shall, in the case of Minimum Rate Periods or Special Rate
Periods of 28 Rate Period Days or fewer, and may, in the case of any other
Special Rate Period, notify the Auction Agent of
B-13
<PAGE> 62
the amount to be so included not later than the Dividend Payment Date next
preceding the Auction Date on which the Applicable Rate for such dividend is to
be established. Whenever the Auction Agent receives such notice from the Trust,
it will be required in turn to notify each Broker-Dealer, who, on or prior to
such Auction Date, in accordance with its Broker-Dealer Agreement, will be
required to notify its customers who are Beneficial Owners and Potential
Beneficial Owners believed by it to be interested in submitting an Order in the
Auction to be held on such Auction Date. See also "Description of Municipal
Preferred--Dividends--Gross-up Payments" below.
ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS
Prior to the Submission Deadline (as defined under "Submission of Orders by
Broker-Dealers to Auction Agent" below) on each Auction Date for shares of
Municipal Preferred:
(a) each Beneficial Owner of such shares may submit to its
Broker-Dealer by telephone or otherwise a:
(i) "Hold Order" -- indicating the number of outstanding shares
of Municipal Preferred, if any, that such Beneficial Owner desires to
continue to hold without regard to the Applicable Rate for such shares
for the next succeeding Rate Period;
(ii) "Bid" -- indicating the number of outstanding shares of
Municipal Preferred, if any, that such Beneficial Owner offers to sell
if the Applicable Rate for such shares for the next succeeding Rate
Period shall be less than the rate per annum specified by such
Beneficial Owner in such bid; and/or
(iii) "Sell Order" -- indicating the number of outstanding shares
of Municipal Preferred, if any, that such Beneficial Owner offers to
sell without regard to the Applicable Rate for such shares for the
next succeeding Rate Period; and
(b) Broker-Dealers shall contact customers who are Potential
Beneficial Owners by telephone or otherwise to determine whether such customers
desire to submit Bids, in which they will indicate the number of shares of
Municipal Preferred that they offer to purchase if the Applicable Rate for such
shares for the next succeeding Rate Period is not less than the rate per annum
specified in such Bids.
The communication to a Broker-Dealer of the foregoing information is herein
referred to as an "Order" and collectively as "Orders." A Beneficial Owner or a
Potential Beneficial Owner placing an Order with its Broker-Dealer is herein
referred to as a "Bidder" and collectively as "Bidders." The submission by a
Broker-Dealer of an Order to the Auction Agent shall likewise be referred to
herein as an "Order" and collectively as "Orders," and an Existing Holder or
Potential Holder who places an Order with the Auction Agent or on whose behalf
an Order is placed with the Auction Agent shall likewise be referred to herein
as a "Bidder" and collectively as "Bidders."
A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of Municipal Preferred then held by such
Beneficial Owner. A Bid placed by a Beneficial Owner specifying a rate higher
than the Applicable Rate determined in the Auction shall constitute an
irrevocable offer to sell the shares subject thereto. A Beneficial Owner that
submits a Bid to its Broker-Dealer having a rate higher than the Maximum Rate on
the Auction Date thereof will be treated as having submitted a Sell Order to its
Broker-Dealer. A Beneficial Owner that fails to submit to its Broker-Dealer
prior to the Submission Deadline for shares of Municipal Preferred an Order or
Orders covering all the outstanding shares of Municipal Preferred held by such
Beneficial Owner will be deemed to have submitted a Hold Order to its
Broker-Dealer covering the number of outstanding shares of Municipal Preferred
held by such Beneficial Owner and not subject to Orders submitted to its
Broker-Dealer; provided, however, that if a Beneficial Owner fails to submit to
its Broker-Dealer prior to the Submission Deadline for shares of Municipal
Preferred an Order or Orders covering all of the outstanding shares of Municipal
Preferred held by such Beneficial Owner for an Auction relating to a Special
Rate Period consisting of more than 28 Rate Period Days, such Beneficial Owner
will be deemed to have submitted a Sell Order to its Broker-Dealer covering the
number of outstanding shares of Municipal Preferred held by such Beneficial
Owner and not subject to Orders submitted to its Broker-Dealer. A Sell Order
shall constitute an irrevocable offer to sell the shares of Municipal Preferred
B-14
<PAGE> 63
subject thereto at a price per share equal to $25,000. A Beneficial Owner of
shares of Municipal Preferred that offers to become the Beneficial Owner of
additional shares of Municipal Preferred is, for purposes of such offer, a
Potential Beneficial Owner.
A Potential Beneficial Owner of shares of Municipal Preferred may submit to
its Broker-Dealer Bids in which it offers to purchase shares of Municipal
Preferred if the Applicable Rate for the next Rate Period is not less than the
rate specified in such Bid. A Bid placed by a Potential Beneficial Owner
specifying a rate not higher than the Maximum Rate shall constitute an
irrevocable offer to purchase the number of shares of Municipal Preferred
specified in such Bid if the rate determined in the Auction is equal to or
greater than the rate specified in such Bid.
As described more fully below under "Submission of Orders by Broker-Dealers
to Auction Agent," the Broker-Dealers will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves (unless otherwise permitted by the Trust)
as Existing Holders in respect of shares subject to Orders submitted or deemed
submitted to them by Beneficial Owners and as Potential Holders in respect of
shares subject to Orders submitted to them by Potential Beneficial Owners.
However, neither the Trust nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing. Any Order placed with the
Auction Agent by a Broker-Dealer as or on behalf of an Existing Holder or a
Potential Holder will be treated in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or a Potential Beneficial Owner, as
described in the preceding paragraph. Similarly, any failure by a Broker-Dealer
to submit to the Auction Agent an Order in respect of any shares of Municipal
Preferred held by it or its customers who are Beneficial Owners will be treated
in the same manner as a Beneficial Owner's failure to submit to its
Broker-Dealer an Order in respect of shares of Municipal Preferred held by it,
as described in the second preceding paragraph. For information concerning the
priority given to different types of Orders placed by Existing Holders, see
"Submission of Orders by Broker-Dealers to Auction Agent" below.
Neither the Trust nor an affiliate may submit an Order in any Auction,
except that any Broker-Dealer that is an affiliate of the Trust may submit
Orders in an Auction, but only if such Orders are not for its own account.
The Auction Procedures include a pro rata allocation of shares for purchase
and sale, which may result in an Existing Holder continuing to hold or selling,
or a Potential Holder purchasing, a number of shares of Municipal Preferred that
is fewer than the number of shares of Municipal Preferred specified in its
Order. See "Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocation of Shares" below. To the extent the allocation procedures have
that result, Broker-Dealers that have designated themselves as Existing Holders
or Potential Holders in respect of customer Orders will be required to make
appropriate pro rata allocations among their respective customers. Each purchase
or sale shall be made for settlement on the Business Day next succeeding the
Auction Date at a price per share equal to $25,000. See "Notification of
Results; Settlement" below.
As described above, any Bid specifying a rate higher than the Maximum Rate
(as defined below) will (i) be treated as a Sell Order if submitted by a
Beneficial Owner or an Existing Holder and (ii) not be accepted if submitted by
a Potential Beneficial Owner or a Potential Holder. Accordingly, the Auction
Procedures establish the Maximum Rate as a maximum rate per annum that can
result from an Auction. See "Determination of Sufficient Clearing Bids, Winning
Bid Rate and Applicable Rate" and "Acceptance and Rejection of Submitted Bids
and Submitted Sell Orders and Allocation of Shares" below.
As used herein, "Maximum Rate," when used with respect to shares of
Municipal Preferred on an Auction Date, means:
(i) in the case of any Auction Date which is not the Auction Date
immediately prior to the first day of any proposed Special Rate
Period, the product of (1) the Reference Rate on such Auction Date for
the next Rate Period and (2) the Rate Multiple on such Auction Date,
unless such shares have or had a Special Rate Period (other than a
Special Rate Period of 28 Rate Period Days or fewer) and an Auction at
which Sufficient Clearing Bids existed has not yet occurred for a
Minimum Rate Period after such Special Rate Period, in which case the
higher of:
B-15
<PAGE> 64
(A) the dividend rate on such shares for the then-ending
Rate Period; and
(B) the product of (x) the higher of (I) the Reference Rate
on such Auction Date for a Rate Period equal in length to the
then-ending Rate Period, if such then-ending Rate Period was 364
Rate Period Days or fewer, or the Treasury Note Rate on such
Auction Date for a Rate Period equal in length to the then-ending
Rate Period, if such then-ending Rate Period was more than 364
Rate Period Days, and (II) the Reference Rate on such Auction
Date for a Rate Period equal in length to such Special Rate
Period, if such Special Rate Period was 364 Rate Period Days or
fewer, or the Treasury Note Rate on such Auction Date for a Rate
Period equal in length to such Special Rate Period, if such
Special Rate Period was more than 364 Rate Period Days and (y)
the Rate Multiple on such Auction Date; or
(ii) in the case of any Auction Date which is the Auction Date
immediately prior to the first day of any proposed Special Rate
Period, the product of (1) the highest of (x) the Reference Rate on
such Auction Date for a Rate Period equal in length to the then-ending
Rate Period, if such then-ending Rate Period was 364 Rate Period Days
or fewer, or the Treasury Note Rate on such Auction Date for a Rate
Period equal in length to the then-ending Rate Period, if such
then-ending Rate Period was more than 364 Rate Period Days, (y) the
Reference Rate on such Auction Date for the Special Rate Period for
which the Auction is being held if such Special Rate Period is 364
Rate Period Days or fewer or the Treasury Note Rate on such Auction
Date for the Special Rate Period for which the Auction is being held
if such Special Rate Period is more than 364 Rate Period Days, and (z)
the Reference Rate on such Auction Date for Minimum Rate Periods and
(2) the Rate Multiple on such Auction Date.
As used herein, "Reference Rate" shall mean (i) the higher of the Taxable
Equivalent of the Short-Term Municipal Bond Rate and the "AA" Composite
Commercial Paper Rate in the case of Minimum Rate Periods and Special Rate
Periods of 28 Rate Period Days or fewer; (ii) the "AA" Composite Commercial
Paper Rate in the case of Special Rate Periods of more than 28 Rate Period Days
but fewer than 183 Rate Period Days; and (iii) the Treasury Bill Rate in the
case of Special Rate Periods of more than 182 Rate Period Days but fewer than
365 Rate Period Days.
As used herein, "Taxable Equivalent of the Short-Term Municipal Bond Rate,"
on any date for any Minimum Rate Period or Special Rate Period of 28 Rate Period
Days or fewer, shall mean 90% of the quotient of (A) the per annum rate
expressed on an interest equivalent basis equal to the Kenny S&P 30 day High
Grade Index or any successor index (the "Kenny Index") (provided, however, that
any such successor index must be approved by Moody's (if Moody's is then rating
the shares of Municipal Preferred) and Standard & Poor's (if Standard & Poor's
is then rating the shares of Municipal Preferred)), made available for the
Business Day immediately preceding such date but in any event not later than
8:30 A.M., New York City time, on such date by Kenny S&P 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 Kenny S&P
Evaluation Services or any such successor from time to time in its discretion,
which component issuers shall include, without limitation, issuers of general
obligation bonds but shall exclude any bonds the interest on which constitutes
an item of tax preference under Section 57(a)(5) of the Code, or successor
provisions, for purposes of the "alternative minimum tax," divided by (B) 1.00
minus the maximum marginal regular Federal individual income tax rate applicable
to ordinary income or the maximum marginal regular Federal corporate income tax
rate applicable to ordinary income (in each case expressed as a decimal),
whichever is greater; provided, however, that if the Kenny Index is not made so
available by 8:30 A.M., New York City time, on such date by Kenny S&P Evaluation
Services or any successor, the Taxable Equivalent of the Short-Term Municipal
Bond Rate shall mean the quotient of (A) the per annum rate expressed on an
interest equivalent basis equal to the most recent Kenny Index so made available
for any preceding Business Day, divided by (B) 1.00 minus the maximum marginal
regular Federal individual income tax rate applicable to ordinary income or the
maximum marginal regular Federal corporate income tax rate applicable to
ordinary income (in each case expressed as a decimal), whichever is greater.
As used herein, "'AA' Composite Commercial Paper Rate," on any date for any
Rate Period, means:
(i) (A) in the case of any Minimum Rate Period or any Special
Rate Period of fewer than 49 Rate Period Days, the interest equivalent
of the 30-day rate; provided, however, that if such Rate Period is a
Minimum Rate
B-16
<PAGE> 65
Period and the "AA" Composite Commercial Paper Rate is being used to
determine the Applicable Rate when all of the outstanding shares of
Municipal Preferred are subject to Submitted Hold Orders, then the
interest equivalent of the seven-day rate, and (B) in the case of any
Special Rate Period of (1) 49 or more but fewer than 70 Rate Period
Days, the interest equivalent of the 60-day rate; (2) 70 or more but
fewer than 85 Rate Period Days, the arithmetic average of the interest
equivalent of the 60-day and 90-day rates; (3) 85 or more but fewer
than 99 Rate Period Days, the interest equivalent of the 90-day rate;
(4) 99 or more but fewer than 120 Rate Period Days, the arithmetic
average of the interest equivalent of the 90-day and 120-day rates; (5)
120 or more but fewer than 141 Rate Period Days, the interest
equivalent of the 120-day rate; (6) 141 or more but fewer than 162 Rate
Period Days, the arithmetic average of the 120-day and 180-day rates;
and (7) 162 or more but fewer than 183 Rate Period Days, the interest
equivalent of the 180-day rate, in each case on commercial paper placed
on behalf of issuers whose corporate bonds are rated "AA" by Standard &
Poor's or the equivalent of such rating by Standard & Poor's or another
rating agency, as made available on a discount basis or otherwise by
the Federal Reserve Bank of New York for the Business Day immediately
preceding such date; or
(ii) in the event that the Federal Reserve Bank of New York does
not make available any such rate, then the arithmetic average of such
rates, as quoted on a discount basis or otherwise, by 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 ______________________ or, in lieu of
any thereof, their respective affiliates or successors, if such entity is a
commercial paper dealer. As used herein, "Substitute Commercial Paper Dealer"
means _____________________ or their respective affiliates or successors, if
such entity is a commercial paper dealer, provided that none of such entities
shall be a Commercial Paper Dealer.
As used herein, "Treasury Bill Rate," on any date for any Rate Period,
means:
(i) the bond equivalent yield, calculated in accordance with
prevailing industry convention, of the rate on the most recently
auctioned Treasury Bill with a remaining maturity closest to the
length of such Rate Period, as quoted in The Wall Street Journal on
such date for the Business Day next preceding such date; or
(ii) in the event that any such rate is not published in The Wall
Street Journal, then the bond equivalent yield, calculated in
accordance with prevailing industry convention, as calculated by
reference to the arithmetic average of the bid price quotations of the
most recently auctioned Treasury Bill with a remaining maturity
closest to the length of such Rate Period, as determined by bid price
quotations as of the close of business on the Business Day immediately
preceding such date obtained from the U.S. Government Securities
Dealers to the Auction Agent.
As used herein, "Treasury Note Rate," on any date for any Rate Period,
means:
(i) the yield on the most recently auctioned Treasury Note with a
remaining maturity closest to the length of such Rate Period, as
quoted in The Wall Street Journal on such date for the Business Day
next preceding such date; or
B-17
<PAGE> 66
(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 ____________________ 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 ___________________or their respective affiliates or
successors, if such entity is a U.S. government securities dealer, provided that
none of such entities shall be a U.S. Government Securities Dealer.
The applicable "AA" Composite Commercial Paper Rates, Taxable Equivalent of
the Short-Term Municipal Bond Rates, Treasury Bill Rates and Treasury Note Rates
will be the rates announced on such Auction Date for the Business Day
immediately prior to such Auction Date.
The "Rate Multiple" will be a percentage, determined as set forth below,
based on the prevailing rating of shares of Municipal Preferred in effect at the
close of business on the Business Day next preceding such Auction Date:
<TABLE>
<CAPTION>
PREVAILING RATING PERCENTAGE
----------------- ----------
<S> <C>
"aa3"/AA- or higher............................. 110%
"a3"/A-......................................... 125%
"baa3"/BBB-..................................... 150%
"ba3"/BB-....................................... 200%
Below "ba3"/BB-................................. 250%
</TABLE>
provided, however, that in the event the Trust has notified the Auction Agent of
its intent to allocate income taxable for Federal income tax purposes to shares
of Municipal Preferred prior to the Auction establishing the Applicable Rate for
such shares, the applicable percentage in the foregoing table shall be divided
by the quantity 1 minus the maximum marginal regular Federal individual income
tax rate applicable to ordinary income or the maximum marginal regular Federal
corporate income tax rate applicable to ordinary income, whichever is greater.
If the shares of Municipal Preferred are rated by only one rating agency, such
rating will be the prevailing rating.
For purposes of this definition, the "prevailing rating" of shares of
Municipal Preferred shall be (i) "aa3"/AA- or higher if such shares have a
rating of "aa3" or better by Moody's and AA- or better by Standard & Poor's or
the equivalent of such ratings by such agencies or a substitute rating agency or
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
B-18
<PAGE> 67
Below "ba3"/BB-; provided, however, that if such shares are rated by only one
rating agency, the prevailing rating shall be determined without reference to
the rating of any other rating agency. The Trust will take all reasonable action
necessary to enable either Standard & Poor's or Moody's to provide a rating for
shares of Municipal Preferred. If neither Standard & Poor's nor Moody's shall
make such a rating available, _______________________ or its successor shall
select at least one nationally recognized statistical rating organization (as
that term is used in the rules and regulations of the SEC under the Securities
Exchange Act of 1934, as amended) to act as a substitute rating agency in
respect of the shares of Municipal Preferred, and the Trust shall take all
reasonable action to enable such rating agency to provide a rating for such
shares.
SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT
Prior to 1:30 P.M., New York City time, on each Auction Date, or such other
time on the Auction Date specified by the Auction Agent (the "Submission
Deadline"), each Broker-Dealer will submit to the Auction Agent in writing all
Orders obtained by it for the Auction to be conducted on such Auction Date,
designating itself (unless otherwise permitted by the Trust) as the Existing
Holder or Potential Holder, as the case may be, in respect of the shares of
Municipal Preferred subject to such Orders. Any Order submitted by a Beneficial
Owner or a Potential Beneficial Owner to its Broker-Dealer, or by a
Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any
Auction Date, shall be irrevocable.
If any rate specified in any Bid contains more than three figures to the
right of the decimal point, the Auction Agent will round such rate to the next
highest one-thousandth (0.001) of 1%.
If one or more Orders of an Existing Holder is submitted to the Auction
Agent covering in the aggregate more than the number of outstanding shares of
Municipal Preferred subject to an Auction held by such Existing Holder, such
Orders will be considered valid in the following order of priority:
(a) all Hold Orders will be considered valid, but only up to and
including in the aggregate the number of shares of Municipal Preferred held
by such Existing Holder, and, if the number of shares subject to such Hold
Orders exceeds the number of shares held by such Existing Holder, the
number of shares subject to each such Hold Order shall be reduced pro rata
to cover the number of shares held by such Existing Holder;
(b) (i) any Bid will be considered valid up to and including the
excess of the number of shares of Municipal Preferred held by such Existing
Holder over the number of shares of Municipal Preferred subject to any Hold
Orders referred to in clause (a) above;
(ii) subject to subclause (i), if more than one Bid of an
Existing Holder is submitted to the Auction Agent with the same rate
and the number of shares of Municipal Preferred subject to such Bids
is greater than such excess, such Bids will be considered valid up to
and including the amount of such excess, and the number of shares of
Municipal Preferred subject to each Bid with the same rate will be
reduced pro rata to cover the number of shares of Municipal Preferred
equal to such excess;
(iii) subject to subclauses (i) and (ii), if more than one Bid of
an Existing Holder is submitted to the Auction Agent with different
rates, such Bids shall be considered valid in the ascending order of
their respective rates up to and including the amount of such excess;
and
(iv) in any such event, the number, if any, of such shares
subject to any portion of Bids considered not valid in whole or in
part under this clause (b) will be treated as the subject of a Bid by
or on behalf of a Potential Holder at the rate specified therein; and
(c) all Sell Orders will be considered valid up to and including the
excess of the number of outstanding shares of Municipal Preferred held by
such Existing Holder over the sum of shares of Municipal Preferred subject
to valid Hold Orders referred to in clause (a) above and valid Bids
referred to in clause (b) above.
B-19
<PAGE> 68
If more than one Bid of a Potential Holder for shares of Municipal
Preferred is submitted to the Auction Agent by or on behalf of any Potential
Holder, each Bid submitted will be a separate Bid with the rate and number of
shares therein specified.
DETERMINATION OF SUFFICIENT CLEARING BIDS,
WINNING BID RATE AND APPLICABLE RATE
Not earlier than the Submission Deadline on each Auction Date, the Auction
Agent will assemble all valid Orders submitted or deemed submitted to it by the
Broker-Dealers (each such Hold Order, Bid or Sell Order as submitted or deemed
submitted by a Broker-Dealer being herein referred to as a "Submitted Hold
Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as
a "Submitted Order" and collectively as "Submitted Hold Orders," "Submitted
Bids" or "Submitted Sell Orders," as the case may be, or as "Submitted Orders")
and will determine the excess of the number of outstanding shares of Municipal
Preferred over the number of outstanding shares of Municipal Preferred subject
to Submitted Hold Orders (such excess being herein referred to as the "Available
Municipal Preferred") and whether Sufficient Clearing Bids have been made in the
Auction. "Sufficient Clearing Bids" will have been made if the number of
outstanding shares of Municipal Preferred that are the subject of Submitted Bids
of Potential Holders specifying rates not higher than the Maximum Rate equals or
exceeds the number of outstanding shares of Municipal Preferred that are the
subject of Submitted Sell Orders (including the number of shares subject to Bids
of Existing Holders specifying rates higher than the Maximum Rate).
If Sufficient Clearing Bids have been made, the Auction Agent will
determine the lowest rate specified in the Submitted Bids (the "Winning Bid
Rate") which, taking into account the rates in the Submitted Bids of Existing
Holders, would result in Existing Holders continuing to hold an aggregate number
of outstanding shares of Municipal Preferred which, when added to the number of
outstanding shares of Municipal Preferred to be purchased by Potential Holders,
based on the rates in their Submitted Bids, would equal not less than the
Available Municipal Preferred. In such event, the Winning Bid Rate will be the
Applicable Rate for the next Rate Period for all shares of Municipal Preferred.
If Sufficient Clearing Bids have not been made (other than because all of
the outstanding shares of Municipal Preferred are subject to Submitted Hold
Orders), the Applicable Rate for the next Rate Period for all shares of
Municipal Preferred will be equal to the Maximum Rate. If Sufficient Clearing
Bids have not been made, Beneficial Owners that have submitted or that are
deemed to have submitted Sell Orders may not be able to sell in the Auction all
shares of Municipal Preferred subject to such Sell Orders but will continue to
own shares of Municipal Preferred for the next Rate Period, dividends for which
may include income taxable to such Beneficial Owners. See "The Auction--Auction
Dates; Advance Notice of Allocation of Taxable Income" above and "Acceptance and
Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares"
below.
If all of the outstanding shares of Municipal Preferred are subject to
Submitted Hold Orders, the Applicable Rate for the next Rate Period will be the
lesser of the Kenny Index (if such Rate Period consists of fewer than 183 Rate
Period Days) or the product of (i) (1) the "AA" Composite Commercial Paper Rate
on the Auction Date for such Rate Period, if such Rate Period consists of fewer
than 183 Rate Period Days; (2) the Treasury Bill Rate on such Auction Date for
such Rate Period, if such Rate Period consists of more than 182 but fewer than
365 Rate Period Days; or (3) the Treasury Note Rate on such Auction Date for
such Rate Period, if such Rate Period is more than 364 Rate Period Days (the
rate described in the foregoing clause (i)(1), (2) or (3) as applicable, being
referred to herein as the "Benchmark Rate") and (ii) 1 minus the maximum
marginal regular Federal individual income tax rate applicable to ordinary
income or the maximum marginal regular Federal corporate income tax rate
applicable to ordinary income, whichever is greater; provided, however, that if
the Trust has notified the Auction Agent of its intent to allocate to shares of
Municipal Preferred in such Rate Period any net capital gain or other income
taxable for Federal income tax purposes ("Taxable Income"), the Applicable Rate
for shares of Municipal Preferred for such Rate Period will be (A) if the
Taxable Yield Rate (as defined below) is greater than the Benchmark Rate, then
the Benchmark Rate, or (B) if the Taxable Yield Rate is less than or equal to
the Benchmark Rate, then the rate equal to the sum of (x) the lesser of the
Kenny Index (if such Rate Period consists of fewer than 183 Rate Period Days) or
the product of the Benchmark Rate multiplied by the factor set forth in the
preceding clause (ii) and (y) the product of the maximum marginal regular
Federal individual income tax rate applicable to ordinary income or the maximum
marginal regular Federal corporate income tax applicable to ordinary income,
whichever is greater, multiplied by the Taxable Yield
B-20
<PAGE> 69
Rate. For purposes of the foregoing, "Taxable Yield Rate" means the rate
determined by (a) dividing the amount of Taxable Income available for
distribution per share of Municipal Preferred by the number of days in the
Dividend Period in respect of which such Taxable Income is contemplated to be
distributed, (b) multiplying the amount determined in (a) above by 365 (in the
case of a Dividend Period of 7 Rate Period Days) or 360 (in the case of any
other Dividend Period), and (c) dividing the amount determined in (b) above by
$25,000. In calculating the "AA" Composite Commercial Paper Rate, the Treasury
Bill Rate and the Treasury Note Rate for such purpose, the rates used will be
the rates or yields specified in the applicable definitions of "AA" Composite
Commercial Paper Rate, Treasury Bill Rate and Treasury Note Rate set forth under
"The Auction--Orders by Existing Holders and Potential Holders."
ACCEPTANCE AND REJECTION OF SUBMITTED BIDS
AND SUBMITTED SELL ORDERS AND ALLOCATION OF SHARES
Based on the determinations made under "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" above and, subject to the
discretion of the Auction Agent to round and allocate certain shares as
described below, Submitted Bids and Submitted Sell Orders will be accepted or
rejected in the order of priority set forth in the Auction Procedures, with the
result that Existing Holders and Potential Holders of shares of Municipal
Preferred will sell, continue to hold and/or purchase such shares as set forth
below. Existing Holders that submitted or were deemed to have submitted Hold
Orders (or on whose behalf Hold Orders were submitted or deemed to have been
submitted) will continue to hold the shares of Municipal Preferred subject to
such Hold Orders.
If Sufficient Clearing Bids have been made:
(a) Each Existing Holder that placed or on whose behalf was placed a
Submitted Sell Order or Submitted Bid specifying any rate higher than the
Winning Bid Rate will sell the outstanding shares of Municipal Preferred
subject to such Submitted Sell Order or Submitted Bid;
(b) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate lower than the Winning Bid Rate will
continue to hold the outstanding shares of Municipal Preferred subject to
such Submitted Bid;
(c) Each Potential Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate lower than the Winning Bid Rate will
purchase the number of outstanding shares of Municipal Preferred subject to
such Submitted Bid;
(d) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to the Winning Bid Rate will continue
to hold the shares of Municipal Preferred subject to such Submitted Bid,
unless the number of outstanding shares of Municipal Preferred subject to
all such Submitted Bids is greater than the number of shares of Municipal
Preferred in excess of the Available Municipal Preferred over the number of
shares of Municipal Preferred accounted for in clauses (b) and (c) above,
in which event each Existing Holder with such a Submitted Bid will continue
to hold a number of outstanding shares of Municipal Preferred subject to
such Submitted Bid determined on a pro rata basis based on the number of
outstanding shares of Municipal Preferred subject to all such Submitted
Bids of such Existing Holders; and
(e) Each Potential Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to the Winning Bid Rate will purchase
any shares of Available Municipal Preferred not accounted for in clauses
(b) through (d) above on a pro rata basis based on the outstanding shares
of Municipal Preferred subject to all such Submitted Bids.
If Sufficient Clearing Bids have not been made (unless this results because
all outstanding shares of Municipal Preferred are subject to Submitted Hold
Orders):
B-21
<PAGE> 70
(a) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to or lower than the Maximum Rate
will continue to hold the outstanding shares of Municipal Preferred subject
to such Submitted Bid;
(b) Each Potential Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to or lower than the Maximum Rate
will purchase the number of outstanding shares of Municipal Preferred
subject to such Submitted Bid; and
(c) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate higher than the Maximum Rate or a Submitted
Sell Order will sell a number of shares of Municipal Preferred determined
on a pro rata basis based on the number of outstanding shares of Municipal
Preferred subject to all such Submitted Bids and Submitted Sell Orders.
If, as a result of the pro rata allocation described in clauses (d) or (e)
of the second preceding paragraph or clause (c) of the next preceding paragraph,
any Existing Holder would be entitled or required to sell, or any Potential
Holder would be entitled or required to purchase, a fraction of a share of
Municipal Preferred, the Auction Agent will, in such manner as, in its sole
discretion, it will determine, round up or down to the nearest whole share the
number of shares of Municipal Preferred being sold or purchased on such Auction
Date so that the number of shares sold or purchased by each Existing Holder or
Potential Holder will be whole shares of Municipal Preferred. If as a result of
the pro rata allocation described in clause (e) of the second preceding
paragraph, any Potential Holder would be entitled or required to purchase less
than a whole share of Municipal Preferred, the Auction Agent will, in such
manner as, in its sole discretion, it will determine, allocate shares of
Municipal Preferred for purchase among Potential Holders so that only whole
shares of Municipal Preferred are purchased by any such Potential Holder, even
if such allocation results in one or more of such Potential Holders not
purchasing shares of Municipal Preferred.
NOTIFICATION OF RESULTS; SETTLEMENT
The Auction Agent will be required to advise each Broker-Dealer that
submitted an Order of the Applicable Rate for the next Rate Period and, if the
Order was a Bid or Sell Order, whether such Bid or Sell Order was accepted or
rejected, in whole or in part, by telephone by approximately 3:00 P.M., New York
City time, on each Auction Date. Each Broker-Dealer that submitted an Order for
the account of a customer will then be required to advise such customer of the
Applicable Rate for the next Rate Period and, if such Order was a Bid or a Sell
Order, whether such Bid or Sell Order was accepted or rejected, in whole or in
part, will be required to confirm purchases and sales with each customer
purchasing or selling shares of Municipal Preferred as a result of the Auction
and will be required to advise each customer purchasing or selling shares of
Municipal Preferred as a result of the Auction to give instructions to its Agent
Member of the Securities Depository to pay the purchase price against delivery
of such shares or to deliver such shares against payment therefor, as
appropriate. The Auction Agent will be required to record each transfer of
shares of Municipal Preferred on the registry of Existing Holders to be
maintained by the Auction Agent. See "General" above.
In accordance with the Securities Depository's normal procedures, on the
Business Day after the Auction Date, the transactions described above will be
executed through the Securities Depository and the accounts of the respective
Agent Members at the Securities Depository will be debited and credited and
shares delivered as necessary to effect the purchases and sales of shares of
Municipal Preferred as determined in the Auction. Purchasers will make payment
through their Agent Members in same-day funds to the Securities Depository
against delivery through their Agent Members; the Securities Depository will
make payment in accordance with its normal procedures, which now provide for
payment against delivery by their Agent Members in same-day funds. The
settlement procedures to be used with respect to Auctions for shares of
Municipal Preferred are set forth in Appendix C hereto.
If any Existing Holder selling shares of Municipal Preferred in an Auction
fails to deliver such shares, the Broker-Dealer of any person that was to have
purchased shares of Municipal Preferred in such Auction may deliver to such
person a number of whole shares of Municipal Preferred that is less than the
number of shares that otherwise was to be purchased by
B-22
<PAGE> 71
such person. In such event, the number of shares of Municipal Preferred to be so
delivered shall be determined by such Broker-Dealer. Delivery of such lesser
number of shares shall constitute good delivery.
CONCERNING THE AUCTION AGENT
The Auction Agent is acting as agent for the Trust in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered, or omitted or for any
error of judgment made by it in the performance of its duties under the Auction
Agency Agreement and will not be liable for any error of judgment made in good
faith unless the Auction Agent will have been negligent in ascertaining the
pertinent facts.
The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of shares of Municipal Preferred, a list of initial owners of
such shares provided by the Trust, the results of Auctions, notices from any
Broker-Dealer (or other Person, if permitted by the Trust) with respect to
transfers described in the Prospectus under "The Auction--Secondary Market
Trading and Transfer of Municipal Preferred" and notices from the Trust. The
Auction Agent is not required to accept any such notice for an Auction unless it
is received by the Auction Agent by 3:00 P.M., New York City time, on the
Business Day preceding such Auction.
The Auction Agent will be the transfer agent, registrar, dividend
disbursing agent and redemption agent for shares of Municipal Preferred. The
registrar for shares of Municipal Preferred will send notices to holders of
shares of Municipal Preferred of any special meetings at which holders of
Municipal Preferred have the right to elect trustees of the Trust. See
"Description of Municipal Preferred--Voting Rights" below.
The Auction Agent may terminate the Auction Agency Agreement upon notice to
the Trust on a date no earlier than 45 days after such notice. If the Auction
Agent should resign, the Trust will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Trust may remove the Auction
Agent provided that prior to such removal the Trust shall have entered into such
an agreement with a successor Auction Agent.
BROKER-DEALERS
The Auction Agent after each Auction for shares of Municipal Preferred will
pay to each Broker-Dealer, from funds provided by the Trust, a service charge at
the annual rate of 1/4 of 1% in the case of any Auction immediately preceding a
Rate Period of less than one year, or a percentage agreed to by the Trust and
the Broker-Dealers in the case of any Auction immediately preceding a Rate
Period of one year or longer, of the purchase price of shares of Municipal
Preferred placed by such Broker-Dealer at such Auction. For the purposes of the
preceding sentence, shares of Municipal Preferred will be placed by a
Broker-Dealer if such shares were (i) the subject of Hold Orders deemed to have
been submitted to the Auction Agent by the Broker-Dealer and were acquired by
such Broker-Dealer for its own account or were 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.
B-23
<PAGE> 72
The Broker-Dealers expect, but are not obligated, to maintain a secondary
trading market in shares of Municipal Preferred outside of Auctions. There can
be no assurance that a secondary trading market in shares of Municipal Preferred
will develop or, if it does develop, that it will provide owners with liquidity
of investment. The shares of Municipal Preferred will not be registered on any
stock exchange or on the National Association of Securities Dealers Automated
Quotations system.
DESCRIPTION OF MUNICIPAL PREFERRED
The descriptions of the shares of Municipal Preferred contained in the
Prospectus and this Statement of Additional Information do not purport to be
complete and are subject to and qualified in their entireties by reference to
the Declaration and the By-Laws. Copies of the Declaration and the form of the
By-Laws are filed as exhibits to the Registration Statement of which the
Prospectus and this Statement of Additional Information are a part and may be
inspected, and copies thereof may be obtained, as described under "Further
Information" in the Prospectus.
GENERAL
The shares of Municipal Preferred will rank on a parity with each other and
with shares of any other series of Preferred Shares as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Trust.
DIVIDENDS
General. The holders of shares of Municipal Preferred offered pursuant to
the Prospectus will be entitled to receive, when, as and if declared by the
Board of Trustees, out of funds legally available therefor in accordance with
the Declaration, the By-Laws and applicable law, cumulative cash dividends at
the Applicable Rate thereof, determined as set forth below under "Determination
of Dividend Rate," and no more (except as otherwise provided below under
"Gross-up Payments"), payable on the respective dates determined as set forth
below. No interest, or sum of money in lieu of interest, will be payable in
respect of any dividend payment or payments on shares of Municipal Preferred
which may be in arrears, and, except as otherwise provided herein, no additional
sum of money will be payable in respect of any such arrearage.
Dividends on shares of Municipal Preferred shall accumulate at the
Applicable Rate from the Date of Original Issue and, except as provided below,
shall be payable on ________, ________ __, 1999, and thereafter on each ______;
provided, however, that (1) if the ________ 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 _________ and
(2) the Trust in its discretion may establish Dividend Payment Dates in respect
of any Special Rate Period of such shares consisting of more than 28 Rate Period
Days that differ from those set forth above; provided, however, that such dates
shall be set forth in the Notice of Special Rate Period relating to such Special
Rate Period, as delivered to the Auction Agent and filed with the Secretary of
the Trust; and further provided that (1) any such Dividend Payment Date shall be
a Business Day and (2) the last Dividend Payment Date in respect of such Special
Rate Period shall be the Business Day immediately following the last day
thereof, as such last day is determined as set forth below under "Designation of
Special Rate Periods."
The amount of dividends per share payable on shares of Municipal Preferred
on any date on which dividends shall be payable on such shares shall be computed
by multiplying the Applicable Rate in effect for such Dividend Period or
Dividend Periods or part thereof for which dividends have not been paid by a
fraction, the numerator of which shall be the number of days in such Dividend
Period or Dividend Periods or part thereof and the denominator of which shall be
365 if such Dividend Period consists of 7 Rate Period Days and 360 for all other
Dividend Periods, and applying the rate obtained against $25,000. Any dividend
payment made on shares of Municipal Preferred shall first be credited against
the earliest accumulated but unpaid dividends due with respect to such shares.
Each dividend on shares of Municipal Preferred will be paid on the Dividend
Payment Date therefor to the holders of record as their names appear on the
record books of the Trust on the Business Day next preceding such Dividend
Payment
B-24
<PAGE> 73
Date. Dividends in arrears for any past Dividend Period may be declared and paid
at any time, without reference to any regular Dividend Payment Date, to the
holders of record as their names appear on the record books of the Trust on such
date, not exceeding 15 days preceding the payment date thereof, as may be fixed
by the Board of Trustees.
The Securities Depository, in accordance with its current procedures, is
expected to credit on each Dividend Payment Date dividends received from the
Trust to the accounts of the respective Agent Members in next-day funds. Each of
the initial Broker-Dealers, however, has represented to the Trust that such
Broker-Dealer (or if such Broker-Dealer does not act as Agent Member, the Agent
Member designated by such Broker-Dealer) will make such dividend payments
available in same-day funds on each Dividend Payment Date to Beneficial Owners
that use such Broker-Dealer or its designee as Agent Member. A Beneficial Owner
of shares of Municipal Preferred that does not use one of the initial
Broker-Dealers or a designee thereof as its Agent Member should contact the
Agent Member used by such Beneficial Owner to determine whether such Agent
Member will make dividend payments available to such Beneficial Owner in
next-day or same-day funds. If any Agent Member does not make such dividends
available in same-day funds to a Beneficial Owner, such Beneficial Owner who
uses such Agent Member would not have same-day funds available to it until the
next Business Day, which, in the case of a Dividend Payment Date that is a
________, would be the following ________ if it is a Business Day.
Determination of Dividend Rate. The dividend rates on shares of Municipal
Preferred offered pursuant to the Prospectus during the period from and after
the Date of Original Issue thereof to and including the last day of the Initial
Rate Period therefor will be equal to the rate per annum set forth with respect
to such shares on the cover page of the Prospectus. For each Subsequent Rate
Period thereafter, the dividend rate on such shares will be equal to the rate
per annum that results from an Auction on the Auction Date next preceding such
Subsequent Rate Period; provided, however, if:
(i) an Auction for any Subsequent Rate Period is not held for any
reason other than as described below, the dividend rate on such shares
for such Subsequent Rate Period will be the Maximum Rate on the
Auction Date therefor;
(ii) any Failure to Deposit shall have occurred with respect to
shares of Municipal Preferred during any Rate Period thereof (other
than any Special Rate Period of more than 364 Rate Period Days or any
Rate Period succeeding any Special Rate Period of more than 364 Rate
Period Days during which a Failure to Deposit occurred that has not
been cured), but, prior to 12:00 Noon, New York City time, on the
third Business Day next succeeding the date on which such Failure to
Deposit occurred, such Failure to Deposit shall have been cured in
accordance with the next succeeding paragraph and the Trust shall have
paid to the Auction Agent a late charge ("Late Charge") equal to the
sum of (1) if such Failure to Deposit consisted of the failure timely
to pay to the Auction Agent the full amount of dividends with respect
to any Dividend Period of such shares, an amount computed by
multiplying (x) 200% of the Reference Rate for the Rate Period during
which such Failure to Deposit occurs on the Dividend Payment Date for
such Dividend Period by (y) a fraction, the numerator of which shall
be the number of days for which such Failure to Deposit has not been
cured in accordance with the next succeeding paragraph (including the
day such Failure to Deposit occurs and excluding the day such Failure
to Deposit is cured) and the denominator of which shall be 360, and
applying the rate obtained against the aggregate Liquidation
Preference of the outstanding shares of Municipal Preferred and (2) if
such Failure to Deposit consisted of the failure timely to pay to the
Auction Agent the Redemption Price of the shares of Municipal
Preferred, if any, for which Notice of Redemption has been mailed by
the Trust, an amount computed by multiplying (x) 200% of the Reference
Rate for the Rate Period during which such Failure to Deposit occurs
on the redemption date by (y) a fraction, the numerator of which shall
be the number of days for which such Failure to Deposit is not cured
in accordance with the next succeeding paragraph (including the day
such Failure to Deposit occurs and excluding the day such Failure to
Deposit is cured) and the denominator of which shall be 360, and
applying the rate obtained against the aggregate Liquidation
Preference of the outstanding shares of Municipal Preferred to be
redeemed, no Auction will be held in respect of shares of Municipal
Preferred for the Subsequent Rate Period thereof and the dividend rate
for such Subsequent Rate Period will be the Maximum Rate on the
Auction Date for such Subsequent Rate Period;
(iii) any Failure to Deposit shall have occurred with respect to
shares of Municipal Preferred during any Rate Period thereof (other
than any Special Rate Period of more than 364 Rate Period Days or any
Rate Period
B-25
<PAGE> 74
succeeding any Special Rate Period of more than 364 Rate Period Days
during which a Failure to Deposit occurred that has not been cured),
and, prior to 12:00 Noon, New York City time, on the third Business Day
next succeeding the date on which such Failure to Deposit occurred,
such Failure to Deposit shall not have been cured in accordance with
the next succeeding paragraph or the Trust shall not have paid the
applicable Late Charge to the Auction Agent, no Auction will be held in
respect of Municipal Preferred for the first Subsequent Rate Period
thereof thereafter (or for any Rate Period thereafter to and including
the Rate Period during which (1) such Failure to Deposit is cured in
accordance with the next succeeding paragraph and (2) the Trust pays
the applicable Late Charge to the Auction Agent (the condition set
forth in this clause (2) to apply only in the event Moody's is rating
such shares at the time the Trust cures such Failure to Deposit), in
each case no later than 12:00 Noon, New York City time, on the fourth
Business Day prior to the end of such Rate Period), and the dividend
rate for shares of Municipal Preferred for each such Subsequent Rate
Period will be a rate per annum equal to the Maximum Rate on the
Auction Date for such Subsequent Rate Period (but with the prevailing
rating for such shares, for purposes of determining such Maximum Rate,
being deemed to be "Below "ba3"/BB-"); or
(iv) any Failure to Deposit shall have occurred with respect to
shares of Municipal Preferred during a Special Rate Period thereof of
more than 364 Rate Period Days, or during any Rate Period thereof
succeeding any Special Rate Period of more than 364 Rate Period Days
during which a Failure to Deposit occurred that has not been cured,
and, prior to 12:00 Noon, New York City time, on the fourth Business
Day preceding the Auction Date for the Rate Period subsequent to such
Rate Period, such Failure to Deposit shall not have been cured in
accordance with the next succeeding paragraph or, in the event Moody's
is then rating such shares, the Trust shall not have paid the
applicable Late Charge to the Auction Agent (such Late Charge, for
purposes of this subparagraph (iv), to be calculated by using, as the
Reference Rate, the Reference Rate applicable to a Rate Period (x)
consisting of more than 182 Rate Period Days but fewer than 365 Rate
Period Days and (y) commencing on the date on which the Rate Period
during which Failure to Deposit occurs commenced), no Auction will be
held in respect of shares of Municipal Preferred for such Subsequent
Rate Period (or for any Rate Period thereafter to and including the
Rate Period during 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, New York City time, on the fourth
Business Day prior to the end of such Rate Period), and the dividend
rate for shares of Municipal Preferred for each such Subsequent Rate
Period shall be a rate per annum equal to the Maximum Rate on the
Auction Date for such Subsequent Rate Period (but with the prevailing
rating for such shares, for purposes of determining such Maximum Rate,
being deemed to be "Below "ba3"/BB-") (the rate per annum at which
dividends are payable on shares of Municipal Preferred for any Rate
Period being herein referred to as the "Applicable Rate" for such
shares).
A Failure to Deposit with respect to shares of Municipal Preferred shall
have been cured (if such Failure to Deposit is not solely due to the willful
failure of the Trust to make the required 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 any such condition precedent shall not have
been satisfied at the time or times and in the manner specified in such Notice
of Redemption.
Gross-up Payments. Holders of shares of Municipal Preferred shall be
entitled to receive, when, as and if declared by the Board of Trustees, out of
funds legally available therefor in accordance with the Declaration, the By-Laws
and applicable law, dividends in an amount equal to the aggregate Gross-up
Payment in accordance with the following:
If, in the case of any Minimum Rate Period or any Special Rate Period of 28
Rate Period Days or fewer, the Trust allocates any net capital gain or other
income taxable for Federal income tax purposes to a dividend paid on shares of
Municipal Preferred without having given advance notice thereof to the Auction
Agent as described above under "The
B-26
<PAGE> 75
Auction--Auction Dates; Advance Notice of Allocation of Taxable Income" (such
allocation is referred to herein as a "Taxable Allocation") solely by reason of
the fact that such allocation is made retroactively as a result of the
redemption of all or a portion of the outstanding shares of Municipal Preferred
or the dissolution, liquidation or winding up of the affairs of the Trust, the
Trust will, prior to the end of the calendar year in which such dividend was
paid, provide notice thereof to the Auction Agent and direct the Trust's
dividend disbursing agent to send such notice with a Gross-up Payment to each
holder of shares (initially Cede & Co., as nominee of the Securities Depository)
that was entitled to such dividend payment during such calendar year at such
holder's address as the same appears or last appeared on the record books of the
Trust.
If, in the case of any Special Rate Period of more than 28 Rate Period
Days, the Trust makes a Taxable Allocation to a dividend paid on shares of
Municipal Preferred, the Trust shall, prior to the end of the calendar year in
which such dividend was paid, provide notice thereof to the Auction Agent and
direct the Trust's dividend disbursing agent to send such notice with a Gross-up
Payment to each holder of shares that was entitled to such dividend payment
during such calendar year at such holder's address as the same appears or last
appeared on the record books of the Trust.
The Trust shall not be required to make Gross-up Payments with respect to
any net capital gain or other taxable income determined by the Internal Revenue
Service to be allocable in a manner different from that allocated by the Trust.
A "Gross-up Payment" in respect of any dividend means payment to a holder
of shares of Municipal Preferred of an amount which, giving effect to the
Taxable Allocations made with respect to such dividend, would cause such
holder's after-tax returns (taking into account both the Taxable Allocations and
the Gross-up Payment) to be equal to the after-tax return the holder would have
received if no such Taxable Allocations had occurred. Such Gross-up Payment
shall be calculated: (i) without consideration being given to the time value of
money; (ii) assuming that no holder of shares of Municipal Preferred is subject
to the Federal alternative minimum tax with respect to dividends received from
the Trust; and (iii) assuming that each holder of shares of Municipal Preferred
is taxable at the maximum marginal regular Federal individual income tax rate
applicable to ordinary income or net capital gain, as applicable, or the maximum
marginal regular Federal corporate income tax rate applicable to ordinary income
or net capital gain, as applicable, whichever is greater, in effect at the time
such Gross-up Payment is made.
Restrictions on Dividends and Other Payments. Under the 1940 Act, the Board
of Trustees may not declare any dividend (except a dividend payable in Common
Shares), or declare any other distribution, upon Common Shares, or purchase
Common Shares, unless in every such case the Preferred Shares, including the
shares of Municipal Preferred, have, at the time of any such declaration or
purchase (and after giving effect thereto), an asset coverage (as defined in and
determined pursuant to the 1940 Act) of at least 200% (or such other percentage
as may in the future be required by law).
In addition, for so long as any shares of Municipal Preferred are
outstanding, except as set forth in the following paragraph or otherwise
described herein, (A) the Trust may not declare, pay or set apart for payment
any dividend or other distribution (other than a dividend or distribution paid
in shares of, or in options, warrants or rights to subscribe for or purchase,
Common Shares or other shares, if any, ranking junior to the shares of Municipal
Preferred as to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Trust) in respect
of Common Shares or any other shares of the Trust ranking junior to or on a
parity with the shares of Municipal Preferred as to the payment of dividends or
the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust, or call for redemption, redeem, purchase or otherwise
acquire for consideration any Common Shares or any other such junior shares
(except by conversion into or exchange for shares of the Trust ranking junior to
the shares of Municipal Preferred as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust), or any such parity shares (except by conversion into or
exchange for shares of the Trust ranking junior to or on a parity with the
shares of Municipal Preferred as to payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up of the affairs of the Trust),
unless (1) full cumulative dividends on shares of Municipal Preferred through
their most recently ended Dividend Period shall have been paid or shall have
been declared and sufficient funds for the payment thereof deposited with the
Auction Agent and (2) the Trust has redeemed the full number of shares of
Municipal Preferred required to be redeemed by any provision for mandatory
redemption pertaining thereto and (B) if either Moody's or Standard & Poor's is
rating the shares of Municipal Preferred, the Trust may not declare, pay or set
apart for payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or in options, warrants or rights to
B-27
<PAGE> 76
subscribe for or purchase, Common Shares or other shares, if any, ranking junior
to shares of Municipal Preferred as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust) in respect of Common Shares or any other shares of the
Trust ranking junior to shares of Municipal Preferred as to the payment of
dividends or the distribution of assets upon dissolution, liquidation or winding
up of the affairs of the Trust, or call for redemption, redeem, purchase or
otherwise acquire for consideration any Common Shares or any other such junior
shares (except by conversion into or exchange for shares of the Trust ranking
junior to the shares of Municipal Preferred as to the payment of dividends or
the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust), unless immediately after such transaction the Discounted
Value of Moody's Eligible Assets or Standard & Poor's Eligible Assets, or both,
as the case may be, would at least equal the Municipal Preferred Basic
Maintenance Amount (see "Description of Municipal Preferred--Rating Agency
Guidelines" and "--Redemption").
Except as set forth in the next sentence, no dividends shall be declared or
paid or set apart for payment on any class or series of shares of beneficial
interest of the Trust ranking, as to the payment of dividends, on a parity with
shares of Municipal Preferred for any period unless full cumulative dividends
have been or contemporaneously are declared and paid on the shares of Municipal
Preferred through their most recent Dividend Payment Date. When dividends are
not paid in full upon the shares of Municipal Preferred through their most
recent Dividend Payment Date or upon any other class or series of shares ranking
on a parity as to the payment of dividends with shares of Municipal Preferred
through their most recent respective dividend payment dates, all dividends
declared upon shares of Municipal Preferred and any other such class or series
of shares ranking on a parity as to the payment of dividends with shares of
Municipal Preferred shall be declared pro rata so that the amount of dividends
declared per share on shares of Municipal Preferred and such other class or
series of shares shall in all cases bear to each other the same ratio that
accumulated dividends per share on the shares of Municipal Preferred and such
other class or series of shares bear to each other (for purposes of this
sentence, the amount of dividends declared per share of Municipal Preferred
shall be based on the Applicable Rate for such share for the Dividend Periods
during which dividends were not paid in full).
Under the Code, the Trust must, among other things, distribute at least 90%
of the sum of its net investment income (including the excess, if any, of net
short-term capital gain over net long-term capital loss) and its net tax-exempt
income each year in order to maintain its qualification for tax treatment as a
regulated investment company. The foregoing limitations on dividends,
distributions and purchases may under certain circumstances impair the Trust's
ability to maintain such qualification. See "Tax Matters--Federal Income Tax
Matters."
Designation of Special Rate Periods. The Trust, at its option, may
designate any succeeding Subsequent Rate Period of shares of Municipal Preferred
as a Special Rate Period consisting of a specified number of Rate Period Days
evenly divisible by seven and not more than 1,820 (approximately 5 years),
subject to adjustment as described below. A designation of a Special Rate Period
shall be effective only if (i) notice thereof shall have been given as provided
herein, (ii) an Auction for such shares shall have been held on the Auction Date
immediately preceding the first day of such proposed Special Rate Period and
Sufficient Clearing Bids for such shares shall have existed in such Auction and
(iii) if the Trust shall have mailed a notice of redemption with respect to any
shares of Municipal Preferred, as described under "Redemption--Notice of
Redemption" below, the Redemption Price with respect to such shares shall have
been deposited with the Auction Agent. In the event the Trust wishes to
designate any succeeding Subsequent Rate Period for shares of Municipal
Preferred as a Special Rate Period consisting of more than 28 Rate Period Days,
the Trust shall notify Standard & Poor's (if Standard & Poor's is then rating
such shares) and Moody's (if Moody's is then rating such shares) in advance of
the commencement of such Subsequent Rate Period that the Trust wishes to
designate such Subsequent Rate Period as a Special Rate Period and shall provide
Standard & Poor's (if Standard & Poor's is then rating such shares) and Moody's
(if Moody's is then rating such shares) with such documents as either may
request.
In the event the Trust wishes to designate a Subsequent Rate Period of
shares of Municipal Preferred as a Special Rate Period, but the day following
what would otherwise be the last day of such Special Rate Period is not a
_______ that is a Business Day, then the Trust shall designate such Subsequent
Rate Period as a Special Rate Period consisting of the period commencing on the
first day following the end of the immediately preceding Rate Period and ending
on the first ________ that is followed by a ________ that is a Business Day
preceding what would otherwise be such last day.
B-28
<PAGE> 77
If the Trust proposes to designate any succeeding Subsequent Rate
Period of shares of Municipal Preferred as a Special Rate Period, not less than
20 (or such lesser number of days as may be agreed to from time to time by the
Auction Agent) nor more than 30 days prior to the date the Trust proposes to
designate as the first day of such Special Rate Period (which shall be such day
that would otherwise be the first day of a Minimum Rate Period), notice shall be
(i) published or caused to be published by the Trust in a newspaper of general
circulation to the financial community in The City of New York, New York, which
carries financial news, and (ii) mailed by the Trust by first-class mail,
postage prepaid, to the holders of shares of Municipal Preferred. Each such
notice shall state (A) that the Trust may exercise its option to designate a
succeeding Subsequent Rate Period of shares of Municipal Preferred as a Special
Rate Period, specifying the first day thereof and (B) that the Trust will, by
11:00 A.M., New York City time, on the second Business Day next preceding such
date (or by such later time or date, or both, as may be agreed to by the Auction
Agent), notify the Auction Agent of either (x) its determination, subject to
certain conditions, to exercise such option, in which case the Trust shall
specify the Special Rate Period designated, or (y) its determination not to
exercise such option.
No later than 11:00 A.M., New York City time, on the second Business
Day next preceding the first day of any proposed Special Rate Period as to which
notice has been given as set forth in the preceding paragraph (or such later
time or date, or both, as may be agreed to by the Auction Agent), the Trust
shall deliver to the Auction Agent either:
(i) a notice ("Notice of Special Rate Period") stating (A)
that the Trust has determined to designate the next succeeding Rate
Period of shares of Municipal Preferred as a Special Rate Period,
specifying the same and the first day thereof, (B) the Auction Date
immediately prior to the first day of such Special Rate Period, (C)
that such Special Rate Period shall not commence if (1) an Auction for
such shares shall not be held on such Auction Date for any reason or
(2) an Auction for such shares shall be held on such Auction Date but
Sufficient Clearing Bids for such shares shall not exist in such
Action, (D) the scheduled Dividend Payment Dates for such shares during
such Special Rate Period and (E) the Special Redemption Provisions, if
any, applicable to such shares in respect of such Special Rate Period;
such notice to be accompanied by a Municipal Preferred Basic
Maintenance Report showing that, as of the third Business Day next
preceding such proposed Special Rate Period, Moody's Eligible Assets
(if Moody's is then rating such shares) and Standard & Poor's Eligible
Assets (if Standard & Poor's is then rating such shares) each have an
aggregate Discounted Value at least equal to the Municipal Preferred
Basic Maintenance Amount as of such Business Day (assuming for purposes
of the foregoing calculation that (a) the Maximum Rate is the Maximum
Rate on such Business Day as if such Business Day were the Auction Date
for the proposed Special Rate Period, and (b) the Moody's Discount
Factors applicable to Moody's Eligible Assets will be determined by
reference to the first Moody's Exposure Period longer than the Moody's
Exposure Period then applicable to the Trust); or
(ii) a notice stating that the Trust has determined not to
exercise its option to designate a Special Rate Period of shares of
Municipal Preferred and that the next succeeding Rate Period shall be a
Minimum Rate Period.
If the Trust fails to deliver either such notice (and, in the case of
the notice described in clause (i) above, a Municipal Preferred Basic
Maintenance Report to the effect set forth in clause (i) (if either Moody's or
Standard & Poor's is then rating the shares of Municipal Preferred)) with
respect to any designation of any proposed Special Rate Period to the Auction
Agent by 11:00 A.M., New York City time, on the second Business Day next
preceding the first day of such proposed Special Rate Period (or by such later
time or date, or both, as may be agreed to by the Auction Agent), the Trust
shall be deemed to have delivered a notice to the Auction Agent with respect to
such Special Rate Period to the effect set forth in clause (ii) above. In the
event the Trust delivers to the Auction Agent a notice described in clause (i)
above, it shall file a copy of such notice with the Secretary of the Trust, and
the contents of such notice shall be binding on the Trust. In the event the
Trust delivers to the Auction Agent a notice described in clause (ii) above, the
Trust will provide Moody's (if Moody's is then rating the shares of Municipal
Preferred) and Standard & Poor's (if Standard & Poor's is then rating the shares
of Municipal Preferred) a copy of such notice.
B-29
<PAGE> 78
VOTING RIGHTS
Holders of shares of Municipal Preferred are entitled to vote on
certain matters as described herein under "Investment Objectives and
Policies--Fundamental Investment Policies" and in the Prospectus under
"Description of Municipal Preferred--Voting Rights" and "Certain Provisions in
the Agreement and Declaration of Trust."
In connection with the election of the Trust's trustees, holders of
outstanding Preferred Shares, including shares of Municipal Preferred, voting
together as one separate class, shall be entitled to elect two of the Trust's
trustees, and the remaining trustees will be elected by holders of Common Shares
and Preferred Shares, including shares of Municipal Preferred, voting together
as a single class. In addition, if at any time dividends (whether or not earned
or declared) on outstanding Preferred Shares, including shares of Municipal
Preferred, shall be due and unpaid in an amount equal to two full years'
dividends thereon, and sufficient cash or specified securities shall not have
been deposited with the Auction Agent for the payment of such dividends, then,
as the sole remedy of holders of outstanding Preferred Shares, including shares
of Municipal Preferred, the number of trustees constituting the Board of
Trustees shall be automatically increased by the smallest number that, when
added to the two trustees elected exclusively by the holders of Preferred
Shares, including shares of Municipal Preferred, as described above, would
constitute a majority of the Board of Trustees as so increased by such smallest
number; and at a special meeting of shareholders which will be called and held
as soon as practicable, and at all subsequent meetings at which trustees are to
be elected, the holders of Preferred Shares, including shares of Municipal
Preferred, voting as a separate class, will be entitled to elect the smallest
number of additional trustees that, together with the two trustees which such
holders will be in any event entitled to elect, constitutes a majority of the
total number of trustees of the Trust as so increased. The terms of office of
the persons who are trustees at the time of that election will continue. If the
Trust thereafter shall pay, or declare and set apart for payment, in full all
dividends payable on all outstanding Preferred Shares, including shares of
Municipal Preferred, the voting rights stated in the preceding sentence shall
cease, and the terms of office of all of the additional trustees elected by the
holders of Preferred Shares, including shares of Municipal Preferred (but not of
the trustees with respect to whose election the holders of Common Shares were
entitled to vote or the two trustees the holders of Preferred Shares have the
right to elect in any event), will terminate automatically.
The Trust may not, without the affirmative vote of the holders of at
least a majority of the shares of Municipal Preferred outstanding at the time,
voting together as one separate class:
(a) authorize, create or issue additional shares of Municipal
Preferred or classes or series of Preferred Shares ranking prior to or
on a parity with shares of Municipal Preferred with respect to the
payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Trust (except that (i)
the Trust may, without the vote of the holders of shares of Municipal
Preferred, authorize, create or issue additional shares of Municipal
Preferred or classes or series of Preferred Shares ranking on a parity
with shares of Municipal Preferred with respect to the payment of
dividends and the distribution of assets upon dissolution, liquidation
or winding up of the affairs of the Trust if, after giving effect
thereto, the aggregate liquidation preference of all Preferred Shares
then outstanding, exclusive of accumulated and unpaid dividends, would
not exceed $__________; provided, however, that the Trust obtains
written confirmation from Moody's (if Moody's is then rating the shares
of Municipal Preferred) and Standard & Poor's (if Standard & Poor's is
then rating the shares of Municipal Preferred) that the issuance of any
such additional shares or class or series of shares would not impair
the rating then assigned by such rating agency to shares of Municipal
Preferred, and (ii) so long as either at least one of Moody's or
Standard & Poor's is rating the shares of Municipal Preferred, 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 the 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 notwithstanding that, after
giving effect thereto, the aggregate liquidation preference of all
Preferred Shares then outstanding would exceed $__________; provided,
however, that the Trust obtains written confirmation from Moody's (if
Moody's is then rating the shares of Municipal Preferred) and Standard
& Poor's (if Standard & Poor's is then rating the shares of Municipal
Preferred) that the issuance of any such additional shares or class or
series of shares would not impair the rating then assigned by such
rating agency to shares of Municipal Preferred) or
B-30
<PAGE> 79
(b) amend, alter or repeal the provisions of the Declaration
or the By-Laws, whether by merger, consolidation or otherwise, so as to
affect any preference, right or power of the shares of Municipal
Preferred or the holders thereof (provided, however, that a division of
a share of Municipal Preferred shall be deemed to affect any such
preference, right or power only if the terms of such division adversely
affect the holders of any shares of Municipal Preferred);
provided, however, that (i) none of the actions permitted by the exception to
(a) above will be deemed to affect such preferences, rights or powers and (ii)
the authorization, creation and issuance of classes or series of shares ranking
junior to the Municipal Preferred with respect to the payment of dividends and
the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust will be deemed to affect such preferences, rights or powers
only if at least one of Moody's or Standard & Poor's is then rating the shares
of Municipal Preferred and such issuance would, at the time thereof, cause the
Trust not to satisfy the 1940 Act Municipal Preferred Asset Coverage or the
Municipal Preferred Basic Maintenance Amount. So long as any shares of Municipal
Preferred are outstanding, the Trust may not, without the affirmative vote of
the holders of at least 66 2/3% of the shares of Municipal Preferred outstanding
at the time, voting as a separate class, file a voluntary application for relief
under Federal bankruptcy law or any similar application under state law for so
long as the Trust is solvent and does not foresee becoming insolvent. If any
action set forth in this paragraph would adversely affect the rights of one or
more series (the "Affected Series") of Municipal Preferred in a manner different
from any other series of Municipal Preferred, the Trust will not approve any
such action without the affirmative vote of the holders of at least a majority
of the shares of each such Affected Series outstanding at the time (each such
Affected Series voting as a separate class).
Voting provisions will not apply with respect to shares of Municipal
Preferred if, at or prior to the time when a vote is required, such shares shall
have been (i) redeemed or (ii) called for redemption and sufficient funds shall
have been deposited in trust to effect such redemption.
The Board of Trustees may, without shareholder approval, amend, alter
or repeal any or all of the definitions and related provisions required to be
contained in the By-Laws by the rating agencies in the event the Trust receives
written confirmation from Moody's or Standard & Poor's, or both, as appropriate,
that any such amendment, alteration or repeal would not impair the ratings then
assigned by Moody's and Standard & Poor's to shares of Municipal Preferred.
RATING AGENCY GUIDELINES
The Trust intends that, so long as shares of Municipal Preferred are
outstanding, the composition of its portfolio will reflect guidelines
established by at least one of Moody's or Standard & Poor's in connection with
the Trust's receipt on the Date of Original Issue of the shares of Municipal
Preferred of ratings of "aaa" from Moody's or AAA from Standard & Poor's.
Moody's and Standard & Poor's, nationally recognized independent rating
agencies, issue ratings for various securities reflecting their perceived
creditworthiness of such securities. The guidelines described below have been
developed by Moody's and Standard & Poor's in connection with other issuances of
asset-backed and similar securities, including debt obligations and adjustable
rate preferred shares, generally on a case-by-case basis through discussions
with the issuers of those securities. The guidelines are designed to ensure that
assets underlying outstanding debt or preferred shares will be sufficiently
varied and will be of sufficient quality and amount to justify investment grade
ratings. The guidelines do not have the force of law, but have been adopted by
the Trust in order to satisfy current requirements necessary for Moody's or
Standard & Poor's, or both, to issue the above-described ratings for shares of
Municipal Preferred, which ratings are generally relied upon by investors in
purchasing such securities. In the context of a closed-end investment company
such as the Trust, therefore, the guidelines provide a set of tests for
portfolio composition and asset coverage that supplement (and in some cases are
more restrictive than) the applicable requirements under the 1940 Act. A rating
agency's guidelines will apply to shares of Municipal Preferred only so long as
such rating agency is rating such shares. The Board of Trustees may, without
shareholder approval, amend, alter or repeal any or all of the definitions and
related provisions which have been adopted by the Trust pursuant to the rating
agency guidelines in the event the Trust receives written confirmation from
Moody's or Standard & Poor's, or both, as appropriate, that any such change
would not impair the ratings then assigned by Moody's and Standard & Poor's to
shares of Municipal Preferred.
B-31
<PAGE> 80
So long as either Standard & Poor's or Moody's, or both, are rating the
shares of Municipal Preferred, the Trust may not, among other things, (1) engage
in futures or options transactions, except in accordance with the then-current
guidelines of such rating agencies, (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 and (b) such borrowing (i) is privately arranged with a bank or other
person and is evidenced by a promissory note or other evidence of indebtedness
that is not intended to be publicly distributed or (ii) is for "temporary
purposes," is evidenced by a promissory note or other evidence of indebtedness
and is an amount not exceeding 5 per centum of the value of the total assets of
the Trust at the time of the borrowing (for purposes of the foregoing,
"temporary purpose" means that the borrowing is to be repaid within sixty days
and is not to be extended or renewed), (3) issue additional shares of Municipal
Preferred or any class or series of shares ranking prior to or on a parity with
the shares of Municipal Preferred with respect to the payment of dividends or
the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust, or reissue any shares of Municipal Preferred previously
purchased or redeemed by the Trust, (4) engage in any short sales of securities,
(5) lend any securities, (6) merge or consolidate into or with any corporation,
(7) change the pricing service (currently _________) referred to in the
definition of Market Value, or (8) enter into reverse repurchase agreements,
unless in each case (except as described above) it has received written
confirmation from Standard & Poor's or Moody's, or both, as appropriate, that
any such action would not impair the rating then assigned by such rating agency
to shares of Municipal Preferred. While the Trust does not presently intend to
borrow, and while the Trust is restricted under the 1940 Act from borrowing in
excess of 33 1/3% of its total assets and is otherwise restricted from borrowing
pursuant to rating agency guidelines, under certain circumstances and
notwithstanding adverse interest rate or market conditions, the Trust is
permitted to borrow for temporary or emergency purposes (e.g., to make required
distributions or pay dividends) or to repurchase shares when such borrowing is
deemed to be in the best interest of the common shareholders. See "Repurchase of
Common Shares" herein and "Repurchase of Common Shares; Conversion to Open-End
Fund" in the Prospectus for the circumstances under which the Trust may purchase
Common Shares and incur indebtedness in connection therewith. Should the Trust
borrow, the Trust would be required to pay when due the interest obligation on
any debt incurred by the Trust before it would be able to pay dividends on
shares of Municipal Preferred, and it is likely that the Trust would be required
to pay the principal amount of any such debt prior to meeting the liquidation
preference of the shares of Municipal Preferred. Because the interest expense on
borrowings by the Trust will reduce the Trust's net investment earnings
available to pay dividends on shares of Municipal Preferred, borrowing may
impair the Trust's ability to pay such dividends on shares of Municipal
Preferred. This risk is heightened in the event the Trust incurs variable rate
debt, the interest rate on which may increase with increases in prevailing
market rates.
ASSET MAINTENANCE
1940 Act Municipal Preferred Asset Coverage. The Trust will be required
under rating agency guidelines to maintain, as of the last Business Day of each
month on which any shares of Municipal Preferred are outstanding, asset coverage
of at least 200% with respect to such shares (or such other asset coverage as
may in the future be specified in or under the 1940 Act as the minimum asset
coverage for senior securities which are shares of a closed-end investment
company as a condition of declaring dividends on its common shares). If the
Trust fails to maintain such asset coverage in accordance with the requirements
of the rating agency or agencies then rating the shares of Municipal Preferred
("1940 Act Municipal Preferred Asset Coverage") and such failure is not cured as
of the last Business Day of the following month (the "1940 Act Cure Date"), the
Trust will be required under certain circumstances to redeem certain of the
shares of Municipal Preferred. See "Redemption" below.
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
seventh 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.
B-32
<PAGE> 81
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 any
redemption premium applicable to shares of Municipal Preferred 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;
(iii) subject to certain exceptions, the aggregate amount of
dividends that would accumulate on shares of Municipal
Preferred outstanding from such first Dividend Payment Date
through the 49th day after such Valuation Date, at the Maximum
Rate (calculated as if such Valuation Date were the Auction
Date for the Rate Period commencing on such Dividend Payment
Date) for a Minimum Rate Period thereof to commence on such
Dividend Payment Date, assuming, solely for purposes of the
foregoing, that if on such Valuation Date the Trust shall have
delivered a Notice of Special Rate Period to the Auction Agent
with respect to such shares, such Maximum Rate shall be the
higher of (a) the Maximum Rate for the Special Rate Period of
such shares to commence on such Dividend Payment Date and (b)
the Maximum Rate for a Minimum Rate Period of such shares to
commence on such Dividend Payment Date, multiplied by the
Volatility Factor applicable to a Minimum Rate Period, or, in
the event the Trust shall have delivered a Notice of Special
Rate Period to the Auction Agent with respect to such shares
designating a Special Rate Period consisting of 49 Rate Period
Days or more, the Volatility Factor applicable to a Special
Rate Period of that length;
(iv) the amount of anticipated Trust expenses for the 90 days
subsequent to such Valuation Date;
(v) the amount of the Trust's Maximum Potential Gross-up
Payment Liability as of such Valuation Date; and
(vi) any current liabilities as of such Valuation Date to the
extent not reflected in any of (A)(i) through (A)(v)
(including, without limitation, any payables for Municipal
Obligations purchased as of such Valuation Date and any
liabilities incurred for the purpose of clearing securities
transactions) less
(B) the value of any Trust assets irrevocably deposited by the
Trust for the payment of any of (A)(i) through (A)(vi), all as
calculated in accordance with the requirements of the rating agency or
agencies then rating the shares of Municipal Preferred.
For purposes of the foregoing, "Maximum Potential Gross-up Payment Liability,"
as of any Valuation Date, means the aggregate amount of Gross-up Payments that
would be due if the Trust were to make 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.
B-33
<PAGE> 82
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 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
---------------- --- -- --- --- -------
<S> <C> <C> <C> <C> <C>
45 Business Days.............................. 190% 195% 210% 250% 220%
22 Business Days.............................. 170 175 190 230 220
10 Business Days.............................. 155 160 175 215 220
7 Business Days............................... 150 155 170 210 220
3 Business Days............................... 130 135 150 190 220
</TABLE>
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, 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,
B-34
<PAGE> 83
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 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 Moody's. For purposes of the foregoing, Anticipation Notes rated SP-1+ or, if
not rated by Standard & Poor's, rated MIG-1 or VMIG-1 by Moody's, which do not
mature or have a demand feature at par exercisable in 30 days and which do not
have a long-term rating, will be considered to be short-term Municipal
Obligations. "Receivables for Municipal Obligations Sold," for purposes of
calculating Standard & Poor's Eligible Assets as of any Valuation Date, means
the book value of receivables for Municipal Obligations sold as of or prior to
such Valuation Date if such receivables are due within five business days of
such Valuation Date.
The Standard & Poor's guidelines impose certain minimum issue size,
issuer, geographical diversification and other requirements for purposes of
determining Standard & Poor's Eligible Assets:
(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, 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; and
(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.
(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 fair market
value of such Municipal Obligations does not exceed 10% of the
aggregate fair 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 fair market value of such Municipal
Obligations exceeds 5% of the aggregate fair market value of Standard &
Poor's Eligible Assets.
(3) Municipal Obligations rated by another nationally
recognized credit rating agency but not rated by Standard & Poor's will
be considered Standard & Poor's Eligible Assets only to the extent the
fair market value of such Municipal Obligations does not exceed 50% of
the aggregate fair 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 fair market
value of such Municipal Obligations does not exceed 20% of the
aggregate fair market value of Standard & Poor's Eligible Assets.
B-35
<PAGE> 84
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 for bonds with 10 years to maturity 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 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
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 by Moody's or Standard &
Poor's.
Since the Moody's Exposure Period currently applicable to the Trust is
49 days, the Moody's Discount Factors currently applicable to Moody's Eligible
Assets will be determined by reference to the factors set forth opposite the
line entitled "7 weeks." Notwithstanding the foregoing, (i) the Moody's Discount
Factor for short-term Municipal Obligations will be 115%, so long as such
Municipal Obligations are rated at least MIG-1, VMIG-1 or P-1 by Moody's and
mature or have a demand feature at par exercisable in 30 days or less or 125% so
long as such Municipal Obligations are rated at least A-1+/AA or SP-1+/AA by
Standard & Poor's and mature or have a demand feature at par exercisable in 30
days or less and (ii) no Moody's Discount Factor will be applied to cash or to
Receivables for Municipal Obligations Sold. "Receivables for Municipal
Obligations Sold," for purposes of calculating Moody's Eligible Assets as of any
Valuation Date, means no more than the aggregate of the following: (i) the book
value of receivables for Municipal Obligations sold as of or prior to such
Valuation Date if such receivables are due within five business days of such
Valuation Date, and if the trades which generated such receivables are (x)
settled through clearing house firms with respect to which the Trust has
received prior written authorization from Moody's or (y) with counterparties
having a Moody's long-term debt rating of at least Baa3; and (ii) the Moody's
Discounted Value of Municipal Obligations sold as of or prior to such Valuation
Date which generated receivables, if such receivables are due within five
business days of such Valuation Date but do not comply with either of conditions
(x) or (y).
B-36
<PAGE> 85
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
</TABLE>
- --------------
* Municipal Obligations not rated by Moody's but rated BBB by Standard &
Poor's.
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 ratings 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 Municipal Preferred are redeemable, at the
option of the Trust, as a whole or from time to time in part, on the
second Business Day preceding any Dividend Payment Date therefor, out
of funds legally available therefor in accordance with the Declaration,
the By-Laws and applicable law, at a redemption price per share equal
to the sum of $25,000 plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption; provided, however, that (1)
shares of Municipal Preferred may not be redeemed in part if after such
partial redemption fewer than 500 shares remain outstanding; (2) unless
otherwise provided in the By-laws, shares of Municipal Preferred are
redeemable by the Trust during the Initial Rate Period thereof only on
the second Business Day next preceding the last Dividend Payment Date
for such Initial Rate Period; and (3) subject to the next succeeding
sentence, the Notice of Special Rate Period relating to a Special Rate
Period of shares of Municipal Preferred, as delivered to the Auction
Agent and filed with the Secretary of the Trust, may provide that such
shares shall not be redeemable during the whole or any part of such
Special Rate Period (except as provided in (ii) below) or shall be
redeemable during the whole or any part of such Special Rate Period
only upon payment of such redemption premium or premiums as shall be
specified therein ("Special Redemption Provisions"); and
(ii) shares of Municipal Preferred are redeemable, at the
option of the Trust, as a whole but not in part, out of funds legally
available therefor in accordance with the Declaration, the By-Laws and
applicable law, on the first
B-37
<PAGE> 86
day following any Dividend Period thereof included in a Rate Period of
more than 364 Rate Period Days if, on the date of determination of the
Applicable Rate for such shares for such Rate Period, such Applicable
Rate equaled or exceeded on such date of determination the Treasury
Note Rate for such Rate Period, at a redemption price of $25,000 per
share plus an amount equal to accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date
fixed for redemption.
A Notice of Special Rate Period relating to shares of Municipal Preferred for a
Special Rate Period may contain Special Redemption Provisions only if the Board
of Trustees, after consultation with the Broker-Dealer or Broker-Dealers for
such Special Rate Period of such shares, determines that such Special Redemption
Provisions are in the best interest of the Trust.
If fewer than all of the outstanding shares of Municipal Preferred are
to be redeemed as set forth above, the number of shares to be redeemed shall be
determined by the Board of Trustees, and such shares shall be redeemed pro rata
from the holders of record of shares of such series (initially Cede & Co. as
nominee of the Securities Depository) in proportion to the number of such shares
held by such holders. Since the nominee of the Securities Depository is the only
record holder of shares of Municipal Preferred, the Securities Depository will
determine the number of shares to be redeemed from the accounts of the Agent
Members. The Agent Members, in turn, may determine to redeem shares from some
persons listed on their records as beneficial owners (which may include an Agent
Member holding shares for its own account) without redeeming shares from the
accounts of other persons listed on their records as beneficial owners.
The Trust may not mail a Notice of Redemption relating to an optional
redemption as described above on any date unless on such date (a) the Trust has
available certain Deposit Securities with maturity or tender dates not later
than the day preceding the applicable redemption date and having a value not
less than the amount (including any applicable premium) due to holders of shares
of Municipal Preferred by reason of the redemption of such shares on such
redemption date and (b) the Discounted Value of Moody's Eligible Assets (if
Moody's is then rating the shares of Municipal Preferred) and the Discounted
Value of Standard & Poor's Eligible Assets (if Standard & Poor's is then rating
the shares of Municipal Preferred) each at least equal the Municipal Preferred
Basic Maintenance Amount and would at least equal the Municipal Preferred Basic
Maintenance Amount immediately subsequent to such redemption if such redemption
were to occur on such date. For purposes of determining in clause (b) of the
preceding sentence whether the Discounted Value of Moody's Eligible Assets at
least equals the Municipal Preferred Basic Maintenance Amount, the Moody's
Discount Factors applicable to Moody's Eligible Assets will be determined by
reference to the first Moody's Exposure Period longer than the Moody's Exposure
Period then applicable to the Trust.
Mandatory Redemption. The Trust will be required to redeem, at a
redemption price equal to $25,000 per share plus accumulated but unpaid
dividends thereon (whether or not earned or declared) to (but not including) the
date fixed by the Board of Trustees for redemption (such amount, together with
the redemption prices described above under "Optional Redemption," being herein
referred to as the "Redemption Price"), certain of the shares of Municipal
Preferred to the extent permitted under the 1940 Act, the Declaration, the
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
B-38
<PAGE> 87
Preferred Asset Coverage, as the case may be, pro rata among shares of Municipal
Preferred and any other Preferred Shares subject to redemption or retirement.
The Trust is required to effect such a mandatory redemption not earlier
than 20 days and not later than 40 days after such Cure Date, except that if the
Trust does not have funds legally available under the Declaration, the By-Laws
and applicable law for the redemption of all of the required number of shares of
Municipal Preferred and other Preferred Shares which are subject to mandatory
redemption or retirement or the Trust otherwise is unable to effect such
redemption on or prior to 40 days after such Cure Date, the Trust will redeem
those shares of Municipal Preferred and other Preferred Shares which it was
unable to redeem on the earliest practicable date on which it is able to effect
such redemption. If fewer than all of the outstanding shares of Municipal
Preferred are to be redeemed pursuant to a mandatory redemption, the number of
shares to be redeemed shall be redeemed pro rata from the holders of such shares
in proportion to the number of such shares held by such holders, in the same
manner as described above in respect of optional redemptions of fewer than all
outstanding shares of Municipal Preferred.
Notice of Redemption. Notice of redemption shall be given by mailing
the same to each holder of the shares to be redeemed (initially Cede & Co. as
nominee of the Securities Depository), not less than 20 nor more than 45 days
prior to the date fixed for redemption thereof, to the respective addresses of
such holders as the same shall appear on the record books of the Trust ("Notice
of Redemption"). Each such notice shall state (i) the redemption date; (ii) the
number of shares of Municipal Preferred to be redeemed; (iii) the CUSIP number
for such shares; (iv) the Redemption Price; (v) the place or places where
certificate(s) for such shares (properly endorsed or assigned for transfer, if
the Board of Trustees shall so require and the notice shall so state) are to be
surrendered for payment of the Redemption Price; (vi) that dividends on the
shares to be redeemed will cease to accumulate on such redemption date; and
(vii) the provisions of the By-Laws under which such redemption is made. If
fewer than all shares of Municipal Preferred held by any holder are to be
redeemed, the notice mailed to such holder shall also specify the number of
shares to be redeemed from such holder. The Trust may provide in any Notice of
Redemption relating to an optional redemption that such redemption is subject to
one or more conditions precedent and that the Trust shall not be required to
effect such redemption unless each such condition shall have been satisfied at
the time or times and in the manner specified in such Notice of Redemption.
Other Redemption Procedures. To the extent that any redemption for
which notice of redemption has been mailed is not made by reason of the absence
of legally available funds therefor, such redemption will be made as soon as
practicable to the extent such funds become available. Failure to redeem shares
of Municipal Preferred will be deemed to exist at any time after the date
specified for redemption in a notice of redemption when the Trust shall have
failed, for any reason whatsoever, to deposit with the Auction Agent the
Redemption Price with respect to any shares for which such notice of redemption
has been mailed. Notwithstanding the fact that the Trust may not have redeemed
shares of Municipal Preferred for which a notice of redemption has been mailed,
dividends may be declared and paid on shares of Municipal Preferred and will
include those shares of Municipal Preferred for which 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
B-39
<PAGE> 88
date fixed for redemption, any cash deposited with the Auction Agent in excess
of (i) the aggregate Redemption Price of the shares of Municipal Preferred
called for redemption on such date and (ii) all other amounts to which holders
of shares of Municipal Preferred called for redemption may be entitled. Any
funds so deposited that are unclaimed at the end of 90 days from such redemption
date will, to the extent permitted by law, be repaid to the Trust, after which
time the holders of shares of Municipal Preferred so called for redemption may
look only to the Trust for payment of the Redemption Price and all other amounts
to which they may be entitled. The Trust will be entitled to receive, from time
to time after the date fixed for redemption, any interest on the funds so
deposited.
Notwithstanding the foregoing, if any dividends on shares of Municipal
Preferred (whether or not earned or declared) are in arrears, no shares of
Municipal Preferred shall be redeemed unless all outstanding shares of Municipal
Preferred are simultaneously redeemed, and the Trust shall not purchase or
otherwise acquire any shares of Municipal Preferred; provided, however, that the
foregoing shall not prevent the purchase or acquisition of all outstanding
shares of Municipal Preferred pursuant to the successful completion of an
otherwise lawful purchase or exchange offer made on the same terms to, and
accepted by, holders of all outstanding shares of Municipal Preferred.
Except as described above with respect to redemptions and under "The
Auction--Orders by Existing Holders and Potential Holders," the Declaration and
the By-Laws do not prohibit the Trust or any affiliate of the Trust from
purchasing or otherwise acquiring any shares of Municipal Preferred.
The Trust has the right to arrange for third parties to purchase from
the holders thereof shares of Municipal Preferred which are to be redeemed as
described above.
LIQUIDATION
Upon a dissolution, liquidation or winding up of the affairs of the
Trust, whether voluntary or involuntary, the holders of shares of Municipal
Preferred then outstanding will be entitled to receive and to be paid out of the
assets of the Trust available for distribution to its shareholders, before any
payment or distribution shall be made on the Common Shares or on any other class
of shares of the Trust ranking junior to the Municipal Preferred upon
dissolution, liquidation or winding up of the affairs of the Trust, an amount
equal to the liquidation preference with respect to such shares. The liquidation
preference for shares of Municipal Preferred shall be $25,000 per share, plus an
amount equal to all dividends thereon (whether or not earned or declared)
accumulated but unpaid to (but not including) the date of final distribution in
same-day funds, together with any applicable Gross-up Payments in connection
with the dissolution, liquidation or winding up of the affairs of the Trust.
After the payment to the holders of the shares of Municipal Preferred of the
full preferential amounts provided for as described herein, the holders of
Municipal Preferred as such shall have no right or claim to any of the remaining
assets of the Trust. In the event the assets of the Trust available for
distribution to the holders of shares of Municipal Preferred, upon any
dissolution, liquidation or winding up of the affairs of the Trust, whether
voluntary or involuntary, shall be insufficient to pay in full all amounts to
which such holders are entitled, no such distribution shall be made on account
of any other class or series of Preferred Shares ranking on a parity with the
shares of Municipal Preferred upon such dissolution, liquidation or winding up
unless proportionate distributive amounts shall be paid on account of the shares
of Municipal Preferred, ratably, in proportion to the full distributable amounts
for which holders of all such parity shares are respectively entitled upon such
dissolution, liquidation or winding up. Subject to the rights of the holders of
any series or class or classes of shares ranking on a parity with the shares of
Municipal Preferred with respect to the 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
B-40
<PAGE> 89
business trust or corporation into or with the Trust shall be a dissolution,
liquidation or winding up of the affairs of the Trust, whether voluntary or
involuntary, for the purposes of the foregoing paragraph.
REPURCHASE OF COMMON SHARES
The Trust is a closed-end investment company and as such its
shareholders will not have the right to cause the Trust to redeem their shares.
Common Shares trade in the open market at a price that is a function of several
factors, including net asset value and yield. Although the common shares of a
closed-end investment company such as the Trust that invests substantially all
of its assets in investment grade municipal obligations have generally traded at
a premium to net asset value, such shares have occasionally traded at a discount
to net asset value. The Board of Trustees has currently determined that, at
least annually, it will consider action that might be taken to reduce or
eliminate any material discount from net asset value in respect of Common
Shares, which may include the repurchase of such shares in the open market or in
private transactions, the making of a tender offer for such shares at net asset
value, or the conversion of the Trust to an open-end investment company. There
can be no assurance, however, that the Board of Trustees will decide to take any
of these actions, or that share repurchases or tender offers, if undertaken,
will reduce market discount. In addition, see "Description of Municipal
Preferred--Dividends--Restrictions on Dividends and Other Payments" for a
discussion of the limitations on the Trust's ability to engage in certain
transactions. The staff of the SEC currently requires that any tender offer made
by a closed-end investment company for its shares must be at a price equal to
the net asset value of such shares on the close of business on the last day of
the tender offer. Any service fees incurred in connection with any tender offer
made by the Trust will be borne by the Trust and will not reduce the stated
consideration to be paid to tendering shareholders.
Subject to its investment limitations, the Trust may borrow to finance
the repurchase of shares or to make a tender offer. Interest on any borrowings
to finance share repurchase transactions or the accumulation of cash by the
Trust in anticipation of share repurchases or tenders will reduce the Trust's
net income. Any share repurchase, tender offer or borrowing that might be
approved by the Board of Trustees would have to comply with the Securities
Exchange Act of 1934, as amended, and the 1940 Act and the rules and regulations
thereunder.
Although the decision to take action in response to a discount from net
asset value will be made by the Board of Trustees at the time it considers such
issue, it is the Board's present policy, which may be changed by the Board, not
to authorize repurchases of the Trust's Common Shares or a tender offer for such
shares if (1) such transactions, if consummated, would (a) result in the
delisting of the Common Shares from the New York Stock Exchange (the
"Exchange"), or (b) impair the Trust's status as a regulated investment company
under the Code (which would make the Trust a taxable entity, causing the Trust's
income to be taxed at the corporate level in addition to the taxation of
shareholders who receive dividends from the Trust) or as a registered closed-end
investment company under the 1940 Act; (2) the Trust would not be able to
liquidate portfolio securities in an orderly manner and consistent with the
Trust's investment objectives and policies in order to repurchase shares; or (3)
there is, in the Board's judgment, any (a) material legal action or proceeding
instituted or threatened challenging such transactions or otherwise materially
adversely affecting the Trust, (b) general suspension of or limitation 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.
B-41
<PAGE> 90
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
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.
B-42
<PAGE> 91
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.
Zero-coupon bonds are issued at a significant discount from their
principal amount in lieu of paying interest periodically. Payment-in-kind bonds
allow the issuer, at its option, to make current interest payments on the bonds
either in cash or in additional bonds. Because zero coupon and payment-in-kind
bonds do not pay current interest in cash, their value is subject to greater
fluctuation in response to changes in market interest rates than bonds that pay
interest currently. Both zero coupon and payment-in-kind bonds allow an issuer
to avoid the need to generate cash to meet current interest payments.
Accordingly, such bonds may involve greater credit risks than bonds paying
interest currently in cash. The Trust is required to accrue interest income on
such investments and to distribute such amounts at least annually to
shareholders even though such bonds do not pay current interest in cash. Thus,
it may be necessary at times for the Trust to liquidate investments in order to
satisfy its dividend distribution requirements.
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, are 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
B-43
<PAGE> 92
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 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.
B-44
<PAGE> 93
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. 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.
B-45
<PAGE> 94
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.
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
B-46
<PAGE> 95
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 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.
B-47
<PAGE> 96
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.
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.
B-48
<PAGE> 97
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 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
B-49
<PAGE> 98
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 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
B-50
<PAGE> 99
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.
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) 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
Fund's assets must consist of cash and cash items, U.S. Government securities,
securities of other regulated investment companies, and securities of other
issuers (as to which the Trust has not invested more than 5% of the value of the
Trust's total assets in securities of such issuer and as to which the Trust does
not hold more than 10% of the outstanding voting securities of such issuer), and
no more than 25% of the value of its total assets may be invested in the
securities of any one issuer (other than U.S. Government securities and
securities of other regulated interment companies), or in two or more issuers
which the Trust controls and which are engaged in the same or similar trades or
businesses.
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 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). The balance of such income must be
distributed during the next calendar 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.
B-51
<PAGE> 100
If the Trust does not qualify for taxation as a regulated investment
company for any taxable year, the Trust's income will be taxed 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 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 a 4% Federal excise tax (imposed on regulated investment companies that fail
to distribute for a given calendar year substantially all of their taxable net
investment income for such year and substantially all of their capital gain net
income for the one-year period ending October 31 of such year) and may prevent
the Trust from satisfying the Distribution Requirement. The Trust may redeem
shares of Municipal Preferred in an effort to comply with the Distribution
Requirement and to avoid the excise tax. See "Description of Municipal
Preferred--Dividends."
Federal Taxation of Shareholders
Dividends and Other Distributions. In order for any distributions to
holders of shares of Municipal Preferred to be eligible to be treated as
exempt-interest dividends, the shares of Municipal Preferred must be treated as
equity for Federal income tax purposes. Based in part on certain representations
made by the Trust to Ropes & Gray relating to the lack of any present intention
to redeem or purchase shares of Municipal Preferred at any time in the future,
it is the opinion of Ropes & Gray that the shares of Municipal Preferred will
constitute equity for Federal income tax purposes. This opinion relies in part
on a published ruling of the Internal Revenue Service stating that certain
auction rate preferred stock similar in many material respects to the Municipal
Preferred represents equity. The opinion of Ropes & Gray represents only its
best legal judgment and is not binding on the Internal Revenue Service or the
courts. If the Internal Revenue Service were successfully to assert that
variable rate preferred stock such as the Municipal Preferred should be treated
as debt for Federal income tax purposes, dividends on shares of Municipal
Preferred would be treated as taxable interest for Federal income tax purposes.
In such event, dividends on shares of Municipal Preferred would not be increased
by the Trust and holders of shares of Municipal Preferred would not be entitled
to any additional distributions from the Trust (including any Gross-up Payments)
to offset the effect of paying Federal income tax on Trust distributions so
recharacterized as interest. Ropes & Gray has advised the Trust that, should the
Internal Revenue Service pursue in court the position that the shares of
Municipal Preferred should be treated as debt for Federal income tax purposes,
the Internal Revenue Service would be unlikely to prevail.
Prior proposed legislation that was ultimately not enacted would have
reinstated a deductible tax (the "Environmental Tax"), imposed through tax years
beginning before January 1, 1996, at a rate of 0.12% on a corporation's
alternative minimum taxable income (computed without regard to the alternative
minimum tax net operating loss deduction) in excess of $2 million. If the
Environmental Tax is reinstated, exempt-interest dividends paid by the Trust
that are included in a corporate shareholder's alternative minimum taxable
income may subject such shareholder to the Environmental Tax. It is not possible
for the Trust to predict whether similar legislation might be proposed and
enacted in the future. Corporate shareholders should consult with their own tax
advisors regarding the likelihood of such legislation and its effect on them.
As discussed in the Prospectus, exempt-interest dividends attributable
to interest received on certain private activity bonds and certain industrial
development bonds will not be tax-exempt to any shareholders who are, within the
meaning of Section 147(a) of the Code, "substantial users" of the facilities
financed by such obligations or bonds or who are "related persons" of such
substantial users. In general, a "substantial user" of a facility includes a
"non-exempt person who regularly uses a part of such facility in his trade or
business." "Related persons" are in general defined to include persons among
whom there exists a relationship, either by family or business, which would
result in a disallowance of losses in transactions among them under various
provisions of the Code (or if they are members of the same controlled group of
corporations under the Code), including a partnership and each of its partners
(and their spouses and minor children), an S corporation and each of its
shareholders (and their spouses and minor children) and various combinations of
these relationships. The foregoing is not a complete statement of all of the
provisions of the Code covering the definitions of "substantial user" and
"related person." For additional information, investors should consult their tax
advisors before investing in Municipal Preferred.
B-52
<PAGE> 101
All or a portion of interest on indebtedness incurred or continued by a
shareholder to purchase or carry Trust shares may not be deductible by the
shareholder. The portion of interest that is not deductible is equal to the
total interest paid or accrued on the indebtedness multiplied by the percentage
of the Trust's total distributions (not including distributions of net capital
gain) paid to the shareholder that are exempt-interest dividends. Under rules
used by the Internal Revenue Service for determining when borrowed funds are
considered to have been used for the purpose of purchasing or carrying
particular assets, the purchase of shares of Municipal Preferred may be
considered to have been made with borrowed funds even though such funds are not
directly traceable to the purchase of shares.
Under Federal tax law in effect at the date of this Prospectus, a
shareholder's interest deduction generally will not be disallowed if the average
adjusted basis of the shareholder's tax-exempt obligations (including shares of
Municipal Preferred) does not exceed two percent of the average adjusted basis
of the shareholder's trade or business assets (in the case of most corporations
and some individuals) and portfolio investments (in the case of individuals).
Prior proposed legislation that was ultimately not enacted would have further
limited or repealed this two-percent de minimis exception, which could reduce
the total after-tax yield of the Municipal Preferred to investors to whom the de
minimis exception would otherwise apply. It is not possible for the Trust to
predict whether similar legislation might be proposed and enacted in the future.
Shareholders should consult with their own tax advisors regarding the likelihood
of such legislation and its effect on them.
Sales or Redemptions of Shares. From time to time the Trust may make a
tender or repurchase offer for its Common Shares. It is expected that the terms
of any such offer will require a tendering shareholder to tender all Common
Shares, and dispose of all shares of Municipal Preferred, held or considered
under Code rules to be held by such shareholder. Shareholders who tender all
Common Shares and dispose of all shares of Municipal Preferred held, or
considered held, by them will be treated as having sold such shares and
generally will realize a capital gain or loss. If, however, a shareholder
tenders fewer than all of its Common Shares, or retains a substantial portion of
its Municipal Preferred, such shareholder may be treated as having received a
taxable dividend upon the tender of its Common Shares. In such a case, there is
a remote risk that non-tendering shareholders (including holders of Municipal
Preferred) will be treated as having received taxable distributions from the
Trust. Likewise, if the Trust redeems some but not all of the Municipal
Preferred held by a holder of Municipal Preferred and such holder of Municipal
Preferred is treated as having received a taxable dividend upon such redemption,
there is a remote risk that holders of Common Shares and non-redeeming holders
of Municipal Preferred will be treated as having received taxable distributions
from the Trust.
Backup Withholding. The Trust generally is required to withhold and
remit to the U.S. Treasury 31% of the taxable dividends and other distributions
paid to non-corporate shareholders who fail to furnish the Trust with a correct
taxpayer identification number, who have underreported dividends or interest
income, or who fail to certify to the Trust that they are not subject to such
withholding. An individual's taxpayer identification number is his or her social
security number.
Foreign Investors. Non-resident alien individuals, foreign corporations
and certain other foreign entities generally will be subject to a U.S.
withholding tax at a rate of 30% on the Trust's distributions from its ordinary
income and the excess of its net short-term capital gain over its net long-term
capital loss, unless the tax is reduced or eliminated by an applicable tax
treaty. Distributions from the excess of the Trust's net capital gain received
by such shareholders and any gain from the sale or other disposition of shares
of the Trust generally will not be subject to U.S. Federal income taxation,
provided that non-resident alien status has been certified by the shareholder.
Different U.S. tax consequences may result if the shareholder is engaged in a
trade or business in the United States, is present in the United States for a
sufficient period of time during a taxable year to be treated as a U.S.
resident, or fails to provide any required certifications regarding status as a
non-resident alien investor. Foreign shareholders should consult their tax
advisors regarding the U.S. and foreign tax consequences of an investment in the
Trust.
The Internal Revenue Service recently revised its regulations affecting
the application to foreign investors of the back-up withholding and withholding
tax rules described above. The new regulations will generally be effective for
payments made after December 31, 1999 (although transition rules will apply). 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.
B-53
<PAGE> 102
The foregoing is a general, abbreviated summary of the provisions of
the Code and regulations thereunder presently in effect as they directly govern
the taxation of the Trust and owners of shares of Municipal Preferred. These
provisions are subject to change by legislative or administrative action, and
any such change may be retroactive with respect to Trust transactions. Owners of
shares of Municipal Preferred are advised to consult with their own tax advisors
for more detailed information concerning Federal income tax matters.
FOREIGN, STATE AND LOCAL TAX MATTERS
The exemption from Federal income tax for exempt-interest dividends
does not necessarily result in exemption for such dividends under the income or
other tax laws of any foreign, state or local taxing authority. Some states
exempt from state income tax that portion of any exempt-interest dividend that
is derived from interest received by a regulated investment company on its
holdings of securities of that state and its political subdivisions and
instrumentalities. Therefore, the Trust will report annually to its shareholders
the percentage of interest income earned by the Trust during the preceding year
on tax-exempt obligations indicating, on a state-by-state basis, the source of
such income. Holders of shares of Municipal Preferred are advised to consult
with their own tax advisors about foreign, state and local tax matters.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration disclaims shareholder liability for acts or obligations
of the Trust and requires that a notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Trust or the
Trustees. The Declaration provides for indemnification out of Trust property for
all loss and expense of any shareholder held personally liable for the
obligations of the Trust. Thus, the risk of a shareholder's incurring financial
loss on account of shareholder liability is limited to circumstances (which are
considered remote) in which the Trust would be unable to meet its obligations
and the disclaimer was inoperative.
CUSTODIAN
The Chase Manhattan Bank, located at 270 Park Avenue, New York, New
York 10017-0270, is the Trust's custodian. The custodian is responsible for
safeguarding the Trust's cash and securities, receiving and delivering
securities and collecting the Trust's interest and dividends.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP are the Trust's independent accountants,
providing audit and tax return preparation services and assistance and
consultation in connection with the review of various Securities and Exchange
Commission filings. The address of PricewaterhouseCoopers LLP is 160 Federal
Street, Boston, Massachusetts 02110. The financial statements included in this
SAI have been so included, and the financial highlights included in the
Prospectus have been so included, in reliance upon the report of
PricewaterhouseCoopers LLP given on the authority of said firm as experts in
accounting and auditing.
B-54
<PAGE> 103
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
B-55
<PAGE> 104
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
--------
B-56
<PAGE> 105
...............................................................................
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
B-57
<PAGE> 106
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
B-58
<PAGE> 107
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
B-59
<PAGE> 108
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
B-60
<PAGE> 109
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,
B-61
<PAGE> 110
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,
B-62
<PAGE> 111
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
B-63
<PAGE> 112
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
B-64
<PAGE> 113
--------
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
B-65
<PAGE> 114
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,
B-66
<PAGE> 115
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.,
B-67
<PAGE> 116
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,
B-68
<PAGE> 117
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
B-69
<PAGE> 118
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
B-70
<PAGE> 119
--------
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,
B-71
<PAGE> 120
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
--------
B-72
<PAGE> 121
--------
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
B-73
<PAGE> 122
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
B-74
<PAGE> 123
-----
$ 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>
B-75
<PAGE> 124
<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>
B-76
<PAGE> 125
<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>
B-77
<PAGE> 126
<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
B-78
<PAGE> 127
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
B-79
<PAGE> 128
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
B-80
<PAGE> 129
------------- ------------
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.
B-81
<PAGE> 130
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>
B-82
<PAGE> 131
<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>
B-83
<PAGE> 132
<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>
B-84
<PAGE> 133
GLOSSARY
"AA" Composite Commercial Paper Rate" has the meaning set forth on
pages B-16 to B-17 of this Statement of Additional Information.
"Advisor" means Colonial Management Associates, Inc.
"Affected Series" has the meaning set forth on page B-31 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 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 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 the following obligations: 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) that are rated by Standard & Poor's.
"Applicable Rate" has the meaning set forth on page B-12 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-20
of this Statement of Additional Information.
"Benchmark Rate" has the meaning set forth on page B-20 of this
Statement of Additional Information.
"Beneficial Owner" has the meaning set forth on page B-12 of this
Statement of Additional Information.
"Bid" has the meaning set forth on page B-14 of this Statement of
Additional Information.
"Bidder" and "Bidders" have the respective meanings set forth on page
B-14 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
B-85
<PAGE> 134
such member or participant, has been selected by the Trust and has entered into
a Broker-Dealer Agreement that remains effective.
"Broker-Dealer Agreement" means an agreement among the Trust, the
Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to
follow the procedures specified in the By-Laws, the Prospectus and this
Statement of Additional Information.
"Business Day" has the meaning set forth on page B-12 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 State 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-47 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-17 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-12 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 State of
the Commonwealth of Massachusetts.
"Deposit Securities" has the meaning set forth on page B-38 of this
Statement of Additional Information.
"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-12 of this
Statement of Additional Information.
"Dividend Period" has the meaning set forth on page B-12 of this
Statement of Additional Information.
"DTC" has the meaning set forth on page B-13 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
B-86
<PAGE> 135
Standard & Poor's economic defeasance criteria and assigned a rating of AAA by
Standard & Poor's, (iii) are not rated by Standard & Poor's but have been
determined to be legally defeased by Moody's, or (iv) have been determined to be
economically defeased by Moody's and assigned a rating no lower than the rating
that is Moody's equivalent of Standard & Poor's AAA rating.
"Exchange" has the meaning set forth on page B-41 of this Statement of
Additional Information.
"Existing Holder" has the meaning set forth on page B-12 of this
Statement of Additional Information.
"Failure to Deposit," with respect to shares of Municipal Preferred,
means a failure by the Trust to pay to the Auction Agent, not later than 12:00
noon, New York City time, (A) on the Business Day next preceding any Dividend
Payment Date for such shares, in funds available on such Dividend Payment Date
in The City of New York, New York, the full amount of any dividend (whether or
not earned or declared) to be paid on such Dividend Payment Date on any share or
(B) on the Business Day next preceding any redemption date in funds available on
such redemption date for such shares in The City of New York, New York, the
Redemption Price to be paid on such redemption date for any share after notice
of redemption is mailed as set forth in the By-Laws, the Prospectus or this
Statement of Additional Information; provided, however, that the foregoing
clause (B) shall not apply to the Trust's failure to pay the Redemption Price in
respect of shares of Municipal Preferred when the related notice of redemption
provides that redemption of such shares is subject to one or more conditions
precedent and any such condition precedent shall not have been satisfied at the
time or times and in the manner specified in such notice of redemption.
"Gross-up Payment" has the meaning set forth on page B-27 of
this Statement of Additional Information.
"Hold Order" has the meaning set forth on page B-14 of this Statement
of Additional Information.
"Holder" means the registered holder of shares of Municipal Preferred
as the same appears on the record books of the Trust.
"Initial Rate Period" has the meaning set forth on page B-12 of this
Statement of Additional Information.
"IRS" means the Internal Revenue Service.
"Kenny Index" has the meaning set forth on page B-16 of this Statement
of Additional Information.
"Late Charge" has the meaning set forth on page B-25 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.
"Maximum Potential Gross-up Payment Liability" has the meaning set
forth on page B-33 of this Statement of Additional Information.
"Maximum Rate" has the meaning set forth on page B-15 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.
"Moody's Discount Factors" has the meaning set forth on page B-36 of
this Statement of Additional Information.
"Moody's Eligible Assets" has the meaning set forth on page B-36 of
this Statement of Additional Information.
B-87
<PAGE> 136
"Moody's Exposure Period" has the meaning set forth on page B-36 of
this Statement of Additional Information.
"Moody's Volatility Factor" means, as of any Valuation Date, (i) in the
case of any Minimum Rate Period, any Special Rate Period of 28 Rate Period Days
or fewer, or any Special Rate Period of 57 Rate Period Days or more, a
multiplicative factor equal to 275%, except as otherwise provided in the last
sentence of this definition; (ii) in the case of any Special Rate Period of more
than 28 but fewer than 36 Rate Period Days, a multiplicative factor equal to
203%; (iii) in the case of any Special Rate Period of more than 35 but fewer
than 43 Rate Period Days, a multiplicative factor equal to 217%; (iv) in the
case of any Special Rate Period of more than 42 but fewer than 50 Rate Period
Days, a multiplicative factor equal to 226%; and (v) in the case of any Special
Rate Period of more than 49 but fewer than 57 Rate Period Days, a multiplicative
factor equal to 235%. If, as a result of the enactment of changes to the Code,
the greater of the maximum marginal Federal individual income tax rate
applicable to ordinary income and the maximum marginal Federal corporate income
tax rate applicable to ordinary income will increase, such increase being
rounded up to the next five percentage points, until the effective date of such
increase, the Moody's Volatility Factor in the case of any Rate Period described
in (i) above in this definition instead shall be determined by reference to the
following table:
<TABLE>
<CAPTION>
Federal Volatility
Tax Rate Increase Factor
----------------- ----------
<S> <C>
5% 295%
10% 317%
15% 341%
20% 369%
25% 400%
30% 436%
35% 477%
40% 525%
</TABLE>
"Municipal Preferred" means the Municipal Auction Rate Cumulative
Preferred Shares, without par value, liquidation preference $25,000 per share,
of the Trust.
"Municipal Preferred Basic Maintenance Amount" has the meaning set
forth on page B-33 of this Statement of Additional Information.
"Municipal Preferred Basic Maintenance Cure Date" has the meaning set
forth on page B-32 of this Statement of Additional Information.
"Municipal Preferred Basic Maintenance Report" has the meaning set
forth on page B-33 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-32 of this
Statement of Additional Information.
"1940 Act Municipal Preferred Asset Coverage" has the meaning set forth
on page B-32 of this Statement of Additional Information.
"Notice of Redemption" has the meaning set forth on page B-39 of this
Statement of Additional Information.
"Notice of Special Rate Period" has the meaning set forth on page B-28
of this Statement of Additional Information.
"Order" and "Orders" have the respective meanings set forth on page
B-14 of this Statement of Additional Information.
B-88
<PAGE> 137
"Outstanding" means, as of any Auction Date with respect to shares of
Municipal Preferred, the number of such shares theretofore issued by the Trust
except, without duplication, (i) any shares of Municipal Preferred theretofore
canceled or delivered to the Auction Agent for cancellation or redeemed by the
Trust, (ii) any shares of Municipal Preferred as to which the Trust or any
Affiliate thereof shall be an Existing Holder, and (iii) any shares of Municipal
Preferred represented by any certificate in lieu of which a new certificate has
been executed and delivered by the Trust.
"Person" means and includes an individual, a partnership, a
corporation, a trust, an unincorporated association, a joint venture or other
entity or a government or any agency or political subdivision thereof.
"Potential Beneficial Owner" has the meaning set forth on page B-12 of
this Statement of Additional Information.
"Potential Holder" has the meaning set forth on page B-12 of this
Statement of Additional Information.
"Preferred Shares" means the preferred shares of beneficial interest,
without par value of the Trust, and includes the Municipal Preferred.
"Rate Multiple" has the meaning set forth on page B-18 of this
Statement of Additional Information.
"Rate Period" has the meaning set forth on page B-12 of this Statement
of Additional Information.
"Rate Period Days," for any Rate Period or Dividend Period, means the
number of days that would constitute such Rate Period or Dividend Period but for
the application of the second paragraph under "Description of Municipal
Preferred--Dividends--General" or the second paragraph under "Description of
Municipal Preferred--Dividends--Designation of Special Rate Periods."
"Receivables for Municipal Obligations Sold," for purposes of
calculating Moody's Eligible Assets or Standard & Poor's Eligible Assets, as the
case may be, has the meaning set forth on pages B-36 to B-37 and B-35 of this
Statement of Additional Information, respectively.
"Redemption Price" has the meaning set forth on page B-38 of this
Statement of Additional Information.
"Reference Rate" has the meaning set forth on page B-16 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-14 of this Statement
of Additional Information.
"Special Rate Period" has the meaning set forth on page B-12 of this
Statement of Additional Information.
"Special Redemption Provisions" has the meaning set forth on page B-37
of this Statement of Additional Information.
"Standard & Poor's" means Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies.
"Standard & Poor's Discount Factors" has the meaning set forth on page
B-34 of this Statement of Additional Information.
"Standard & Poor's Eligible Assets" has the meaning set forth on page
B-34 of this Statement of Additional Information.
B-89
<PAGE> 138
"Standard & Poor's Exposure Period" has the meaning set forth on page
B-34 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., 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" has the meaning set forth on page B-20 of this
Statement of Additional Information.
"Submitted Hold Order" has the meaning set forth on page B-20 of this
Statement of Additional Information.
"Submitted Order" has the meaning set forth on page B-20 of this
Statement of Additional Information.
"Submitted Sell Order" has the meaning set forth on page B-20 of this
Statement of Additional Information.
"Subsequent Rate Period" has the meaning set forth on pages B-12 to
B-13 of this Statement of Additional Information.
"Substitute Commercial Paper Dealer" has the meaning set forth on page
B-17 of this Statement of Additional Information.
"Substitute U.S. Government Securities Dealer" has the meaning set
forth on page B-18 of this Statement of Additional Information.
"Sufficient Clearing Bids" has the meaning set forth on page B-20 of
this Statement of Additional Information.
"Taxable Allocation" has the meaning set forth on page B-27 of this
Statement of Additional Information.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" has the
meaning set forth on page B-16 of this Statement of Additional Information.
"Taxable Income" has the meaning set forth on page B-20 of this
Statement of Additional Information.
"Taxable Yield Rate" has the meaning set forth on page B-20 of this
Statement of Additional Information.
"Treasury Bill" has the meaning set forth on page B-18 of this
Statement of Additional Information.
"Treasury Bill Rate" has the meaning set forth on page B-18 of this
Statement of Additional Information.
"Treasury Note" has the meaning set forth on page B-18 of this
Statement of Additional Information.
"Treasury Note Rate" has the meaning set forth on page B-18 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-18 of this Statement of Additional Information.
B-90
<PAGE> 139
"Valuation Date" has the meaning set forth on page B-32 of this
Statement of Additional Information.
"Volatility Factor" means, as of any Valuation Date, the greater of the
Moody's Volatility Factor and the Standard & Poor's Volatility Factor.
"Winning Bid Rate" has the meaning set forth on page B-20 of this
Statement of Additional Information.
B-91
<PAGE> 140
APPENDIX A
RATINGS OF INVESTMENTS
STANDARD & POOR'S RATINGS SERVICES -- A brief description of the applicable
Standard & Poor's Ratings Services ("S&P") rating symbols and their meanings (as
published by S&P) follows:
LONG TERM DEBT
An S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely
on unaudited financial information. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
INVESTMENT GRADE
AAA Debt rated 'AAA' has the highest rating assigned by 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.
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
B-92
<PAGE> 141
debt will likely have some quality and protective characteristics, these are
outweighed by major uncertainties or major exposures to adverse conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. The 'BB' rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied 'BBB-' rating.
B Debt rated 'B' has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal.
The 'B' rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied 'BB' or 'BB-' rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial, or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal.
The 'CCC' rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied 'B' or 'B-' rating.
CC The rating 'CC' typically is applied to debt subordinated to senior
debt that is assigned an actual or implied 'CCC' debt rating.
C The rating 'C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C'
rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued.
CI The rating 'CI' is reserved for income bonds on which no interest is
being paid.
D Debt rated 'D' is in payment default. The 'D' rating category is used
when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The
'D' rating also will be used upon the filing of a bankruptcy petition
if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
PROVISIONAL RATINGS: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should exercise judgment
with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is federally insured and interest is adequately
collateralized.* In the case of certificates of deposit the letter 'L'
indicates that the deposit, combined with other deposits being held in
the same right and capacity, will be honored for principal and accrued
pre-default interest up to the federal insurance limits within 30 days
after closing of the insured institution or, in the event that the
deposit is assumed by a successor insured institution, upon maturity.
B-93
<PAGE> 142
* Continuance of the rating is contingent upon S&P's receipt of an
executed copy of the escrow agreement or closing documentation
confirming investments and cash flow.
NR Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
MUNICIPAL NOTES
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note rating.
Notes maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment:
-- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
NOTE RATING SYMBOLS ARE AS FOLLOWS:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell, or hold a security
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
COMMERCIAL PAPER
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. These categories are as follows:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted with a
plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-l."
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
B-94
<PAGE> 143
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
MOODY'S INVESTORS SERVICE, INC.-- A brief description of the applicable Moody's
Investors Service, Inc. ("Moody's") rating symbols and their meanings (as
published by Moody's) follows:
MUNICIPAL BONDS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
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.
B-95
<PAGE> 144
Bonds for which the security depends upon the completion of some act or
the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned in operation experience, (c) rentals
which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes
probable credit stature upon completion of construction or elimination
of basis of condition.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the
symbols Aal, Al, Baal, Bal and Bl.
SHORT-TERM LOANS
MIG 1/VMIG 1 This designation denotes best quality. There is present
strong protection by established cash flows, superior
liquidity support or demonstrated broadbased access to the
market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of
protection are ample although not so large as in the
preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security
elements are accounted for but there is lacking the
undeniable strength of the preceding grades. Liquidity and
cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is
present and although not distinctly or predominantly
speculative, there is specific risk.
S.G. This designation denotes speculative quality. Debt
instruments in this category lack margins of protection.
COMMERCIAL PAPER
Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
--Leading market positions in well established industries.
--High rates of return on funds employed.
--Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
--Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
--Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated PRIME-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
B-96
<PAGE> 145
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
B-97
<PAGE> 146
APPENDIX B
AUCTION PROCEDURES
The following procedures will be set forth as Section 1 through 8 of
Part II of Section 12.1 of the Amended and Restated By-Laws of the Trust. The
terms not defined below are defined in the Glossary or in the Prospectus or this
Statement of Additional Information.
1. Orders.
(a) Prior to the Submission Deadline on each Auction Date for
shares of a series of Municipal Preferred:
(i) each Beneficial Owner of shares of such series may
submit to its Broker-Dealer by telephone or otherwise
information as to:
(A) the number of Outstanding shares, if any, of
such series held by such Beneficial Owner
which such Beneficial Owners desires to
continue to hold without regard to the
Applicable Rate for shares of such series
for the next succeeding Rate Period of such
shares;
(B) the number of Outstanding shares, if any, of
such series held by such Beneficial Owner
offers to sell if the Applicable Rate for
shares of such series for the next
succeeding Rate Period of shares of such
series shall be less than the rate per annum
specified by such Beneficial Owner; and/or
(C) the number of Outstanding shares, if any, of
such series held by such Beneficial Owners
which such Beneficial Owner offers to sell
without regard to the Applicable Rate for
shares of such series for the next Rate
Period of shares of such series;
and
(ii) one or more Broker-Dealers, using lists of Potential
Beneficial Owners, shall in good faith for the
purpose of conducting a competitive Auction in a
commercially reasonable manner, contact Potential
Beneficial Owners (by telephone or otherwise),
including Persons that are not Beneficial Owners, on
such lists to determine the number of shares, if any,
of such series which each such Potential Beneficial
Owner offers to purchase if the Applicable Rate for
shares of such series for the next succeeding Rate
Period of shares of such series shall not be less
than the rate per annum specified by such Potential
Beneficial Owner.
For purposes hereof, the communication by a Beneficial Owner or Potential
Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the Auction Agent,
of information referred to in clause (i)(a), (i)(B), (i)(C), or (ii) of this
paragraph (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 paragraph (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 paragraph (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 paragraph (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:
B-98
<PAGE> 147
(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 clause (iv) of
paragraph (a) of Section 4 of this Part II
if the Applicable Rate for shares of such
series determined on such Auction Date shall
be equal to the rate specified therein; or
(C) the number of Outstanding shares of such
series specified in such Bid if the rate
specified therein shall be higher than the
Maximum Rate for shares of such series, or
such number or a lesser number of
Outstanding shares of such series to be
determined as set forth in clause (iii) of
paragraph (b) of Section 4 of this Part II
if the rate specified therein shall be
higher than the Maximum Rate for shares of
such series and Sufficient Clearing Bids for
shares of such series do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing
Holder of shares of a series of Municipal Preferred
subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such
series specified in such Sell Order; or
(B) such number or a lesser number of
Outstanding shares of such series as set
forth in clause (iii) of paragraph (b) of
Section 4 of this Part II if Sufficient
Clearing Bids for shares of such series do
not exist;
provided, however, that a Broker-Dealer that is an Existing Holder with respect
to shares of a series of Municipal Preferred shall not be liable to any Person
for failing to sell such shares pursuant to a Sell Order described in the
proviso to paragraph (c) of Section 2 of this Part II if (1) such shares were
transferred by the Beneficial Owner thereof without compliance by such
Beneficial Owner or its transferee Broker-Dealer (or other transferee person, if
permitted by the Trust) with the provisions of Section 7 of this Part II or (2)
such Broker-Dealer has informed the Auction Agent pursuant to the terms of its
Broker-Dealer Agreement that, according to such Broker-Dealer's records, such
Broker-Dealer believes it is not the Existing Holder of such shares.
(iii) A Bid by a Potential Beneficial Holder or a Potential
Holder of shares of a series of Municipal Preferred
subject to an Auction on any Auction Date shall
constitute an irrevocable offer to purchase:
(A) the number of Outstanding shares of such
series specified in such Bid if the
Applicable Rate for shares of such series
determined on such Auction Date shall be
higher than the rate specified therein; or
(B) such number or a lesser number of
Outstanding shares of such series as set
forth in clause (v) of paragraph (a) of
Section 4 of this Part II if the Applicable
Rate for shares of such series determined on
such Auction Date shall be equal to the rate
specified therein.
(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
B-99
<PAGE> 148
Date obtained by such Broker-Dealer, designating itself
(unless otherwise permitted by the Trust) as an Existing
Holder in respect of shares subject to Orders submitted or
deemed submitted to it by Beneficial Owners and as a Potential
Holder in respect of shares subject to Orders submitted to it
by Potential Beneficial Owners, and shall specify with respect
to each Order for such shares:
(i) the name of the Bidder placing such Order (which
shall be the Broker-Dealer unless otherwise permitted
by the Trust);
(ii) the aggregate number of shares of such series that
are the subject of such Order;
(iii) to the extent that such Bidder is an Existing Holder
of shares of such series:
(A) the number of shares, if any, of such series
subject to any Hold Order of such Existing
Holder;
(B) the number of shares, if any, of such series
subject to any Bid of such Existing Holder
and the rate specified in such Bid; and
(C) the number of shares, if any, of such series
subject to any Sell Order of such Existing
Holder; and
(iv) to the extent such Bidder is a Potential Holder of
shares of such series, the rate and number of shares
of such series specified in such Potential Holder's
Bid.
(b) If any rate specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent
shall round such rate up to the next highest one thousandth
(.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding shares
of Municipal Preferred of a series held by any Existing Holder
is not submitted to the Auction Agent prior to the Submission
Deadline, the Auction Agent shall deem a Hold Order to have
been submitted by or on behalf of such Existing Holder
covering the number of Outstanding shares of such series held
by such Existing Holder and not subject to Orders submitted to
the Auction Agent; provided, however, that if an Order or
Orders covering all of the Outstanding shares of such series
held by any Existing Holder is not submitted to the Auction
Agent prior to the Submission Deadline for an Auction relating
to a Special Rate Period consisting of more than 28 Rate
Period Days, the Auction Agent shall deem a Sell Order to have
been submitted by or on behalf of such Existing Holder
covering the number of outstanding shares of such series held
by such Existing Holder and not subject to Orders submitted to
the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted to
the Auction Agent covering in the aggregate more than the
number of Outstanding shares of Municipal Preferred of a
series subject to an Auction held by such Existing Holder,
such Orders shall be considered valid in the following order
of priority:
(i) all Hold Orders for shares of such series shall be
considered valid, but only up to and including in the
aggregate the number of Outstanding shares of such
series held by such Existing Holder, and if the
number of shares of such series subject to such Hold
Orders exceeds the number of Outstanding shares of
such series held by such Existing Holder, the number
of shares subject to each such Hold Order shall be
reduced pro rata to cover the number of Outstanding
shares of such series held by such Existing Holder;
B-100
<PAGE> 149
(ii) (A) any Bid for shares of such series shall be
considered valid up to and including the
excess of the number of Outstanding shares
of such series held by such Existing Holder
over the number of shares of such series
subject to any Hold Orders referred to in
clause (i) above;
(B) subject to subclause (A), if more than one
Bid of an Existing Holder for shares of such
series is submitted to the Auction Agent
with the same rate and the number of
Outstanding shares of such series subject to
such Bids is greater than such excess, such
Bids shall be considered valid up to and
including the amount of such excess, and the
number of shares of such series subject to
each Bid with the same rate shall be reduced
pro rata to cover the number of shares of
such series equal to such excess;
(C) subject to subclauses (A) and (B), if more
than one Bid of an Existing Holder for
shares of such series is submitted to the
Auction Agent with different rates, such
Bids shall be considered valid in the
ascending order of their respective rates up
to and including the amount of such excess;
and
(D) in any such event, the number, if any, of
such Outstanding shares of such series
subject to any portion of Bids considered
not valid in whole or in part under this
clause (ii) shall be treated as the subject
of a Bid for shares of such series by or on
behalf of a Potential Holder at the rate
therein specified; and
(iii) all Sell Orders for shares of such series shall be
considered valid up to and including the excess of
the number of Outstanding shares of such series held
by such Existing Holder over the sum of shares of
such series subject to valid Hold Orders referred to
in clause (i) above and valid Bids referred to in
clause (ii) above.
(e) If more than one Bid for one or more shares of a series of
Municipal Preferred is submitted to the Auction Agent by or on
behalf of any Potential Holder, each such Bid submitted shall
be a separate Bid with the rate and number of shares therein
specified.
(f) Any Order submitted by a Beneficial Owner or a Potential
Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer
to the Auction Agent, prior to the Submission Deadline on any
Auction Date, shall be irrevocable.
3. Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate.
(a) Not earlier than the Submission Deadline on each Auction Date
for shares of a series of Municipal Preferred, the Auction
Agent shall assemble all valid Orders submitted or deemed
submitted to it by the Broker-Dealers in respect of shares of
such series (each such Order as submitted or deemed submitted
by a Broker-Dealer being hereinafter referred to individually
as a "Submitted 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:
B-101
<PAGE> 150
(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) which if:
(iii) if Sufficient Clearing Bids for shares of such series
exist, the lowest rate specified in such Submitted
Bids (the "Winning Bid Rate" for shares of such
series) which if:
(A) (I) each such Submitted Bid of Existing
Holders specifying such lowest rate and (II)
all other such Submitted Bids of Existing
Holders specifying lower rates were
rejected, thus entitling such Existing
Holders to continue to hold the shares of
such series that are subject to such
Submitted Bids; and
(B) (I) each such Submitted Bid of Potential
Holders specifying such lowest rate and (II)
all other such Submitted Bids of Potential
Holders specifying lower rates were
accepted;
would result in such Existing Holders described in subclause (A) above
continuing to hold an aggregate number of Outstanding shares of such
series which, when added to the number of Outstanding shares of such
series to be purchased by such Potential Holders described in subclause
(B) above, would equal not less than the Available Municipal Preferred
of such series.
(b) Promptly after the Auction Agent has made the determinations
pursuant to paragraph (a) of this Section 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 paragraph (c) of this Section 3.
B-102
<PAGE> 151
(c) For purposes of subparagraph (b)(iii) of this Section 3, the
Applicable Rate for shares of such series for the next
succeeding Rate Period of shares of such series shall be equal
to the lesser of the Kenny Index (if such Rate Period consists
of fewer than 183 Rate Period Days) or the product of (A) (I)
the "AA" Composite Commercial Paper Rate on such Auction Date
for such Rate Period, if such Rate Period consists of fewer
than 183 Rate Period Days; (II) the Treasury Bill Rate on such
Auction Date for such Rate Period, if such Rate Period
consists of more than 182 but fewer than 365 Rate Period Days;
or (III) the Treasury Note Rate on such Auction Date for such
Rate Period, if such Rate Period is more than 364 Rate Period
Days (the rate described in the foregoing clause (A)(I), (II)
or (III), as applicable, being referred to herein as the
"Benchmark Rate") and (B) 1 minus the maximum marginal regular
Federal individual income tax rate applicable to ordinary
income or the maximum marginal regular Federal corporate
income tax rate applicable to ordinary income, whichever is
greater; provided, however, that if the Trust has notified the
Auction Agent of its intent to allocate to shares of such
series in such Rate Period any net capital gains or other
income taxable for Federal income tax purposes ("Taxable
Income"), the Applicable Rate for shares of such series for
such Rate Period will be (i) if the Taxable Yield Rate (as
defined below) is greater than the Benchmark Rate, then the
Benchmark Rate, or (ii) if the Taxable Yield Rate is less than
or equal to the Benchmark Rate, then the rate equal to the sum
of (x) the lesser of the Kenny Index (if such Rate Period
consists of fewer than 183 Rate Period Days) or the product of
the Benchmark Rate multiplied by the factor set forth in the
preceding clause (B) and (y) the product of the maximum
marginal regular Federal individual income tax rate applicable
to ordinary income or the maximum marginal regular Federal
corporate income tax applicable to ordinary income, whichever
is greater, multiplied by the Taxable Yield Rate. For purposes
of the foregoing, Taxable Yield Rate means the rate determined
by (a) dividing the amount of Taxable Income available for
distribution per such share of Municipal Preferred by the
number of days in the Dividend Period in respect of which such
Taxable Income is contemplated to be distributed, (b)
multiplying the amount determined in (a) above by 365 (in the
case of a Dividend Period of 7 Rate Period Days) or 360 (in
the case of any other Dividend Period), and (c) dividing the
amount determined in (b) above by $25,000.
4. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocation of Shares. Existing Holders shall continue to hold the
shares of Municipal Preferred that are subject to Submitted Hold
Orders, and, based on the determinations made pursuant to paragraph (a)
of Section 3 of this Part II, the Submitted Bids and Submitted Sell
Orders shall be accepted or rejected by the Auction Agent and the
Auction Agent shall take such other action as set forth below:
(a) If Sufficient Clearing Bids for shares of a series of
Municipal Preferred have been made, all Submitted Sell Orders
with respect to shares of such series shall be accepted and,
subject to the provisions of paragraphs (d) and (e) of this
Section 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;
B-103
<PAGE> 152
(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
paragraph (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 paragraph
(d) of this Section 4, Submitted Orders for shares of such
series shall be accepted or rejected as follows in the
following orders of priority and all other Submitted Bids for
shares of such series shall be rejected:
(i) Existing Holder's Submitted Bids for shares of such
series specifying any rate that is equal to or lower
than the Maximum Rate for shares of such series shall
be rejected, thus entitling such Existing Holders to
continue to hold the shares of Municipal Preferred
subject to such Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of such
series specifying any rate that is equal to or lower
than the Maximum Rate for shares of such series shall
be accepted; and
(iii) Each Existing Holder's Submitted Bid for shares of
such series specifying any rate that is higher than
the Maximum Rate for shares of such series and the
Submitted Sell Orders for 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 paragraph (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.
B-104
<PAGE> 153
(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 paragraph (a) or clauses (iii) of paragraph (b) of this
Section 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 Section 4, any Potential Holder would be
entitled or required to purchase less than a whole share of
series of Municipal Preferred on any Auction Date, the Auction
Agent shall, in such manner as it shall determine in its sole
discretion, allocate shares of Municipal Preferred of such
series for purchase among Potential Holders so that only whole
shares of Municipal Preferred of such series are purchased on
such Auction Date as a result of such procedures by any
Potential Holder, even if such allocation results in one or
more Potential Holders not purchasing shares of Municipal
Preferred of such series on such Auction Date.
(f) Based on the results of each Auction for shares of a series of
Municipal Preferred, the Auction Agent shall determine the
aggregate of shares of such series to be purchased and the
aggregate number of shares of such series to be sold by
Potential Holders and Existing Holders and, with respect to
each Potential Holder and Existing Holder, to the extent that
such aggregate number of shares to be purchased and such
aggregate number of shares to be sold differ, determine to
which other Potential Holder(s) or Existing Holder(s) they
shall deliver, or from which other Potential Holder(s) or
Existing Holder(s) they shall receive, as the case may be,
shares of Municipal Preferred of such series. Notwithstanding
any provision of the Auction procedures or the Settlement
Procedures to the contrary, in the event an Existing Holder or
Beneficial Owner of shares of a series of Municipal Preferred
with respect to whom a Broker-Dealer submitted a Bid to the
Auction Agent for such shares that was accepted in whole or in
part, or submitted or is deemed to have submitted a Sell Order
for such shares that was accepted in whole or in part, fails
to instruct its Agent Member to deliver such shares against
payment therefor, partial deliveries of shares of Municipal
Preferred that have been made in respect of Potential Holders'
or Potential Beneficial Owners' Submitted Bids for shares of
such series that have been accepted in whole or in part shall
constitute good delivery to such Potential Holders and
Potential Beneficial Owners.
(g) Neither the Trust nor the Auction Agent nor any affiliate of
either shall have any responsibility or liability with respect
to the failure of an Existing Holder, a Potential Holder, a
Benefit Owner, a Potential Beneficial Owner or its respective
Agent Member to deliver shares of Municipal Preferred of any
series or to pay for shares of Municipal Preferred of any
series sold or purchased pursuant to the Auction Procedures or
otherwise.
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.
B-105
<PAGE> 154
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 believe. Such
Broker-Dealer shall not, in its capacity as Existing Holder of shares
of such series, submit Orders in such Auction in respect of shares of
such series covering in the aggregate more than the number of shares of
such series specified by the Auction Agent in response to such
Broker-Dealer's inquiry.
7. Transfer of Shares of Municipal Preferred. Unless otherwise permitted
by the Trust, a Beneficial Owner or an Existing Holder may sell,
transfer or otherwise dispose of shares of Municipal Preferred only in
whole shares and only pursuant to a Bid or Sell Order placed with the
Auction Agent in accordance with the procedures described in this Part
II or to a Broker-Dealer; provided, however, that (a) a sale, transfer
or other disposition of shares of Municipal Preferred from a customer
of a Broker-Dealer who is listed on the records of that Broker-Dealer
as the holder of such shares to that Broker-Dealer or another customer
of that Broker-Dealer shall not be deemed to be a sale, transfer or
other disposition for purposes of this Section 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) books
of the Trust to any Person other than the Securities Depository or its
nominee.
B-106
<PAGE> 155
APPENDIX C
SETTLEMENT PROCEDURES
Capitalized terms used herein have the respective meanings specified in
the forepart of the Prospectus or the Glossary included in the Prospectus, as
the case may be.
(a) On each Auction Date for shares of Municipal Preferred, the Auction
Agent shall notify by telephone the Broker-Dealers that participated in the
Auction held on such Auction Date and submitted an Order to the Auction Agent as
or on behalf of an Existing Holder or Potential Holder of:
(i) the Applicable Rate fixed for the next Rate Period;
(ii) whether Sufficient Clearing Bids existed for the
determination of the Applicable Rate;
(iii) if such Broker-Dealer submitted a Bid or a Sell Order to
the Auction Agent as or on behalf of an Existing Holder, whether such
Bid or Sell Order was accepted or rejected, in whole or in part, and
the number of shares, if any, of Municipal Preferred then outstanding
to be sold by such Existing Holder;
(iv) if such Broker-Dealer submitted a Bid to the Auction
Agent as or on behalf of a Potential Holder, whether such Bid was
accepted or rejected, in whole or in part, and the number of shares, if
any, of Municipal Preferred to be purchased by such Potential Holder;
(v) if the aggregate number of shares of Municipal Preferred
to be sold by all Existing Holders with respect to whom such
Broker-Dealer submitted Bids or Sell Orders to the Auction Agent is
different than the aggregate number of shares of Municipal Preferred to
be purchased by all Potential Holders with respect to whom such
Broker-Dealer submitted Bids to the Auction Agent, the name or names of
one or more other Broker-Dealers (and the Agent Member, if any, of each
such other Broker-Dealer) and the number of shares of Municipal
Preferred to be (x) purchased from one or more Existing Holders with
respect to whom such other Broker-Dealers submitted Bids or Sell Orders
to the Auction Agent, or (y) sold to one or more Potential Holders with
respect to whom such other Broker-Dealers submitted Bids to the Auction
Agent; and
(vi) the scheduled Auction Date of the next succeeding Auction
for shares of Municipal Preferred.
(b) On each Auction Date for shares of Municipal Preferred, each
Broker-Dealer that submitted an Order to the Auction Agent as or on behalf of
any Existing Holder or Potential Holder shall:
(i) advise each Existing Holder and Potential Holder (and each
Beneficial Owner and Potential Beneficial Owner) with respect to whom
such Broker-Dealer submitted a Bid or Sell Order to the Auction Agent
whether such Bid or Sell Order was accepted or rejected, in whole or in
part;
(ii) instruct each Potential Holder (and each Potential
Beneficial Owner) with respect to whom such Broker-Dealer submitted a
Bid to the Auction Agent that was accepted, in whole or in part, to
instruct such Bidder's Agent Member to pay to such Broker-Dealer (or
its Agent Member) through the Securities Depository the amount
necessary to purchase the number of shares of Municipal Preferred to be
purchased pursuant to such Bid against receipt of such shares;
(iii) instruct each Existing Holder (and each Beneficial
Owner) with respect to whom such Broker-Dealer submitted a Bid to the
Auction Agent that was accepted, in whole or in part, or a Sell Order
that was accepted, in whole or in part, to instruct such Bidder's Agent
Member to deliver to such Broker-Dealer (or its Agent Member)
B-107
<PAGE> 156
through the Securities Depository the number of shares of Municipal
Preferred to be sold pursuant to such Bid or Sell Order against payment
therefor;
(iv) advise each Existing Holder (and each Beneficial Owner)
with respect to whom such Broker-Dealer submitted an Order to the
Auction Agent and each Potential Holder (and each Potential Beneficial
Owner) with respect to whom such Broker-Dealer submitted a Bid to the
Auction Agent of the Applicable Rate for the next succeeding Rate
Period;
(v) advise each Existing Holder (and each Beneficial Owner)
with respect to whom such Broker-Dealer submitted an Order to the
Auction Agent of the Auction Date of the next succeeding Auction; and
(vi) advise each Potential Holder (and each Potential
Beneficial Owner) with respect to whom such Broker-Dealer submitted a
Bid to the Auction Agent that was accepted, in whole or in part, of the
Auction Date of the next succeeding Auction for Municipal Preferred.
(c) On the basis of the information provided to it pursuant to
paragraph (a) above, each Broker-Dealer that submitted a Bid or Sell Order to
the Auction Agent for any shares of Municipal Preferred shall allocate any funds
received by it (or its Agent Member) in respect of such shares pursuant to
paragraph (b)(ii) above and any shares of Municipal Preferred received by it (or
its Agent Member) pursuant to paragraph (b)(iii) above among the Potential
Holders and Potential Beneficial Owners, if any, with respect to whom such
Broker-Dealer submitted Bids to the Auction Agent for such shares, the Existing
Holders and Beneficial Owners, if any, with respect to whom such Broker-Dealer
submitted Bids or Sell Orders to the Auction Agent for such shares, and any
Broker-Dealers identified to it by the Auction Agent pursuant to paragraph
(a)(v) above.
(d) On the Business Day after the Auction Date, the Securities
Depository shall execute the transactions described above, debiting and
crediting the accounts of the respective Agent Members as necessary to effect
the purchases and sales of shares of Municipal Preferred as determined in the
Auction for shares of Municipal Preferred.
B-108
<PAGE> 157
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
(a)(2) Amendment No. 1 to Agreement and Declaration of Trust
(a)(3) Form of Amendment No. 2 to Agreement and Declaration of
Trust
(b)(1) By-Laws, as amended
(b)(2) Amended and Restated By-Laws(1)
(c) Not applicable
(d)(1) To be filed under amendment
(d)(2) Form of specimen for the municipal auction rate
cumulative preferred shares(1)
(e) Dividend Reinvestment Plan(1)
(f) Not applicable
(g) Management Agreement with Colonial Management
Associates, Inc.(1)
(h) Form of Underwriting Agreement(1)
(i) Not applicable
(j)(1) Global Custody Agreement with The Chase
C-1
<PAGE> 158
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)
C-2
<PAGE> 159
(k)(1) Form of Auction Agency Agreement(1)
(k)(2) Form of Broker-Dealer Agreement(1)
(k)(3) Agreement for Stock Transfer Services between the
Registrant and The First National Bank of Boston
(k)(4) Service Contract with Colonial Management Associates,
Inc.
(k)(5) Amendment to Service Contract with Colonial Management
Associates, Inc.
(l)(1) Opinion and Consent of Ropes & Gray, counsel to
Registrant(1)
(m) Not applicable
(n)(1) Consent of independent accountants(1)
(n)(2) Consent of Standard & Poor's Corporation(1)
(n)(3) Consent of Moody's Inc.(1)
(o) Not applicable
(p) Not applicable
(q) Not applicable
- ---------------------------------
(1) To be filed by Amendment.
Item 25. Marketing Arrangements.
See Exhibit (h) 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(2)
Printing(2)
Accounting fees and expenses(2)
Legal fees and expenses(2)
Underwriters expense reimbursement(2)
Auction Agent fees and expenses(2)
Rating Agency fees and expenses(2)
Miscellaneous(2)
---
Total $(2)
===
</TABLE>
(2) To be filed by Amendment.
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) and (a)(2) to this Registration Statement
provides for indemnification to each of the Registrant's
Trustees and officers against all liabilities and expenses
incurred in acting
C-3
<PAGE> 160
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
C-4
<PAGE> 161
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> 162
<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> 163
<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> 164
<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> 165
<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> 166
<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> 167
<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> 168
<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> 169
<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>
C-12
<PAGE> 170
<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>
C-14
<PAGE> 171
<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.
C-15
<PAGE> 172
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Registration Statement on Form N-2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston and the
Commonwealth of Massachusetts on the 18th day of June, 1999.
COLONIAL HIGH INCOME MUNICIPAL TRUST
By: STEPHEN E. GIBSON
--------------------
Stephen E. Gibson
President
Pursuant to the requirements of the Securities Act of 1933, this 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>
STEPHEN E. GIBSON President (chief June 18, 1999
- -------------------- executive officer)
Stephen E. Gibson
J. KEVIN CONNAUGHTON Controller and Chief June 18, 1999
- --------------------- Accounting Officer
J. Kevin Connaughton
TIMOTHY J. JACOBY Treasurer and Chief June 18, 1999
- -------------------- Financial Officer
Timothy J. Jacoby
</TABLE>
C-16
<PAGE> 173
<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 June 18, 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> 174
EXHIBIT INDEX
(a)(1) Agreement and Declaration of Trust
(a)(2) Amendment to No. 1 to Agreement and Declaration of Trust
(a)(3) Form of Amendment No. 2 to Agreement and Declaration of Trust
(b)(1) By-Laws, as amended
(k)(3) Agreement for Stock Transfer Services between the Registrant and The
First National Bank of Boston
(k)(4) Service Contract with Colonial Management Associates, Inc.
(k)(5) Amendment to Service Contract with Colonial Management Associates,
Inc.
<PAGE> 1
EXHIBIT (a)(1)
COLONIAL HIGH INCOME MUNICIPAL TRUST
AGREEMENT AND DECLARATION OF TRUST
January 9, 1989
<PAGE> 2
COLONIAL HIGH INCOME MUNICIPAL TRUST
AGREEMENT AND DECLARATION OF TRUST
AGREEMENT AND DECLARATION OF TRUST made at Boston, Massachusetts, this 9th
day of January, 1989, by the Trustees hereunder, and by the holders of shares of
beneficial interest to be issued hereunder as hereinafter provided.
WITNESSETH that
WHEREAS, this Trust has been formed to carry on the business of an investment
company; and
WHEREAS, the Trustees have agreed to manage all property coming into their
hands as trustees of a Massachusetts business trust in accordance with the
provisions hereinafter set forth.
NOW, THEREFORE, the Trustees hereby declare that they will hold all cash,
securities and other assets which they may from time to time acquire in any
manner as Trustees hereunder IN TRUST to manage and dispose of the same upon the
following terms and conditions for the pro rata benefit of the holders from time
to time of Shares in this Trust as hereinafter set forth.
ARTICLE I
NAME AND DEFINITIONS
Name
Section 1. This Trust shall be known as "Colonial High Income Municipal
Trust" and the Trustees shall conduct the business of the Trust under that name
or any other name as they may from time to time determine.
Definitions
Section 2. Whenever used herein, unless otherwise required by the context or
specifically provided:
(a) The "Trust" refers to the Massachusetts
<PAGE> 3
business trust established by this Agreement and Declaration of Trust, as
amended from time to time;
(b) "Trustees" refers to the Trustees of the Trust named herein or elected
in accordance with Article IV;
(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;
(d) "Shareholder" means a record owner of Shares;
(e) The "1940 Act" refers to the Investment Company Act of 1940 and the
Rules and Regulations thereunder, all as amended from time to time;
The terms "Affiliated Person", "Assignment", "Commission", "Interested Person",,
"Principal Underwriter" and "Majority Shareholder Vote" (the 67% or 50%
requirement of the third sentence of Section 2(a) (42) of the 1940 Act,
whichever may be applicable) shall have the applicable meanings given them in
the 1940 Act;
(g) "Declaration of Trust" shall mean this Agreement and Declaration of
Trust as amended or restated from time to time; and
(h) "By-Laws" shall mean the By-Laws of the Trust as amended from time to
time.
ARTICLE II
PURPOSE
The purpose of the Trust is to provide investors a managed investment
primarily in securities, commodities and debt instruments.
ARTICLE III
SHARES
Division of Beneficial Interest
Section 1. The beneficial interest in the Trust shall
<PAGE> 4
at all times be divided into Shares of a single series, without par value, each
of which shall represent an equal proportionate interest in the Trust with each
other Share, none having priority or preference over another. The number of
Shares authorized shall be unlimited, 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 into a greater or lesser number without thereby
changing the proportionate beneficial interests in the Trust.
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 and as to the number of Shares held from time to time by each
Shareholder.
Investments in the Trust
Section 3. The Trustees shall accept investments in the Trust from such
persons and on such terms and, subject to any requirements of law, for such
consideration, which may consist of cash or tangible or intangible property or a
combination thereof, as they from time to time authorize.
No Preemptive Rights
Section 4. Shareholders shall have no preemptive or other right to
receive, purchase or subscribe for any additional Shares or other securities
issued by the Trust.
Status of Shares and Limitation of Personal Liability
Section 5. Shares shall be deemed to be personal property giving only the
rights provided in this instrument.
Every Shareholder by virtue of having become a Shareholder shall be held to have
expressly assented and agreed to the terms hereof and to have become a party
hereto. The death of a Shareholder during the continuance of the Trust shall not
operate to terminate the same nor entitle the representative of any deceased
Shareholder to an accounting or to take any action in court or elsewhere against
the Trust or the Trustees, but only to the rights of said decedent under this
Trust. Ownership of Shares shall not entitle the Shareholder
<PAGE> 5
to any title in or to the whole or any part of the Trust property or right to
call for a partition or division of the same or for an accounting, nor shall the
ownership of Shares constitute the Shareholders partners. Neither the Trust nor
the Trustees, nor any officer, employee or agent of the Trust, shall have any
power to bind personally any Shareholder, nor except as specifically provided
herein to call upon any Shareholder for the payment of any sum of money or
assessment whatsoever other than such as the Shareholder may at any time
personally agree to pay.
ARTICLE IV
THE TRUSTEES
Number of Trustees and Term of Office
Section 1. 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) nor more than fifteen (15). 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. Within the limits above specified, 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
<PAGE> 6
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 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. 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, a Trustee may be
removed, with or without cause, by vote of a majority of the outstanding shares.
By vote of a majority of the Trustees then in office, the Trustees may remove a
Trustee with or without cause.
Effect of Death, Resignation, etc. of a Trustee
Section 3. The death, declination, resignation, retirement, removal, or
incapacity of the Trustees, or any one of them, shall not operate to annul the
Trust or to revoke any existing agency created pursuant to the terms of this
Declaration of Trust.
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 ByLaws 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; they may fill vacancies in 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
<PAGE> 7
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.
Without limiting the foregoing, the Trustees shall have power and authority:
(a) To invest and reinvest cash, and to hold cash uninvested;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate, write
options on and lease any or all of the assets of the Trust;
(c) To vote or give assent, or exercise any rights of ownership,
with respect to stock or other securities or property; and to execute and
deliver proxies or powers of attorney to such person or persons as the
Trustees shall deem proper, granting to such person or persons such power
and discretion with relation to securities or property as the Trustees
shall deem proper;
(d) To exercise powers and rights of subscription or otherwise which
in any manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating any
trust, whether in bearer, unregistered or other negotiable form, or in the
name of the Trustees or of the Trust or in the name of a custodian,
subcustodian or other depository or a nominee or nominees or otherwise;
(f) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or issuer, any security of
which is or was
<PAGE> 8
held in the Trust; to consent to any contract, lease, mortgage, purchase
or sale of property by such corporation or issuer, and to pay calls or
subscriptions with respect to any security held in the Trust;
(g) To join with other security holders in acting through a
committee, depositary, voting trustee or otherwise, and in that connection
to deposit any security with, or transfer any security to, any such
committee, depositary or trustee, and to delegate to them such power and
authority with relation to any security (whether or not so deposited or
transferred) as the Trustees shall deem proper, and to agree to pay, and
to pay, such portion of the expenses and compensation of such committee,
depositary or trustee as the Trustees shall deem proper;
(h) To compromise, arbitrate or otherwise adjust claims in favor of
or against the Trust on any matter in controversy, including but not
limited to claims for taxes;
(i) To enter into joint ventures, general or limited partnerships
and any other combinations or associations;
(j) To borrow funds;
(k) To endorse or guarantee the payment of any notes or other
obligations of any person; to make contracts of guaranty or suretyship, or
otherwise assume liability for payment thereof; and to mortgage and pledge
the Trust property or any part thereof to secure any of or all of such
obligations;
(1) To purchase and pay for entirely out of Trust property such
insurance as they may deem necessary or appropriate for the conduct of the
business of the Trust, including, without limitation, insurance policies
insuring the assets of the Trust and payment of distributions and
principal on its portfolio investments, and insurance policies insuring
the Shareholders, Trustees, officers, employees, agents, investment
advisers or managers, principal underwriters or independent contractors of
the Trust individually against all claims and liabilities of every nature
arising by reason of holding, being or having held any such office or
position, or by reason of any action alleged to have been taken or omitted
by any such person as Shareholder, Trustee, officer, employee, agent,
<PAGE> 9
investment adviser or manager, principal underwriter or independent
contractor, including any action taken or omitted that may be determined
to constitute negligence, whether or not the Trust would have the power to
indemnify such person against such liability; and
(m) To pay pensions for faithful service, as deemed appropriate by
the Trustees, and to adopt, establish and carry out pension,
profit-sharing, share bonus, share purchase, savings, thrift and other
retirement, incentive and benefit plans, trusts and provisions, including
the purchasing of life insurance and annuity contracts as a means of
providing such retirement and other benefits, for any or all of the
Trustees, officers, employees and agents of the Trust.
The Trustees shall not in any way be bound or limited by any present or
future law or custom in regard to investments by Trustees. Except as otherwise
provided herein or from time to time in the By-Laws, any action to be taken by
the Trustees may be taken by a majority of the Trustees present at a meeting of
the Trustees (a quorum being present), within or without Massachusetts,
including any meeting held by means of a conference telephone or other
communications equipment by means of which all persons participating in the
meeting can hear each other at the same time and participation by such means
shall constitute presence in person at a meeting, or by written consents of a
majority of the Trustees then in office.
Payment of Expenses by Trust
Section 5. The Trustees are authorized to pay or to cause to be paid out of the
principal or income of the Trust, or partly out of principal and partly out of
income, as they deem fair, all expenses, fees, charges, taxes and liabilities
incurred or arising in connection with the Trust, or in connection with the
management thereof, including, but not limited to, the Trustees' compensation
and such expenses and charges for the services of the Trust's officers,
employees, investment adviser or manager, principal underwriter, auditor,
counsel, custodian, transfer agent, Shareholder servicing agent, and such other
agents or independent contractors and such other expenses and charges as the
Trustees may deem necessary or proper to incur.
Ownership of Assets of the Trust
Section 6. Title to all of the assets of the Trust shall at all times be
considered as vested in the Trustees,
Advisory, Management and Distribution
<PAGE> 10
Section 7. Subject to a favorable Majority Shareholder Vote, the Trustees
may, at any time and from time to time, contract for exclusive or nonexclusive
advisory and/or management services with Colonial Management Associates, Inc., a
Massachusetts corporation, or any other corporation, trust, association or other
organization (the "Adviser"), every such contract to comply with such
requirements and restrictions as may be set forth in the By-Laws; and any such
contract may contain such other terms interpretive of or in addition to said
requirements and restrictions as the Trustees may determine, including, without
limitation, authority to determine from time to time what investments shall be
purchased, held, sold or exchanged and what portion, if any, of the assets of
the Trust shall be held uninvested and to make changes in the Trust's
investments. The Trustees may also, at any time and from time to time, contract
with the Adviser or any other corporation, trust, association or other
organization, appointing it exclusive or nonexclusive distributor or principal
underwriter for the Shares, every such contract to comply with such requirements
and restrictions as may be set forth in the By-Laws; and any such contract may
contain such other terms interpretive of or in addition to said requirements and
restrictions as the Trustees may determine.
The fact that:
(i) any of the Shareholders, Trustees or officers of the Trust is a
shareholder, director, officer, partner, trustee, employee, manager, adviser,
principal underwriter or distributor or agent of or for any corporation, trust,
association or other organization, or of or for any parent or affiliate of any
organization, with which an advisory or management contract, or principal
underwriter's or distributor's contract or transfer, shareholder services or
other agency contract may have been or may hereafter be made, or that any
organization, or any parent or affiliate thereof, is a Shareholder or has an
interest in the Trust, or that
(ii) any corporation, trust, association or other organization with which
an advisory or management contract or principal underwriter's or distributor's
contract or transfer, shareholder services or other agency contract may have
been or may hereafter be made also has an advisory or management contract, or
principal underwriter's or distributor's contract or transfer,, shareholder
services or other agency contract with one or more other corporations, trusts,
associations or other organizations, or has other business or interests shall
not affect the validity of any such contract or disqualify any Shareholder,
Trustee or officer of the Trust from voting upon or executing the same
<PAGE> 11
or create any liability or accountability to the Trust or its Shareholders.
ARTICLE V
SHAREHOLDERS' VOTING POWERS AND MEETINGS
Voting Powers
Section 1. 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 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 ByLaws 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. 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 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.
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
<PAGE> 12
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 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 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 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 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 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. Thirty per cent (30%) of the Shares entitled to vote shall be a
quorum for the transaction of business at a Shareholders' meeting. 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.
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
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.
Action by Written Consent
<PAGE> 13
Section 5. Any action taken by Shareholders may be taken without a meeting
if a majority of Shareholders entitled to vote on the matter (or such larger
proportion thereof as shall be required by any express provision of this
Declaration of Trust or the By-Laws) consent to the action in writing and such
written consents are filed with the records of the meetings of Shareholders.
Such consent shall be treated for all purposes as a vote taken at a meeting of
Shareholders.
Additional Provisions
Section 6. The By-Laws may include further provisions for Shareholders' votes
and meetings and related matters.
ARTICLE VI
DISTRIBUTIONS AND DETERMINATION OF NET ASSET VALUE
Distributions
Section 1. The Trustees may, but need not, each year distribute to the
Shareholders 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. 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 shall be made ratably according to the
number of Shares 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.
<PAGE> 14
Determination of Net Asset Value
Section 2. 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.
The Trustees, or any officer or officers or agent of the Trust designated
for the purpose by the Trustees, shall determine the net asset value of the
Shares, and the Trustees shall fix the times as of which the net asset value of
the Shares shall be determined and shall fix the periods during which any such
net asset value shall be effective as to sales and other transactions in the
Shares, except as such times and periods for any such transaction may be fixed
by other provisions of this Declaration of Trust or by the By-Laws.
In valuing the portfolio investments for determination of net asset value
per share, securities for which market quotations are readily available shall be
valued at prices which, in the opinion of the Trustees, or any officer or
officers or agent of the Trust designated for the purpose by the Trustees, most
nearly represent the market value of such securities, which may, but need not,
be the most recent bid price obtained from one or more of the market makers for
such securities; other securities and assets shall be valued at fair value as
determined by or pursuant to the direction of the Trustees. Notwithstanding the
foregoing, short-term debt obligations, commercial paper and repurchase
agreements may be, but need not be, valued on the basis of quoted yields for
securities of comparable maturity, quality and type, or on the basis of
amortized cost. In determination of net asset value, dividends receivable and
accounts receivable for investments sold and for Shares sold shall be stated at
the amounts to be received therefor; and income receivable accrued daily on
bonds and notes owned shall be stated at the amount to be received. Any other
assets shall be stated at fair value as determined by the Trustees or such
officer, officers or agent pursuant to the Trustees' authority, except that no
value shall be assigned to goodwill, furniture, lists, reports, statistics or
other noncurrent assets other than real estate. Liabilities for accounts payable
for investments purchased shall be stated at the amounts payable therefor. In
determining net asset value of the Trust, the person or persons making such
determination on behalf of the Trust may include in liabilities such reserves,
estimated accrued expenses and contingencies as such person or persons may in
its, his or their best judgment deem fair and reasonable under the
circumstances. Any income dividends and gains distributions payable by the Trust
shall be deducted as
<PAGE> 15
of such time or times on the record date therefor as the Trustees shall
determine.
The manner of determining the net assets of the Trust or of determining the
net asset value of the Shares may from time to time be altered as necessary or
desirable in the judgment of the Trustees to conform to any other method
prescribed or permitted by any applicable law or regulation.
Determinations under this Section 2 made in good faith and in accordance
with the provisions of the 1940 Act shall be binding on all parties concerned.
ARTICLE VII
COMPENSATION AND LIMITATION
OF LIABILITY OF TRUSTEES
Compensation
Section 1. The Trustees as such shall be entitled to reasonable
compensation from the Trust; they may fix the amount of their compensation.
Nothing herein shall in any way prevent the employment of any Trustee for
advisory, management, legal, accounting, investment banking or other services
and payment for the same by the Trust.
Limitation of Liability
Section 2. The Trustees shall not be responsible or liable in any event
for any neglect or wrongdoing of any officer, agent, employee, adviser or
principal underwriter of the Trust, nor shall any Trustee be responsible for the
act or omission of any other Trustee, but nothing herein contained shall protect
any Trustee against any liability to which he or she would otherwise be subject
by reason of wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office.
Every note, bond, contract, instrument, certificate, Share or undertaking
and every other act or thing whatsoever executed or done by or on behalf of the
Trust or the Trustees or any of them in connection with the Trust shall be
conclusively deemed to have been executed or done only in or with respect to
their or his or her capacity as Trustees or Trustee, and such Trustees or
Trustee shall not be personally liable thereon.
ARTICLE VIII
INDEMNIFICATION
<PAGE> 16
Trustees, Officers etc.
Section 1. The Trust shall indemnify each of its Trustees and officers
(including persons who serve at the Trust's request as directors, officers or
trustees of another organization in which the Trust has any interest as a
shareholder, creditor or otherwise) (hereinafter referred to as a "Covered
Person") against all liabilities and expenses, including but not limited to
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and counsel fees reasonably incurred by any Covered Person in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or otherwise or with which such person may be or may have been
threatened, while in office or thereafter, by reason of being or having been
such a Trustee or officer, except with respect to any matter as to which such
Covered Person shall have been finally adjudicated in a decision on the merits
in any such action, suit or other proceeding not to have acted in good faith in
the reasonable belief that such Covered Person's action was in the best
interests of the Trust and except that no Covered Person shall be indemnified
against any liability to the Trust or its Shareholders to which such Covered
Person would otherwise be subject by reason of wilful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
such Covered Person's office. Expenses, including counsel fees so incurred by
any such Covered Person (but excluding amounts paid in satisfaction of
judgments, in compromise or as fines or penalties), may be paid from time to
time by the Trust in advance of the final disposition of any such action, suit
or proceeding upon receipt of an undertaking by or on behalf of such Covered
Person to repay amounts so paid to the Trust if it is ultimately determined that
indemnification of such expenses is not authorized under this Article, provided
that (a) such Covered Person shall provide security for his undertaking, (b) the
Trust shall be insured against losses arising by reason of such Covered Person's
failure to fulfill his undertaking, or (c) a majority of the Trustees who are
disinterested persons and who are not Interested Persons (provided that a
majority of such Trustees then in office act on the matter), or independent
legal counsel in a written opinion, shall determine, based on a review of
readily available facts (but not a full trial-type inquiry), that there is
reason to believe such Covered Person ultimately will be entitled to
indemnification.
Compromise Payment
<PAGE> 17
Section 2. As to any matter disposed of (whether by a compromise payment,
pursuant to a consent decree or otherwise) without an adjudication in a decision
on the merits by a court, or by any other body before which the proceeding was
brought, that such Covered Person either (a) did not act in good faith in the
reasonable belief that such Covered Person's action was in the best interests of
the Trust or (b) is liable to the Trust or its Shareholders by reason of wilful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such Covered Person's office, indemnification shall
be provided if (a) approved as in the best interest of the Trust, after notice
that it involves such indemnification, by at least a majority of the Trustees
who are disinterested persons and are not Interested Persons (provided that a
majority of such Trustees then in office act on the matter), upon a
determination, based upon a review of readily available facts (but not a full
trial-type inquiry) that such Covered Person acted in good faith in the
reasonable belief that such Covered Person's action was in the best interests of
the Trust and is not liable to the Trust or its Shareholders by reason of wilful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such Covered Person's office, or (b) there has been
obtained an opinion in writing of independent legal counsel, based upon a review
of readily available facts (but not a full-trial type inquiry), to the effect
that such Covered Person appears to have acted in good faith in the reasonable
belief that such Covered Person's action was in the best interests of the Trust
and that such indemnification would not protect such Covered Person against any
liability to the Trust to which such Covered Person would otherwise be subject
by reason of wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office. Any approval
pursuant to this Section shall not prevent the recovery from any Covered Person
of any amount paid to such Covered Person in accordance with this section as
indemnification if such Covered Person is subsequently adjudicated by a court of
competent jurisdiction not to have acted in good faith in the reasonable belief
that such Covered Person's action was in the best interests of the Trust or to
have been liable to the Trust or its Shareholders by reason of wilful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such Covered Person's office.
Indemnification Not Exclusive
Section 3. The right of indemnification hereby provided shall not be
exclusive of or affect any other rights to which any such Covered Person may be
entitled. As used in this Article VIII, the term "Covered Person" shall include
such
<PAGE> 18
person's heirs, executors and administrators, and a "disinterested person" is a
person against whom none of the actions, suits or other proceedings in question
or another action, suit or other proceeding on the same or similar grounds is
then or has been pending. Nothing contained in this Article shall affect any
rights to indemnification to which personnel of the Trust, other than Trustees
and officers, and other persons may be entitled by contract or otherwise under
law, nor the power of the Trust to purchase and maintain liability insurance on
behalf of such person.
Shareholders
Section 4. In case any Shareholder or former Shareholder shall be held to
be personally liable solely by reason of his or her being or having been a
Shareholder and not because of his or her acts or omissions or for some other
reason, the Shareholder or former Shareholder (or his or her heirs, executors,
administrators or other legal representatives or, in the case of a corporation
or other entity, its corporate or other general successor) shall be entitled to
be held harmless from and indemnified against all loss and expense arising from
such liability.
ARTICLE IX
MISCELLANEOUS
Trustees, Shareholders etc. Not Personally Liable: Notice
Section 1. All persons extending credit to, contracting with or having any
claim against the Trust shall look only to the assets of the Trust for payment
under such credit, contract or claim; and neither the Shareholders nor the
Trustees, nor any of the Trust's officers, employees or agents, whether past,
present or future, shall be personally liable therefor. Nothing in this
Declaration of Trust shall protect any Trustee against any liability to which
such Trustee would otherwise be subject by reason of wilful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee.
Every note, bond, contract, instrument, certificate or undertaking made or
issued by the Trustees or by any officers or officer shall give notice that this
Declaration of Trust is on file with the Secretary of State of The Commonwealth
of Massachusetts and shall recite that the same was executed or made by or on
behalf of the Trust or by them as Trustees or Trustee or as officers or officer
and not individually and that the obligations of such instrument are not binding
upon any of them or the Shareholders individually but are binding only upon the
assets and property of the Trust, and may
<PAGE> 19
contain such further recital as he or she or they may deem appropriate, but the
omission thereof shall not operate to bind any Trustees or officers or officer
or Shareholders or Shareholder individually.
Trustee's Good Faith Action, Expert Advice, No Bond or Surety
Section 2. The exercise by the Trustees of their powers and discretions
hereunder shall be binding upon everyone interested. A Trustee shall be liable
for his or her own wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the office of Trustee, and
for nothing else, and shall not be liable for errors of judgment or mistakes of
fact or law. The Trustees may take advice of counsel or other experts with
respect to the meaning and operation of this Declaration of Trust, and shall be
under no liability for any act or omission in accordance with such advice or for
failing to follow such advice. The Trustees shall not be required to give any
bond as such, nor any surety if a bond is required.
Liability of Third Persons Dealing with Trustees
Section 3. No person dealing with the Trustees shall be bound to make any
inquiry concerning the validity of any transaction made or to be made by the
Trustees or to see to the application of any payments made or property
transferred to the Trust or upon its order.
Duration and Termination of Trust
Section 4. Unless terminated as provided herein, the Trust shall continue
without limitation of time. 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
<PAGE> 20
number of Shares held by the several Shareholders on the date of termination.
Filing of Copies, References, Headings
Section 5. The original or a copy of this instrument and of each amendment
hereto shall be kept at the office of the Trust where it may be inspected by any
Shareholder. A copy of this instrument and of each amendment hereto shall be
filed by the Trust with the Secretary of The Commonwealth of Massachusetts and
with the Clerk of the City of Boston, as well as any other governmental office
where such filing may from time to time be required. Anyone dealing with the
Trust may rely on a certificate by an officer of the Trust as to whether or not
any such amendments have been made and as to any matters in connection with the
Trust hereunder; and, with the same effect as if it were the original, may rely
on a copy certified by an officer of the Trust to be a copy of this instrument
or of any such amendments. In this instrument and in any such amendment,
references to this instrument, and all expressions like "herein", "hereof" and
"hereunder", shall be deemed to refer to this instrument as amended or affected
by any such amendments. Headings are placed herein for convenience of reference
only and shall not be taken as a part hereof or control or affect the meaning,
construction or effect of this instrument. This instrument may be executed in
any number of counterparts, each of which shall be deemed an original.
Applicable Law
Section 6. This Declaration of Trust is made in The Commonwealth of
Massachusetts, and it is created under and is to be governed by and construed
and administered according to the laws of said Commonwealth. The Trust shall be
of the type commonly called a Massachusetts business trust, and without limiting
the provisions hereof, the Trust may exercise all powers which are ordinarily
exercised by such a trust.
Amendments
Section 7. (a) 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 when authorized so to do by a vote of
Shareholders holding a majority of the Shares entitled to vote. 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
<PAGE> 21
inconsistent provision contained herein shall not require authorization by
Shareholder vote.
(b) 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 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.
IN WITNESS WHEREOF, all of the Trustees as aforesaid do hereto set their hands
this 9th day of January, 1989
John A. McNeice, Jr.
COMMONWEALTH OF MASSACHUSETTS )
COUNTY OF SUFFOLK ) ss
Then personally appeared before me John A. MaNeice, Jr., who acknowledged
the foregoing instrument to be his free act and deed.
January 9, 1989
Notary Public
My commission expires on 03/02/95.
<PAGE> 1
EXHIBIT (a)(2)
AMENDMENT NO. I TO THE
AGREEMENT AND DECLARATION OF
COLONIAL HIGH INCOME MUNICIPAL TRUST
WHEREAS, Section 7(a) of Article IX of the Agreement and Declaration of
Trust of Colonial High Income Municipal Trust, a copy of which is on file in the
office of the Secretary of the Commonwealth of Massachusetts, provides that said
Agreement and Declaration of Trust may be amended at any time by an instrument
in writing signed by a majority of the then Trustees when authorized so to do by
a vote of a majority of the shareholders; and
WHEREAS, the amendment set forth below has been approved by the Written Consent
of the Sole Shareholder of Colonial High Income Municipal Trust;
WE THE UNDERSIGNED, being at least a majority of the Trustees of Colonial High
Income Municipal Trust, do hereby certify that the undersigned have authorized
the following amendment to said Agreement and Declaration of Trust as follows:
Section 3 of Article V is hereby amended by deleting the words "Thirty per cent
(30%)" from the first line thereof so that said section shall read in its
entirety as follows:
"Section 3. A majority of the Shares entitled to vote shall be a quorum for the
transaction of business at a Shareholders' meeting. 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."
The foregoing amendment shall become effective as of the time this
instrument is filed with the Secretary of the Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands in the
City of Boston, Massachusetts for
<PAGE> 2
themselves and their assigns, on this 8th day of February, 1989.
John A. McNeice, Jr.
THE COMMONWEALTH OF MASSACHUSETTS
Suffolk, ss. February 8, 1989
Then personally appeared the above-named Trustee and acknowledged the
foregoing instrument to be his free act and deed, before me.
Notary Public
My Commission expires 3/02/1995
(Notary's Seal)
<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
INVESTMENT GRADE MUNICIPAL TRUST is made at Boston, Massachusetts this ___ day
of April, 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 Investment Grade
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; and
(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:
Division of Beneficial Interest
<PAGE> 2
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 l. 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 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.
2
<PAGE> 3
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:
3
<PAGE> 4
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 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,
4
<PAGE> 5
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 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.
5
<PAGE> 6
Section I 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:
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.
6
<PAGE> 7
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 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 ___
day of April, 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. 1
to the Agreement and Declaration of Trust of Colonial Investment Grade Municipal
Trust as their free act and deed, before me, this ___ day of April, 1999.
____________________________________
Notary Public
My Commission Expires _____________
8
<PAGE> 1
EXHIBIT (b)(1)
Retyped: 10/12/90
Amended: Section 2.5 10/12/90
Amended: Section 8 12/13/91
Amended: Section 11 10/09/92
Amended: Section 3.1, Paragraph 2 02/16/96
BY-LAWS
OF
COLONIAL HIGH INCOME MUNICIPAL TRUST
Section 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.
Section 2
Shareholders
2.1 Shareholder 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.
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.
<PAGE> 2
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.
Section 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, who may (but need not) be Trustees.
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 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.
<PAGE> 3
Section 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.
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.
<PAGE> 4
Section 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.
Section 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.
Section 7
Shares of Beneficial Interest
7.1 Share Certificates. 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 to the Trust for
cancellation. Such surrender and cancellation shall not affect the ownership of
shares in the Trust.
Section 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 such
dividend or
<PAGE> 5
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 of such purposes close the transfer books for all or any part of
such period.
Section 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.
Section 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.
Section 11
Fiscal Year
Except as from time to time otherwise provided by the Trustees,
President, Secretary, Controller or Treasurer, the fiscal year of the Trust
shall end on December 31.
Section 12
Amendments
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.
<PAGE> 1
EXHIBIT (k)(3)
AGREEMENT FOR STOCK TRANSFER SERVICES
between
COLONIAL HIGH INCOME MUNICIPAL TRUST
and
THE FIRST NATIONAL BANK OF BOSTON
This Agreement sets forth the terms and conditions under which The
First National Bank of Boston ("Bank of Boston") will serve as Sole Transfer
Agent and Registrar for the Common Stock of Colonial High Income Municipal Trust
(hereinafter referred to as Colonial High Income).
A. TERM
The term of this Agreement shall be for a period of three (3)
years, commencing from the effective date of this Agreement, May 1, 1990.
B. FEE FOR STANDARD SERVICES
For the standard services as stated in Section C provided by Bank
of Boston under this Agreement, Colonial High Income will be charged as follows:
$ 9.05 Per Account, Per Annum
The per account fee, as stated hereinabove, is to be adjusted
annually by the Employment Cost Index. (See Section J, Employment
Cost Index Adjustment).
C. STANDARD SERVICES
Bank of Boston agrees to provide the following services to
Colonial High Income in accordance with the standard fee set forth in Section B
hereinabove.
ACCOUNT MAINTENANCE:
1. Annual Administrative Services as Transfer Agent
2. Annual Administrative Services as Registrar
3. Maintaining shareholder accounts, including processing of
new accounts
4. Posting and acknowledging address changes and processing
other routine file maintenance adjustments
5. Posting all transactions, including debit and credit
certificates to the stockholder file
6. Researching and responding to all stockholder inquiries
<PAGE> 2
Colonial High Income Municipal Trust
Page 2
CERTIFICATE ISSUANCE:
7. Certificate issuance, cancellation and registration*
8. Daily Transfer Reports
9. Processing window items, mail items and all legal transfers
10. Combining certificates into large denominations
11. Processing Indemnity Bonds and replacing lost certificates
12. Maintaining stop-transfers, including the placing and
removing of same
MAILING, REPORTING AND MISCELLANEOUS SERVICES:
13. Addressing and enclosing quarterly reports, three (3) per
annum
14. Preparing a full statistical report to reflect shareholder
base by geographic residence code, class code, and share
group, one (1) per annum
15. Coding "multiple" accounts at a single household to suppress
mailing of reports to same
ANNUAL MEETING SERVICES:
16. Preparing a full stockholder list as of the Annual Meeting
Record Date
17. Addressing proxy cards
18. Enclosing proxy card along with notice and statement, return
envelope and Annual Report via Bipak envelop
19. Receiving, opening and examining returned proxies
20. Writing in connection with unsigned or improperly executed
proxies
21. Providing summary reports on status of tabulation on a
daily basis
22. Responding to inquiries as to whether specific accounts have
yet voted
23. Tabulating returned proxies to include two (2) proposals,
excess to be billed at $0.03 per account, per proposal
24. Preparing a final Annual Meeting list reflecting how each
account has voted on each proposal
ABANDONED PROPERTY REPORTING SERVICES:
25. Preparing an Abandoned Property Report, one (1) per annum
<PAGE> 3
Colonial High Income Municipal Trust
Page 3
DIVIDEND SERVICES:
As Dividend Disbursing Agent and Paying Agent (checks to be drawn
on The First National Bank of Boston and funds immediately available in-house on
payable date), we will perform the following dividend related services:
26. Preparing and mailing monthly dividends (check includes address-change
feature) with an enclosure with each dividend check
27. Preparing and filing Federal Information Returns (Form 1099) of dividends
paid in a year and mailing a statement to each stockholder
28. Preparing and filing State Information Returns of dividends paid in a year
to stockholders resident within such state
29. Preparing and filing annual withholding return and payments to government
of income taxes withheld from non-resident aliens (Form 1042)
30. Replacing lost dividend checks
31. Providing photocopies of cancelled checks when requested
32. Reconciling paid and outstanding checks
33. Coding "undeliverable" accounts to suppress mailing dividend checks to same
34. Processing and recordkeeping of accumulated uncashed dividends
35. Furnishing requested dividend information to stockholders
36. Performing the following duties as required by the Interest and
Dividend Tax Compliance Act of 1983:
- - Withholding Tax from Shareholder accounts not in compliance with the
provisions of the Act
- - Reconciling and reporting taxes withheld, including additional 1099
reporting requirements, to the Internal Revenue Service
- - Responding to shareholder inquiries regarding the Regulations
- - Mailing to new accounts who have had taxes withheld, to inform them of
procedures to be followed to curtail subsequent back-up withholding
- - Annual mailing to pre-1984 accounts which have not yet been certified
- - Performing shareholder file adjustments to reflect certification of accounts
<PAGE> 4
Colonial High Income Municipal Trust
Page 4
DIVIDEND REINVESTMENT SERVICES:
As Administrator of your Open Market or Original Issue Dividend
Reinvestment Plan (DRP), Bank of Boston would perform the following DRP related
services:
37. Reinvestment and/or cash investment transactions of Dividend
Reinvestment Plan participant accounts*
38. Preparing and mailing dividend reinvestment detailed statement with an
additional enclosure to each Dividend Reinvestment Plan participant
39. Preparing and mailing cash investment detailed statement with an additional
enclosure to each Dividend Reinvestment Plan participant
40. Maintaining DRP accounts and establishing new participant accounts
41. Processing termination requests
42. Processing withdrawal requests
43. Supplying summary reports for each reinvestment/investment to Colonial High
Income
44. Certificate depository
45. Handling shareholder inquiries concerning the Plan
46. Preparation and mailing of Form 1099 to participants and related filings
with the IRS
D. * LIMITATIONS, EXCLUSIONS AND ADDITIONAL FEES
The fee as stated in Section B includes:
47. The issuance and registration of five thousand (5,000) certificates per
annum, excess will be billed at $1.60 each.
48. A total of twenty four thousand (24,000) DRP transactions (a transaction is
defined as a dividend reinvestment, cash investment, withdrawal or
redemption), per annum; excess will be billed at $1.00 each.
The fee as stated in Section B excludes the following fees associated with
Respondent Bank processing:
<TABLE>
<S> <C>
Respondent Bank Administration Fee $250.00
For each Respondent Bank Omnibus Proxy received $ 50.00
For each Respondent Bank Search Card mailed $ 5.00
</TABLE>
<PAGE> 5
Colonial High Income Municipal Trust
Page 5
E. ITEMS NOT COVERED
Items not included in the fees set forth in this Agreement for "Standard
Services" such as payment of a stock dividend or any services associated with a
special project are to be billed separately, on an appraisal basis.
Services required by legislation or regulatory fiat which become effective
after the date of this Agreement shall not be a part of the Standard Services
and shall be billed by appraisal.
All out-of-pocket expenses such as telephone line coverages associated
with (800) Toll-Free telephone calls, postage, insurance, stationery, etc.
will be billed as incurred.
F. BILLING DEFINITION OF ACCOUNT MAINTENANCE
For billing purposes, number of accounts will be based on open accounts on
file at beginning of each billing period, plus new accounts added during that
period.
G. TERMINATION
This Agreement is terminable by 30 days written notice by either party. If
this Agreement, is terminated there will be a termination charge equivalent to
those fees and expenses covering the coordination of Bank of Boston's
termination process and the transfer of Colonial High Income's records to the
successor Stock Transfer Agent.
H. PAYMENT FOR SERVICES
It is agreed that invoices will be rendered and payable on a monthly
basis. Each billing period will, therefore, be of one-month duration.
I. NON-ASSIGNABILITY
This Agreement, and the duties, obligations and services to be provided
herein, may not be assigned or otherwise transferred without the prior written
consent of Colonial High Income.
<PAGE> 6
Colonial High Income Municipal Trust
Page 6
J. EMPLOYMENT COST INDEX ADJUSTMENT
An Employment Cost Index Rate analysis will be performed annually by Bank
of Boston at the contract's anniversary date and the per account fee will be
adjusted accordingly.
K. CONFIDENTIALITY
The information contained in this Agreement is confidential and
proprietary in nature. By receiving this Agreement, Colonial High Income agrees
that none of its directors, officers, employees, or agents without the prior
written consent of the Bank, will divulge, furnish or make accessible to any
third party, except as permitted by the next sentence, any part of this
Agreement or information in connection therewith which has been or may be made
available to it. In this connection, Colonial High Income agrees that it will
limit access to the Agreement and such information to only those officers or
employees with responsibilities for analyzing the Agreement and to such
independent consultants hired expressly for the purpose of assisting in such
analysis. In addition, Colonial High Income agrees that any persons to whom such
information is properly disclosed shall be informed of the confidential nature
of the Agreement and the information relating thereto, and shall be directed to
treat the same appropriately.
ACCEPTED AND AGREED AS OF THE 1st DAY OF May 1990.
THE FIRST NATIONAL BANK OF BOSTON COLONIAL HIGH INCOME MUNICIPAL TRUST
BY: BY:
TITLE: VICE PRESIDENT TITLE: SENIOR VICE PRESIDENT
DATE: May 14, 1990 DATE: May 23, 1990
<PAGE> 1
EXHIBIT (k)(4)
SERVICE CONTRACT
AGREEMENT dated as of February 16, 1989, between Colonial Management
Associates, Inc. ("Colonial"), a Massachusetts corporation with principal
offices at one Financial Center, Boston, Massachusetts, and Colonial High Income
Municipal Trust (the "Trust"), a Massachusetts business trust with principal
offices at One Financial Center, Boston, Massachusetts.
1. Appointment. The Trust hereby appoints Colonial as agent to perform
certain services, all as described in Paragraph 2 hereunder, for the Trust, such
appointment to take effect at the close of business on the date hereof.
2. Services. Colonial shall be responsible for (i) the determination of the
Trust's net assets and the net asset value per share of the Trust's outstanding
shares and the offering price, if any, at which the Trust's shares are sold, at
the times and in the manner from time to time directed by the trustees or
officers of the Trust ("pricing") and the timely communication of such
information to the person or persons designated by the Trust; and (ii)
maintaining the accounts, books and other records of the Trust required by
Section 31(a) of the Investment Company Act of 1940 and the rules thereunder
("bookkeeping"). All accounts, books and other records shall be available for
inspection and use by the Trust and shall be preserved by Colonial for the
periods and in the places required by Rule 3la-2 under the Investment Company
Act of 1940. Colonial shall furnish at its expense office space and all
necessary light, heat, telephone service, office equipment, stationery, and
stenographic, clerical, mailing and messenger services in connection with such
pricing and bookkeeping.
3. Audit and Inspection. Colonial shall make available during regular
business hours all accounts, books and other records created and maintained
pursuant to this Agreement for reasonable audit and inspection by the Trust, any
person retained by the Trust, or any regulatory agency having authority over the
Trust. Upon reasonable notice by the Trust, Colonial shall make available during
regular business hours its facilities and premises employed in connection with
its performance of this Agreement for reasonable inspection by the Trust, any
person retained by the Trust, or any regulatory agency having authority over the
Trust.
4. Compensation. For the performance of its obligations hereunder, the
Trust shall pay Colonial a monthly fee at the rate of 1/12 of .0125% of the
average of the weekly closing value of the Trust's total net assets for the
month concerned.
In the event this Agreement is in effect for only part of any fiscal year
of the Trust, the fee payable shall be reduced proportionately on the basis of
the number of business days (any day on which the New York Stock Exchange is
open for trading) during which the Agreement was in effect for such year.
5. Use of Trust's Name. Colonial shall not use the name of the Trust or
material relating to the Trust on any forms for other than internal use in any
manner not approved prior thereto in writing, provided, however, that the Trust
shall approve all uses of its name which merely refer in accurate terms to the
appointment of Colonial hereunder or which are required by the Securities and
Exchange Commission or a state securities commission and provided, further, that
in no event shall such approval be unreasonably withheld.
6. Security. Colonial represents and warrants that the various procedures
and systems which Colonial has implemented with regard to safeguarding the
Trust's accounts, books and other records and Colonial's records, data,
equipment, facilities and other property used in the performance of its
obligations hereunder from loss or damage attributable to fire, theft or any
other cause are adequate, and that it will make such changes therein from time
to time as in its judgment are required for the secure performance of its
obligations hereunder.
7. Limitation of Liability. Colonial shall not be liable to the Trust or to
its stockholders or creditors for any matter or thing in connection with the
performance of its obligations hereunder, except on account of
<PAGE> 2
Colonial's willful misfeasance, bad faith or gross negligence in the performance
of its obligations hereunder or by reason of its reckless disregard of its
obligations hereunder.
8. Acts of God etc. Colonial shall not be liable for delays or errors
occurring by reason of circumstances beyond its control, including but not
limited to acts of civil or military authority, national emergencies, work
stoppage, fire, flood, catastrophe, acts of God, insurrection, war, riot or
failure of communication or power supply. In the event of equipment breakdown
beyond its control, Colonial shall, at no additional expense to the Trust, take
reasonable steps to minimize service interruptions but shall have no liability
with respect thereto.
9. Amendments. Colonial and the Trust shall regularly consult with each
other regarding Colonial's performance of its obligations and its compensation
hereunder. In connection therewith, the Trust shall submit to Colonial a
reasonable time in advance of filing with the Securities and Exchange Commission
copies of any amended or supplemented registration statements (including
exhibits) under the Securities Act of 1933, as amended, and the Investment
Company Act of 1940, as amended. In the event that a change in such documents or
the procedures contained therein materially increases the cost to Colonial of
performing its obligations hereunder, Colonial shall be entitled to receive
reasonable compensation therefor.
10. Duration, Termination, etc. Neither this Agreement nor any provisions
hereof may be changed, waived, discharged or terminated orally, but only by
written instrument which shall make specific reference to this Agreement and
which shall be signed by the party against which enforcement of such change,
waiver, discharge or termination is sought. This Agreement shall continue in
effect until July 31, 1990 and thereafter from year to year provided that such
continuance is specifically approved by vote of a majority of the trustees of
the Trust who are not affiliated with Colonial. This Agreement may be terminated
at any time by thirty days' written notice given by Colonial to the Trust or
thirty days' written notice given by the Trust to Colonial; and provided further
that this Agreement may be terminated immediately at any time for cause either
by the Trust or by Colonial in the event that such cause remains unremedied for
a reasonable period of time not to exceed ninety days after receipt of written
specification of such cause. Any such termination shall not affect the rights
and obligations of the parties under Paragraphs 7 and 8 hereof. In the event
that the Trust designates a successor to any of Colonial's obligations
hereunder, Colonial shall, at the expense and direction of the Trust, transfer.
to such successor all relevant accounts, books and other records established or
maintained by Colonial hereunder.
11. Miscellaneous. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced in accordance with and
governed by the laws of The Commonwealth of Massachusetts. A copy of the
Agreement and Declaration of Trust of Colonial High Income Municipal Trust is on
file with the Secretary of State of The Commonwealth of Massachusetts. This
Agreement is executed on behalf of the Trustees of the Trust as Trustees and not
individually and the obligations of this Agreement 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 Agreement may be executed
simultaneously in two counterparts, which taken together shall constitute one
and the same instrument.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date
and year first above written.
COLONIAL HIGH INCOME MUNICIPAL TRUST
By:
COLONIAL MANAGEMENT ASSOCIATES, INC.
By:
<PAGE> 1
EXHIBIT (k)(5)
COLONIAL HIGH INCOME MUNICIPAL TRUST
One Financial Center
Boston, MA 02111
January 1, 1990
Colonial Management Associates, Inc.
One Financial Center
Boston, MA 02111
Dear Sirs:
This is in connection with the Service Contract (the "Contract") dated
February 16, 1989.
This is to advise you that effective January 1, 1990, Section 4. of said
Contract is amended to read in its entirety as follows:
"4. Compensation. For the performance of its obligations hereunder, the
Trust shall pay Colonial a monthly fee determined as follows:
A monthly fee of $1,500, plus percentage fee on assets equal to the
following: 0% for the first $50 million of Trust assets; a monthly fee of 1/12
of .0233% on the next $950 million; 1/12 of .0167% on the next $1 billion; 1/12
of .0100% of the next $1 billion; and 1/12 of .0007% on the excess over $3
billion of the average weekly net assets of the Trust for such month.
In the event this Agreement is in effect for only part of any month, the
fee payable shall be reduced proportionately on the basis of the number of
business days (any day on which the New York Stock Exchange is open for trading)
during which the Agreement was in effect for such month."
Colonial Management Associates, Inc.
Julian Daly, Vice President
Colonial High Income Municipal Trust
Evelyn A. Mellen, Vice President
