<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 14, 1999
1933 ACT FILE NO. 333-78945
1940 ACT FILE NO. 811-5767
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- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No. 1
[ ] Post-Effective Amendment No.
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 6
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
EXACT NAME OF REGISTRANT SPECIFIED IN CHARTER
222 SOUTH RIVERSIDE PLAZA
CHICAGO, ILLINOIS 60606
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES (NUMBER, STREET, CITY, STATE, ZIP CODE)
(312) 537-7000
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
------------------------
PHILIP J. COLLORA
SCUDDER KEMPER INVESTMENTS, INC.
222 SOUTH RIVERSIDE PLAZA
CHICAGO, ILLINOIS 60606
NAME AND ADDRESS (NUMBER, STREET, STATE, ZIP CODE) OF AGENT FOR SERVICE
------------------------
COPIES TO:
ROBERT W. HELM, ESQ.
DECHERT PRICE & RHOADS
1775 EYE STREET, N.W.
SUITE 1100
WASHINGTON, D.C. 20006-2401
------------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement.
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [ ]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED UNIT(1) PRICE(1) REGISTRATION FEE(2)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Preferred Shares of Beneficial
Interest (par value $.01 per
share).......................... 2,800 $25,000 $70,000,000 $19,460
- ------------------------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act of 1933.
(2) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
CROSS-REFERENCE SHEET
PART A
<TABLE>
<CAPTION>
ITEM
NO. CAPTION LOCATION IN PROSPECTUS
- ---- ------- ----------------------
<C> <S> <C>
1. Outside Front Cover........................ Front Cover Page
2. Inside Front and Outside Back Cover Page... Front 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............................ Prospectus Summary; Use of Proceeds
8. General Description of the Registrant...... Front Cover Page; Prospectus Summary; The
Fund
9. Management................................. Prospectus Summary; Management of The Fund
10. Capital Stock, Long-Term Debt, and Other
Securities................................. Front Cover Page; Description of Municipal
Preferred; Capitalization; Description of
Capital Structure; Financial Highlights
11. Defaults and Arrears on Senior
Securities................................. Not Applicable
12. Legal Proceedings.......................... Not Applicable
13. Table of Contents of the Statement of
Additional Information..................... Table of Contents of Statement of
Additional Information
</TABLE>
PART B
<TABLE>
<CAPTION>
ITEM
NO. CAPTION LOCATION IN STATEMENT OF ADDITIONAL INFORMATION
- ---- ------- -----------------------------------------------
<C> <S> <C>
14. Cover Page................................. Cover Page
15. Table of Contents.......................... Table of Contents
16. General Information and History............ General Information
17. Investment Objective and Policies.......... Additional Information About Investments and
Investment Techniques; Investment Restrictions
18. Management................................. Trustees and Officers; Investment Advisory and
Other Services
19. Control Persons and Principal Holders of
Securities................................. Ownership of Fund Shares
20. Investment Advisory and Other Services..... Investment Advisory and Other Services
21. Brokerage Allocation and Other Practices... Portfolio Transactions
22. Tax Status................................. Taxes
23. Financial Statements....................... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED SEPTEMBER 14, 1999
PROSPECTUS
$70,000,000
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED ("MUNICIPAL PREFERRED") SHARES
2,800 SHARES, SERIES T
LIQUIDATION PREFERENCE $25,000 PER SHARE
Kemper Strategic Municipal Income Trust (the "Fund") is selling 2,800
Series T Municipal Auction Rate Cumulative Preferred Shares. The Fund is a
closed-end, non-diversified management investment company. The Fund's investment
objective is to provide a high level of current income exempt from federal
income tax. The Fund seeks to achieve this objective by investing in a portfolio
of tax-exempt municipal securities. The Fund invests at least 50% of its total
assets in investment grade municipal securities or unrated municipal securities
of comparable quality and may invest up to 50% of its total assets in high-yield
municipal securities that are rated below investment grade and involve certain
risks. Securities rated below investment grade are commonly known as "junk
bonds." The Fund may also employ certain trading strategies such as purchasing
securities on a "when issued" or "forward delivery" basis and engaging in
certain hedging techniques, including financial futures and options
transactions. There is no assurance that the Fund will achieve its investment
objective. The Fund's investment adviser is Scudder Kemper Investments, Inc.
("Scudder Kemper" or the "Adviser"). An investment in the Fund 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
initial period from and including the date of issue to but excluding
, 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 Fund may redeem shares of Municipal
Preferred as described under "Description of Municipal Preferred -- Redemption."
This Prospectus sets forth concisely the information you should know before
investing, including information about risks. You should read this Prospectus
before you invest and keep it for future reference. The Fund's Statement of
Additional Information ("SAI"), dated September , 1999, contains additional
information about the Fund and is incorporated by reference into (which means it
is considered to be a part of) this Prospectus. You may obtain a free copy of
the SAI by calling 1-800-621-1048 or by writing to the Fund at 222 South
Riverside Plaza, Chicago, Illinois 60606. A table of contents to the SAI is
located at page 41 of this Prospectus. The SAI is available along with other
Fund-related materials at the Securities and Exchange Commission's internet web
site (http://www.sec.gov).
------------------
INVESTING IN THE SHARES OF MUNICIPAL PREFERRED INVOLVES RISKS. SEE THE
"INVESTMENT OBJECTIVE, POLICIES AND RISKS" SECTION BEGINNING ON PAGE 9 OF THIS
PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public Price................................................ $ 25,000 $70,000,000
Sales Load.................................................. $ $
Proceeds to Fund(1)......................................... $ $
</TABLE>
(1) Not including offering expenses incurred by the Fund, estimated to be
$ .
The public offering price per share will be increased by the amount of
dividends, if any, that have accumulated from the date the shares of Municipal
Preferred are first issued.
------------------
The underwriter is offering the shares of Municipal Preferred subject to
various conditions. The underwriter expects to deliver the shares to purchasers,
in book-entry form through The Depository Trust Company, on or about
, 1999.
------------------
SALOMON SMITH BARNEY
, 1999
<PAGE> 4
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. THE FUND 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 FUND 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 FUND'S BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE
THAT DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Financial Highlights........................................ 6
The Fund.................................................... 7
Use of Proceeds............................................. 7
Capitalization.............................................. 7
Portfolio Composition....................................... 8
Investment Objective, Policies and Risks.................... 9
Determination of Net Asset Value............................ 19
The Auction................................................. 20
Description of Municipal Preferred.......................... 23
Rating Agency Guidelines.................................... 30
Management of the Fund...................................... 31
Custodian, Transfer Agent, Dividend Disbursing Agent and
Registrar................................................. 32
Taxes....................................................... 32
Description of Capital Structure............................ 35
Underwriting................................................ 40
Legal Matters............................................... 40
Experts..................................................... 40
Further Information......................................... 41
Table of Contents for the Statement of Additional
Information............................................... 41
</TABLE>
i
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights selected information from this Prospectus. It may
not contain all of the information that is important to you. To understand the
offering of the Municipal Preferred shares fully, you should read this entire
Prospectus carefully, including the risk factors. This summary is qualified in
its entirety by reference to the detailed information included in this
Prospectus and the SAI.
THE OFFERING.................. The Fund is offering a total of 2,800 shares of
Series T Municipal Preferred at a purchase
price of $25,000 per share plus dividends, if
any, that have accumulated from the date the
Fund first issues the shares. Salomon Smith
Barney Inc. is offering the shares as
underwriter.
The Municipal Preferred shares will be
preferred shares of the Fund that entitle their
holders to receive cash dividends at an annual
rate that may vary for the successive dividend
periods for such shares. In general, except as
described under "-- Dividends and Dividend
Periods" and "Description of Municipal
Preferred -- Dividends and Dividend Periods,"
each dividend period will be seven days. The
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 record 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 FUND...................... Kemper Strategic Municipal Income Trust is a
closed-end, non-diversified management
investment company. The Fund was organized as a
Massachusetts business trust on August 3, 1988,
and is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"). The
Fund's principal office is located at 222 South
Riverside Plaza, Chicago, Illinois 60606, and
its telephone number is 1-800-621-1048.
The Fund commenced investment operations on
March 22, 1989 upon the closing of an initial
public offering of its common shares of
beneficial interest, par value $0.01 per share.
As of August 31, 1999, the Fund had net assets
of approximately $125 million. The Fund is
offering pursuant to this Prospectus 2,800
preferred shares of beneficial interest, par
value $0.01 per share, designated Series T
Municipal Auction Rate Cumulative Preferred
Shares.
1
<PAGE> 6
INVESTMENT OBJECTIVE AND
POLICIES...................... The Fund's investment objective is to provide a
high level of current income exempt from
federal income tax. An investment in Municipal
Preferred shares may not be appropriate for
certain investors (e.g., most retirement plans)
and there is no assurance that the Fund will
achieve its investment objective.
The Fund seeks to achieve its objective by
investing in a portfolio of tax-exempt
municipal securities. During normal market
conditions, at least 65% of the Fund's total
assets will be invested in municipal
securities. The Fund invests at least 50% of
its total assets in municipal securities rated
at the time of purchase within the four highest
grades by Standard & Poor's Ratings Services
("S&P") or Moody's Investors Service, Inc.
("Moody's") and unrated municipal securities
which, in the opinion of Scudder Kemper, have
equivalent credit characteristics and are of
comparable quality. The Fund may invest up to
50% of its total assets in high-yield municipal
securities rated BB or lower by S&P or Ba or
lower by Moody's or unrated municipal
securities which, in the opinion of Scudder
Kemper, have equivalent credit characteristics
and are of comparable quality. Securities rated
BB or lower by S&P and Ba or lower by Moody's
are below investment grade and are regarded by
S&P and Moody's, on balance, as predominantly
speculative with respect to the issuer's
capacity to pay interest and repay principal in
accordance with the terms of the obligation.
The Fund will not purchase municipal securities
rated lower than B- by S&P or B by Moody's or
unrated municipal securities that Scudder
Kemper considers comparable. The Fund may also
employ certain trading strategies such as
purchasing and selling securities on a "when
issued" or "forward delivery" basis and
engaging in certain hedging techniques,
including financial futures and options
transactions.
PRINCIPAL INVESTMENT RISKS.... The Fund may invest up to 50% of its total
assets in municipal securities rated below
investment grade and unrated municipal
securities considered to have equivalent credit
characteristics and to be of comparable quality
by Scudder Kemper (but not rated lower than B-
by S&P or B by Moody's or unrated municipal
securities that Scudder Kemper considers
comparable). Investment in municipal securities
of below investment grade quality involves
special risks as compared with investment in
higher grade municipal securities. These risks
include greater sensitivity to general market
price volatility and less secondary market
trading. Securities rated below investment
grade are commonly known as "junk bonds." Such
securities are regarded, on balance, as
predominantly speculative with respect to the
issuer's ability to pay interest and repay
principal owed.
INVESTMENT ADVISER............ The Fund's investment adviser is Scudder Kemper
Investments, Inc. The Adviser, including
certain of its predecessors, has been engaged
in the management of investment companies for
more than 50 years and is among the nation's
largest asset management companies. As of June
30, 1999, total assets under management by the
Adviser were more than $290 billion for
2
<PAGE> 7
investment company, corporate, pension,
profit-sharing and other accounts. The Adviser
receives an annualized fee, calculated and paid
monthly, in the amount of 0.60% of the Fund's
average weekly net assets. The Adviser will
benefit from an increase in the Fund's assets
resulting from the offering.
DIVIDENDS AND DIVIDEND
PERIODS....................... Dividends on Municipal Preferred shares are
cumulative from the date the shares are first
issued. The Fund will pay dividends on the
shares of Municipal Preferred, out of legally
available funds and when declared by the Board
of Trustees, beginning on , 1999.
After the initial dividend period, each
dividend period for the shares of Municipal
Preferred will generally consist of seven days;
provided, however, that before any auction, the
Fund may decide, subject to limitations and
only if it gives the required notices, to
declare a special dividend period of up to five
years. Accordingly, in the case of dividend
periods that are not special dividend periods,
dividends generally will be payable on each
succeeding Wednesday. The Fund may specify
different dividend payment dates for special
dividend periods.
The Fund 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 from and including the
date of issue to but excluding ,
1999 will be % per year. For each
subsequent dividend period, the auction agent
(Bankers Trust Company) will determine the
dividend rate on Municipal Preferred shares
through an auction.
MAXIMUM DIVIDEND RATE......... Generally, the rate at which the Fund pays
dividends on shares of Municipal Preferred may
not exceed the maximum dividend rate. The
maximum dividend rate may vary for different
dividend periods. The maximum dividend rate is
based upon the current credit rating assigned
to the shares of Municipal Preferred and an
independent reference rate that may vary over
time.
If the number of shares of Municipal Preferred
available during an auction exceeds the total
number of shares subject to bids for that
auction at less than or equal to the maximum
dividend rate, then the dividend rate for the
subsequent dividend period will be the maximum
dividend rate. In addition, if the Fund fails
to pay a dividend on shares of Municipal
Preferred, or if the Fund fails to pay the full
redemption price for shares of Municipal
Preferred when due, then the dividend rate for
the subsequent dividend period will be the
maximum dividend rate. If, however, the Fund
cures its failure to pay a dividend or to pay
the full redemption price, then the maximum
dividend rate will not automatically apply.
ASSET MAINTENANCE............. Under the Fund's Certificate of Designation for
Preferred Shares (the "Certificate"), which
establishes and fixes the rights and
3
<PAGE> 8
preferences of the shares of Municipal
Preferred, the Fund 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 1940 Act.
Based on the composition of the Fund's
portfolio and market conditions as of August
31, 1999, the asset coverage of the Municipal
Preferred shares as measured pursuant to the
1940 Act would be approximately 279% if the
Fund were to issue all Municipal Preferred
shares offered in this Prospectus, representing
approximately 36% of the Fund's capital.
MANDATORY REDEMPTION.......... If the Fund 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 Fund
will limit redemption to the number of
Municipal Preferred shares, together with all
other preferred shares of the Fund, if any,
necessary to restore the required asset
coverage. As of the date of this offering,
there are no other preferred shares
outstanding. The Fund may avoid mandatory
redemption by restoring its required asset
coverage pursuant to rating agency guidelines.
The provisions of the 1940 Act may restrict the
Fund's ability to make a mandatory redemption
in connection with a failure to comply with the
rating agencies' asset coverage requirements.
OPTIONAL REDEMPTION........... The Fund, at its option and subject to various
conditions, may choose to redeem all or a
portion of the shares of Municipal Preferred
generally on the second business day preceding
any dividend payment date at the price of
$25,000 per share plus accumulated but unpaid
dividends, if any, whether or not earned or
declared to (but not including) the date fixed
for redemption, and, during some special rate
periods, any applicable premium.
LIQUIDATION PREFERENCE........ The liquidation preference (that is, the amount
the Fund must pay to Municipal Preferred
shareholders if the Fund 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 1940 Act requires that the holders of
Municipal Preferred shares, and the holders of
any other preferred shares of the Fund, 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 Fund, are unpaid for two
full years.
In each case, the holders of common shares,
Municipal Preferred shares, and any other
preferred shares of the Fund, voting
4
<PAGE> 9
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 Fund, will vote as a
separate class or classes on other matters as
required under the Fund's Amended and Restated
Agreement and Declaration of Trust (the
"Declaration"), the 1940 Act and Massachusetts
law. Each common share, each Municipal
Preferred share, and each share of any other
class of preferred shares of the Fund 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 Fund's
investments. All or a portion of the Fund's
dividends may be subject to the federal
alternative minimum tax. The Fund is currently
required to allocate net capital gain and other
income taxable for federal income tax purposes,
if any, proportionately between common shares
of beneficial interest and shares of Municipal
Preferred. The Fund 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 Fund,
but is not generally expected to be
significant.
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 Fund.
RATINGS....................... The Fund will not issue shares of Municipal
Preferred unless such shares have a rating of
Aaa from Moody's and AAA from S&P.
5
<PAGE> 10
FINANCIAL HIGHLIGHTS
The table below sets forth certain specified information for a common share
of beneficial interest of the Fund outstanding throughout each period presented.
The financial highlights for each period (except for the six-month period ended
May 31, 1999) presented have been audited by Ernst & Young LLP, the Fund's
independent auditors, whose unqualified report is included in the Fund's
November 30, 1998 Annual Report and is incorporated by reference in the SAI. The
financial highlights should be read in conjunction with the financial statements
and notes thereto included in the Fund's November 30, 1998 Annual Report, which
is available without charge by calling the Fund at 1-800-621-1048.
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED FOR THE FISCAL YEARS ENDED NOVEMBER 30,
MAY 31, ----------------------------------------------------
1999* 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning
of year.................... $ 12.24 $ 12.29 $ 12.14 $ 12.19 $ 11.54 $ 12.36
INCOME FROM INVESTMENT
OPERATIONS
Net investment income....... $ .39 $ .77 $ .80 $ .82 $ .83 $ .83
Net realized and unrealized
gain (loss)................ $ (.23) $ (.05) $ .17 $ (.05) $ .64 $ (.80)
Total from investment
operations................. $ .16 $ .72 $ .97 $ .77 $ 1.47 $ .03
LESS DIVIDENDS
Distribution from net
investment income.......... $ .38 $ .77 $ .82 $ .82 $ .82 $ .82
Distribution from net
realized gain.............. $ .01 -- -- -- -- $ .03
Total dividends............. $ .39 $ .77 $ .82 $ .82 $ .82 $ .85
Net asset value, end of
year....................... $ 12.01 $ 12.24 $ 12.29 $ 12.14 $ 12.19 $ 11.54
Market value, end of year... $ 11.88 $ 12.81 $ 13.06 $ 12.38 $ 12.13 $ 11.63
TOTAL RETURN
Based on net asset value.... 1.28% 5.99% 8.28% 6.58% 13.09% .12%
Based on market value....... (4.34)% 4.36% 12.87% 9.19% 11.70% .74%
RATIOS TO AVERAGE NET ASSETS
Expenses.................... .81% .77% .76% .74% .76% .75%
Net investment income....... 6.44% 6.29% 6.62% 6.82% 6.97% 6.92%
SUPPLEMENTAL DATA
Net assets at end of year
(in thousands)............. $128,918 $131,006 $130,895 $128,234 $127,844 $120,689
Portfolio turnover rate
(annualized)............... 29% 22% 13% 31% 8% 11%
<CAPTION>
MARCH 22,
FOR THE FISCAL YEARS ENDED NOVEMBER 30, 1989** TO
----------------------------------------- NOVEMBER 30,
1993 1992 1991 1990 1989
-------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning
of year.................... $ 11.86 $ 11.65 $ 11.37 $ 11.55 $ 11.05
INCOME FROM INVESTMENT
OPERATIONS
Net investment income....... $ .83 $ .84 $ .84 $ .81 $ .52
Net realized and unrealized
gain (loss)................ $ .58 $ .30 $ .36 $ (.04) $ .43
Total from investment
operations................. $ 1.41 $ 1.14 $ 1.20 $ .77 $ .95
LESS DIVIDENDS
Distribution from net
investment income.......... $ .89 $ .83 $ .81 $ .85 $ .45
Distribution from net
realized gain.............. $ .02 $ .10 $ .11 $ .10 --
Total dividends............. $ .91 $ .93 $ .92 $ .95 $ .45
Net asset value, end of
year....................... $ 12.36 $ 11.86 $ 11.65 $ 11.37 $ 11.55
Market value, end of year... $ 12.38 $ 12.13 $ 12.13 $ 10.75 $ 11.50
TOTAL RETURN
Based on net asset value.... 12.32% 10.14% 10.99% 7.01% 8.57%
Based on market value....... 9.51% 7.86% 21.92% 1.66% (.45)%
RATIOS TO AVERAGE NET ASSETS
Expenses.................... .74% .77% .77% .76% .77%
Net investment income....... 6.87% 7.17% 7.31% 7.15% 6.59%
SUPPLEMENTAL DATA
Net assets at end of year
(in thousands)............. $128,564 $122,035 $118,864 $114,929 $115,985
Portfolio turnover rate
(annualized)............... 8% 10% 20% 57% 22%
</TABLE>
- ---------------
* Unaudited
** Commencement of operations.
Note: Total return based on net asset value reflects changes in the Fund's net
asset value during the year. Total return based on market value reflects
changes in market value. Each figure includes reinvestment of dividends.
These figures will differ depending upon the level of any discount from or
premium to net asset value at which the Fund's shares trade during the
year.
6
<PAGE> 11
THE FUND
Kemper Strategic Municipal Income Trust is a closed-end, non-diversified
management investment company. The Fund was organized as a Massachusetts
business trust on August 3, 1988, and is registered under the 1940 Act. The Fund
commenced investment operations on March 22, 1989 upon the closing of an initial
public offering of its common shares. As of August 31, 1999, the Fund had net
assets of approximately $125 million. On August 31, 1999, the Fund had
outstanding approximately 10,742,480 common shares. The Fund's principal office
is located at 222 South Riverside Plaza, Chicago, Illinois 60606, and its
telephone number is 1-800-621-1048.
USE OF PROCEEDS
The net proceeds of this offering will be approximately $ , after
the payment of the underwriting commission to Salomon Smith Barney Inc. (the
"Underwriter") and estimated offering costs. The net proceeds of the offering
will be invested in accordance with the Fund's investment objective and
policies. It is presently anticipated that this may take up to three months from
the offer and sale of the Municipal Preferred shares, depending on market
conditions and the availability of appropriate securities. Pending such
investment, it is anticipated that the proceeds will be invested in short-term
tax-exempt securities.
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Fund as
of August 31, 1999 and as adjusted to give effect to the issuance of the shares
of Municipal Preferred offered hereby (including estimated offering expenses and
sales loads of $964,460).
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Shareholders' Equity:
Preferred Shares, par value $0.01 per share (no shares
issued; 2,800 Series T Municipal Preferred, as
adjusted, at $25,000 per share liquidation
preference)............................................ -- $ 70,000,000
Common Shares, par value $0.01 per share (10,742,480
shares outstanding).................................... $120,634,994 $120,634,994
Undistributed (overdistributed) net investment income....... $ 178,615 $ 178,615
Net realized gain (loss) from investment transactions....... $ (634,673) $ (634,673)
Net unrealized appreciation of investments.................. $ 4,849,618 $ 4,849,618
Net assets................................................ $125,028,555 $195,028,555
</TABLE>
7
<PAGE> 12
PORTFOLIO COMPOSITION
As of August 31, 1999, approximately 36.7% of the market value of the
Fund's portfolio was invested in long-term municipal securities and
approximately 63.3% was invested in short- and intermediate-term municipal
securities. The following table sets forth information with respect to the
composition of the Fund's investment portfolio as of August 31, 1999.*
<TABLE>
<CAPTION>
HOLDINGS PERCENT
- -------- -------
<S> <C>
1. Revenue Bonds............................................ 68%
2. U.S. Government Secured.................................. 30%
3. General Obligations...................................... 2%
</TABLE>
Average maturity of the Fund: 15.1 years.
* Portfolio holdings and composition are subject to change.
PORTFOLIO STATISTICS
(S&P / MOODY'S -- AS OF AUGUST 31, 1999)+
<TABLE>
<CAPTION>
SECURITIES RATINGS
- ------------------
<S> <C>
AAA/Aaa..................................................... 38%
AA/Aa....................................................... 2%
A/A......................................................... 1%
BBB/Baa..................................................... 14%
BB/Ba....................................................... 5%
B/B......................................................... 0%
Not rated*.................................................. 40%
</TABLE>
+ The ratings of S&P and Moody's represent their opinions as to the quality of
securities that they undertake to rate. The percentage shown reflects the
higher of Moody's or S&P's ratings. Ratings are relative and subjective and
not absolute standards of quality. S&P's rating categories may be modified
further by a plus (+) or minus (-) in AA, A, BBB, BB, B and C ratings. Moody's
ratings categories may be modified further by a 1, 2 or 3 in Aa, A, Baa, Ba
and B ratings.
* Securities that are not rated by S&P or Moody's may be rated by nationally
recognized statistical rating organizations other than S&P or Moody's, or may
not be rated by any such organization. With respect to the percentage of the
Fund's assets invested in such securities, the Adviser believes that these are
of comparable quality to rated municipal securities. This determination is
based on the Adviser's own internal evaluation and does not necessarily
reflect how such securities would be rated by S&P or Moody's if either were to
rate the securities.
8
<PAGE> 13
INVESTMENT OBJECTIVE, POLICIES AND RISKS
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide a high level of current
income exempt from federal income tax. The Fund seeks to achieve this objective
by investing in a portfolio of tax-exempt municipal securities. The Fund would
not ordinarily be a suitable investment for tax-exempt retirement plans or other
investors unable to benefit from tax-exempt income. The Fund has not established
any limit on the percentage of its portfolio that may be invested in municipal
securities subject to the alternative minimum tax provisions of federal tax law,
and a substantial portion of the income produced by the Fund may be taxable
under the alternative minimum tax. The Fund therefore would not ordinarily be a
suitable investment for investors who are subject to the alternative minimum
tax. The suitability of the Fund for these investors will depend upon a
comparison of the yield likely to be provided from the Fund with the yield from
comparable tax-exempt investments not subject to the alternative minimum tax and
with the yield from comparable fully taxable investments in light of each such
investor's tax position. See "Taxes."
INVESTMENT POLICIES
General Composition of the Fund. During normal market conditions, at least
65% of the Fund's total assets will be invested in municipal securities. The
Fund invests at least 50% of its total assets in tax-exempt municipal securities
rated at the time of purchase within the four highest grades (Baa or BBB or
better) by Moody's or S&P, which are considered "investment grade" securities,
and unrated municipal securities which, in the opinion of Scudder Kemper, have
equivalent credit characteristics and are of comparable quality. Municipal
securities rated Baa by Moody's are considered medium grade obligations which
lack outstanding investment characteristics and in fact have speculative
characteristics as well, while municipal securities rated BBB by S&P are
regarded as having an adequate capacity to pay principal and interest, although
adverse economic conditions or changing circumstances may lead to a weakened
capacity of the issuer to meet its financial commitment to the obligation. The
Fund may invest up to 50% of its total assets in high-yield municipal securities
rated BB or lower by S&P or Ba or lower by Moody's or unrated municipal
securities which, in the opinion of Scudder Kemper, have equivalent credit
characteristics and are of comparable quality. Securities rated BB or lower by
S&P or Ba or lower by Moody's are below investment grade and are regarded by S&P
and Moody's, on balance, as predominantly speculative with respect to capacity
to pay interest and repay principal in accordance with the terms of the
obligation. Securities rated below investment grade are commonly known as "junk
bonds." The lowest quality municipal securities in which the Fund may invest are
those rated B- by S&P or B by Moody's or unrated municipal securities which, in
the opinion of Scudder Kemper, have credit characteristics equivalent to, and
will be of comparable quality to, such B- or B rated municipal securities. A
general description of Moody's and S&P's ratings of municipal securities is set
forth in Appendix A to the SAI. The ratio of investment grade municipal
securities to higher yielding, lower quality municipal securities in the Fund's
portfolio will be adjusted by Scudder Kemper for both income potential and risk
in order to seek to achieve the Fund's investment objective. An investment in
the Fund may not be appropriate for all investors and there is no assurance that
the Fund will achieve its investment objective. The Fund generally emphasizes
investments in municipal securities with longer term maturities (i.e., 10 or
more years to maturity at the time of purchase), but the degree of such emphasis
depends upon market conditions existing at the time of investment. The Fund will
also engage in hedging practices to the extent deemed appropriate by Scudder
Kemper. The Fund may also invest in zero-coupon bonds and inverse floaters. See
"-- Additional Investment Practices."
The foregoing policies as to ratings of portfolio investments apply only at
the time of the purchase of a security, and the Fund is not required to dispose
of a security in the event Moody's or S&P subsequently downgrades its assessment
of the credit characteristics of a particular issuer.
During temporary defensive periods (e.g., times when, in the opinion of
Scudder Kemper, temporary imbalances of supply and demand or other temporary
dislocations in the tax-exempt bond market adversely affect the price at which
municipal securities are available), the Fund may invest any percentage of its
net
9
<PAGE> 14
assets in taxable temporary investments. The Fund will invest only in temporary
investments which are U.S. Government securities and other securities rated
within the two highest grades by Moody's or S&P, and which mature within one
year from the date of purchase. Temporary investments of the Fund may also
include repurchase agreements. See "-- Additional Investment Practices." To the
extent the Fund invests during temporary defensive periods in taxable
investments, the Fund will not at such times be in a position to achieve its
investment objective of tax-exempt income.
The Fund's objective, and certain fundamental investment restrictions set
forth in the SAI, may not be changed without a vote of holders of common shares
and Municipal Preferred shares voting together as a single class and the holders
of Municipal Preferred shares voting as a separate class. See "Description of
Municipal Preferred -- Voting Rights." Except for its investment objective and
fundamental investment restrictions, the policies of the Fund may be changed by
the Board of Trustees without action by holders of common shares and Municipal
Preferred shares.
Municipal Securities. Municipal securities include debt obligations issued
by states, cities, local authorities, and possessions and certain territories of
the United States to obtain funds for various public purposes, including the
construction of such public facilities as airports, bridges, highways, housing,
hospitals, mass transportation, schools, streets and water and sewer works.
Other public purposes for which municipal securities may be issued include the
refinancing of outstanding obligations, the obtaining of funds for general
operating expenses and for loans to other public institutions and facilities. In
addition, certain industrial development, private activity and pollution control
bonds may be included within the term municipal securities if the interest paid
thereon qualifies as exempt from federal income tax. Municipal securities in
which the Fund invests, except for temporary investments, bear interest that, in
the opinion of bond counsel to the issuer of a given municipal security, is
exempt from federal income tax, although such interest may be subject to the
alternative minimum tax. The Fund will not typically make an independent
determination as to whether a bond produces income exempt from federal income
tax.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Industrial
development, private activity and pollution control bonds are in most cases
revenue bonds and do not generally constitute the pledge of the credit or taxing
power of the issuer of such bonds. There are, of course, variations in the level
of security of municipal securities, both within a particular classification and
between classifications, depending on numerous factors.
Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of municipal authorities
or entities. Although lease obligations do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
The Fund seeks to minimize these risks by not investing more than 10% of its
total assets in lease obligations that contain "non-appropriation" clauses, and
by only investing in those "non-appropriation" lease obligations where (1) the
nature of the leased equipment or property is such that its ownership or use is
essential to a governmental function of the municipality, (2) the lease payments
will commence amortization of principal at an early date resulting in an average
life of seven years or less for the lease obligation, (3) appropriate covenants
will be obtained from the municipal obligor prohibiting the substitution or
purchase of similar equipment if lease payments are not appropriated, (4) the
investment is of a size that will be attractive to institutional investors, and
(5) the underlying leased equipment has elements of
10
<PAGE> 15
portability and/or use that enhance its marketability in the event foreclosure
on the underlying equipment was ever required.
Certain municipal securities may carry variable or floating rates of
interest whereby the rate of interest is not fixed but varies with changes in
specified market rates or indexes, such as a bank prime or a tax-exempt money
market index. As used in this Prospectus, the term municipal securities also
includes tax-exempt notes, municipal commercial paper and municipal lease
obligations having shorter term maturities, although, as noted above, the Fund
intends to emphasize investments in municipal securities with longer term
maturities.
The yields on municipal securities are dependent on a variety of factors,
including the condition of the general money market and the municipal securities
market, the size of a particular offering, the maturity of the obligation and
the rating of the issue. The ratings of Moody's and S&P represent their opinions
as to the quality of those municipal securities that they rate. It should be
emphasized, however, that ratings are general and are not absolute standards of
quality. Consequently, municipal securities with the same maturity, coupon and
rating may have different yields while obligations of the same maturity and
coupon with different ratings may have the same yield. The market value of
outstanding municipal securities will vary with changes in prevailing interest
rate levels and as a result of changing evaluations of the ability of their
issuers to meet interest and principal payments.
Obligations of issuers of municipal securities are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the U.S. Bankruptcy Code. In addition, the
obligations of such issuers may become subject to the laws enacted in the future
by Congress, state legislatures or referenda extending the time for payment of
principal and/or interest, or imposing other constraints upon enforcement of
such obligations or upon municipalities to levy taxes. There is also the
possibility that, as a result of legislation or other conditions, the power or
ability of any issuer to pay, when due, the principal of and interest on its
municipal securities may be materially affected.
High Yield Municipal Securities. Investors should carefully consider their
ability to assume the risks of owning shares of an investment company which
invests in lower-rated securities before making an investment in the Fund. The
lower rating of certain securities held by the Fund reflects a greater
possibility that the financial condition of the issuer, or adverse changes in
general economic conditions, or both, may impair the ability of the issuer to
make payments of income and principal. In addition, these medium and lower rated
or unrated municipal securities are frequently traded only in markets where the
number of potential purchasers and sellers, if any, is very limited. This
consideration may have the effect of limiting the Fund's ability to purchase
such securities and may also have the effect of limiting the ability of the Fund
to sell such securities at their fair value in order to respond to changes in
the economy or the financial markets.
Like those of other fixed-income securities, the values of such lower-rated
securities fluctuate in response to changes in interest rates. In addition, the
values of certain of such securities are also affected by general economic
conditions and business conditions affecting the specific industries of the
issuers. Changes by recognized rating services in their ratings of any
fixed-income securities and in the ability of an issuer to make payments of
interest and principal may also affect the value of these investments. Changes
in the value of portfolio securities generally will not affect cash income
derived from such securities, but will affect the Fund's net asset value.
Scudder Kemper seeks to minimize the risks involved in investing in
lower-rated municipal securities through careful investment analysis. It should
be noted, however, that the amount of information about the financial condition
of an issuer of municipal securities may not be as extensive as that which is
made available by corporations whose securities are publicly traded. Because the
Fund may invest up to 50% of its total assets in municipal securities in the
lower rating categories, the achievement of the Fund's goals is more dependent
on Scudder Kemper's investment analysis than would be the case if the Fund were
investing exclusively in securities in the higher rating categories.
11
<PAGE> 16
Scudder Kemper will buy and sell securities for the Fund's portfolio with a
view to seek a high level of current income exempt from federal income tax and
select securities which Scudder Kemper believes do not involve undue risk to
income or principal considered in relation to the particular investment policies
of the Fund. As a result, the Fund does not necessarily invest in the highest
yielding tax-exempt municipal securities permitted by its investment policies if
Scudder Kemper determines that market risks or credit risks associated with such
investments would subject the Fund's portfolio to excessive risk. The potential
for realization of capital gains resulting from possible changes in interest
rates is a consideration. Scudder Kemper will be free to take full advantage of
the entire range of maturities offered by municipal securities and may adjust
the average maturity of the Fund's portfolio from time to time, depending on its
assessment of the relative yields available on securities of different
maturities and its expectations of future changes in interest rates.
ADDITIONAL INVESTMENT PRACTICES
In connection with the investment objectives and policies described above,
the Fund may: purchase and sell options on municipal securities and on indices
based on municipal securities; engage in interest rate and other hedging
transactions; purchase and sell municipal securities on a "when issued" or
"forward delivery" basis; enter into repurchase agreements; invest in
zero-coupon bonds; and invest in inverse floaters. These investment practices,
which are described below and in the SAI, entail risks and may be changed
without shareholder approval. However, these practices may be limited by certain
conditions imposed in connection with the rating of the Municipal Preferred
shares.
Securities Options Transactions. At times, the Fund may engage in any of
the following strategies for hedging purposes with the goal of preserving
capital rather than as a means of enhancing income.
The Fund may engage in options transactions on municipal securities, which
may be listed for trading on a national securities exchange or traded
over-the-counter. The Fund may write (sell) covered call options and secured put
options on up to 25% of its net assets and may purchase put and call options
provided that no more than 5% of its net assets may be invested in premiums on
such options. The Securities and Exchange Commission ("SEC") requires that
obligations of investment companies such as the Fund, in connection with option
sale positions, must comply with certain segregation or cover requirements
mandated by the SEC.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security at the agreed upon exercise (or
"strike") price during the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying security at
the strike price during the option period. Purchasers of options pay an amount,
known as a premium, to the option writer in exchange for the right under the
option contract.
The Fund may purchase put and call options in hedging transactions to
protect against a decline in the market value of municipal securities in the
Fund's portfolio (e.g., by the purchase of a put option) and to protect against
an increase in the cost of municipal securities that the Fund may seek to
purchase in the future (e.g., by the purchase of a call option). In the event
the Fund purchases put and call options, paying premiums therefor, and price
movements in the underlying securities are such that exercise of the options
would not be profitable for the Fund to the extent such underlying securities
correlate in value to the Fund's portfolio securities, losses of the premiums
paid may be offset by an increase in the value of the Fund's portfolio
securities (in the case of a purchase of put options) or by a decrease in the
cost of acquisition of securities by the Fund (in the case of a purchase of call
options).
Over-the-counter options ("OTC options") differ from exchange-traded
options in several respects. They are transacted directly with dealers and not
with a clearing corporation, and there is a risk of non-performance by the
dealer. OTC options are available for a greater variety of securities and for a
wider range of expiration dates and exercise prices than for exchange-traded
options. Because OTC options are not traded on an exchange, pricing is normally
done by reference to information from a market maker, which information will be
carefully monitored by Scudder Kemper and verified in appropriate cases.
12
<PAGE> 17
It will generally be the Fund's policy, in order to avoid the exercise of
an option sold by it, to cancel its obligation under the option by entering into
a closing purchase transaction, if available, unless it is determined to be in
the Fund's interest to sell (in the case of a call option) or to purchase (in
the case of a put option) the underlying securities. A closing purchase
transaction consists of the Fund purchasing an option having the same terms as
the option sold by the Fund and has the effect of canceling the Fund's position
as a seller. The premium which the Fund will pay in executing a closing purchase
transaction may be higher than the premium received when the option was sold,
depending in large part upon the relative price of the underlying security at
the time of each transaction. To the extent options sold by the Fund are
exercised and the Fund either delivers portfolio securities to the holder of a
call option or liquidates securities in its portfolio as a source of funds to
purchase securities put to the Fund, the Fund's portfolio turnover rate may
increase, resulting in a possible increase in short term capital gains and a
possible decrease in long term capital gains.
During the option period the Fund, as a covered call writer, gives up the
potential appreciation above the exercise price should the underlying security
rise in value, and the Fund, as a secured put writer, retains the risk of loss
should the underlying security decline in value. For the covered call writer,
substantial appreciation in the value of the underlying security would result in
the security being "called away" at the strike price of the option which may be
substantially below the fair market value of such security. For the secured put
writer, substantial depreciation in the value of the underlying security would
result in the security being "put to" the writer at the strike price of the
option which may be substantially in excess of the fair market value of such
security. If a covered call option or a secured put option expires unexercised,
the writer realizes a gain, and the buyer a loss, in the amount of the premium.
As part of its options transactions the Fund may also use index options,
subject to the limitation that the Fund may write (sell) options on up to 25% of
its net assets and may purchase put and call options without regard to any
percentage limitation. Indices on which the Fund may purchase and sell options
include indices on municipal securities. Through the writing or purchase of
index options the Fund can achieve many of the same objectives as through the
use of options on individual securities. Options on securities indices are
similar to options on securities except that, rather than the right to take or
make delivery of a security at a specified price, an option on a securities
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the securities index upon which the
option is based is greater than, in the case of a call, or less than, in the
case of a put, the strike price of the option. If no active secondary market
exists for any index with respect to which the Fund purchases or sell options,
such options will be treated as illiquid securities for purposes of the Fund's
investment restrictions.
Price movements in securities which the Fund owns or intends to purchase
will not correlate perfectly with movements in the level of an index and,
therefore, the Fund bears the risk of a loss on an index option which is not
completely offset by movements in the price of such securities. Because index
options are settled in cash, a call writer cannot determine the amount of its
settlement obligations in advance and, unlike call writing on specific
securities, cannot provide in advance for, or cover, its potential settlement
obligations by acquiring and holding the underlying securities.
Interest Rate and Other Hedging Transactions. In order to protect the
value of its portfolio securities against declines resulting from changes in
interest rates or other market changes, the Fund may enter into various hedging
transactions, such as financial futures contracts and related options contracts.
The Fund may enter into various interest rate hedging transactions using
financial instruments with a high degree of correlation to the fixed income
securities which the Fund may purchase for its portfolio, including interest
rate futures contracts in such financial instruments (e.g., futures contracts in
U.S. Treasury securities) and interest rate related indices (municipal bond
indices), put and call options on such futures contracts and on such financial
instruments. The Fund expects to enter into these transactions to "lock in" a
return or spread on a particular investment or portion of its portfolio, to
protect against any increase in the price of securities the Fund anticipates
purchasing at a later date, or for other risk management strategies.
13
<PAGE> 18
The Fund will not engage in the foregoing transactions for speculative
purposes, but only as a means to hedge risks associated with management of the
Fund's portfolio and/or for duration management. Typically, investment in these
contracts requires the Fund to deposit with the applicable exchange or other
specified financial intermediary as a good faith deposit for its obligations an
amount of cash or liquid portfolio securities which initially is 1-3% of the
face amount of the contract and which thereafter fluctuates on a periodic basis
as the value of the contract fluctuates. Thereafter, the Fund must make
additional deposits equal to any net losses due to unfavorable price movements
of the contract, and will be credited with an amount equal to any net gains due
to favorable price movements. These additional deposits or credits are
calculated and required daily and are known as "variation margin."
The SEC generally requires that when investment companies, such as the
Fund, effect transactions of the foregoing nature, such investment companies
must either segregate cash or liquid portfolio securities in the amount of their
obligations under the foregoing transactions, or cover such obligations by
maintaining positions in portfolio securities, futures contracts or options that
would serve to satisfy or offset the risk of such obligations. When effecting
transactions of the foregoing nature, the Fund will comply with such segregation
or asset cover requirements. There is no limitation as to the percentage of the
Fund's assets which may be invested in such transactions.
The Fund will typically enter into a futures contract or related option
only if it constitutes a bona fide hedging position under applicable regulations
and/or for duration management. Otherwise the Fund will limit its investments in
futures contracts and related options so that, immediately after such
investment, the sum of the amount of its initial margin deposits on open futures
contracts and its premiums on open options contracts will not exceed 5% of the
Fund's total assets at current value.
All of the foregoing transactions present certain risks. In particular, the
variable degree of correlation between price movements of futures contracts and
price movements in the security being hedged creates the possibility that losses
on the hedge may be greater than gains in the value of the Fund's securities. In
addition, these instruments may not be liquid in all circumstances and are
generally closed out by entering into offsetting transactions rather than by
disposing of the obligations. As a result, in volatile markets, the Fund may not
be able to close out a transaction without incurring losses. Although the
contemplated use of these contracts should tend to reduce the risk of loss due
to a decline in the value of the hedged security, at the same time the use of
these contracts could tend to limit any potential gain which might result from
an increase in the value of such security. Finally, the daily deposit
requirements in futures contracts create an ongoing greater potential financial
risk than do option purchase transactions, where the exposure is limited to the
cost of the premium for the option.
Successful use of futures contracts and options thereon by the Fund is
subject to the ability of Scudder Kemper to predict correctly movements in the
direction of interest rates and other factors affecting markets for securities.
If the expectations of Scudder Kemper are not met, the Fund would be in a worse
position than if a hedging strategy had not been pursued. For example, if the
Fund has hedged against the possibility of an increase in interest rates which
would adversely affect the price of securities in its portfolio and the price of
such securities increases instead, the Fund will lose part or all of the benefit
of the increased value of its securities because it will have offsetting losses
in its futures position. In addition, in such situations, if the Fund has
insufficient cash to meet daily variation margin requirements, it may have to
sell securities to meet such requirements. Such sales of securities may be, but
will not necessarily be, at increased prices which reflect the rising market.
The Fund may have to sell securities at a time when it is disadvantageous to do
so.
In addition to engaging in transactions utilizing options on futures
contracts, the Fund may purchase put and call options on securities and, as
developed from time to time, on interest indices and other instruments.
Purchasing options may increase investment flexibility and improve total return,
but also risk loss of the option premium if an asset the Fund has the option to
buy declines in value or if an asset the Fund has the option to sell increases
in value.
14
<PAGE> 19
New options and futures contracts and various combinations thereof continue
to be developed and the Fund may invest in any such options and contracts as may
be developed to the extent consistent with its investment objective and
regulatory requirements applicable to investment companies.
Income earned or deemed to be earned, if any, by the Fund from its hedging
activities will be taxable income of the Fund.
When Issued and Forward Delivery Securities. Securities may be purchased
on a "when issued" or on a "forward delivery" basis, which means that the
obligations will be delivered at a future date beyond customary settlement time.
The commitment to purchase a security for which payment will be made on a future
date may be deemed a separate security. Although the Fund is not limited in the
amount of securities for which it may have commitments to purchase on such
basis, it is expected that in normal circumstances, the Fund will not commit
more than 30% of its total assets to such purchases. The Fund does not pay for
or start earning interest on the securities until they are received. In order to
invest its assets immediately, while awaiting delivery of securities purchased
on such basis, the Fund will normally invest in shorter term securities that
offer same-day settlement and earnings, but that may bear interest at a lower
rate than longer term securities.
These transactions are subject to market fluctuation, the value of the
securities at delivery may be more or less than their purchase price, and yields
generally available on comparable securities when delivery occurs may be higher
than yields on the securities obtained pursuant to such transactions. Because
the Fund relies on the buyer or seller, as the case may be, to consummate the
transaction, failure by the other party to complete the transaction may result
in the Fund missing the opportunity of obtaining a price or yield considered to
be advantageous. The Fund makes commitments to purchase securities on such basis
only with the intention of actually acquiring these securities, but the Fund may
sell such securities prior to the settlement date if such sale is considered to
be advisable. To the extent the Fund engages in "when issued" and "forward
delivery" transactions, it will do so for the purpose of acquiring securities
for the Fund's portfolio consistent with the Fund's investment objective and
policies and not for the purpose of investment leverage.
The SEC generally requires that when investment companies, such as the
Fund, effect transactions of the foregoing nature, such investment companies
must either segregate cash or liquid portfolio securities in the amount of their
obligations under the foregoing transactions, or cover such obligations by
maintaining positions in portfolio securities, futures contracts or options that
would serve to satisfy or offset the risk of such obligations. When effecting
transactions of the foregoing nature, the Fund will comply with such segregation
or asset cover requirements.
Repurchase Agreements. In general, the Fund does not engage, nor does it
intend to engage in the foreseeable future, in repurchase agreements. The Fund
has the ability, however, pursuant to its investment objective and policies, to
enter into repurchase agreements (a purchase of, and a simultaneous commitment
to resell, a financial instrument at an agreed upon price on an agreed upon
date) only with member banks of the Federal Reserve System, member firms of the
New York Stock Exchange ("NYSE") or other entities determined by the Adviser to
be creditworthy. When participating in repurchase agreements, the Fund buys
securities from a vendor, e.g., a bank or brokerage firm, with the agreement
that the vendor will repurchase the securities at a higher price at a later
date. The Fund may be subject to various delays and risks of loss if the vendor
is unable to meet its obligation to repurchase. Under the 1940 Act, repurchase
agreements are deemed to be collateralized loans of money by the Fund to the
seller. In evaluating whether to enter into a repurchase agreement, the Adviser
will consider carefully the creditworthiness of the vendor. If the member bank
or member firm that is the party to the repurchase agreement petitions for
bankruptcy or otherwise becomes subject to the U.S. Bankruptcy Code, the law
regarding the rights of the Fund to enforce the terms of the repurchase
agreement is unsettled. The securities underlying a repurchase agreement will be
marked to market every business day so that the value of the collateral is at
least equal to the value of the loan, including the accrued interest thereon,
and the Adviser will monitor the value of the collateral.
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<PAGE> 20
Zero-Coupon Bonds. The Fund may invest in zero-coupon bonds, whose values
are subject to greater fluctuation in response to changes in market interest
rates than bonds that pay interest currently. Zero-coupon bonds are issued at a
significant discount from face value and pay interest only at maturity rather
than at intervals during the life of the security.
Inverse Floaters. The Fund may invest in inverse floaters, also called
residual interest municipal bonds, whose interest rates bear an inverse
relationship to the interest rate on another security or the value of an index.
Because changes in the interest rate on the other security or index inversely
affect the residual interest paid on the inverse floater, the value of an
inverse floater is generally more volatile than that of a fixed rate bond.
Inverse floaters tend to underperform the market for fixed rate bonds in a
rising interest rate environment, but tend to outperform the market for fixed
rate bonds when interest rates decline. Although generally volatile, inverse
floaters typically offer the potential for yields exceeding the yields available
on fixed rate bonds with comparable credit quality, coupons, call provisions,
and maturities.
PRINCIPAL INVESTMENT RISKS
Auction Risk. Shares of Municipal Preferred may not be able to be sold at
an auction if the auction fails; that is if there are more shares of Municipal
Preferred offered for sale than there are buyers for those shares. Also if hold
orders are placed at an auction only at a specified rate, and that bid rate
exceeds the rate set at the auction, Municipal Preferred shares will not be
retained by the holders who placed those hold orders. Finally, if Municipal
Preferred shares are bought or elected to be retained without specifying a
minimum rate to continue to hold, and the auction sets a below-market rate, a
rate of return lower than the market rate may be received on Municipal Preferred
shares.
Call Risk. If interest rates fall, it is possible that issuers of callable
bonds with high interest coupons will "call" (or prepay) their bonds before
their maturity date. If a call were exercised by the issuer during a period of
declining interest rates, the Fund is likely to replace such called security
with a lower yielding security.
Credit Risk. Municipal securities are subject to the risk of non-payment
of scheduled interest and/or principal. Such non-payment would result in a
reduction of income to the Fund and a reduction in the value of the security
experiencing non-payment. Securities rated below investment grade or unrated
securities of comparable quality ("lower quality securities") are subject to the
risk of an issuer's inability to meet principal and interest payments on the
obligations ("credit risk") and may also be subject to price volatility due to
such factors as interest rate sensitivity, market perception of the
creditworthiness of the issuer and general market liquidity ("market risk"). The
prices of lower quality securities are also more likely to react to real or
perceived developments affecting market and credit risk than are prices of
investment grade quality securities ("higher quality securities"), which react
primarily to movements in the general level of interest rates. The investments
in the Fund's portfolio will have speculative characteristics.
As indicated above, the Fund may invest up to 50% of its total assets in
municipal securities rated below investment grade or unrated municipal
securities which, in the opinion of Scudder Kemper, have equivalent credit
characteristics and are of comparable quality. The Fund will not purchase
municipal securities rated lower than B- by S&P or B by Moody's or unrated
municipal securities, which in the opinion of Scudder Kemper, have equivalent
credit characteristics and are of comparable quality. Such obligations are
commonly called "junk bonds" and will have speculative characteristics in
varying degrees. While such obligations may have some quality and protective
characteristics, these characteristics can be expected to be offset or
outweighed by uncertainties or major risk exposures to adverse conditions.
Scudder Kemper seeks to minimize the risks of investing in below investment
grade securities through professional investment analysis, attention to current
developments in interest rates and economic conditions, and industry and
geographic diversification (if practicable). When the Fund invests in lower
rated or unrated municipal securities, the achievement of the Fund's goals is
more dependent on Scudder Kemper's ability than would be the case if the Fund
were investing in municipal securities in the higher rating categories. In
evaluating the credit quality of a particular issue, whether rated or unrated,
Scudder Kemper will
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<PAGE> 21
normally take into consideration, among other things, the financial resources of
the issuer (or, as appropriate, of the underlying source of funds for debt
service), 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. Scudder Kemper will
attempt to reduce the risks of investing in the lowest investment grade, below
investment grade and comparable unrated obligations through active portfolio
management, credit analysis and attention to current developments and trends in
the economy and the financial markets.
Increases in interest rates and changes in the economy may adversely affect
the ability of issuers of lower grade municipal securities to pay interest and
to repay principal, to meet projected financial goals and to obtain additional
financing. In the event that an issuer of securities held by the Fund
experiences difficulties in the timely payment of principal or interest and such
issuer seeks to restructure the terms of its borrowings, the Fund may incur
additional expenses and may determine to invest additional assets with respect
to such issuer or the project or projects to which the Fund's portfolio
securities relate. Further, the Fund may incur additional expenses to the extent
that it is required to seek recovery upon a default in the payment of interest
or the repayment of principal on its portfolio holdings, and the Fund may be
unable to obtain full recovery thereof.
To the extent that there is no established retail market for some of the
lower grade municipal securities in which the Fund may invest, trading in such
securities may be relatively inactive. The Adviser is responsible for
determining the net asset value of the Fund, subject to the supervision of the
Board of Trustees of the Fund. During periods of reduced market liquidity and in
the absence of readily available market quotations for lower grade municipal
securities held in the Fund's portfolio, the ability of the Adviser to value the
Fund's securities becomes more difficult and the Adviser's use of judgment may
play a greater role in the valuation of the Fund's securities due to the reduced
availability of reliable objective data. The effects of adverse publicity and
investor perceptions may be more pronounced for securities for which no
established retail market exists as compared with the effects on securities for
which such a market does exist. Further, the Fund may have more difficulty
selling such securities in a timely manner and at their stated value than would
be the case for securities for which an established retail market does exist.
Municipal securities held by the Fund that are of below investment grade
quality but which, subsequent to the assignment of such rating, are backed by
escrow accounts containing U.S. Government obligations may be determined by
Scudder Kemper to be of investment grade quality for purposes of the Fund's
investment policies. The Fund may retain in its portfolio an obligation that
declines in quality, including defaulted obligations, if such retention is
considered desirable by Scudder Kemper. In the case of a defaulted obligation,
the Fund may incur additional expense seeking recovery of its investment.
Changes in the credit quality of the issuers of municipal securities held
by the Fund will affect the principal value of (and possibly the income earned
on) such obligations. In addition, the value of such securities are affected by
changes in general economic conditions and business conditions affecting the
relevant economic sectors. Changes by rating agencies in their ratings of a
security and in the ability of the issuer to make payments of principal and
interest may also affect the value of the Fund's investments. The amount of
information about the financial condition of an issuer of municipal securities
may not be as extensive as that made available by corporations whose securities
are publicly traded.
The Fund may invest in municipal leases, and participations in municipal
leases. The obligation of the issuer to meet its obligations under such leases
is often subject to the appropriation by the appropriate legislative body, on an
annual or other basis, of funds for the payment of the obligations. Investments
in municipal leases are thus subject to the risk that the legislative body will
not make the necessary appropriation and the issuer will not otherwise be
willing or able to meet its obligation.
Income Risk. The Fund's income is based primarily on the interest it earns
from its investments, which can vary widely over the short- and long-term. If
interest rates drop, the Fund's income available over time to make dividend
payments with respect to the Municipal Preferred shares could drop as well if
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<PAGE> 22
the Fund purchases securities with lower interest coupons. This risk is
magnified when prevailing short-term interest rates increase and the Fund holds
inverse floaters.
Inflation Risk. Inflation is the reduction in the purchasing power of
money resulting from the increase in the price of goods and services. Inflation
risk is the risk that the inflation adjusted (or "real") value of a Municipal
Preferred investment or the income from that investment will be worth less in
the future. As inflation occurs, the real value of the shares of Municipal
Preferred and distributions declines. In an inflationary period, however, it is
expected that, through the auction process, dividend rates on Municipal
Preferred shares would increase, tending to offset this risk.
Interest Rate and Market Risk. The prices of municipal securities tend to
fall as interest rates rise. Securities that have longer maturities tend to
fluctuate more in price in response to changes in market interest rates than do
securities with shorter maturities. This risk is usually greater among municipal
securities with longer maturities or durations and when inverse floaters are
held by the Fund. Although the Fund has no policy governing the maturities or
durations of its investments, the Fund expects that it will invest in a
portfolio of longer-term securities. This means that the Fund will be subject to
greater market risk (other things being equal) than a fund investing solely in
shorter-term securities. Market risk is often greater among certain types of
income securities, such as zero-coupon bonds, which do not make regular interest
payments. As interest rates change, these bonds often fluctuate in price more
than higher quality bonds that make regular interest payments. Because the Fund
may invest in these types of income securities, it may be subject to greater
market risk than a fund that invests only in current interest paying securities.
The Fund may invest in inverse floaters. Compared to similar fixed rate
municipal bonds, the value of these bonds will fluctuate to a greater extent in
response to changes in prevailing long-term interest rates. Moreover, the income
earned on inverse floaters will fluctuate in response to changes in prevailing
short-term interest rates. Thus, when such bonds are held by the Fund, an
increase in short- or long-term market interest rates will adversely affect the
income received from such bonds.
Non-Diversification Risk. The Fund has registered as a "non-diversified"
investment company under the 1940 Act so that, subject to its investment
restrictions and applicable federal income tax diversification requirements,
with respect to 50% of its total assets, it will be able to invest more than 5%
(but not more than 25%) of the value of its total assets in the obligations of
any single issuer. To the extent the Fund invests a relatively high percentage
of its assets in obligations of a limited number of issuers, the Fund will be
more susceptible than a more widely diversified investment company to any single
corporate, economic, political or regulatory occurrence.
Ratings and Asset Coverage Risk. While Moody's and S&P assign ratings of
Aaa or AAA to Municipal Preferred shares, the ratings do not eliminate or
necessarily mitigate the risks of investing in Municipal Preferred shares. A
rating agency could downgrade Municipal Preferred shares, which may make the
shares less liquid at an auction or in the secondary market, though probably
with higher resulting dividend rates. If a rating agency downgrades Municipal
Preferred shares, or if the asset coverage for Municipal Preferred shares
declines to less than 200%, the Fund is required to alter its portfolio or
redeem Municipal Preferred shares. The Fund may voluntarily redeem Municipal
Preferred shares under certain circumstances.
Secondary Market Risk. At times, a substantial portion of the Fund's
assets may be invested in securities as to which the Fund, by itself or together
with other accounts managed by Scudder Kemper and its affiliates, holds a major
portion of all of such securities. Under adverse market or economic conditions
or in the event of adverse changes in the financial condition of the issuer, the
Fund could find it more difficult to sell such securities when Scudder Kemper
believes it advisable to do so or may be able to sell such securities only at
prices lower than if such securities were more widely held. In such
circumstances, it may also be more difficult to determine the fair value of such
securities for purposes of computing the Fund's net asset value.
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<PAGE> 23
If Municipal Preferred shares are attempted to be sold between auctions,
any or all of the shares may not be able to be sold, or they may not be able to
be sold for $25,000 per share or $25,000 per share plus accumulated dividends.
If the Fund has designated a special dividend period, changes in interest rates
could affect the price on shares sold in the secondary market. Broker-dealers
that maintain a secondary market for Municipal Preferred shares are not required
to maintain this market, and the Fund is not required to redeem shares either if
an auction or an attempted secondary market sale fails because of lack of
buyers. Municipal Preferred shares are not registered on a stock exchange or on
the National Association of Securities Dealers Automated Quotations System
("NASDAQ") stock market. If Municipal Preferred shares are sold to a
broker-dealer between auctions, the sale price of the shares sold may be less
than their original purchase price, especially when market interest rates have
risen since the last auction. Accrued Municipal Preferred dividends, however,
should at least partially compensate for the increased market interest rates.
Year 2000 Risk. Like other registered investment companies and financial
business organizations worldwide, the Fund could be adversely affected if
computer systems on which the Fund relies, which primarily include those used by
the Adviser, its affiliates or other service providers, are unable to correctly
process date-related information on and after January 1, 2000. This risk is
commonly called the Year 2000 (Y2K) Issue. Failure to successfully address the
Y2K Issue could result in interruptions to and other material adverse effects on
the Fund's business and operations. The Adviser has commenced a review of the
Y2K Issue as it may affect the Fund and is taking steps it believes are
reasonably designed to address the Y2K Issue, although there can be no
assurances that these steps will be sufficient. In addition, there can be no
assurances that the Y2K Issue will not have any adverse effect on the issuers
whose securities are held by the Fund or on global markets or economies
generally.
DETERMINATION OF NET ASSET VALUE
Net asset value of the Fund will be determined as of the close of regular
trading on the NYSE (generally 4:00 p.m. Eastern time) on the last business day
of each week (generally Friday), and at such other times as the Fund may
authorize. The net asset value of the Fund equals the value of the Fund's assets
less the Fund's liabilities. Portfolio securities for which market quotations
are readily available are valued at current market value. Short-term investments
maturing in 60 days or less are valued at amortized cost when the Adviser
determines, pursuant to procedures adopted by the Board of Trustees, that such
cost approximates current market value. All other securities and assets are
valued at their fair value following procedures adopted by the Board of
Trustees.
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<PAGE> 24
THE AUCTION
SUMMARY OF AUCTION PROCEDURES
The following is a brief summary of the auction procedures. They are
described in more detail in the SAI. The auction procedures are complicated, and
there are exceptions to these procedures. Many of the terms in this section have
a special meaning. Any terms in this section not defined have the meaning
assigned to them in the SAI. See the SAI for a full description of the auction
procedures. The auction determines the Applicable Rate (the dividend rate) for
Municipal Preferred shares, but the Applicable Rate will not be higher than the
Maximum Rate. See "Description of Municipal Preferred -- Dividends and Dividend
Periods." You also may buy or sell shares of Municipal Preferred in the auction.
If you own shares of Municipal Preferred, you may instruct, orally or in
writing, a Broker-Dealer or a broker-dealer that has entered into an agreement
with a Broker-Dealer, to enter an order in the auction. For purposes of this
discussion regarding the auction procedures, a "Broker-Dealer" is any
broker-dealer, commercial bank or other entity permitted by law to perform the
functions required of a broker-dealer that is a member of, or a participant in,
The Depository Trust Company or is an affiliate of such member or participant,
has been selected by the Fund and has entered into an agreement with the Fund
and the auction agent to follow the auction procedures. Existing Municipal
Preferred shareholders can enter three kinds of orders regarding their Municipal
Preferred shares: sell, bid, and hold.
- If you enter a sell order, you indicate that you want to sell shares of
Municipal Preferred at $25,000 per share, no matter what the next rate
period's Applicable Rate will be.
- If you enter a bid (or "hold at a rate") order, you indicate that you
want to sell shares of Municipal Preferred only if the next rate period's
Applicable Rate is less than the rate you specify.
- If you enter a hold order, you indicate that you want to continue to own
shares of Municipal Preferred, no matter what the next rate period's
Applicable Rate will be.
You may enter different types of orders for your Municipal Preferred
shares, as well as orders for additional Municipal Preferred shares. All orders
must be for whole shares. All orders you submit are irrevocable. There are a
fixed number of Municipal Preferred shares, and the Applicable Rate likely will
vary from auction to auction depending on the number of bidders, the number of
shares the bidders seek to buy, and general economic conditions including
current interest rates. If you own Municipal Preferred shares and submit a bid
higher than the Maximum Rate, your bid will be treated as a sell order. If you
do not enter an order, the Broker-Dealer will assume that you want to continue
to hold Municipal Preferred shares, but if you fail to submit an order and the
rate period is longer than 28 days, the Broker-Dealer will treat your failure to
submit a bid as a sell order.
If you do not currently own shares of Municipal Preferred, or want to buy
more shares, you may instruct a Broker-Dealer, or a broker-dealer that has
entered into an agreement with a Broker-Dealer, to enter a bid order to buy
shares in an auction at $25,000 per share at or above a specified dividend rate.
If your bid specifies a rate higher than the Maximum Rate, your order will not
be accepted.
Broker-Dealers will submit orders from existing and potential shareholders
to the auction agent. Neither the Fund nor the auction agent will be responsible
for a Broker-Dealer's failure to submit orders from existing shareholders and
potential shareholders. A Broker-Dealer's failure to submit orders for Municipal
Preferred shares held by it or its customers will be treated in the same manner
as a shareholder's failure to submit an order to the Broker-Dealer. A
Broker-Dealer may submit orders to the auction agent for its own account
provided it is not an affiliate of the Fund.
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 Fund and the
Broker-Dealers, in the case of any auction immediately preceding a rate period
of one year
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<PAGE> 25
or longer, of the purchase price of shares of Municipal Preferred placed by the
Broker-Dealers at the auction.
If the number of Municipal Preferred shares subject to bid orders with a
dividend rate equal to or lower than the Maximum Rate for shares of Municipal
Preferred is at least equal to the number of Municipal Preferred shares subject
to sell orders, then the Applicable Rate for the next rate period will be the
lowest rate submitted which, taking into account that rate and all lower rates
submitted in order from existing and potential shareholders, would result in
existing and potential shareholders owning all the Municipal Preferred shares
available for purchase in the auction.
If the number of Municipal Preferred shares subject to bid orders with a
dividend rate equal to or lower than the Maximum Rate for shares of Municipal
Preferred is less than the number of Municipal Preferred shares subject to sell
orders, then the auction is considered to be a failed auction, and the dividend
rate will be the Maximum Rate. In that event, existing shareholders that have
submitted sell orders (or are treated as having submitted sell orders) may not
be able to sell any or all of the shares for which they submitted sell orders.
The auction agent will not accept a bid above the Maximum Rate. The purpose
of the Maximum Rate is to place an upper limit on Municipal Preferred dividends
and in so doing to help protect the earnings available to pay common share
dividends, and to serve as the Applicable Rate in the event of a failed auction
(that is, an auction where there are more Municipal Preferred shares offered for
sale than there are buyers for those shares).
If the Fund plans to include any net capital gains or other federal taxable
income in a Municipal Preferred dividend, it generally will notify the auction
agent of the amount to be included at least a week before the next dividend
payment date for the rate period in which taxable income will be included in the
dividend. The auction agent will notify Broker-Dealers, who in turn will notify
their customers.
If Broker-Dealers submit or are deemed to submit hold orders for all
outstanding shares of Municipal Preferred, that is considered an "all hold"
auction and the Applicable Rate for the next rate period will be the All Hold
Order Rate. The All Hold Order Rate is the lesser of the S&P Kenny 30-day High
Grade Index (if the rate period is less than 183 days) or the product of:
(1)(a) the "AA" Composite Commercial Paper Rate on the auction date
for that rate period if the rate period is less than 183 days, (b) the
Treasury Bill Rate on the auction date for that rate period if the rate
period is greater than 182 days but less than 365 days, or (c) the Treasury
Note Rate on the auction date for that rate period if the rate period is
greater than 364 days; and
(2) 1 minus the greater of the maximum marginal regular federal
individual income tax rate applicable to ordinary income or the maximum
marginal regular federal corporate income tax rate.
However, if the Fund has notified the auction agent that it intends to allocate
any net capital gains or other federally taxable income to shares of Municipal
Preferred for that rate period, the All Hold Order Rate may be adjusted as set
forth in the SAI.
The auction procedures include a pro rata allocation of shares for purchase
and sale. This allocation process may result in an existing shareholder
continuing to hold or selling, or a potential shareholder buying, fewer shares
than the number of shares in its order. If this happens, Broker-Dealers will be
required to make appropriate pro rata allocations among their customers.
Settlement of purchases and sales will be made on the next business day
(which also is a dividend payment date) after the auction date through The
Depository Trust Company. Purchasers will pay for their shares through
Broker-Dealers in same-day funds to The Depository Trust Company against
delivery to the Broker-Dealers. The Depository Trust Company will make payment
to the sellers' Broker-Dealers in accordance with its normal procedures, which
require Broker-Dealers to make payment against delivery in same-day funds.
Throughout this Prospectus, a business day is a day on which the NYSE is open
for trading, and which is neither a Saturday, Sunday nor any other day on which
banks in New York, New York are authorized by law to close.
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<PAGE> 26
The first auction for shares of Municipal Preferred will be held on
Tuesday, , 1999, the business day preceding the dividend payment date
for the initial rate period. Thereafter, except during special rate periods,
auctions will normally be held every Tuesday, and each subsequent rate period
will normally begin on the following Wednesday.
The following is a simplified example of how a typical auction works.
Assume that the Fund has 1,000 outstanding shares of Municipal Preferred, and
three current shareholders. The three current shareholders and three potential
shareholders submit orders through Broker-Dealers at the auction:
<TABLE>
<S> <C> <C>
Current Shareholder A................ Owns 500 shares, wants to Bid order of 3.5% rate for
sell all 500 shares if all 500 shares
auction rate is less than
3.5%
Current Shareholder B................ Owns 300 shares, wants to Hold order -- will take
hold the auction rate
Current Shareholder C................ Owns 200 shares, wants to Bid order of 3.3% rate for
sell all 200 shares if all 200 shares
auction rate is less than
3.3%
Potential Shareholder D.............. Wants to buy 200 shares Places order to buy at or
above 3.4%
Potential Shareholder E.............. Wants to buy 300 shares Places order to buy at or
above 3.3%
Potential Shareholder F.............. Wants to buy 200 shares Places order to buy at or
above 3.5%
</TABLE>
The lowest dividend rate that will result in all 1,000 shares of Municipal
Preferred continuing to be held is 3.4% (the offer by D). Therefore, the
Applicable Rate will be 3.4%. Current shareholders B and C will continue to own
their shares. Current shareholder A will sell its shares because A's dividend
rate bid was higher than the Applicable Rate. Potential shareholder D will buy
200 shares and Potential shareholder E will buy 300 shares, both because their
bid rates were at or below the Applicable Rate. Potential shareholder F will not
buy any shares because its bid rate was above the Applicable Rate.
SECONDARY MARKET TRADING AND TRANSFER OF MUNICIPAL PREFERRED
The Broker-Dealers (including the Underwriter) expect, but are not
obligated, to maintain a secondary trading market in shares of 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
NASDAQ stock market. 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 that 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.
An existing shareholder 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 Fund; 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 shareholder of the shares so sold,
transferred or disposed of immediately after such sale, transfer or disposition
and (b) in the case of all transfers other than pursuant to auctions, the
Broker-Dealer (or other person, if permitted by the Fund) to whom such transfer
is made shall advise the auction agent of such transfer.
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<PAGE> 27
DESCRIPTION OF MUNICIPAL PREFERRED
GENERAL
The following is a brief description of the terms of the shares of
Municipal Preferred. For the complete terms of the Municipal Preferred, you may
refer to the Fund's Certificate filed as an exhibit to the Fund's registration
statement on Form N-2.
Under the Declaration, the Fund is authorized to issue an unlimited number
of preferred shares. The Fund's Certificate authorizes the issuance of up to
5,000 shares of Municipal Preferred. Municipal Preferred shares will have a
liquidation preference of $25,000 per share, plus an amount equal to accumulated
dividends. Municipal Preferred shares, when issued and sold, will be fully paid
and nonassessable by the Fund, will not by their terms be convertible into or
exchangeable for shares of another class and will have no preemptive rights.
Shares of Municipal Preferred will not be subject to any sinking fund, but will
be subject to mandatory redemption under the certain circumstances described
below.
DIVIDENDS AND DIVIDEND PERIODS
General. The following is a general description of dividends and rate
periods. The calculation of dividends and rate periods is complex and subject to
special rules. See the SAI for a description of the terms used in this section
and a more detailed discussion of this topic.
The dividend rate for the initial rate period for Municipal Preferred
shares will be the rate set out on the cover of the Prospectus. For subsequent
rate periods, Municipal Preferred shares will pay dividends based on a rate set
at the auction, normally held weekly, but the rate set at the auction will not
exceed the Maximum Rate. Rate periods generally will be seven days, and a rate
period will begin on the first business day after the auction. In most
instances, dividends are also paid weekly, on the day following the end of the
rate period. The Fund, subject to some limitations, may change the length of
rate periods, designating them as "special rate periods." See "-- Designation of
Special Rate Periods."
Dividend Payments. Except as provided below, the dividend payment date
will be the day after the rate period ends. If the Wednesday on which the
Municipal Preferred normally pays dividends is not a business day, then the
dividends will be paid on the first business day that falls after that
Wednesday. The Fund may specify different dividend payment dates in respect of
any special rate period of more than 28 rate periods days. See "-- Designation
of Special Rate Periods" for a discussion of payment dates for a special rate
period.
Dividends on Municipal Preferred shares will be paid on the dividend
payment date to holders of record as their names appear on the Fund's record
books on the business day next preceding the dividend payment date. If dividends
are in arrears, they may be declared and paid at any time to holders of record
as their names appear on the Fund's record books on that date, not more than 15
days before the payment date, as the Fund's Board of Trustees may fix.
The Depository Trust Company, in accordance with its current procedures, is
expected to credit on each dividend payment date dividends received from the
Fund to the accounts of its agent members, in next-day funds. "Agent members"
are Broker-Dealers or broker-dealers that are members of or participants in The
Depository Trust Company who act on behalf of Municipal Preferred shareholders.
Agent members, in turn, are expected to distribute dividend payments to the
person for whom they are acting as agents. The initial Broker-Dealer, Salomon
Smith Barney Inc., however, has indicated to the Fund that it or the agent
member it designates will make these dividend payments available in same-day
funds, rather than next-day funds, on each dividend payment date to customers
that use that Broker-Dealer or its designee as its agent member. A Municipal
Preferred shareholder that does not use an initial Broker-Dealer, or one of its
affiliates, should contact his or her Broker-Dealer or another broker-dealer
that is an agent member of The Depository Trust Company to determine whether it
will make dividend payments available to the shareholder in same-day or next-day
funds. If a Broker-Dealer or a broker-
23
<PAGE> 28
dealer that is an agent member of The Depository Trust Company does not make
dividends available to Municipal Preferred shareholders in same-day funds, these
shareholders will not have funds available until the next business day.
Dividend Rate Set at Auction. Municipal Preferred shares pay dividends
based on a rate set at auction. The auction usually is held weekly, but may be
held less frequently. The auction sets the dividend rate, and Municipal
Preferred shares may be bought and sold at the auction. Bankers Trust Company,
the auction agent, reviews orders from Broker-Dealers on behalf of existing
shareholders that wish to sell, hold at the auction rate, or hold only at a
specified rate, and on behalf of potential shareholders that wish to buy
Municipal Preferred shares. The auction agent then determines the lowest
dividend rate that will result in all of the outstanding Municipal Preferred
shares continuing to be held. The shares in this offering will trade at auction
starting in the week following this offering. See "The Auction."
Determination of Dividend Rates. The Fund computes the dividends per share
by multiplying the dividend rate determined at the auction by a fraction, the
numerator of which normally is seven and the denominator of which normally is
365. If the Fund has designated a special rate period, then the numerator is the
number of days in the rate period, and the denominator is 360. In either case,
this rate is then multiplied by $25,000 to arrive at the dividend per share. The
numerator may be different if the rate period includes a holiday.
If an auction for any subsequent rate period of Municipal Preferred shares
is not held for any reason other than as described below, the dividend rate on
those shares will be the Maximum Rate on the auction date for that subsequent
rate period.
Maximum Rate. The dividend rate that results from an auction for Municipal
Preferred will not be greater than the Maximum Rate, which is:
(a) for any auction date which is not the auction date immediately
prior to the first day of any proposed special rate period, the product of
(i) the Reference Rate on that auction date for the next rate period of
Municipal Preferred shares and (ii) the Rate Multiple on that auction date,
unless Municipal Preferred 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 after that
special rate period for a minimum rate period (seven days) in which case
the Maximum Rate will be the higher of:
(A) the dividend rate on Municipal Preferred shares for the
then-ending rate period, and
(B) the product of (x) the higher of (I) the Reference Rate on that
auction date for a rate period equal in length to the then-ending rate
period of Municipal Preferred shares, if the then-ending rate period was
364 rate period days or fewer, or the Treasury Note Rate on that auction
date for a rate period equal in length to the then-ending rate period of
Municipal Preferred shares, if the then-ending rate period was more than
364 rate period days, and (II) the Reference Rate on that auction date
for a rate period equal in length to that special rate period of
Municipal Preferred shares, if that special rate period was 364 rate
period days or fewer, or the Treasury Note Rate on that auction date for
a rate period equal in length to that special rate period, if that
special rate period was more than 364 rate period days and (y) the Rate
Multiple on that auction date; or
(b) for any auction date that is the auction date immediately prior to
the first day of any proposed special rate period, the product of (i) the
highest of (x) the Reference Rate on that auction date for a rate period
equal in length to the then-ending rate period of Municipal Preferred
shares, if the then-ending rate period was 364 rate period days or fewer,
or the Treasury Note Rate on that auction date for a rate period equal in
length to the then-ending rate period of Municipal Preferred shares, if the
then-ending rate period was more than 364 rate period days, (y) the
Reference Rate on that auction date for the special rate period for which
the auction is being held if that special rate period is 364 rate period
days or fewer or the Treasury Note Rate on that auction date for the
special rate period for which the auction is being held if that special
rate period is more than 364 rate period
24
<PAGE> 29
days, and (z) the Reference Rate on that auction date for minimum rate
periods and (ii) the Rate Multiple on that auction date.
The Reference Rate is (i) the higher of the Taxable Equivalent of the
Short-Term Municipal Bond Rate and the "AA" Composite Commercial Paper Rate in
the case of minimum rate periods and special rate periods of 28 rate period days
or fewer; (ii) the "AA" Composite Commercial Paper Rate in the case of special
rate periods of more than 28 rate period days but fewer than 183 rate period
days; and (iii) the Treasury Bill Rate in the case of special rate periods of
more than 182 rate period days but fewer than 365 rate period days.
The Taxable Equivalent of the Short-Term Municipal Bond Rate, "AA"
Composite Commercial Paper Rate, Treasury Bill Rate and Treasury Note Rate will
be the rates announced on the auction date for the business day immediately
before the auction date. See the SAI for the definitions of these rates. The
"Rate Multiple" will be a percentage, determined as set out below, based on the
prevailing rating of Municipal Preferred shares in effect at the close of
business on the business day immediately before the auction date. See the SAI
for a description of "prevailing rating."
<TABLE>
<CAPTION>
PREVAILING RATING PERCENTAGE
- ----------------- ----------
<S> <C>
Aa3/AA- or higher......................................... 110%
A3/A-..................................................... 125%
Baa3/BBB-................................................. 150%
Ba3/BB-................................................... 200%
Below Ba3/BB-............................................. 250%
</TABLE>
If the Fund has notified the auction agent that it intends to allocate
federal taxable income to Municipal Preferred shares before the auction
establishing the Applicable Rate for those shares, the applicable percentage in
the table above will be divided by the quantity 1 minus the greater of the
maximum marginal regular federal individual income tax rate applicable to
ordinary income or the maximum marginal regular federal corporate income tax
rate. If the ratings for shares of Municipal Preferred are split between two of
the foregoing categories, the lower rating will determine the prevailing rating.
If only one rating agency is rating Municipal Preferred shares, that agency's
rating will be the prevailing rating.
The Fund may only pay dividends when and if the Fund's Board of Trustees
declares dividends out of monies legally available for this purpose, at the
applicable rate per year for this purpose and no more (except as described under
"-- Dividends and Dividend Periods -- Gross-Up Payments"), payable on the dates
determined as described below. If the Fund does not pay a dividend when the
Board declares it, then that dividend will be added to dividends payable on
those Municipal Preferred shares in the future.
Effect of Failure to Pay Dividends in a Timely Manner. If the Fund fails
to pay, in a timely manner, the auction agent the full amount of any dividend
on, or the redemption price of, any Municipal Preferred shares during any rate
period (other than any special rate period of more than 364 rate period days or
any rate period succeeding any special rate period of more than 364 rate period
days during which a failure occurred that has not been cured), but the Fund
cures the failure and pays any late charge before 12:00 noon Eastern time on the
third business day following the date the failure occurred, no auction will be
held for Municipal Preferred shares for the first subsequent rate period
thereafter, and the dividend rate for Municipal Preferred shares for that
subsequent rate period will be the Maximum Rate on the auction date for that
subsequent rate period.
If the Fund fails to pay, in a timely manner, the auction agent the full
amount of any dividend on, or the redemption price of, any Municipal Preferred
shares during any rate period thereof (other than any special rate period of
more than 364 rate period days or any rate period succeeding any special rate
period of more than 364 rate period days during which a failure occurred that
has not been cured), and the Fund does not cure the failure and pay any late
charge before 12:00 noon Eastern time on the third business day next succeeding
the date on which the failure occurred, no auction will be held for Municipal
Preferred
25
<PAGE> 30
shares for the first subsequent rate period thereafter (or for any rate period
thereafter, to and including the rate period during which the failure is cured
and the late charge is paid) (the late charge is to be paid only in the event
Moody's is rating the shares at the time the Fund cures the failure), and the
dividend rate for Municipal Preferred shares for each such subsequent rate
period will be an annual rate equal to the Maximum Rate on the auction date for
that subsequent rate period (but with the prevailing rating for Municipal
Preferred, for purposes of determining the Maximum Rate, being "Below Ba3/BB-").
If the Fund fails to pay, in a timely manner, the auction agent the full
amount of any dividend on, or the redemption price of, any shares of Municipal
Preferred during a special rate period of more than 364 rate period days, or
during any rate period succeeding any special rate period of more than 364 rate
period days during which a failure occurred that has not been cured, and the
Fund does not cure the failure and pay a late charge, no auction will be held
for Municipal Preferred shares for that subsequent rate period (or for any rate
period thereafter, to and including the rate period during which the failure is
cured and the late charge paid) (the late charge is to be paid only in the event
Moody's is rating Municipal Preferred shares at the time the Fund cures the
failure), and the dividend rate for Municipal Preferred shares for each
subsequent rate period will be an annual rate equal to the Maximum Rate on the
auction date for each subsequent rate period (but with the prevailing rating for
Municipal Preferred, for purposes of determining the Maximum Rate, being "Below
Ba3/BB-").
The Fund cures a failure to pay dividends on shares of Municipal Preferred
for any rate period, within the respective time periods described in the
Certificate, by paying the auction agent all accumulated and unpaid dividends on
the Municipal Preferred shares.
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
Certificate 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 Fund 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" (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 Fund, the Fund 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 Fund'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 Depository Trust Company) that was entitled to such dividend payment with
respect to shares of Municipal Preferred during such calendar year at such
holder's address as the same appears or last appeared on the record books of the
Fund.
If, in the case of any special rate period of more than 28 rate period
days, the Fund makes a Taxable Allocation to a dividend paid on shares of
Municipal Preferred, the Fund 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 Fund'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 Fund.
The Fund 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 (the "IRS") to be allocable in a manner different from that allocated by
the Fund.
A "Gross-up Payment" in respect of any dividend means payment to a holder
of 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
26
<PAGE> 31
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 Fund 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. When the Fund has any
Municipal Preferred shares outstanding, the Fund may not pay any dividend or
distribution (other than a dividend or distribution paid in shares of a series
of, or in options, warrants or rights to subscribe for or purchase, common
shares) in respect of common shares or call for redemption, redeem, purchase or
otherwise acquire for consideration any common shares (except by conversion into
or exchange for shares of the Fund ranking junior to the shares of Municipal
Preferred as to the payment of dividends and the distribution of assets upon
liquidation), unless (1) it has paid all cumulative dividends on Municipal
Preferred shares; (2) it has redeemed any Municipal Preferred shares that it has
called for mandatory redemption; and (3) after paying the dividend, the Fund
meets Moody's and S&P's asset coverage requirements described under "Rating
Agency Guidelines."
Except as set forth in the next sentence, no dividends shall be declared or
paid or set apart for payment on any class or series of shares of beneficial
interest of the Fund ranking, as to the payment of dividends, on a parity with
shares of Municipal Preferred for any period unless full cumulative dividends
have been or contemporaneously are declared and paid on the shares of Municipal
Preferred through their most recent dividend payment date. When dividends are
not paid in full upon the shares of Municipal Preferred through their most
recent dividend payment date or upon any other class or series of shares ranking
on a parity as to the payment of dividends with shares of Municipal Preferred
through their most recent respective dividend payment dates, all dividends
declared upon shares of Municipal Preferred and any other such class or series
of shares ranking on a parity as to the payment of dividends with shares of
Municipal Preferred shall be declared pro rata so that the amount of dividends
declared per share on shares of Municipal Preferred and such other class or
series of shares shall in all cases bear to each other the same ratio that
accumulated dividends per share on the shares of Municipal Preferred and such
other class or series of shares bear to each other.
DESIGNATION OF SPECIAL RATE PERIODS
The Fund may instruct the auction agent to hold auctions and pay dividends
less frequently than weekly. The Fund may do this if, for example, the Fund
expects that short-term rates might increase or market conditions otherwise
change, in an effort to optimize the effect of the Fund's leverage on common
shareholders. If the Fund decides to use a special rate period, the special rate
period will consist of a number of days evenly divisible by seven and not more
than 1,820 days (approximately five years), subject to adjustments. The Fund
does not currently expect to hold auctions and pay dividends less frequently
than weekly in the near future. If the Fund designates a special rate period,
changes in interest rates could affect the price received if the shares were
sold in the secondary market.
Before the Fund designates a special rate period: (1) at least 20 (or such
lesser number of days as may be agreed to from time to time by the auction
agent) and not more than 30 days before the first day of the proposed special
rate period, the Fund must publish a notice of its intention to designate a
special rate period in a newspaper circulated to the financial community in New
York, and must mail a notice to Municipal Preferred shareholders of its intent
to designate a special rate period; (2) the Fund must inform the auction agent
by 11:00 a.m. Eastern time on the second business day before the first day of
the proposed special rate period; (3) an auction must have been held in the rate
period before the special rate period, and in that auction sufficient clearing
bids existed; and (4) the Fund must deposit the redemption price with the
auction agent for any shares it has decided to redeem.
If the Fund has designated a special rate period of 14, 21, or 28 days,
then dividends generally will be paid on the same day of the week on which
dividends are paid in a seven-day rate period, but will be the
27
<PAGE> 32
second, third, or fourth such day of the week, respectively, after the first day
of the special rate period. Thus, the dividend payment date for a special rate
period of 14, 21, or 28 days generally will be the second, third, or fourth
Wednesday, respectively, after the first day of the special rate period. The
dividend payment date for a special rate period of more than 28 days will be set
out in the notice designating a special rate period. The dividend payment date
will be a business day, and the last dividend payment date for any special rate
period will be the business day immediately following the last day of the
special rate period. After any special rate period, the rate periods normally
will be seven days, and dividends on Municipal Preferred shares will be payable,
except as described elsewhere in this Prospectus or the SAI, on each succeeding
regular dividend payment date, but the Fund may further designate any subsequent
rate period as a special rate period.
VOTING RIGHTS
In addition to voting rights described below under "Description of Capital
Structure" and in the SAI under "Investment Restrictions," holders of shares of
Municipal Preferred, voting as a separate class, are entitled to elect (1) two
trustees of the Fund 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 "Description of Capital Structure," the Fund 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 Fund 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, the By-laws of the Fund or the
Certificate, 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 Fund 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 Fund is solvent and does not foresee becoming insolvent.
Notwithstanding the second sentence of this paragraph, the Fund may, without the
vote of the holders of shares of Municipal Preferred, authorize, create or issue
additional shares of Municipal Preferred or classes or series of preferred
shares ranking on a parity with shares of Municipal Preferred with respect to
the payment of dividends and the distribution of assets upon liquidation if the
Fund obtains written confirmation from Moody's (if Moody's is then rating the
shares of Municipal Preferred) and S&P (if S&P is then rating the shares of
Municipal Preferred) that the issuance of any such additional shares or class or
series of shares would not impair the rating then assigned by such rating agency
to shares of Municipal Preferred; provided, however, that if Moody's or S&P is
not then rating the shares of Municipal Preferred, the aggregate liquidation
preference of all preferred shares of the Fund outstanding after any such
issuance, exclusive of accumulated and unpaid dividends, may not exceed
$70,000,000.
To the extent permitted by the 1940 Act, if any action set forth in the
preceding paragraph would adversely affect the rights of one or more series (the
"Affected Series") of Municipal Preferred in a manner different from any other
series of Municipal Preferred, the Fund 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).
28
<PAGE> 33
REDEMPTION
Mandatory Redemption. In the event the Fund 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 Certificate 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 Fund 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 (discussed
below), as the case may be, pro rata among shares of Municipal Preferred and
other preferred shares of the Fund, subject to redemption or retirement.
Optional Redemption. Shares of Municipal Preferred are redeemable, at the
option of the Fund:
(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 Certificate 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 Fund, 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 Certificate 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 Fund shall not purchase or
otherwise acquire any shares of Municipal Preferred; provided, however, that the
foregoing shall not prevent the purchase or acquisition of all outstanding
shares of Municipal Preferred pursuant to the successful completion of an
otherwise lawful purchase or exchange offer made on the same terms to, and
accepted by, holders of all outstanding shares of Municipal Preferred.
LIQUIDATION
Subject to the rights of holders of any series or class or classes of
shares ranking on a parity with shares of Municipal Preferred with respect to
the distribution of assets upon liquidation of the Fund, 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 Fund available
for distribution to its shareholders, before any payment or distribution shall
be made on the common shares, an amount equal to the
29
<PAGE> 34
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 Fund. 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 the shares of Municipal Preferred as such shall
have no right or claim to any of the remaining assets of the Fund.
Neither the sale of all or substantially all the property or business of
the Fund, nor the merger or consolidation of the Fund 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 Fund shall be a
liquidation, whether voluntary or involuntary, for the purposes of the foregoing
paragraph.
RATING AGENCY GUIDELINES
The Fund is required under Moody's and S&P'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 S&P 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 S&P's guidelines do not impose any limitations on the percentage of Fund
assets that may be invested in holdings not eligible for inclusion in the
calculation of the discounted value of the Fund's portfolio. The amount of such
assets included in the portfolio at any time may vary depending upon the rating,
diversification and other characteristics of the eligible assets included in the
portfolio. The Municipal Preferred Basic Maintenance Amount includes the sum of
(i) the aggregate liquidation preference of shares of Municipal Preferred then
outstanding and (ii) accrued and projected payment obligations of the Fund.
The Fund 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 of
beneficial interest in the Fund, 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 Fund's portfolio and market conditions as of August 31, 1999,
the 1940 Act Municipal Preferred Asset Coverage with respect to shares of
Municipal Preferred, assuming the issuance on the date hereof of all shares of
Municipal Preferred offered hereby would be computed as follows:
<TABLE>
<S> <C> <C> <C> <C>
Value of Fund assets less liabilities not constituting
senior securities $195,028,555
= = 279%
- ------------------------------------------------------ -----------
Senior securities representing indebtedness plus
liquidation value of the shares of Municipal $ 70,000,000
Preferred
</TABLE>
In the event the Fund does not timely cure a failure to maintain (1) a
discounted value of its portfolio equal to the Municipal Preferred Basic
Maintenance Amount or (2) the 1940 Act Municipal Preferred Asset Coverage, in
each case in accordance with the requirements of the rating agency or agencies
then rating the shares of Municipal Preferred, the Fund will be required to
redeem shares of Municipal Preferred as described above under "Description of
Municipal Preferred -- Redemption."
The Fund may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by Moody's or S&P. 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 Fund pursuant to the rating
agency
30
<PAGE> 35
guidelines in the event the Fund receives written confirmation from Moody's or
S&P, or both, as appropriate, that any such change would not impair the ratings
then assigned by Moody's and S&P to shares of Municipal Preferred.
As described by Moody's and S&P, 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
S&P by the Fund and the Adviser, 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 Fund will pay fees
to Moody's or S&P, or both, for rating shares of Municipal Preferred.
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES
The management of the Fund, including general supervision of the duties
performed by the Adviser under the Fund's investment advisory agreement, is the
responsibility of the Fund's Board of Trustees under the laws of the
Commonwealth of Massachusetts.
INVESTMENT ADVISER
Scudder Kemper Investments, Inc., the global investment management business
of Zurich Financial Services, is one of the largest and most experienced
investment counsel firms in the world, managing assets for institutional and
corporate clients, retirement and pension plans, insurance companies, mutual
fund investors and individuals. Scudder Kemper offers a full range of investment
counsel and asset management capabilities, based on a combination of proprietary
research and disciplined, long-term investment strategies. Zurich Financial
Services Group is a financial services holding company incorporated in
Switzerland and owned 57% by Zurich Allied AG and 43% by Allied Zurich p.l.c.
The Adviser has served as investment adviser to the Fund since December 31,
1997, when the Adviser replaced Zurich Kemper Investments, Inc. and its
predecessors, which had served as the Fund's investment manager since the
inception of the Fund. As of June 30, 1999, the Adviser had more than $290
billion in assets under management. The Adviser's principal office is located at
222 South Riverside Plaza, Chicago, Illinois 60606.
Philip G. Condon is the lead portfolio manager and Rebecca L. Wilson is the
co-portfolio manager of the Fund. Both have been responsible for the day-to-day
management of the Fund since April 1999. Mr. Condon is a Managing Director of
the Adviser and has been the Director of the Municipal Bond Group since December
1997. He was the Head of Municipal Bond Research from May 1986 to December 1997.
He joined the Adviser in 1983. Mr. Condon received a B.A. and M.B.A. from the
University of Massachusetts, Amherst. Ms. Wilson is a Vice President and joined
the Adviser in 1986. During the past five years, she has been a co-portfolio
manager for several tax-exempt portfolios and has served as a trader for several
long-term municipal bond funds. Ms. Wilson received a B.A from the University of
Redlands, California.
The Investment Management Agreement between the Fund and the Adviser (the
"Advisory Agreement") provides that the Adviser acts as investment adviser,
manages the Fund's investments, administers the Fund's business affairs,
furnishes offices, necessary facilities and equipment, provides clerical,
bookkeeping and administrative services, provides shareholder and information
services and permits any of its officers or employees to serve without
compensation as Trustees or officers of the Fund
31
<PAGE> 36
if duly elected to such positions. Under the Advisory Agreement, the Fund agrees
to assume and pay the charges and expenses of its operations including, by way
of example, the compensation of the Trustees other than those affiliated with
the Adviser, charges and expenses of independent auditors, of legal counsel, of
any transfer or dividend disbursing agent, of any registrar of the Fund and of
the custodian (including fees for safekeeping of securities), costs of
calculating net asset value, all costs of acquiring and disposing of portfolio
securities, interest, if any, on obligations incurred by the Fund, costs of
share certificates, membership dues in the Investment Company Institute or any
similar organization, reports and notices to shareholders, other like
miscellaneous expenses and all taxes and fees to federal, state or other
governmental agencies.
For services and facilities provided by the Adviser under the Advisory
Agreement, the Fund pays the Adviser an annualized fee, calculated and paid
monthly, in the amount of 0.60% of the average weekly net assets of the Fund.
Average weekly net assets, for purposes of determining the advisory fee, shall
mean the average weekly value of the total assets of the Fund, minus the sum of
accrued liabilities of the Fund (other than the liquidation value of any
preferred shares) and accumulated dividends on any Municipal Preferred shares.
Because the Adviser's fees are based on the average weekly net assets of the
Fund, the Adviser will benefit from an increase in the Fund's assets resulting
from the offering of shares of Municipal Preferred.
The Advisory Agreement provides that the Adviser shall not be liable for
any error of judgment or of law, or for any loss suffered by the Fund in
connection with the matters to which the Advisory Agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of the Adviser in the performance of its obligations and duties or by
reason of its reckless disregard of its obligations and duties under the
Advisory Agreement.
The Advisory Agreement will continue in effect only if such continuance is
specifically approved at least annually by the Board of Trustees or by vote of a
majority of the outstanding common shares and all preferred shares voting as a
single class and, in either case, by a majority of the Trustees who are not
parties to the Advisory Agreement or interested persons of any such party. The
Advisory Agreement terminates automatically if it is assigned and may be
terminated without penalty by vote of a majority of the Fund's outstanding
voting securities or by either party on 60 days' written notice to the other
party.
CUSTODIAN, TRANSFER AGENT, DIVIDEND
DISBURSING AGENT AND REGISTRAR
The Fund's securities and cash are held under a custodian agreement by
State Street Bank and Trust Company ("State Street"), whose principal place of
business is 225 Franklin Street, Boston, Massachusetts 02110. Investors
Fiduciary Trust Company ("IFTC"), whose principal place of business is 127 West
10th Street, Kansas City, Missouri 64105, serves as transfer agent, registrar
and dividend disbursing agent for the Fund's common shares. Pursuant to a
services agreement with IFTC, Kemper Service Company, an affiliate of the
Adviser, serves as Shareholder Service Agent for the Fund and, as such, performs
all of IFTC's duties as transfer agent and dividend-paying agent. The Depository
Trust Company ("DTC") will act as securities depository for the Municipal
Preferred shares. Bankers Trust Company will act as transfer agent, registrar,
dividend disbursing agent, and redemption agent for the Municipal Preferred.
TAXES
The following information is meant as a general summary for U.S. taxpayers.
It is based on the advice of Dechert Price & Rhoads, counsel to the Fund, and
reflects provisions of the Internal Revenue Code (the "Code"), existing Treasury
regulations, rulings published by the IRS, and other applicable authority, as of
the date of this Prospectus. These authorities are subject to change by
legislative or administrative action. The following discussion is only a summary
of some of the important tax considerations generally applicable to investments
in the Fund. There may be other tax considerations applicable to particular
32
<PAGE> 37
investors. In addition, income earned through an investment in the Fund may be
subject to foreign, state, or local taxes. Please see the SAI for additional
information. You should rely on your own tax adviser for advice about the tax
consequences to you of investing in the Fund.
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as the
Fund so qualifies, in any taxable year in which it distributes at least 90% of
the sum of its (x) net investment income (i.e., investment company taxable
income as that term is defined in the Code, without regard to the deduction for
dividends paid) and (y) its net tax-exempt income (see below), the Fund will not
be subject to federal income tax on its net investment income and net capital
gain (i.e., the excess of net long-term capital gain over net short-term capital
loss that it distributes). The Fund intends to distribute all or substantially
all of such income and gain each year.
Based in part on certain representations made by the Fund to Dechert Price
& Rhoads relating to the lack of any present intention to redeem or purchase
shares of Municipal Preferred at any time in the future, it is the opinion of
Dechert Price & Rhoads that the shares of Municipal Preferred will constitute
stock of the Fund and distributions with respect to shares of Municipal
Preferred (other than distributions in redemption of Municipal Preferred shares
that are treated as exchanges of stock under Section 302(b) of the Code) thus
will constitute dividends to the extent of the Fund's current and accumulated
earnings and profits as calculated for federal income tax purposes. This opinion
relies in part on a published ruling of the IRS stating that certain auction
rate preferred stock similar in many material respects to the Municipal
Preferred shares represents equity. It is possible, however, that the IRS might
take a contrary position asserting, for example, that the Municipal Preferred
shares constitute debt of the Fund. If this position were upheld, the discussion
of the treatment of distributions below would not apply. Instead, distributions
by the Fund to holders of shares of Municipal Preferred would constitute
interest, whether or not they exceeded the earnings, and profits of the Fund
would be included in full in the income of the recipient and would be taxed as
ordinary income. In such event, the Fund would not be required to make payments
to such shareholders to offset the effect of paying federal income tax on fund
distributions so recharacterized as interest. Dechert Price & Rhoads has advised
the Fund that, should the IRS pursue in court the position that the shares of
Municipal Preferred should be treated as debt for federal income tax purposes,
the IRS would be unlikely to prevail.
Each dividend distribution ordinarily will primarily constitute income
exempt from federal income tax (i.e., qualify as an "exempt-interest" dividend,
which is excludable from the shareholder's gross income). A portion of dividends
attributable to interest on certain municipal securities, however, may be a
preference item for alternative minimum tax purposes. In addition, for
corporations, alternative minimum taxable income is increased by a percentage of
the amount by which an alternative measure of income that includes interest on
all tax-exempt securities exceeds the amount otherwise determined to be
alternative minimum taxable income. Accordingly, the portion of the Fund's
dividends that would otherwise be tax-exempt to shareholders may cause certain
shareholders to be subject to the federal alternative minimum tax or may
increase the tax liability of a shareholder who is subject to such tax.
Investors should thus consider the possible effect of an investment in the Fund
on their federal alternative minimum tax liability. Furthermore, exempt-interest
dividends are included in determining what portion, if any, of a person's social
security and railroad retirement benefits will be includible in gross income
subject to federal income tax. Distributions of any taxable net investment
income (which term includes short-term capital gain) will be taxable as ordinary
income. Distributions of the Fund's net capital gain, if any, will be taxable to
shareholders as long-term capital gain, regardless of the length of time they
held their shares. Distributions, if any, in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and, after
that basis has been reduced to zero, will constitute capital gain to the
shareholder (assuming the shares are held as a capital asset).
Exempt-interest dividends attributable to interest received on certain
private activity bonds and certain industrial development bonds will not be
tax-exempt to any shareholders who are, within the meaning of Section 147(a) of
the Code, "substantial users" of the facilities financed by such obligations or
bonds or who are "related persons" of such substantial users.
33
<PAGE> 38
Dividends and other distributions declared by the Fund in October, November
or December of any year and payable to shareholders of record on a date in any
of those months will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The IRS has taken
the position that if a RIC has more than one class of shares, it may designate
distributions made to each class in any year as consisting of no more than that
class's proportionate share of particular types of income for that year,
including tax-exempt interest and net capital gain. A class's proportionate
share of a particular type of income for a year is determined according to the
percentage of total dividends paid by the RIC during that year that was paid to
the class. Thus, the Fund is required to allocate a portion of its net capital
gain and other taxable income to the Municipal Preferred shares. The Fund
generally will notify the auction agent of the amount of any net capital gain
and other taxable income to be included in any dividend on the shares of
Municipal Preferred prior to the auction establishing the Applicable Rate for
that dividend. Except for the portion of any dividend that it informs the
auction agent will be treated as net capital gain or other taxable income, the
Fund anticipates that the dividends paid on the Municipal Preferred shares will
constitute exempt-interest dividends. The amount of net capital gain and
ordinary income allocable to the Municipal Preferred shares (the "taxable
distribution") will depend upon the amount of such gains and income realized by
the Fund and the total dividends paid by the Fund on its common shares and the
Municipal Preferred shares during a taxable year, but taxable distributions
generally are not expected to be significant. The tax treatment of additional
dividends also may affect the Fund's calculation of each class's allocable share
of capital gain and other taxable income.
Although the matter is not free from doubt, due to the absence of direct
regulatory or judicial authority, Dechert Price & Rhoads has advised the Fund
that under current law the manner in which the Fund intends to allocate items of
tax-exempt income, net capital gain, and other taxable income, if any, among the
Fund's common shares and the Municipal Preferred shares will be respected for
federal income tax purposes. It is possible that the IRS could disagree with
counsel's opinion and attempt to reallocate the Fund's net capital gain or other
taxable income. In the event of such a reallocation, some of the dividends
identified by the Fund as exempt-interest dividends to holders of shares of
Municipal Preferred may be recharacterized as additional net capital gain or
other taxable income. In the event of such recharacterization, however, the Fund
would not be required to make payments to such shareholders to offset the tax
effect of such reallocation.
Interest on indebtedness incurred or continued by a shareholder to purchase
or carry Municipal Preferred shares is not deductible for federal income tax
purposes to the extent that interest relates to exempt-interest dividends
received from the Fund.
If at any time when shares of the Municipal Preferred are outstanding the
Fund does not meet the asset coverage requirements of the 1940 Act, the Fund
will be required to suspend distributions to holders of common shares until the
asset coverage is restored. Such a suspension may prevent the Fund from
distributing at least 90% of its net investment income and its tax-exempt
income, and may, therefore, jeopardize the Fund's qualification for taxation as
a RIC. Upon any failure to meet the asset coverage requirements of the 1940 Act,
the Fund, in its sole discretion, may redeem shares of the Municipal Preferred
in order to maintain or restore the requisite asset coverage and avoid the
adverse consequences to the Fund and its shareholders of failing to qualify for
treatment as a RIC. There can be no assurance, however, that any such action
would achieve that objective.
Certain of the Fund's investment practices are subject to special Code
provisions that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to recognize income or gain without receiving cash with which
to make distributions in the amounts necessary to satisfy the requirements for
maintaining RIC status and for avoiding income and
34
<PAGE> 39
excise taxes. The Fund will monitor its transactions and may make certain tax
elections in order to mitigate the effect of these rules and to attempt to
prevent disqualification of the Fund as a RIC.
If the Fund pays dividends in respect of Gross-up Payments, it will
generally designate such payments as exempt-interest dividends except to the
extent that net capital gain or other taxable income is allocated thereto as
described above. The federal income tax consequences of such dividends under
existing law are uncertain.
SALES OF MUNICIPAL PREFERRED
The sale of Municipal Preferred shares (including transfers in connection
with a redemption or repurchase of Municipal Preferred shares) will be a taxable
transaction for federal income tax purposes. A selling shareholder generally
will recognize gain or loss equal to the difference between the holder's
adjusted tax basis in the Municipal Preferred shares and the amount received. If
the Municipal Preferred shares are held as capital assets, the gain or loss will
be a capital loss and will be long-term if the Municipal Preferred shares have
been held for more than one year. Any loss realized on a disposition of shares
of Municipal Preferred held for six months or less will be disallowed to the
extent of any exempt-interest dividends received with respect to those shares of
Municipal Preferred, and any such loss that is not disallowed will be treated as
a long-term, rather than a short-term, capital loss to the extent of any capital
gain distributions received with respect to those shares of Municipal Preferred.
A shareholder's holding period is suspended for any periods during which the
shareholder's risk of loss is diminished as a result of holding one or more
other positions in substantially similar or related property, or through certain
options or short sales. Any loss realized on a sale or exchange of Municipal
Preferred shares will be disallowed to the extent those Municipal Preferred
shares are replaced by other Municipal Preferred shares within a period of 61
days beginning 30 days before and ending 30 days after the date of disposition
of the original Municipal Preferred shares. In that event, the basis of the
replacement shares of Municipal Preferred will be adjusted to reflect the
disallowed loss.
BACKUP WITHHOLDING
The Fund is required to withhold 31% of all taxable dividends, capital gain
dividends and repurchase proceeds payable to any individuals and certain other
non-corporate shareholders who do not provide the Fund with a correct taxpayer
identification number. Withholding at that rate from taxable dividends and
capital gain distributions is also required for such shareholders who otherwise
are subject to backup withholding.
------------------------
The foregoing briefly summarizes some of the important federal income tax
consequences of investing in shares of Municipal Preferred, reflects the federal
tax law, as of the date of this Prospectus, and does not address special tax
rules applicable to certain types of investors, such as corporate and foreign
investors. Other federal, state or local tax considerations may apply to a
particular investor, including state alternative minimum tax. Investors should
consult their tax advisers.
DESCRIPTION OF CAPITAL STRUCTURE
The Fund is an unincorporated business trust established under the laws of
the Commonwealth of Massachusetts by the Declaration dated February 27, 1989.
The Declaration provides that the Trustees of the Fund may authorize separate
classes of shares of beneficial interest. The Trustees have authorized an
unlimited number of shares of beneficial interest, par value $0.01 per share,
all of which were initially classified as common shares. The Declaration also
authorizes the issuance of an unlimited number of shares of beneficial interest
with preference rights, including preferred shares, having a par value of $0.01
per share, in one or more series, with rights as determined by the Board of
Trustees, by action of the Board of Trustees without the approval of the
shareholders. For a description of the Municipal Preferred shares, see
"Description of Municipal Preferred." The following table shows the amount of
(i) shares
35
<PAGE> 40
authorized, (ii) shares held by the Fund for its own account and (iii) shares
outstanding, for each class of authorized securities of the Fund as of August
31, 1999.
<TABLE>
<CAPTION>
AMOUNT HELD AMOUNT OUTSTANDING
BY FUND (EXCLUSIVE OF
AMOUNT FOR ITS OWN AMOUNT HELD BY FUND
TITLE OF CLASS AUTHORIZED ACCOUNT FOR ITS OWN ACCOUNT)
- -------------- ---------- ----------- --------------------
<S> <C> <C> <C>
Common Shares................................ unlimited 0 10,742,480
Municipal Preferred shares
Series T................................... 5,000 0 0
</TABLE>
The common shares outstanding are fully paid and nonassessable by the Fund.
Holders of common shares are entitled to share equally in dividends declared by
the Board of Trustees payable to holders of common shares and in the net assets
of the Fund available for distribution to holders of common shares after payment
of the preferential amounts payable to holders of any outstanding preferred
shares. Neither holders of common shares nor holders of preferred shares have
pre-emptive or conversion rights and common shares are not redeemable. Upon
liquidation of the Fund, after paying or adequately providing for the payment of
all liabilities of the Fund and the liquidation preference with respect to any
outstanding preferred shares, and upon receipt of such releases, indemnities and
refunding agreements as they deem necessary for their protection, the Trustees
may distribute the remaining assets of the Fund among the holders of the common
shares. Under the rules of the NYSE applicable to listed companies, the Fund
will be required to hold an annual meeting of shareholders in each year. If the
Fund is converted to an open-end investment company or if for any other reason
common shares are no longer listed on the NYSE (or any other national securities
exchange the rules of which require annual meetings of shareholders), the Fund
does not intend to hold annual meetings of shareholders.
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Declaration disclaims shareholder liability for acts or obligations of the Fund
and requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Fund or the Trustees.
The Declaration provides for indemnification out of Fund property for all loss
and expense of any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund would be
unable to meet its obligations.
Holders of common shares are entitled to one vote for each share held and
will vote with the holders of any outstanding Municipal Preferred shares or
other preferred shares on each matter submitted to a vote of holders of common
shares, except as described under "Description of Municipal Preferred -- Voting
Rights."
Shareholders are entitled to one vote for each share held. The common
shares, Municipal Preferred shares and any other preferred shares do not have
cumulative voting rights, which means that the holders of more than 50% of the
shares of common shares, Municipal Preferred shares and any other preferred
shares voting for the election of Trustees can elect all of the Trustees
standing for election by such holders, and, in such event, the holders of the
remaining shares of common shares, Municipal Preferred shares and any other
preferred shares will not be able to elect any of such Trustees.
The issuance of Municipal Preferred will create leverage which will affect
the amount of income available for distribution on the common shares and the net
asset value of the common shares. The applicable dividend rates on the Municipal
Preferred could exceed both the current yield on the Fund's portfolio
investments and the yield received on investments made with the proceeds of the
issuance of the offering of the shares of Municipal Preferred and, therefore,
the offering could result in a decline in the Fund's net asset value and a
reduction of net investment income available for distribution on common shares.
So long as any Municipal Preferred shares or any other preferred shares are
outstanding, holders of common shares will not be entitled to receive any
dividends of or other distributions from the Fund, unless at the time of such
declaration, (1) all accrued dividends on preferred shares or accrued interest
on
36
<PAGE> 41
borrowings has been paid and (2) the value of the Fund's total assets
(determined after deducting the amount of such dividend or other distribution),
less all liabilities and indebtedness of the Fund not represented by senior
securities, is at least 300% of the aggregate amount of such securities
representing indebtedness and at least 200% of the aggregate amount of
securities representing indebtedness plus the aggregate liquidation value of the
outstanding preferred shares (expected to equal the aggregate original purchase
price of the outstanding preferred shares plus redemption premium, if any,
together with any accrued and unpaid dividends thereon, whether or not earned or
declared and on a cumulative basis). In addition to the requirements of the 1940
Act, the Fund is required to comply with other asset coverage requirements as a
condition of the Fund obtaining a rating of the preferred shares from a rating
agency. These requirements include an asset coverage test more stringent than
under the 1940 Act.
The Fund will send unaudited reports at least semi-annually and audited
financial statements annually to all of its shareholders.
The Fund has no present intention of offering additional common shares
except for the issuance of common shares under the Fund's dividend reinvestment
plan, which allows holders of common shares to reinvest dividends and capital
gain distributions from the Fund, if any, in additional common shares of the
Fund. The dividend reinvestment plan is not available to holders of Municipal
Preferred. Other offerings of its common shares, if made, will require approval
of the Fund's Board of Trustees. Any additional offering will not be sold at a
price per common share below the then-current net asset value (exclusive of
underwriting discounts and commissions) except in connection with an offering to
existing holders of common shares or with the consent of a majority of the
Fund's outstanding common shares. In addition, the Fund expects that it would
commence a continuous offering of its shares in the event it converted to an
open-end investment company. See "-- Conversion to Open-End Fund."
The Declaration further provides that obligations of the Fund are not
binding upon Trustees individually but only upon the property of the Fund and
that the Trustees will not be liable for errors of judgment or mistakes of fact
or law, but nothing in the Declaration protects a Trustee against any liability
to which he/ she would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his/ her office.
The common shares have traded on the NYSE since March 22, 1989. The
following table shows the ranges of the Fund's net asset value per common share
and sales prices, and the volume of shares traded:
<TABLE>
<CAPTION>
NET ASSET VALUE PUBLIC OFFERING PRICE VOLUME TRADED
--------------- --------------------- -------------
QUARTER ENDED HIGH LOW HIGH LOW (IN 000S)
- ------------- ------ ------ --------- --------- -------------
<S> <C> <C> <C> <C> <C>
May 31, 1999................................... $12.13 $11.99 $12.500 $11.875 641,000
February 28, 1999.............................. $12.26 $12.12 $12.938 $12.063 537,400
November 30, 1998.............................. $12.40 $12.18 $13.000 $12.188 610,600
August 31, 1998................................ $12.33 $12.23 $12.500 $12.125 738,000
</TABLE>
As of August 31, 1999, the net asset value per share of common shares was
$11.64, and the closing price per share of common shares on the NYSE was
$11.375.
PREFERRED SHARES
Under the 1940 Act, the Fund is permitted to have outstanding more than one
series of preferred shares as long as no single series has priority over another
series as to the distribution of assets of the Fund or the payment of dividends.
Neither holders of common shares nor holders of preferred shares have
pre-emptive rights to purchase any Municipal Preferred shares or any other
preferred shares that might be issued. It is anticipated that the net asset
value per share of the Municipal Preferred shares will equal its original
purchase price per share plus accumulated dividends per share.
37
<PAGE> 42
CONVERSION TO OPEN-END FUND
The Trustees may at any time propose conversion of the Fund to an open-end
management investment company depending upon their judgment as to the
advisability of such action in light of circumstances then prevailing. In
considering whether to submit an open-ending proposal to shareholders, the
Trustees might consider, among other factors, the differences in operating
expenses between open-end and closed-end funds (due to the expenses of
continuously selling shares and of standing ready to effect redemptions), the
potentially adverse tax consequences to non-redeeming shareholders once a fund
is open-ended, and the impact of open-ending on portfolio management policies.
Such a conversion would require the approval of both a majority of the Fund's
outstanding common shares and Municipal Preferred shares voting together as a
single class and a majority of the outstanding Municipal Preferred shares voting
as a separate class on such conversion. Conversion of the Fund to an open-end
investment company would require the redemption of all outstanding preferred
shares, including the Municipal Preferred shares, which would eliminate the
leveraged capital structure of the Fund with respect to the common shares. A
delay in conversion could result following shareholder approval due to the
Fund's inability to redeem the preferred shares. Shareholders of an open-end
investment company may require the company to redeem their shares at any time
(except in certain circumstances as authorized by or under the 1940 Act) at
their next computed net asset value less any redemption charge as might be in
effect at the time of redemption. If the Fund is converted to an open-end
management investment company, it could be required to liquidate portfolio
securities to meet requests for redemption, and its shares would no longer be
listed on the NYSE. If the Fund were to experience significant redemptions as an
open-end fund, the decrease in total assets could result in a higher expense
ratio and inefficiencies in portfolio management. In this regard, the Fund could
reserve the right to effect redemptions in-kind with portfolio securities, which
would subject redeeming shareholders to transaction costs in liquidating those
securities.
REPURCHASE OF COMMON SHARES
Shares of closed-end management investment companies frequently trade at a
discount from net asset value but in some cases trade at a premium. In
recognition of the possibility that the Fund's shares might similarly trade at a
discount, the Fund may from time to time take action to attempt to reduce or
eliminate a market value discount from net asset value by repurchasing its
shares in the open market or by tendering for its own shares at net asset value.
The Board of Trustees, in consultation with the Adviser, reviews on a quarterly
basis the possibility of open market repurchases and/or tender offers for Fund
shares. There are no assurances that the Board of Trustees will, in fact, decide
to undertake either of these actions or, if undertaken, that such actions will
result in the Fund's shares trading at a price which is equal to or approximates
their net asset value. In addition, the Board of Trustees will not necessarily
announce when it has given consideration to these matters. Notwithstanding the
foregoing, so long as any shares of Municipal Preferred are outstanding, the
Fund may not purchase, redeem or otherwise acquire any common shares unless (1)
all accumulated dividends on the shares of Municipal Preferred have been paid or
set aside for payment through the date of such purchase, redemption or other
acquisition and (2) at the time of such purchase, redemption or acquisition the
Municipal Preferred Basic Maintenance Amount and the 1940 Act Municipal
Preferred Asset Coverage (determined after deducting the acquisition price of
the common shares) are met.
Subject to the Fund's investment policies and restrictions with respect to
borrowings, the Fund may incur debt to finance repurchases and/or tenders. See
"Investment Objective, Policies and Risks" and "Investment Restrictions" in the
SAI. Interest on any such borrowings will reduce the Fund's net investment
income.
Although the Board of Trustees believes that share repurchases and tenders
generally would have a favorable effect on the market price of the Fund's
shares, it should be recognized that the acquisition of shares by the Fund will
decrease the total assets of the Fund and, therefore, have the effect of
increasing the Fund's expense ratio. In addition, any purchase by the Fund of
its common shares at a time when the Municipal Preferred shares are outstanding
will increase the leverage applicable to the outstanding common shares then
remaining. Such leverage would be further increased if the Fund were to borrow
38
<PAGE> 43
money to finance repurchases. Under the Fund's Certificate, the Fund may not
borrow more than 5% of its total assets for temporary purposes, including share
repurchases, without the prior written permission of Moody's and S&P. Such
leverage may exaggerate changes in the net asset value and the yield on the
Fund's portfolio. Repurchases of common shares may result in the Fund being
required to redeem Municipal Preferred shares to satisfy asset coverage
requirements. Because of the nature of the Fund's investment objective and
policies and the Fund's portfolio, the Adviser does not anticipate that
repurchases and tenders should have a materially adverse effect on the Fund's
investment performance and does not anticipate any material difficulty in
disposing of portfolio securities in order to consummate share repurchases and
tenders.
The portfolio turnover rate of the Fund may or may not be affected by the
Fund's repurchases of shares pursuant to a tender offer.
39
<PAGE> 44
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement between
Salomon Smith Barney Inc. (the "Underwriter") and the Fund (the "Underwriting
Agreement") dated the date hereof, the Underwriter has agreed to purchase, and
the Fund has agreed to sell, 2,800 shares of Series T Municipal Preferred
offered hereby.
The Underwriting Agreement provides that the obligations of the Underwriter
to purchase the shares included in this offering are subject to the approval of
certain legal matters by counsel and to certain other conditions. The
Underwriter is obligated to purchase all of the shares of Municipal Preferred
offered hereby if it purchases any of the shares. In the Underwriting Agreement,
the Fund and the Adviser have agreed to indemnify the Underwriter against
certain liabilities, including liabilities arising under the Securities Act of
1933, as amended, or to contribute payments the Underwriter may be required to
make for any of those liabilities.
The Fund has been advised by the Underwriter that it proposes initially to
offer some of the shares of Municipal Preferred directly to the public at the
public offering price set forth on the cover page of this Prospectus and some of
the shares to selected dealers at the public offering price less a concession
not in excess of $ per share. The underwriting commission the Fund will pay
of $ per share is equal to % of the initial offering price. The
Underwriter may allow, and such dealers may reallow, a concession not in excess
of $ per share on sales to certain other dealers. After the initial public
offering, the Underwriter may change the public offering price and the
concession. Investors must pay for any shares of Municipal Preferred purchased
in the initial public offering on or before , 1999.
The Fund anticipates that the Underwriter may from time to time act as a
broker or dealer in connection with the execution of its portfolio transactions
after it has ceased to be an underwriter. The Fund anticipates that the
Underwriter or one of its affiliates may from time to time act in auctions as a
Broker-Dealer and will receive fees as described under "The Auction" and in the
SAI. The Underwriter is an active underwriter of, and dealer in, securities and
acts as a market maker in a number of such securities, and therefore can be
expected to engage in portfolio transactions with the Fund.
The principal business address of Salomon Smith Barney Inc. is 388
Greenwich Street, New York, New York 10013.
LEGAL MATTERS
Vedder, Price, Kaufmann & Kammholz, Chicago, Illinois, serves as counsel to
the Fund and to the non-interested Trustees. Dechert Price & Rhoads, Washington,
DC, which is serving as special counsel to the Fund with respect to the offering
of Municipal Preferred shares, will pass on the legality of the shares offered
hereby. Certain legal matters will be passed on for the Underwriter by Simpson
Thacher & Bartlett, New York, New York. Simpson Thacher & Bartlett will rely as
to certain matters under Massachusetts law on the opinion of Dechert Price &
Rhoads.
EXPERTS
The financial statements of the Fund at November 30, 1998 and the selected
per share data and ratios set forth under the caption "Financial Highlights" for
each of the fiscal periods from 1989 to November 30, 1998 have been audited by
Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606, independent
auditors, as set forth in their report incorporated by reference in the SAI, and
are included in reliance upon their report given upon Ernst & Young's authority
as experts in accounting and auditing. Ernst & Young audits and reports on the
Fund's annual financial statements, reviews certain regulatory reports and the
Fund's federal income tax returns, and performs other professional accounting,
auditing, tax and advisory services when engaged to do so by the Fund.
40
<PAGE> 45
FURTHER INFORMATION
The Fund has filed with the SEC, Washington, DC, a Registration Statement
under the Securities Act of 1933 with respect to the shares of Municipal
Preferred offered hereby. Further information concerning these securities and
the Fund may be found in the Registration Statement, of which this Prospectus
constitutes a part, on file with the SEC. The Registration Statement may be
inspected without charge at the SEC's office in Washington, DC, and copies of
all or any part thereof may be obtained from such office after payment of the
fees prescribed by the SEC.
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 , as amended, and the 1940 Act, and in accordance therewith
files reports and other information with the SEC. Such reports, proxy and
information statements and other information can be inspected and copied at the
public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, DC 20549 and the SEC's regional offices, including offices at Seven
World Trade Center, New York, New York 10048. Call 1-800-SEC-0330 for
information about the public reference facilities. Copies of such material can
be obtained from the Public Reference Section of the SEC at 450 Fifth Street,
N.W., Washington, DC 20549 at prescribed rates. Such reports and other
information concerning the Fund may also be inspected at the offices of the
NYSE. The SEC maintains a Web site (http://www.sec.gov) that contains the SAI,
material incorporated by reference into this Prospectus and the SAI, and
reports, proxy and information statements and other information regarding
registrants that file with the SEC. In addition, reports, proxy and information
statements and other information concerning the Fund can be inspected at the
offices of the NYSE, 20 Broad Street, New York, New York 10005.
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information......................................... 3
Additional Information About Investments and Investment
Techniques................................................ 3
Investment Restrictions..................................... 7
Trustees and Officers....................................... 8
Ownership of Fund Shares.................................... 11
Investment Advisory and Other Services...................... 12
Portfolio Transactions...................................... 14
Net Asset Value............................................. 14
The Auction................................................. 15
Description of Municipal Preferred.......................... 26
Repurchase of Common Shares................................. 45
Taxes....................................................... 46
Experts..................................................... 48
Financial Statements........................................ 48
Glossary.................................................... 49
Appendix A -- Ratings of Investments........................ 55
Appendix B -- Tax Equivalent Yield Table.................... 60
Appendix C -- Settlement Procedures......................... 61
Appendix D -- Auction Procedures............................ 63
</TABLE>
41
<PAGE> 46
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$70,000,000
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
2,800 SHARES, SERIES T
------------
PROSPECTUS
, 1999
------------
SALOMON SMITH BARNEY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 47
SUBJECT TO COMPLETION, DATED SEPTEMBER 14, 1999
The information in this Statement of Additional Information is not complete
and may be changed. We may not sell these securities until the Registration
Statement filed with the Securities and Exchange Commission is effective. This
Statement of Additional Information is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
[KEMPER FUND LOGO]
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER , 1999
This Statement of Additional Information ("SAI") relating to the offering
of Series T Municipal Auction Rate Cumulative Preferred Shares ("Municipal
Preferred") is not a prospectus, but should be read in conjunction with the
Prospectus for Kemper Strategic Municipal Income Trust (the "Fund") dated
September , 1999. This SAI does not include all information that a prospective
investor should consider before purchasing shares of the Fund, and investors
should obtain and read the Prospectus prior to purchasing shares. A copy of the
Prospectus may be obtained without charge, by calling 1-800-621-1048.
The Prospectus and this SAI omit certain of the information contained in
the registration statement filed with the Securities and Exchange Commission,
Washington, DC. The registration statement may be obtained from the Commission
upon payment of the fee prescribed, or inspected at the Commission's office at
no charge.
<PAGE> 48
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION......................................... 2
ADDITIONAL INFORMATION ABOUT INVESTMENTS AND INVESTMENT
TECHNIQUES................................................ 2
INVESTMENT RESTRICTIONS..................................... 7
TRUSTEES AND OFFICERS....................................... 9
OWNERSHIP OF FUND SHARES.................................... 11
INVESTMENT ADVISORY AND OTHER SERVICES...................... 12
PORTFOLIO TRANSACTIONS...................................... 14
NET ASSET VALUE............................................. 15
THE AUCTION................................................. 15
DESCRIPTION OF MUNICIPAL PREFERRED.......................... 28
REPURCHASE OF COMMON SHARES................................. 48
TAXES....................................................... 49
EXPERTS..................................................... 51
FINANCIAL STATEMENTS........................................ 51
GLOSSARY.................................................... 52
APPENDIX A RATINGS OF INVESTMENTS........................... 58
APPENDIX B TAX EQUIVALENT YIELD TABLE....................... 63
APPENDIX C SETTLEMENT PROCEDURES............................ 64
APPENDIX D AUCTION PROCEDURES............................... 66
</TABLE>
------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY THE PROSPECTUS OF THE FUND DATED SEPTEMBER , 1999 AS
SUPPLEMENTED FROM TIME TO TIME, WHICH IS INCORPORATED HEREIN BY REFERENCE. THIS
STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ IN CONJUNCTION WITH SUCH
PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED WITHOUT CHARGE BY CONTACTING YOUR
FINANCIAL INTERMEDIARY OR CALLING THE FUND AT 1-800-621-1048.
<PAGE> 49
GENERAL INFORMATION
The Fund is a closed-end, non-diversified management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund's investment adviser is Scudder Kemper Investments, Inc. (the
"Adviser"). The Fund's investment objective is to provide a high level of
current income exempt from federal income tax. The Fund invests at least 50% of
its total assets in investment grade Municipal Securities or unrated Municipal
Securities of comparable quality and may invest up to 50% of its total assets in
high-yield Municipal Securities that are rated below investment grade or unrated
Municipal Securities of comparable quality. The Fund will not purchase Municipal
Securities rated lower than B- by S&P or B by Moody's or unrated Municipal
Securities of comparable quality.
Capitalized terms used in this SAI and not otherwise defined herein have
the meanings given them in the Fund's Prospectus.
ADDITIONAL INFORMATION ABOUT INVESTMENTS
AND INVESTMENT TECHNIQUES
Some of the different types of securities in which the Fund may invest,
subject to its investment objective, policies and restrictions, are described in
the Prospectus, dated September , 1999 (the "Prospectus"), under "Investment
Objective, Policies and Risks." Additional information concerning certain of the
Fund's investments and investment techniques is set forth below.
MUNICIPAL SECURITIES. Municipal Securities are issued to obtain funds for
various public and private purposes. Municipal Securities include long-term
obligations, which are often called municipal bonds, as well as tax-exempt
commercial paper, project notes and municipal notes such as tax, revenue and
bond anticipation notes of short maturity, generally less than three years.
Market rates of interest available with respect to Municipal Securities may be
lower than those available with respect to taxable securities, although such
differences may be partially or wholly offset by the effects of federal income
tax on income derived from taxable securities. While most municipal bonds pay a
fixed rate of interest semi-annually in cash, some bonds pay no periodic cash
interest but instead make a single payment at maturity representing both
principal and interest. Municipal Securities may be issued or subsequently
offered with interest coupons materially greater or less than those then
prevailing, with price adjustments reflecting such deviation.
In general, there are three categories of Municipal Securities the interest
on which is exempt from federal income tax and is not a tax preference item for
purposes of the federal alternative minimum tax ("AMT") ("Preference Items"):
(i) certain "public purpose" obligations (whenever issued), which include
obligations issued directly by state and local governments or their agencies to
fulfill essential governmental functions; (ii) certain obligations issued before
August 8, 1986 for the benefit of non-governmental persons or entities; and
(iii) certain "private activity bonds" issued after August 7, 1986, which
include "qualified Section 501(c)(3) bonds" or refundings of certain obligations
included in the second category. Interest on obligations in the last category is
exempt from federal income tax but is treated as a Preference Item that could
subject the recipient to, or increase the recipient's liability for, the AMT.
For corporate shareholders, the Fund's distributions derived from interest on
all Municipal Securities (whenever issued) is included in "adjusted current
earnings" for purposes of the AMT (to the extent not already included in
alternative minimum taxable income as income attributable to private activity
bonds). In assessing the federal income tax treatment of interest on any such
obligation, the Fund will rely on an opinion of the issuer's counsel (when
available) obtained by the issuer or other reliable authority and will not
undertake any independent verification thereof.
The two principal classifications of municipal bonds are "general
obligation" and "revenue" bonds. Issuers of general obligation bonds include
states, counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects including the
construction or improvement of schools, highways and roads, water and sewer
systems and a variety of other public
2
<PAGE> 50
purposes. The basic security of general obligation bonds is the issuer's pledge
of its faith, credit, and taxing power for the payment of principal and
interest. The taxes that can be levied for the payment of debt service may be
limited or unlimited as to rate and amount.
Revenue bonds are generally secured by the net revenues derived from a
particular facility or group of facilities or, in some cases, from the proceeds
of a special excise or other specific revenue source. Revenue bonds have been
issued to fund a wide variety of capital projects including: electric, gas,
water, sewer and solid waste disposal systems; highways, bridges and tunnels;
port, airport and parking facilities; transportation systems; housing
facilities, colleges and universities and hospitals. Although the principal
security behind these bonds varies widely, many provide additional security in
the form of a debt service reserve fund whose monies may be used to make
principal and interest payments on the issuer's obligations. Housing finance
authorities have a wide range of security including partially or fully insured,
rent subsidized and/or collateralized mortgages, and/or the net revenues from
housing or other public projects. In addition to a debt service reserve fund,
some authorities provide further security in the form of a state's ability
(without legal obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are normally secured by annual lease rental payments from the
state or locality to the authority sufficient to cover debt service on the
authority's obligations. Such payments are usually subject to annual
appropriations by the state or locality. Industrial development and pollution
control bonds, although normally issued by municipal authorities, are in most
cases revenue bonds and are generally not secured by the taxing power of the
municipality, but are usually secured by the revenues derived by the authority
from payments of the industrial user or users. The Fund may on occasion acquire
revenue bonds which carry warrants or similar rights covering equity securities.
Such warrants or rights may be held indefinitely, but if exercised, the Fund
anticipates that it would, under normal circumstances, dispose of any equity
securities so acquired within a reasonable period of time.
The obligations of any person or entity to pay the principal of and
interest on a Municipal Security are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Act, and laws, if any, which may be enacted by
Congress or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations. There is also the possibility that as a result of litigation or
other conditions the power or ability of any person or entity to pay when due
principal of and interest on a Municipal Security may be materially affected.
There have been recent instances of defaults and bankruptcies involving
Municipal Securities which were not foreseen by the financial and investment
communities. The Fund will take whatever action it considers appropriate in the
event of anticipated financial difficulties, default or bankruptcy of either the
issuer of any Municipal Security or of the underlying source of funds for debt
service. Such action may include retaining the services of various persons or
firms (including affiliates of the Adviser) to evaluate or protect any real
estate, facilities or other assets securing any such obligation or acquired by
the Fund as a result of any such event, and the Fund may also manage (or engage
other persons to manage) or otherwise deal with any real estate, facilities or
other assets so acquired. The Fund anticipates that real estate consulting and
management services may be required with respect to properties securing various
Municipal Securities in its portfolio or subsequently acquired by the Fund. The
Fund will incur additional expenditures in taking protective action with respect
to portfolio obligations in default and assets securing such obligations. To
enforce its rights in the event of a default in the payment of interest or
repayment of principal, or both, the Fund may take possession of and manage the
assets or have a receiver appointed to collect and disburse pledged revenues
securing the issuer's obligations on such securities, which may increase the
operating expenses and adversely affect the net asset value of the Fund. Any
income derived from the ownership of operation of such assets may not be
tax-exempt. In addition, the Fund's intention to qualify as a "regulated
investment company" ("RIC") under the Code may limit the extent to which the
Fund may exercise its rights by taking possession of such assets, because as a
RIC the Fund is subject to certain limitations on its investments and on the
nature of its income. See "Taxes".
3
<PAGE> 51
The yields on Municipal Securities are dependent on a variety of factors,
including purposes of issue and source of funds for repayment, general money
market conditions, general conditions of the municipal bond market, size of a
particular offering, maturity of the obligation and rating of the issue. The
ratings of Moody's and S&P represent their opinions as to the quality of the
Municipal Securities which they undertake to rate. It should be emphasized,
however, that ratings are based on judgment and are not absolute standards of
quality. Consequently, Municipal Securities with the same maturity, coupon and
rating may have different yields while obligations of the same maturity and
coupon with different ratings may have the same yield. In addition, the market
price of Municipal Securities will normally fluctuate with changes in interest
rates, and therefore the net asset value of the Fund will be affected by such
changes.
Hospital bond ratings are often based on feasibility studies which contain
projections of expenses, revenues and occupancy levels. Among the influences
affecting a hospital's gross receipts and net income available to service its
debt are demand for hospital services, the ability of the hospital to provide
the services required, management capabilities, economic developments in the
service area, efforts by insurers and government agencies to limit rates and
expenses, confidence in the hospital, service area economic developments,
competition, availability and expense of malpractice insurance, Medicaid and
Medicare funding and possible federal legislation limiting the rates of increase
of hospital charges.
Electric utilities face problems in financing large construction programs
in an inflationary period, cost increases and delay occasioned by safety and
environmental considerations (particularly with respect to nuclear facilities),
difficulty in obtaining fuel at reasonable prices and in achieving timely and
adequate rate relief from regulatory commissions, effects of energy conservation
and limitations on the capacity of the capital market to absorb utility debt.
Bonds to finance life care facilities are normally secured only by the
revenues of each facility and not by state or local government tax payments,
they are subject to a wide variety of risks. Primarily, the projects must
maintain adequate occupancy levels to be able to provide revenues sufficient to
meet debt service payments. Moreover, since a portion of housing, medical care
and other services may be financed by an initial deposit, it is important that
the facility maintain adequate financial reserves to secure estimated actuarial
liabilities. The ability of management to accurately forecast inflationary cost
pressures is an important factor in this process. The facilities may also be
affected adversely by regulatory cost restrictions applied to health care
delivery in general, particularly state regulations or changes in Medicare and
Medicaid payments or qualifications, or restrictions imposed by medical
insurance companies. They may also face competition from alternative health care
or conventional housing facilities in the private or public sector.
MUNICIPAL LEASES. The Fund may invest in municipal leases and
participations therein, which arrangements frequently involve special risks.
Municipal leases are obligations in the form of a lease or installment purchase
arrangement which is issued by state or local governments to acquire equipment
and facilities. Interest income from such obligations is generally exempt from
local and state taxes in the state of issuance. "Participations" in such leases
are undivided interests in a portion of the total obligation. Participations
entitle their holders to receive a pro rata share of all payments under the
lease. The obligation of the issuer to meet its obligations under such leases is
often subject to the appropriation by the appropriate legislative body, on an
annual or other basis, of funds for the payment of the obligations. Investments
in municipal leases are thus subject to the risk that the legislative body will
not make the necessary appropriation and the issuer will not otherwise be
willing or able to meet its obligation. Certain municipal lease obligations are
illiquid.
WHEN-ISSUED SECURITIES. New issues of Municipal Securities are sometimes
offered on a "when-issued" basis, that is, delivery and payment for the
securities normally take place within a specified number of days after the date
of the Fund's commitment and are subject to certain conditions such as the
issuance of satisfactory legal opinions. The Fund may also purchase securities
on a when-issued basis pursuant to refunding contracts in connection with the
refinancing of an issuer's outstanding indebtedness. Refunding contracts
generally require the issuer to sell and the Fund to buy such securities on a
settlement
4
<PAGE> 52
date that could be several months or several years in the future. The Fund may
also purchase instruments that give the Fund the option to purchase a Municipal
Security when and if issued.
The Fund will make commitments to purchase when-issued securities only with
the intention of actually acquiring the securities, but may sell such securities
before the settlement date if it is deemed advisable as a matter of investment
strategy. The payment obligation and the interest rate that will be received on
the securities are fixed at the time the Fund enters into the purchase
commitment. When the Fund commits to purchase a security on a when-issued basis
it records the transaction and reflects the value of the security in determining
its net asset value. Securities purchased on a when-issued basis and the
securities held by the Fund are subject to changes in value based upon the
perception of the creditworthiness of the issuer and changes in the level of
interest rates (i.e. appreciation when interest rates decline and depreciation
when interest rates rise). Therefore, to the extent that the Fund remains
substantially fully invested at the same time that it has purchased securities
on a when-issued basis, there will be greater fluctuations in the Fund's net
asset value than if it set aside cash to pay for when-issued securities.
REDEMPTION, DEMAND AND PUT FEATURES AND PUT OPTIONS. Issuers of Municipal
Securities reserve the right to call (redeem) the bond. If an issuer redeems
securities held by the Fund during a time of declining interest rates, the Fund
may not be able to reinvest the proceeds in securities providing the same
investment return as the securities redeemed. Also, some bonds may have "put" or
"demand" features that allow early redemption by the bondholder. Longer term
fixed-rate bonds may give the holder a right to request redemption at certain
times (often annually after the lapse of an intermediate term). These bonds are
more defensive than conventional long term bonds because they may protect to
some degree against a rise in interest rates.
LIQUIDITY AND PROTECTIVE PUT OPTIONS. The Fund may also enter into a
separate agreement with the seller of a security or some other person granting
the Fund the right to put the security to the seller thereof or the other person
at an agreed upon price. Such agreements are subject to the risk of default by
the other party, although the Fund intends to limit this type of transaction to
institutions (such as banks or securities dealers) which the Adviser believes
present minimal credit risks. The Fund would engage in this type of transaction
to facilitate portfolio liquidity or (if the seller so agrees) to hedge against
rising interest rates. There is no assurance that this kind of put option will
be available to the Fund or that selling institutions will be willing to permit
the Fund to exercise a put to hedge against rising interest rates. The Fund does
not expect to assign any value to any separate put option which may be acquired
to facilitate portfolio liquidity, inasmuch as the value (if any) of the put
will be reflected in the value assigned to the associated security; any put
acquired for hedging purposes would be valued in good faith under methods or
procedures established by the Trustees of the Fund after consideration of all
relevant factors, including its expiration date, the price volatility of the
associated security, the difference between the market price of the associated
security and the exercise price of the put, the creditworthiness of the issuer
of the put and the market prices of comparable put options. Interest income
generated by certain bonds having put or demand features may be taxable.
ILLIQUID OBLIGATIONS. At times, a substantial portion of the Fund's assets
may be invested in securities as to which the Fund, by itself or together with
other accounts managed by the Adviser and its affiliates, holds a major portion
or all of such securities. Under adverse market or economic conditions or in the
event of adverse changes in the financial condition of the issuer, the Fund
could find it more difficult to sell such securities when the Adviser believes
it advisable to do so or may be able to sell such securities only at prices
lower than if such securities were more widely held. Under such circumstances,
it may also be more difficult to determine the fair value of such securities for
purposes of computing the Fund's net asset value.
The secondary market for some Municipal Securities issued within a state
(including issues which are privately placed with the Fund) is less liquid than
that for taxable debt obligations or other more widely traded Municipal
Securities. No established resale market exists for certain of the Municipal
Securities in which the Fund may invest. The market for obligations rated below
investment grade is also likely to be
5
<PAGE> 53
less liquid than the market for higher rated obligations. As a result, the Fund
may be unable to dispose of these Municipal Securities at times when it would
otherwise wish to do so at the prices at which they are valued.
ZERO-COUPON BONDS. The Fund may invest in zero-coupon bonds, which are
issued at a significant discount from face value and pay interest only at
maturity rather than at intervals during the life of the security. The values of
zero-coupon bonds are subject to greater fluctuation in response to changes in
market interest rates than bonds that pay interest currently.
INVERSE FLOATERS. The Fund may invest in inverse floaters, also called
residual interest bonds, whose interest rates bear an inverse relationship to
the interest rate on another security or the value of an index. Because changes
in the interest rate on the other security or index inversely affect the
residual interest paid on the inverse floater, the value of an inverse floater
is generally more volatile than that of a fixed rate bond. Inverse floaters tend
to underperform the market for fixed rate bonds in a rising interest rate
environment, but tend to outperform the market for fixed rate bonds when
interest rates decline. Although generally volatile, inverse floaters typically
offer the potential for yields exceeding the yields available on fixed rate
bonds with comparable credit quality, coupon, call provisions, and maturity.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. A change in the level
of interest rates may affect the value of the securities held by the Fund (or of
securities that the Fund expects to purchase). All futures contracts entered
into by the Fund are traded on exchanges or boards of trade that are licensed
and regulated by the Commodity Futures Trading Commission ("CFTC") and must be
executed through a futures commission merchant or brokerage firm which is a
member of the relevant exchange. The Fund will be required, in connection with
transactions in futures contracts, to make margin deposits, which will be held
by the Fund's custodian for the benefit of the futures commission merchant
through whom the Fund engages in such futures and options transactions.
Some futures contracts and options thereon may become illiquid under
adverse market conditions. In addition, during periods of market volatility, a
commodity exchange may suspend or limit transactions in an exchange-traded
instrument, which may make the instrument temporarily illiquid and difficult to
price.
Commodity exchanges may also establish daily limits on the amount that the
price of a futures contract or futures option can vary from the previous day's
settlement price. Once the daily limit is reached, no trades may be made that
day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.
The Fund will engage in futures and related options transactions for bona
fide hedging purposes or non-hedging purposes as defined in or permitted by CFTC
regulations. The Fund will determine that the price fluctuations in the futures
contracts used for hedging purposes are substantially related to price
fluctuations in securities held by the Fund or which it expects to purchase. The
Fund will engage in transactions in futures and related options contracts only
to the extent such transactions are consistent with the requirements of the Code
for maintaining its qualification as a RIC for federal income tax purposes.
6
<PAGE> 54
INVESTMENT RESTRICTIONS
The following investment restrictions of the Fund are designated as
fundamental policies and as such cannot be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities, which as used
in the Prospectus and this SAI means the lesser of (a) 67% or more of the shares
of the Fund present or represented by proxy at a meeting if the holders of more
than 50% of the outstanding shares are present or represented at the meeting or
(b) more than 50% of outstanding shares of the Fund. Except with respect to
borrowings, all percentage limitations set forth below apply immediately after a
purchase or initial investment and no subsequent change in any applicable
percentage resulting from market fluctuations require elimination of any
security from the portfolio. Subsequent to the issuance of Municipal Preferred,
the following investment restrictions may not be changed without the approval of
a majority of the outstanding Common Shares and of Municipal Preferred shares
(and any other Preferred Shares that may be issued in the future), voting
together as a class, and the approval of a majority of the outstanding shares of
Municipal Preferred (and any other Preferred Shares that may be issued in the
future), voting separately as a class. All other investment policies and
practices described in the Prospectus or in this SAI are not fundamental and may
be changed without shareholder approval. The Fund will not:
(1) Issue senior securities, as defined in the 1940 Act, other than
(i) preferred shares which immediately after issuance will have asset
coverage of at least 200%, (ii) the borrowings described under subparagraph
3 below or (iii) transactions involving futures contracts or the writing of
options within the limits described in the Registration Statement;
(2) Make short sales of securities or purchase any securities on
margin (except for such short term credits as are necessary for the
clearance of transactions), or write or purchase put or call options,
except to the extent that the purchase of a stand-by commitment may be
considered the purchase of a put, and except for transactions involving
options within the limits described in the Registration Statement;
(3) Borrow money, except for temporary or emergency purposes or for
repurchase of its shares, and then only in an amount not exceeding
one-third of the value of the Fund's total assets including the amount
borrowed; however, the Fund will not purchase any securities for its
portfolio at any time when the borrowings exceed 5% of its total assets
(taken at value);
(4) Underwrite any issue of securities, except to the extent that the
purchase of municipal securities in accordance with its investment
objective, policies and limitations may be deemed to be an underwriting;
(5) Invest more than 25% of its total assets in securities of issuers
in any one industry; provided, however, that such limitation shall not be
applicable to municipal securities other than those municipal securities
backed only by the assets and revenues of non-governmental issuers, nor
shall it apply to municipal securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities;
(6) Purchase or sell real estate, but this shall not prevent the Fund
from investing in municipal securities secured by real estate or interests
therein;
(7) Purchase or sell commodities or commodities contracts, except for
transactions involving futures contracts or options on such contracts
within the limits described in the Registration Statement;
(8) Make loans, other than by entering into repurchase agreements and
through the purchase of municipal securities or temporary investments in
accordance with its investment objective, policies and limitations;
(9) Invest in securities other than municipal securities and
temporary investments as those terms are defined in the Registration
Statement;
7
<PAGE> 55
(10) Invest more than 5% of its total assets in securities of any one
issuer, except that this limitation shall not apply to securities of the
United States government, its agencies and instrumentalities and except
that with respect to 50% of the Fund's total assets the Fund may invest up
to 25% of its total assets in securities of any one issuer; or
(11) Invest more than 10% of its total assets in repurchase agreements
maturing in more than seven days.
For purposes of applying the limitation set forth in subparagraph (10)
above, an issuer shall be deemed a separate issuer when its assets and revenues
are separate from other governmental entities and its securities are backed only
by its assets and revenues. Similarly, in the case of a non-governmental issuer,
such as an industrial corporation or a privately owned or operated hospital, if
the security is backed only by the assets and revenues of the non-governmental
issuer then such non-governmental issuer would be deemed to be the sole issuer.
Where a security is also backed by the enforceable obligations of a superior
governmental entity, it shall be included in the computation of securities owned
that are issued by such superior governmental entity. If, however, a security is
guaranteed by a governmental entity or some other entity, as in the case of a
bank guarantee or letter of credit, such a guarantee or letter of credit would
be considered a separate security and would be treated as an issue of such
government, other entity or bank.
Whenever an investment policy or investment restriction set forth in the
Prospectus or this SAI states a maximum percentage of assets that may be
invested in any security or other asset or describes a policy regarding quality
standards, such percentage limitation or standard shall be determined
immediately after and as a result of the Fund's acquisition of such security or
asset. Accordingly, any later increase or decrease resulting from a change in
values, assets or other circumstances will not compel the Fund to dispose of
such security or other asset. Notwithstanding the foregoing, the Fund must
always be in compliance with the borrowing policies set forth above.
8
<PAGE> 56
TRUSTEES AND OFFICERS
The Trustees and Executive Officers of the Fund and their principal
occupations during the last five years are set forth below.
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS DURING
NAME, ADDRESS AND AGE THE FUND THE PAST FIVE YEARS
- --------------------- -------------- ----------------------------------------------
<S> <C> <C>
James E. Akins Trustee Consultant on International, Political and
2904 Garfield Terrace, N.W. Economic Affairs; formerly a career United
Washington, DC 20008 States Foreign Service Officer; Energy Advisor
Date of birth: 10/15/26 for the White House; United States Ambassador
to Saudi Arabia.
James R. Edgar Trustee Distinguished Fellow, University of Illinois
1007 W. Nevada Institute of Government and Public Affairs;
Urbana, IL 61801 Director, Kemper Insurance Companies (not
Date of birth: 7/22/46 affiliated with the Kemper Funds); formerly,
Governor, State of Illinois.
Arthur R. Gottschalk Trustee Retired; formerly, President, Illinois
10642 Brookridge Drive Manufacturers Association; Trustee, Illinois
Frankfort, IL Masonic Medical Center; formerly, Illinois
Date of birth: 2/13/25 State Senator; formerly, Vice President, The
Reuben H. Donnelley Corporation; formerly,
attorney.
Frederick T. Kelsey Trustee Retired; formerly, consultant to Goldman Sachs
4010 Arbor Lane & Co.; formerly, President, Treasurer and
Unit 102 Trustee of Institutional Liquid Assets and its
Northfield, IL 60093 affiliated mutual funds; Trustee of the
Date of birth: 4/25/27 Northern Institutional Funds; formerly Trustee
of the Pilot Funds.
*Thomas W. Littauer Trustee and Managing Director, Scudder Kemper Investments,
Two International Place Vice President Inc.; formerly, Head of Broker Dealer Division
Boston, MA 02110 of an unaffiliated investment management firm
Date of birth: 4/26/55 during 1997; prior thereto, President of
Client Management Services of an unaffiliated
investment management firm from 1991 to 1996.
Fred B. Renwick Trustee Professor of Finance, New York University,
3 Hanover Square Stern School of Business; Director, the
Suite 20H Wartburg Home Foundation; Chairman, Investment
New York, NY 10004 Committee of Morehouse College Board of
Date of birth: 2/1/30 Trustees; Director, American Bible Society
Investment Committee; formerly, member of the
Investment Committee of Atlanta University
Board of Trustees; formerly, Director of Board
of Pensions Evangelical Lutheran Church of
America.
John G. Weithers Trustee Retired; formerly, Chairman of the Board and
311 Springlake Chief Executive Officer, Chicago Stock
Hinsdale, IL 60521 Exchange; Director, Federal Life Insurance
Date of birth: 8/8/33 Company; President of the Members of the
Corporation and Trustee, DePaul University.
Mark S. Casady President Managing Director, Scudder Kemper Investments,
Two International Place Inc.
Boston, MA 02110
Date of birth: 9/21/60
</TABLE>
9
<PAGE> 57
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS DURING
NAME, ADDRESS AND AGE THE FUND THE PAST FIVE YEARS
- --------------------- -------------- ----------------------------------------------
<S> <C> <C>
Philip J. Collora Vice President Senior Vice President, Scudder Kemper
222 South Riverside Plaza and Secretary Investments, Inc.
Chicago, IL 60606
Date of birth: 11/15/45
Philip G. Condon Vice President Senior Vice President, Scudder Kemper
Two International Plaza Investments, Inc.
Boston, Ma 02110
Date of birth: 8/15/60
John R. Hebble Treasurer Senior Vice President, Scudder Kemper
222 South Riverside Plaza, Investments, Inc.
Chicago, IL 60606
Date of birth: 6/27/59
Maureen E. Kane Assistant Vice President, Scudder Kemper Investments,
345 Park Avenue Secretary Inc; formerly, Assistant Vice President of an
New York, NY 10154 unaffiliated investment management firm;
Date of birth: 2/14/62 Associate Staff Attorney of an unaffiliated
investment management firm; Associate, Peabody
& Arnold (law firm).
Brenda Lyons Assistant Senior Vice President, Scudder Kemper
Two International Plaza Treasurer Investments, Inc.
Boston, MA 02110
Date of birth: 2/21/63
Ann M. McCreary Vice President Managing Director, Scudder Kemper Investments,
345 Park Avenue Inc.
New York, NY 10154
Date of birth: 11/6/56
Caroline Pearson Assistant Senior Vice President, Scudder Kemper
Two International Plaza Secretary Investments, Inc.; formerly, Associate,
Boston, MA 02110 Dechert Price & Rhoads (law firm) 1989 to
Date of birth: 4/1/62 1997.
Robert C. Peck, Jr. Vice President Managing Director, Scudder Kemper Investments,
222 South Riverside Plaza, Inc.; formerly, Executive Vice President, Van
Chicago, IL 60606 Kampen American Capital, Inc.; Senior Vice
Date of birth: 10/01/46 President, Manufacturers Hanover Investment
Corporation.
Kathryn L. Quirk Vice President Managing Director, Scudder Kemper Investments,
345 Park Avenue Inc.
New York, NY 10154
Date of birth: 12/03/52
Rebecca L. Wilson Vice President Vice President, Scudder Kemper Investments,
Two International Plaza Inc.
Boston, MA 02110
Date of birth: 2/23/62
Linda J. Wondrack Vice President Senior Vice President, Scudder Kemper
Two International Plaza Investments, Inc.
Boston, Ma 02110
Date of birth: 12/03/52
</TABLE>
The Board has an audit and governance committee that is composed of Messrs.
Akins, Edgar, Gottschalk, Kelsey, Renwick, and Weithers. The Committee makes
recommendations regarding the
10
<PAGE> 58
selection of independent auditors for the Fund, confers with the independent
auditors regarding the Fund's financial statements, the results of audits and
related matters, seeks and reviews nominees for Board membership and performs
such other tasks as the Board assigns.
COMPENSATION OF TRUSTEES
The Trustees and Officers who are "interested persons" as designated above
receive no compensation from the Fund. The table below shows actual amounts paid
or accrued to those Trustees who are not designated "interested persons" for the
fiscal year ended November 30, 1998.
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION FROM
COMPENSATION FUND AND FUND COMPLEX
NAME FROM FUND PAID TO TRUSTEES(2)
- ---- ------------ -----------------------
<S> <C> <C>
James E. Akins............................................ $2,600 $140,800
James E. Edgar............................................ N/A N/A
Arthur R. Gottschalk(1)................................... $2,700 $146,300
Frederick T. Kelsey....................................... $2,600 $141,300
Fred B. Renwick........................................... $2,600 $141,300
John G. Weithers.......................................... $2,700 $146,300
</TABLE>
- ---------------
(1) Includes deferred fees. Pursuant to a deferred compensation agreement with
the Fund, deferred amounts accrued interest monthly at a rate approximate to
the yield of Zurich Money Funds -- Zurich Money Market Fund. Total deferred
fees (including interest thereon) paid from the Fund was $13,600 for Mr.
Gottschalk.
(2) Includes compensation for service on the Boards of 15 Kemper Funds with 50
fund portfolios. Each Trustee currently serves as Trustee of 16 Kemper Funds
with 56 fund portfolios.
OWNERSHIP OF FUND SHARES
As of August 31, 1999, the Trustees and Officers of the Fund as a group
owned less than 1% of the outstanding shares of the Fund.
As of August 31, 1999, no persons owned, beneficially or of record, more
than 5% of the outstanding shares of the Fund.
11
<PAGE> 59
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
Scudder Kemper Investments, Inc., the global investment management business
of Zurich Financial Services Group, is one of the largest and most experienced
investment management organizations in the world, managing more than $290
billion in assets, as of June 30, 1999, for institutional and corporate clients,
retirement and pension plans, insurance companies, mutual fund investors, and
individuals. Scudder Kemper offers a full range of investment counsel and asset
management capabilities, based on a combination of proprietary research and
disciplined, long-term investment strategies.
Headquartered in Zurich, Switzerland, Zurich Financial Services Group is
one of the global leaders in the financial services industry, providing its
customers with products and solutions in the area of financial protection and
asset accumulation. The Group has four core businesses: non-life and life
insurance, reinsurance and asset management.
The Advisory Agreement provides that the Adviser will provide portfolio
management services, place portfolio transactions in accordance with policies
expressed in the Fund's registration statement, pay the Fund's office rent, and
render significant administrative services on behalf of the Fund (not otherwise
provided by third parties) necessary for the Fund's operating as a closed-end
investment company, including, but not limited to, preparing reports to and
meeting materials for the Fund's Board of Trustees and reports and notices to
Fund shareholders; supervising, negotiating contractual arrangements with, to
the extent appropriate, and monitoring the performance of various third-party
and affiliated service providers to the Fund (such as the Fund's transfer and
pricing agents, custodian, accountants and others) and other persons in any
capacity deemed necessary or desirable to Fund operations; preparing and making
filings with the SEC and other regulatory and self-regulatory organizations,
including but not limited to, preliminary and definitive proxy materials,
post-effective amendments to the Registration Statement and semi-annual reports
on Form N-SAR; overseeing the tabulation of proxies by the Fund's transfer
agent; assisting in the preparation and filing of the Fund's federal, state and
local tax returns; preparing and filing the Fund's federal excise tax returns
pursuant to Section 4982 of the Internal Revenue Code of 1986, as amended;
providing assistance with investor and public relations matters; monitoring the
valuation of portfolio securities and the calculation of net asset value;
monitoring the registration of shares of the Fund under applicable federal and
state securities laws; maintaining or causing to be maintained for the Fund all
books, records and reports and any other information required under the 1940
Act, to the extent such books, records and reports and other information are not
maintained by the Fund's custodian or other agents of the Fund; assisting in
establishing accounting policies of the Fund; assisting in the resolution of
accounting issues that may arise with respect to the Fund's operations and
consulting with the Fund's independent accountants, legal counsel and other
agents as necessary in connection therewith; establishing and monitoring the
Fund's operating expense budgets; reviewing the Fund's bills; processing the
payment of bills that have been approved by an authorized person; assisting the
Fund in determining the amount of dividends and distributions available to be
paid by the Fund to its shareholders, preparing and arranging for the printing
of dividend notices to shareholders, and providing the transfer and dividend
paying agent, the custodian, and the accounting agent with such information as
is required for such parties to effect the payment of dividends and
distributions; and otherwise assisting the Fund in the conduct of its business,
subject to the direction and control of the Fund's Board of Trustees.
Under the Advisory Agreement, which was last approved by the Board of
Trustees on July 17, 1998 and by the shareholders of the Fund on December 17,
1998, the Fund is responsible for other expenses, including organizational
expenses (including out-of-pocket expenses, but not including the Adviser's
overhead or employee costs); brokers' commissions or other costs of acquiring or
disposing of any portfolio securities of the Fund; legal, auditing and
accounting expenses; payment for portfolio pricing or valuation services to
pricing agents, accountants, bankers and other specialists, if any; taxes and
governmental fees; the fees and expenses of the Fund's transfer agent; expenses
of preparing share certificates and any other expenses, including clerical
expenses, of issuance, offering, distribution, sale, redemption or repurchase of
shares; the expenses of and fees for registering or qualifying securities for
sale; the fees and expenses of
12
<PAGE> 60
those Trustees who are not "interested persons" of the Fund (as defined in the
1940 Act); the cost of printing and distributing reports, notices and dividends
to current shareholders; and the fees and expenses of the Fund's custodians,
subcustodians, dividend disbursing agents and registrars. The Fund may arrange
to have third parties assume all or part of the expenses of sale, underwriting
and distribution of shares of the Fund. The Fund is also responsible for
expenses of shareholders' and other meetings and its expenses incurred in
connection with litigation and the legal obligation it may have to indemnify
officers and Trustees of the Fund with respect thereto. The Fund is also
responsible for the maintenance of books and records which are required to be
maintained by the Fund's custodian or other agents of the Fund; telephone,
telex, facsimile, postage and other communications expenses; any fees, dues and
expenses incurred by the Fund in connection with membership in investment
company trade organizations; expenses of printing and mailing prospectuses and
statements of additional information of the Fund and supplements thereto to
current shareholders; costs of stationery; fees payable to the Adviser and to
any other Fund advisors or consultants; expenses relating to investor and public
relations; interest charges, bond premiums and other insurance expense; freight,
insurance and other charges in connection with the shipment of the Fund's
portfolio securities; and other expenses.
The Adviser is responsible for the payment of the compensation and expenses
of all Trustees, officers and executive employees of the Fund (including the
Fund's share of payroll taxes) affiliated with the Adviser and making available,
without expense to the Fund, the services of such Trustees, officers and
employees as may duly be elected officers of the Fund, subject to their
individual consent to serve and to any limitations imposed by law. The Fund is
responsible for the fees and expenses (specifically including travel expenses
relating to Fund business) of Trustees not affiliated with the Adviser
("Non-Interested Trustees"). Under the Advisory Agreement, the Adviser also pays
the Fund's share of payroll taxes. During the Fund's most recent fiscal year, no
compensation, direct or otherwise (other than through fees paid to the Adviser),
was paid or became payable by the Fund to any of its officers or Trustees who
were affiliated with the Adviser.
In return for the services provided by the Adviser as investment manager
and the expenses it assumes under the Advisory Agreement, the Fund pays the
Adviser a management fee computed at an annual rate of 0.60% of the Fund's
average weekly net assets. The Fund paid the Adviser $789,000, $772,000 and
$759,000 under the Advisory Agreement for the fiscal periods ending November 30,
1998, 1997 and 1996, respectively.
The Advisory Agreement further provides that the Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund in connection with matters to which such agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of the Adviser in the performance of its duties or from reckless disregard
by the Adviser of its obligations and duties under such agreement. The Advisory
Agreement also provides that purchase and sale opportunities, which are suitable
for more than one client of the Adviser, will be allocated by the Adviser in an
equitable manner. Lastly, the Advisory Agreement contains a provision stating
that it supersedes all prior agreements.
The Advisory Agreement may be terminated without penalty upon sixty (60)
days' written notice by either party. The Fund may agree to terminate its
Advisory Agreement either by the vote of a majority of the outstanding voting
securities of the Fund, or by a vote of the Board. The Advisory Agreement may
also be terminated at any time without penalty by the vote of a majority of the
outstanding voting securities of the Fund or by a vote of the Board if a court
establishes that the Adviser or any of its officers or directors has taken any
action resulting in a breach of the Adviser's covenants under the Advisory
Agreement. As stated above, the Advisory Agreement automatically terminates in
the event of its assignment.
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The Fund's securities and cash are held under a custodian agreement by
State Street Bank and Trust Company ("State Street"), whose principal place of
business is 225 Franklin Street, Boston,
13
<PAGE> 61
Massachusetts 02110. Investors Fiduciary Trust Company ("IFTC"), whose principal
place of business is 127 West 10th Street, Kansas City, Missouri 64105, serves
as transfer agent, registrar and dividend disbursing agent for the Fund's common
shares. Pursuant to a services agreement with IFTC, Kemper Service Company, an
affiliate of the Adviser, serves as Shareholder Service Agent for the Fund and,
as such, performs all of IFTC's duties as transfer agent and dividend-paying
agent. The Depository Trust Company ("DTC") will act as Securities Depository
for the Municipal Preferred shares. Bankers Trust Company will act as transfer
agent, registrar, dividend disbursing agent, and redemption agent for the
Municipal Preferred shares.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for decisions to buy and sell securities and
other portfolio holdings for the Fund, 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 Fund, the Adviser is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Adviser 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 Adviser, having in mind the Fund'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 Adviser generally seeks
reasonably competitive spreads or commissions, the Fund 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
Adviser will consider research and investment services provided by brokers and
dealers who effect or are parties to portfolio transactions with the Fund, the
Adviser or the Adviser'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 Adviser in connection with
all of its investment activities, and some of such services obtained in
connection with the execution of transactions for the Fund 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 Adviser in providing
investment management for the Fund. 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 Fund will not be reduced because the Adviser and/or other clients
receive such services. The allocation of orders and the commission rates paid by
the Fund 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 Adviser may cause the Fund to pay a broker-dealer
which provides "brokerage and research services" (as defined in the 1934 Act) to
the Adviser, an amount of disclosed commission for effecting a securities
transaction for the Fund in excess of the commission which another broker-dealer
would have charged for effecting that transaction.
The Fund paid no brokerage commissions during the fiscal years ended
November 30, 1998, 1997 and 1996, as all portfolio transactions were effected on
a principal basis. The rates of portfolio turnover for
14
<PAGE> 62
each of the fiscal years ended November 30, 1998, 1997 and 1996 were
approximately 22%, 13% and 31%, respectively.
NET ASSET VALUE
Net asset value of the Fund will be determined as of the close of regular
trading on the New York Stock Exchange ("NYSE") (generally 4:00 p.m. Eastern
time) on the last Business Day of each week (generally Friday), and at such
other times as the Fund may authorize. The net asset value of the Fund equals
the value of the Fund's assets less the Fund's liabilities. Portfolio securities
for which market quotations are readily available are valued at current market
value. Short-term investments maturing in 60 days or less are valued at
amortized cost when the Adviser determines, pursuant to procedures adopted by
the Board of Trustees, that such cost approximates current market value. All
other securities and assets are valued at their fair value following procedures
adopted by the Board of Trustees.
In determining net asset value for the Fund, the Fund'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. The Pricing Service may employ electronic data
processing techniques or a matrix system, or both, to determine valuations.
Securities for which quotations are not readily available shall be valued at
fair value as determined by the Pricing Service using methods which include
consideration of 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. In the event the Pricing
Service is unable to value a security, the security shall be valued at the lower
of two dealer bids, one of which shall be in writing, obtained by the Fund from
nationally recognized market makers who are members of the National Association
of Securities Dealers, Inc. Futures contracts and options are valued at the most
recent traded price, as of the valuation time, or if market quotations are not
readily available, are valued at fair value on a consistent basis using methods
determined in good faith by the Trustees.
THE AUCTION
GENERAL
The Certificate of Designation for Preferred Shares of the Fund, adopted by
the Board of Trustees (the "Certificate"), provides 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 Certificate 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
Certificate.
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 NYSE 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 Fund
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
15
<PAGE> 63
such shares, (vii) "Existing Holder" means a Broker-Dealer (or any such other
Person as may be permitted by the Fund) 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 Fund) that is not an Existing Holder of such shares or that is an Existing
Holder of such shares that wishes to become the Existing Holder of additional
such shares, (xi) "Rate Period" means the Initial Rate Period of such shares and
any Subsequent Rate Period, including any Special Rate Period, of such shares,
(xii) "Subsequent Rate Period" means any period from and including the first day
following the Initial Rate Period of such shares to but excluding the next
Dividend Payment Date for such shares and any period thereafter from and
including one Dividend Payment Date for such shares to but excluding the next
succeeding Dividend Payment Date for such shares; provided, however, that if any
Subsequent Rate Period is also a Special Rate Period, such term shall mean the
period commencing on the first day of such Special Rate Period and ending on the
last day of the last Dividend Period thereof, (xiii) "Minimum Rate Period" means
any Rate Period consisting of 7 Rate Period Days and (xiv) "Special Rate Period"
means any Subsequent Rate Period commencing on the date designated by the Fund,
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 Fund will enter into an agreement (the
"Auction Agency Agreement") with Bankers Trust Company (together with any
successor bank or trust company or other entity entering into a similar
agreement with the Fund, 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 may enter into similar agreements (collectively,
the "Broker-Dealer Agreements") with one or more additional broker-dealers
(collectively, the "Broker-Dealers") selected by the Fund, which provide for the
participation of Broker-Dealers in Auctions. See "-- Broker-Dealers" below.
SECURITIES DEPOSITORY. DTC (together with any successor securities
depository selected by the Fund, the "Securities Depository") will act as the
Securities Depository for the Agent Members with respect to shares of Municipal
Preferred. One certificate for the series of shares of Municipal Preferred will
be registered in the name of Cede & Co. ("Cede"), as nominee of the Securities
Depository. Each certificate will bear a legend to the effect that each
certificate is issued subject to the provisions restricting transfers of shares
of Municipal Preferred contained in the Certificate. The Fund 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 Fund'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.
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<PAGE> 64
AUCTION DATES; ADVANCE NOTICE OF ALLOCATION OF TAXABLE INCOME
The first Auction for shares of Series T Municipal Preferred will be held
on September 28, 1999, the Business Day preceding the Dividend Payment Date for
the Initial Rate Period of Series T Municipal Preferred. See "Description of
Municipal Preferred -- Dividends." Thereafter, Auctions will normally be held:
(i) every Tuesday, and each Subsequent Rate Period will normally begin on the
following Wednesday for Series T Municipal Preferred; 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 Fund 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 Fund 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 Fund, 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
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<PAGE> 65
with the Auction Agent or on whose behalf an Order is placed with the Auction
Agent shall likewise be referred to herein as a "Bidder" and collectively as
"Bidders."
A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of Municipal Preferred then held by such
Beneficial Owner. A Bid placed by a Beneficial Owner specifying a rate higher
than the Applicable Rate determined in the Auction shall constitute an
irrevocable offer to sell the shares subject thereto. A Beneficial Owner that
submits a Bid to its Broker-Dealer having a rate higher than the Maximum Rate on
the Auction Date thereof will be treated as having submitted a Sell Order to its
Broker-Dealer. A Beneficial Owner that fails to submit to its Broker-Dealer
prior to the Submission Deadline for shares of Municipal Preferred an Order or
Orders covering all the outstanding shares of Municipal Preferred held by such
Beneficial Owner will be deemed to have submitted a Hold Order to its
Broker-Dealer covering the number of outstanding shares of Municipal Preferred
held by such Beneficial Owner and not subject to Orders submitted to its
Broker-Dealer; provided, however, that if a Beneficial Owner fails to submit to
its Broker-Dealer prior to the Submission Deadline for shares of Municipal
Preferred an Order or Orders covering all of the outstanding shares of Municipal
Preferred held by such Beneficial Owner for an Auction relating to a Special
Rate Period consisting of more than 28 Rate Period Days, such Beneficial Owner
will be deemed to have submitted a Sell Order to its Broker-Dealer covering the
number of outstanding shares of Municipal Preferred held by such Beneficial
Owner and not subject to Orders submitted to its Broker-Dealer. A Sell Order
shall constitute an irrevocable offer to sell the shares of Municipal Preferred
subject thereto at a price per share equal to $25,000. A Beneficial Owner of
shares of Municipal Preferred that offers to become the Beneficial Owner of
additional shares of Municipal Preferred is, for purposes of such offer, a
Potential Beneficial Owner.
A Potential Beneficial Owner of shares of Municipal Preferred may submit to
its Broker-Dealer Bids in which it offers to purchase shares of Municipal
Preferred if the Applicable Rate for the next Rate Period is not less than the
rate specified in such Bid. A Bid placed by a Potential Beneficial Owner
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 Fund) 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 Fund 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 Fund nor an affiliate may submit an Order in any Auction,
except that any Broker-Dealer that is an affiliate of the Fund 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
18
<PAGE> 66
designated themselves as Existing Holders or Potential Holders in respect of
customer Orders will be required to make appropriate pro rata allocations among
their respective customers. Each purchase or sale shall be made for settlement
on the Business Day next succeeding the Auction Date at a price per share equal
to $25,000. See "-- Notification of Results; Settlement" below.
As described above, any Bid specifying a rate higher than the Maximum Rate
(as defined below) will (i) be treated as a Sell Order if submitted by a
Beneficial Owner or an Existing Holder and (ii) not be accepted if submitted by
a Potential Beneficial Owner or a Potential Holder. Accordingly, the Auction
Procedures establish the Maximum Rate as a maximum rate per annum that can
result from an Auction. See "-- Determination of Sufficient Clearing Bids,
Winning Bid Rate and Applicable Rate" and "-- Acceptance and Rejection of
Submitted Bids and Submitted Sell Orders and Allocation of Shares" below.
As used herein, "Maximum Rate," when used with respect to shares of
Municipal Preferred on an Auction Date, means:
(i) in the case of any Auction Date which is not the Auction Date
immediately prior to the first day of any proposed Special Rate Period, the
product of (1) the Reference Rate on such Auction Date for the next Rate
Period and (2) the Rate Multiple on such Auction Date, unless such shares
have or had a Special Rate Period (other than a Special Rate Period of 28
Rate Period Days or fewer) and an Auction at which Sufficient Clearing Bids
existed has not yet occurred for a Minimum Rate Period after such Special
Rate Period, in which case the higher of:
(A) the dividend rate on such shares for the then-ending Rate
Period; and
(B) the product of (x) the higher of (I) the Reference Rate on such
Auction Date for a Rate Period equal in length to the then-ending Rate
Period, if such then-ending Rate Period was 364 Rate Period Days or
fewer, or the Treasury Note Rate on such Auction Date for a Rate Period
equal in length to the then-ending Rate Period, if such then-ending Rate
Period was more 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 64 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 S&P Kenny
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<PAGE> 67
30 day High Grade Index or any successor index (the "Kenny Index") (provided,
however, that any such successor index must be approved by Moody's (if Moody's
is then rating the shares of Municipal Preferred) and S&P (if S&P is then rating
the shares of Municipal Preferred)), made available for the Business Day
immediately preceding such date but in any event not later than 8:30 A.M.,
Eastern time, on such date by S&P J.J. Kenny Evaluation Services or any
successor thereto, based upon 30-day yield evaluations at par of short-term
bonds, the interest on which is excludable for regular Federal income tax
purposes under the Code, of "high grade" component issuers selected by S&P J.J.
Kenny Evaluation Services or any such successor from time to time in its
discretion, which component issuers shall include, without limitation, issuers
of general obligation bonds but shall exclude any bonds the interest on which
constitutes an item of tax preference under Section 57(a)(5) of the Code, or
successor provisions, for purposes of the "alternative minimum tax," divided by
(B) 1.00 minus the maximum marginal regular Federal individual income tax rate
applicable to ordinary income or the maximum marginal regular Federal corporate
income tax rate applicable to ordinary income (in each case expressed as a
decimal), whichever is greater; provided, however, that if the Kenny Index is
not made so available by 8:30 A.M., Eastern time, on such date by S&P J.J. Kenny
Evaluation Services or any successor, the Taxable Equivalent of the Short-Term
Municipal Bond Rate shall mean the quotient of (A) the per annum rate expressed
on an interest equivalent basis equal to the most recent Kenny Index so made
available for any preceding Business Day, divided by (B) 1.00 minus the maximum
marginal regular Federal individual income tax rate applicable to ordinary
income or the maximum marginal regular Federal corporate income tax rate
applicable to ordinary income (in each case expressed as a decimal), whichever
is greater.
As used herein, 'AA' Composite Commercial Paper Rate," on any date for any
Rate Period, means:
(i)(A) in the case of any Minimum Rate Period or any Special Rate
Period of fewer than 49 Rate Period Days, the interest equivalent of the
30-day rate; provided, however, that if such Rate Period is a Minimum Rate
Period and the "AA" Composite Commercial Paper Rate is being used to
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 S&P or
the equivalent of such rating by S&P or another rating agency, as made
available on a discount basis or otherwise by the Federal Reserve Bank of
New York for the Business Day 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 Fund 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 Fund 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
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<PAGE> 68
quotient (rounded upwards to the next higher one-thousandth (0.001) of 1%) of
(A) the discount rate divided by (B) the difference between (x) 1.00 and (y) a
fraction the numerator of which shall be the product of the discount rate times
the number of days in which such commercial paper matures and the denominator of
which shall be 360. As used herein, "Commercial Paper Dealers" means Lehman
Commercial Paper Incorporated, Goldman, Sachs & Co. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated and such other commercial paper dealer or dealers as
the Fund may from time to time appoint, 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 CS First
Boston and Morgan Stanley & Co. Incorporated or their respective affiliates or
successors, if such entity is a commercial paper dealer, provided that none of
such entities shall be a Commercial Paper Dealer.
As used herein, "Treasury Bill Rate," on any date for any Rate Period,
means:
(i) the bond equivalent yield, calculated in accordance with
prevailing industry convention, of the rate on the most recently auctioned
Treasury Bill with a remaining maturity closest to the length of such Rate
Period, as quoted in The Wall Street Journal on such date for the Business
Day next preceding such date; or
(ii) in the event that any such rate is not published in The Wall
Street Journal, then the bond equivalent yield, calculated in accordance
with prevailing industry convention, as calculated by reference to the
arithmetic average of the bid price quotations of the most recently
auctioned Treasury Bill with a remaining maturity closest to the length of
such Rate Period, as determined by bid price quotations as of the close of
business on the Business Day immediately preceding such date obtained from
the U.S. Government Securities Dealers to the Auction Agent.
As used herein, "Treasury Note Rate," on any date for any Rate Period,
means:
(i) the yield on the most recently auctioned Treasury Note with a
remaining maturity closest to the length of such Rate Period, as quoted in
The Wall Street Journal on such date for the Business Day next preceding
such date; or
(ii) in the event that any such rate is not published in The Wall
Street Journal, then the yield as calculated by reference to the arithmetic
average of the bid price quotations of the most recently auctioned Treasury
Note with a remaining maturity closest to the length of such Rate Period,
as determined by bid price quotations as of the close of business on the
Business Day immediately preceding such date obtained from the U.S.
Government Securities Dealers to the Auction Agent.
For purposes of the foregoing, "Treasury Bill" means a direct obligation of
the U.S. government having a maturity at the time of issuance of 364 days or
less, and "Treasury Note" means a direct obligation of the U.S. government
having a maturity at the time of issuance of five years or less but more than
364 days. If any U.S. Government Securities Dealer does not quote a rate
required to determine the Treasury Bill Rate or the Treasury Note Rate, such
rate shall be determined on the basis of the quotation or quotations furnished
by the remaining U.S. Government Securities Dealer or U.S. Government Securities
Dealers and any Substitute U.S. Government Securities Dealers selected by the
Fund 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 Fund does not select any such Substitute U.S. Government Securities
Dealer or Substitute U.S. Government Securities Dealers, by the remaining U.S.
Government Securities Dealer or U.S. Government Securities Dealers. As used
herein, "U.S. Government Securities Dealer" means Lehman Government Securities
Incorporated, Goldman, Sachs & Co., Salomon Smith Barney Inc. and Morgan
Guaranty Trust Company of New York or their respective affiliates or successors,
if such entity is a U.S. government securities dealer. As used herein,
"Substitute U.S. Government Securities Dealer" shall mean CS First Boston
Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated or their
respective affiliates or successors, if such entity is a U.S. government
securities dealer, provided however, that none of such entities shall be a U.S.
Government Securities Dealer.
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<PAGE> 69
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 Fund 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 S&P or the equivalent of such
ratings by such agencies or a substitute rating agency or substitute rating
agencies selected as provided below, (ii) if not Aa3/AA- or higher, then A3/A-
if such shares have a rating of A3 or better by Moody's and A- or better by S&P
or the equivalent of such ratings by such agencies or a substitute rating agency
or substitute rating agencies selected as provided below, (iii) if not Aa3/AA-
or higher or A3/A-, then Baa3/BBB- if such shares have a rating of Baa3 or
better by Moody's and BBB- or better by S&P or the equivalent of such ratings by
such agencies or a substitute rating agency or substitute rating agencies
selected as provided below, (iv) if not Aa3/AA- or higher, A3/A- or Baa3/BBB-,
then Ba3/BB- if such shares have a rating of Ba3 or better by Moody's and BB- or
better by S&P or the equivalent of such ratings by such agencies or a substitute
rating agency or substitute rating agencies selected as provided below, and (v)
if not Aa3/AA- or higher, A3/A-, Baa3/BBB-, or Ba3/BB-, then below Ba3/BB-;
provided, however, that if such shares are rated by only one rating agency, the
prevailing rating shall be determined without reference to the rating of any
other rating agency. The Fund will take all reasonable action necessary to
enable either S&P or Moody's to provide a rating for shares of Municipal
Preferred. If neither S&P nor Moody's shall make such a rating available,
Salomon Smith Barney Inc. or its successor shall select at least one nationally
recognized statistical rating organization (as that term is used in the rules
and regulations of the 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 Fund 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 1:00 P.M., Eastern time, on each Auction Date, or such other time
on the Auction Date specified by the Auction Agent (the "Submission Deadline"),
each Broker-Dealer will submit to the Auction Agent in writing all Orders
obtained by it for the Auction to be conducted on such Auction Date, designating
itself (unless otherwise permitted by the Fund) 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.
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<PAGE> 70
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.
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 for shares of
the series of Municipal Preferred, 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).
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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 "-- 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 Fund has notified the Auction Agent of its intent to allocate to shares of
Municipal Preferred in such Rate Period any net capital gain or other income
taxable for Federal income tax purposes ("Taxable Income"), the Applicable Rate
for shares of Municipal Preferred for such Rate Period will be (A) if the
Taxable Yield Rate (as defined below) is greater than the Benchmark Rate, then
the Benchmark Rate, or (B) if the Taxable Yield Rate is less than or equal to
the Benchmark Rate, then the rate equal to the sum of (x) the lesser of the
Kenny Index (if such Rate Period consists of fewer than 183 Rate Period Days) or
the product of the Benchmark Rate multiplied by the factor set forth in the
preceding clause (ii) and (y) the product of the maximum marginal regular
Federal individual income tax rate applicable to ordinary income or the maximum
marginal regular Federal corporate income tax applicable to ordinary income,
whichever is greater, multiplied by the Taxable Yield Rate. For purposes of the
foregoing, "Taxable Yield Rate" means the rate determined by (a) dividing the
amount of Taxable Income available for distribution per share of Municipal
Preferred by the number of days in the Dividend Period in respect of which such
Taxable Income is contemplated to be distributed, (b) multiplying the amount
determined in (a) above by 365 (in the case of a Dividend Period of 7 Rate
Period Days) or 360 (in the case of any other Dividend Period), and (c) dividing
the amount determined in (b) above by $25,000. In calculating the "AA" Composite
Commercial Paper Rate, the Treasury Bill Rate and the Treasury Note Rate for
such purpose, the rates used will be the rates or yields specified in the
applicable definitions of "AA" Composite Commercial Paper Rate, Treasury Bill
Rate and Treasury Note Rate set forth under "-- 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
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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):
(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
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described in clause (e) of the second preceding paragraph, any Potential Holder
would be entitled or required to purchase less than a whole share of Municipal
Preferred, the Auction Agent will, in such manner as, in its sole discretion, it
will determine, allocate shares of Municipal Preferred for purchase among
Potential Holders so that only whole shares of Municipal Preferred are purchased
by any such Potential Holder, even if such allocation results in one or more of
such Potential Holders not purchasing shares of Municipal Preferred.
NOTIFICATION OF RESULTS; SETTLEMENT
The Auction Agent will be required to advise each Broker-Dealer that
submitted an Order of the Applicable Rate for the next Rate Period and, if the
Order was a Bid or Sell Order, whether such Bid or Sell Order was accepted or
rejected, in whole or in part, by telephone by approximately 3:00 P.M., Eastern
time, on each Auction Date. Each Broker-Dealer that submitted an Order for the
account of a customer will then be required to advise such customer of the
Applicable Rate for the next Rate Period and, if such Order was a Bid or a Sell
Order, whether such Bid or Sell Order was accepted or rejected, in whole or in
part, will be required to confirm purchases and sales with each customer
purchasing or selling shares of Municipal Preferred as a result of the Auction
and will be required to advise each customer purchasing or selling shares of
Municipal Preferred as a result of the Auction to give instructions to its Agent
Member of the Securities Depository to pay the purchase price against delivery
of such shares or to deliver such shares against payment therefor, as
appropriate. The Auction Agent will be required to record each transfer of
shares of Municipal Preferred on the registry of Existing Holders to be
maintained by the Auction Agent. See "-- General" above.
In accordance with the Securities Depository's normal procedures, on the
Business Day after the Auction Date, the transactions described above will be
executed through the Securities Depository and the accounts of the respective
Agent Members at the Securities Depository will be debited and credited and
shares delivered as necessary to effect the purchases and sales of shares of
Municipal Preferred as determined in the Auction. Purchasers will make payment
through their Agent Members in same-day funds to the Securities Depository
against delivery through their Agent Members; the Securities Depository will
make payment in accordance with its normal procedures, which now provide for
payment against delivery by their Agent Members in same-day funds. The
settlement procedures to be used with respect to Auctions for shares of
Municipal Preferred are set forth in Appendix C hereto.
If any Existing Holder selling shares of Municipal Preferred in an Auction
fails to deliver such shares, the Broker-Dealer of any person that was to have
purchased shares of Municipal Preferred in such Auction may deliver to such
person a number of whole shares of Municipal Preferred that is less than the
number of shares that otherwise was to be purchased by such person. In such
event, the number of shares of Municipal Preferred to be so delivered shall be
determined by such Broker-Dealer. Delivery of such lesser number of shares shall
constitute good delivery.
CONCERNING THE AUCTION AGENT
The Auction Agent is acting as agent for the Fund 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 Fund, the results of Auctions, notices from any
Broker-Dealer (or other Person, if permitted by the Fund) with respect to
transfers described in the Prospectus under "The Auction -- Secondary Market
Trading and Transfer of Municipal Preferred" and notices from the Fund. The
Auction Agent is not required to accept any such notice for an Auction unless it
is received by the Auction Agent by 3:00 P.M., Eastern time, on the Business Day
preceding such Auction.
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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 Fund. See
"Description of Municipal Preferred -- Voting Rights" below.
The Auction Agent may terminate the Auction Agency Agreement upon notice to
the Fund on a date no earlier than 60 days after such notice. If the Auction
Agent should resign, the Fund 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 Fund may remove the Auction
Agent provided that prior to such removal the Fund 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 Fund, 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 Fund 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 Fund 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 Fund) may submit Orders in Auctions for its own account, unless
the Fund 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 Fund may submit
Orders in Auctions, but only if such Orders are not for its own account. If a
Broker-Dealer submits an Order for its own account in any Auction, it might have
an advantage over other Bidders because it would have knowledge of all Orders
submitted by it in that Auction; such Broker-Dealer, however, would not have
knowledge of Orders submitted by other Broker-Dealers in that Auction.
The Broker-Dealers expect, but are not obligated, to maintain a secondary
trading market in shares of Municipal Preferred outside of Auctions. There can
be no assurance that a secondary trading market in shares of Municipal Preferred
will develop or, if it does develop, that it will provide owners with liquidity
of investment. The shares of Municipal Preferred will not be registered on any
stock exchange or on the National Association of Securities Dealers Automated
Quotations system.
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DESCRIPTION OF MUNICIPAL PREFERRED
The descriptions of the shares of Municipal Preferred contained in the
Certificate and this SAI do not purport to be complete and are subject to and
qualified in their entireties by reference to the Amended and Restated
Declaration of Trust (the "Declaration"). Copies of the Certificate and
Declaration are filed as exhibits to the Registration Statement of which the
Prospectus and this SAI 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 Fund.
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 Certificate 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 September 29, 1999, and thereafter on each Wednesday for the Series T
Municipal Preferred; provided, however, that (1) if the Wednesday on which
dividends would otherwise be payable as set forth above for the Series T
Municipal Preferred is not a Business Day, then dividends shall be payable
instead on the first Business Day that falls after such Wednesday and (2) the
Fund 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
Fund; 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 Fund on the Business Day next preceding such Dividend
Payment Date. Dividends in arrears for any past Dividend Period may be declared
and paid at any time, without reference to any regular Dividend Payment Date, to
the Holders of record as their names appear on the record books of the Fund on
such date, not exceeding 15 days preceding the payment date thereof, as may be
fixed by the Board of Trustees.
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The Securities Depository, in accordance with its current procedures, is
expected to credit on each Dividend Payment Date dividends received from the
Fund to the accounts of the respective Agent Members in next-day funds. Each of
the initial Broker-Dealers, however, has represented to the Fund 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 Wednesday, would be
the following Thursday if it is a Business Day.
DETERMINATION OF DIVIDEND RATE. The dividend rates on shares of Municipal
Preferred offered pursuant to the Prospectus during the period from and after
the Date of Original Issue thereof to and including the last day of the Initial
Rate Period therefor will be equal to the rate per annum set forth with respect
to such shares on the cover page of the Prospectus. For each Subsequent Rate
Period thereafter, the dividend rate on such shares will be equal to the rate
per annum that results from an Auction on the Auction Date next preceding such
Subsequent Rate Period; provided, however, if:
(i) an Auction for any Subsequent Rate Period is not held for any
reason other than as described below, the dividend rate on such shares for
such Subsequent Rate Period will be the Maximum Rate on the Auction Date
therefor;
(ii) any Failure to Deposit shall have occurred with respect to shares
of Municipal Preferred during any Rate Period thereof (other than any
Special Rate Period of more than 364 Rate Period Days or any Rate Period
succeeding any Special Rate Period of more than 364 Rate Period Days during
which a Failure to Deposit occurred that has not been cured), but, prior to
12:00 Noon, Eastern time, on the third Business Day next succeeding the
date on which such Failure to Deposit occurred, such Failure to Deposit
shall have been cured in accordance with the next succeeding paragraph and
the Fund 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 Fund, 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 (but with
the prevailing rating for shares of such series, for purposes of
determining such Maximum Rate, being deemed to be below Ba3/BB-);
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(iii) any Failure to Deposit shall have occurred with respect to
shares of Municipal Preferred during any Rate Period thereof (other than
any Special Rate Period of more than 364 Rate Period Days or any Rate
Period succeeding any Special Rate Period of more than 364 Rate Period Days
during which a Failure to Deposit occurred that has not been cured), and,
prior to 12:00 Noon, Eastern time, on the third Business Day next
succeeding the date on which such Failure to Deposit occurred, such Failure
to Deposit shall not have been cured in accordance with the next succeeding
paragraph or the Fund 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 Fund 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 Fund cures such Failure
to Deposit), in each case no later than 12:00 Noon, Eastern time, on the
fourth Business Day prior to the end of such Rate Period), and the dividend
rate for shares of Municipal Preferred for each such Subsequent Rate Period
will be a rate per annum equal to the Maximum Rate on the Auction Date for
such Subsequent Rate Period (but with the prevailing rating for such
shares, for purposes of determining such Maximum Rate, being deemed to be
below Ba3/BB-); or
(iv) any Failure to Deposit shall have occurred with respect to shares
of Municipal Preferred during a Special Rate Period thereof of more than
364 Rate Period Days, or during any Rate Period thereof succeeding any
Special Rate Period of more than 364 Rate Period Days during which a
Failure to Deposit occurred that has not been cured, and, prior to 12:00
Noon, Eastern time, on the fourth Business Day preceding the Auction Date
for the Rate Period subsequent to such Rate Period, such Failure to Deposit
shall not have been cured in accordance with the next succeeding paragraph
or, in the event Moody's is then rating such shares, the Fund 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 Fund 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 Fund cures such Failure
to Deposit), in each case no later than 12:00 Noon, Eastern time, on the
fourth Business Day prior to the end of such Rate Period), and the dividend
rate for shares of Municipal Preferred for each such Subsequent Rate Period
shall be a rate per annum equal to the Maximum Rate on the Auction Date for
such Subsequent Rate Period (but with the prevailing rating for such
shares, for purposes of determining such Maximum Rate, being deemed to be
below Ba3/BB-) (the rate per annum at which dividends are payable on shares
of Municipal Preferred for any Rate Period being herein referred to as the
"Applicable Rate" for such shares).
A Failure to Deposit with respect to shares of Municipal Preferred shall
have been cured (if such Failure to Deposit is not solely due to the willful
failure of the Fund 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 Fund 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 Fund'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.
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The Fund shall pay to the Auction Agent, not later than 12:00 Noon, Eastern
time, on the Business Day next preceding each Dividend Payment Date for shares
of Municipal Preferred, an aggregate amount of funds available on the next
Business Day in the City of New York, New York equal to the dividends to be paid
to all Holders of such shares on such Dividend Payment Date. All moneys paid to
the Auction Agent for the payment of dividends (or for payment of any Late
Charge) shall be held in trust for the payment of such dividends (and any such
Late Charge) by the Auction Agent for the benefit of the Holders specified
above. Any moneys paid to the Auction Agent in accordance with the foregoing but
not applied by the Auction Agent to the payment of dividends (and any such Late
Charge) will, to the extent permitted by law, be repaid to the Fund at the end
of 90 days from the date on which such moneys were so to have been applied.
GROSS-UP PAYMENTS. Holders of shares of Municipal Preferred shall be
entitled to receive, when, as and if declared by the Board of Trustees, out of
funds legally available therefor in accordance with the Declaration, the
Certificate 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 Fund allocates any net capital gain or other
income taxable for Federal income tax purposes to a dividend paid on shares of
Municipal Preferred without having given advance notice thereof to the Auction
Agent as described above under "The Auction -- Auction Dates; Advance Notice of
Allocation of Taxable Income" (such allocation is referred to herein as a
"Taxable Allocation") solely by reason of the fact that such allocation is made
retroactively as a result of the redemption of all or a portion of the
outstanding shares of Municipal Preferred or the liquidation of the Fund, the
Fund 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 Fund'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 Fund.
If, in the case of any Special Rate Period of more than 28 Rate Period
Days, the Fund makes a Taxable Allocation to a dividend paid on shares of
Municipal Preferred, the Fund 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 Fund'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 Fund.
The Fund shall not be required to make Gross-up Payments with respect to
any net capital gains or other taxable income determined by the Internal Revenue
Service to be allocable in a manner different from that allocated by the Fund.
A "Gross-up Payment" in respect of any dividend means payment to a holder
of 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 Fund; 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
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after giving effect thereto), an asset coverage (as defined in and determined
pursuant to the 1940 Act) of at least 200% (or such other asset coverage as may
in the future be specified in or under the 1940 Act as the minimum asset
coverage for senior securities which are shares or stock of a closed-end
investment company as a condition of declaring dividends on its common shares or
stock) after deducting the amount of such dividend, distribution or purchase
price, as the case may be.
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 Fund 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) in respect of Common Shares or any other
shares of the Fund ranking junior to or on a parity with the shares of Municipal
Preferred as to the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up, or call for redemption, redeem, purchase
or otherwise acquire for consideration any Common Shares or any other such
junior shares (except by conversion into or exchange for shares of the Fund
ranking junior to the shares of Municipal Preferred as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up), or any such parity shares (except by conversion into or exchange
for shares of the Fund 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), unless (1) full cumulative
dividends on shares of Municipal Preferred through its most recently ended
Dividend Period shall have been paid or shall have been declared and sufficient
funds for the payment thereof deposited with the Auction Agent and (2) the Fund
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 S&P is rating the shares of Municipal Preferred, the Fund
may not declare, pay or set apart for payment any dividend or other distribution
(other than a dividend or distribution paid in shares of, or in options,
warrants or rights to subscribe for or purchase, Common Shares or other shares,
if any, ranking junior to shares of Municipal Preferred as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up) in respect of Common Shares or any other shares of the Fund ranking
junior to shares of Municipal Preferred as to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up, or call for
redemption, redeem, purchase or otherwise acquire for consideration any Common
Shares or any other such junior shares (except by conversion into or exchange
for shares of the Fund 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), unless immediately after such transaction the
Discounted Value of Moody's Eligible Assets or S&P Eligible Assets, or both, as
the case may be, would at least equal the Municipal Preferred Basic Maintenance
Amount (see "-- 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 Fund 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).
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Under the Code, the Fund 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 Fund's
ability to maintain such qualification.
DESIGNATION OF SPECIAL RATE PERIODS. The Fund, 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 Fund 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 Fund 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 Fund shall
notify S&P (if S&P 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 Fund wishes to designate such Subsequent Rate Period as a
Special Rate Period and shall provide S&P (if S&P is then rating such shares)
and Moody's (if Moody's is then rating such shares) with such documents as
either may reasonably request.
In the event the Fund wishes to designate a Subsequent Rate Period as a
Special Rate Period, but the day following what would otherwise be the last day
of such a Special Rate Period is not a Wednesday that is a Business Day in the
case of shares of Series T Municipal Preferred, then the Fund 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 Tuesday that is followed by a Wednesday that is a
Business Day preceding what would otherwise be such last day, in the case of
Series T Municipal Preferred.
If the Fund 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 Fund 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 Fund 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 Fund by first-class mail, postage
prepaid, to the Holders of shares of Municipal Preferred. Each such notice shall
state (A) that the Fund 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 Fund will, by 11:00
A.M., Eastern time, on the second Business Day next preceding such date (or by
such later time or date, or both, as may be agreed to by the Auction Agent),
notify the Auction Agent of either (x) its determination, subject to certain
conditions, to exercise such option, in which case the Fund shall specify the
Special Rate Period designated, or (y) its determination not to exercise such
option.
No later than 11:00 A.M., Eastern time, on the second Business Day next
preceding the first day of any proposed Special Rate Period as to which notice
has been given as set forth in the preceding paragraph (or such later time or
date, or both, as may be agreed to by the Auction Agent), the Fund shall deliver
to the Auction Agent either:
(i) a notice ("Notice of Special Rate Period") stating (A) that the
Fund 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
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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
Auction, (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 S&P Eligible Assets (if S&P 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 Fund); or
(ii) a notice stating that the Fund 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 Fund 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 S&P is then
rating the shares of Municipal Preferred)) with respect to any designation of
any proposed Special Rate Period to the Auction Agent by 11:00 A.M., Eastern
time, on the second Business Day next preceding the first day of such proposed
Special Rate Period (or by such later time or date, or both, as may be agreed to
by the Auction Agent), the Fund 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 Fund 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 Fund, and the contents of such notice shall be binding on
the Fund. In the event the Fund delivers to the Auction Agent a notice described
in clause (ii) above, the Fund will provide Moody's (if Moody's is then rating
the shares of Municipal Preferred) and S&P (if S&P is then rating the shares of
Municipal Preferred) a copy of such notice.
VOTING RIGHTS
Holders of shares of Municipal Preferred are entitled to vote on certain
matters as described herein under "Investment Restrictions," in the Prospectus
under "Description of Municipal Preferred -- Voting Rights" and in Section 5 of
Part I of the Certificate.
In connection with the election of the Fund'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 Fund'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 Fund as so increased. The terms of office of
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the persons who are Trustees at the time of that election will continue. If the
Fund thereafter shall pay, or declare and set apart for payment, in full all
dividends payable on all outstanding Preferred Shares, including shares of
Municipal Preferred, the voting rights stated in the preceding sentence shall
cease, and the terms of office of all of the additional Trustees elected by the
holders of Preferred Shares, including shares of Municipal Preferred (but not of
the Trustees with respect to whose election the holders of Common Shares were
entitled to vote or the two Trustees the holders of Preferred Shares have the
right to elect in any event), will terminate automatically.
So long as any shares of Municipal Preferred are outstanding, the Fund 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 Fund (except that the Fund 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 Fund;
provided, however, that if Moody's or S&P is not then rating the shares of
Municipal Preferred the aggregate liquidation preference of all Preferred
Shares of the Fund outstanding after such issuance, exclusive of
accumulated and unpaid dividends, may not exceed $70,000,000; provided,
however that (i) the Fund obtains written confirmation from Moody's (if
Moody's is then rating the shares of Municipal Preferred) and S&P (if S&P
is then rating the shares of Municipal Preferred) that the issuance of any
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 S&P is rating the shares
of Municipal Preferred, the Fund may, without the vote of the Holders of
the shares of Municipal Preferred, authorize, create or issue additional
shares of Municipal Preferred or classes or series of Preferred Shares
ranking on 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 Fund notwithstanding that,
after giving effect thereto, the aggregate liquidation preference of all
Preferred Shares then outstanding would exceed $70,000,000; or
(b) amend, alter or repeal the provisions of the Certificate,
Declaration or 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 (i) none of the
actions permitted by the exception to (a) above will be deemed to affect
such preferences, rights or powers, (ii) a division of a share of Municipal
Preferred will be deemed to affect such preferences, rights or powers only
if the terms of such division adversely affect the Holders of shares of
Municipal Preferred and (iii) the authorization, creation and issuance of
classes or series of shares ranking junior to shares of Municipal Preferred
with respect to the payment of dividends and the distribution of assets
upon dissolution, liquidation or winding up of the affairs of the Fund will
be deemed to affect such preferences, rights or powers only if Moody's or
S&P is then rating the shares of Municipal Preferred and such issuance
would, at the time thereof, cause the Fund 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 Fund 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, in person or by proxy, either in writing or at a meeting, voting as a
separate class, file a voluntary application for relief under Federal
bankruptcy law or any similar application under state law for so long as
the Fund is solvent and does not foresee becoming insolvent. If any action
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 Fund 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
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the time, in person or by proxy, either in writing or at a meeting (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 Certificate or Declaration by the rating agencies in the event
the Fund receives written confirmation from Moody's or S&P, or both, as
appropriate, that any such amendment, alteration or repeal would not impair the
ratings then assigned by Moody's or S&P, as the case may be, to shares of
Municipal Preferred.
RATING AGENCY GUIDELINES
The Fund intends that, so long as shares of Municipal Preferred are
outstanding, the composition of its portfolio will reflect guidelines
established by either Moody's or S&P in connection with the Fund's receipt on
the Date of Original Issue of the shares of Municipal Preferred of ratings of
Aaa from Moody's or AAA from S&P. Moody's and S&P, 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 S&P in connection with other issuances
of 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 Fund
in order to satisfy current requirements necessary for Moody's or S&P, 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 Fund, 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 Fund pursuant to the rating agency guidelines in the event the
Fund receives written confirmation from Moody's or S&P, or both, as appropriate,
that any such change would not impair the ratings then assigned by Moody's or
S&P, as the case may be, to shares of Municipal Preferred.
For so long as any shares of Municipal Preferred are outstanding and
Moody's or S&P, or both, are rating such shares, the Fund will not, unless it
has received written confirmation from Moody's or S&P, or both, as appropriate,
that any action would not impair the ratings then assigned by such rating agency
to such shares, engage in any one or more of the following transactions (as
outlined in the next paragraph): (1) futures or options transactions, except in
accordance with the then-current guidelines of such rating agencies, (2) borrow
money, except that the Fund may, without obtaining the written confirmation
described above, borrow money for the purpose of clearing securities
transactions if (i) the Municipal Preferred Basic Maintenance Amount would
continue to be satisfied after giving effect to such borrowing and (ii) such
borrowing (A) is privately arranged with a bank or other person and is evidenced
by a promissory note or other evidence of indebtedness that is not intended to
be publicly distributed or (B) is for "temporary purposes," is evidenced by a
promissory note or other evidence of indebtedness and is an amount not exceeding
5 per centum of the value of the total assets of the Fund at the time of the
borrowing; for purposes of the foregoing, "temporary purpose" means that the
borrowing is to be repaid within sixty days and is not be extended or renewed,
(3) issue additional shares of Municipal Preferred or any class or series of
shares ranking prior to 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 Fund, or reissue any shares of Municipal
Preferred previously purchased or redeemed by the Fund, (4) engage in any short
sales of securities, (5) lend securities, (6) merge or consolidate into or with
any corporation,
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(7) use a Pricing Service not approved by S&P or Moody's, or both, as applicable
or (8) enter into reverse repurchase agreements. While the Fund does not
presently intend to borrow, and while the Fund 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 Fund 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 "Description of Capital
Structure -- Repurchase of Common Shares" in the Prospectus for the
circumstances under which the Fund may purchase Common Shares and incur
indebtedness in connection therewith. Should the Fund borrow, the Fund would be
required to pay when due the interest obligation on any debt incurred by the
Fund before it would be able to pay dividends on shares of Municipal Preferred,
and it is likely that the Fund 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 Fund will
reduce the Fund's net investment earnings available to pay dividends on shares
of Municipal Preferred, borrowing may impair the Fund's ability to pay such
dividends on shares of Municipal Preferred. This risk is heightened in the event
the Fund incurs variable rate debt, the interest rate on which may increase with
increases in prevailing market rates.
The Fund may not purchase or sell futures contracts, write, purchase or
sell options on futures contracts or write put options (except covered put
options) or call options (except covered call options) on portfolio securities,
except that the Fund may purchase or sell futures contracts based upon the Bond
Buyer Municipal Bond Index (the "Municipal Index") or the United States Treasury
Bonds or Notes ("Treasury Bonds") and write, purchase or sell put and call
options on such contracts (collectively, "Hedging Transactions"), subject to the
following limitations: (A) the Fund will not engage in any Hedging Transaction
based on the Municipal Index (other than transactions which terminate a futures
contract or option held by the Fund by the Fund's taking an opposite position
thereto ("Closing Transactions")), which would cause the Fund at the time of
such transaction to own or have sold the least of (i) more than 1,000
outstanding futures contracts based upon the Municipal Index, (ii) outstanding
futures contracts based on the Municipal Index exceeding in number 25% of the
quotient of the Market Value of the Fund's total assets divided by $1,000 or
(iii) outstanding futures contracts based on the Municipal Index exceeding in
number 10% of the average number of daily traded futures contracts based on the
Municipal Index in the 30 days preceding the time of effecting such transactions
as reported by The Wall Street Journal; (B) the Fund will not engage in any
Hedging Transaction based on Treasury Bonds (other than Closing Transactions)
which would cause the Fund at the time of such transaction to own or have sold
the lesser of (i) outstanding futures contracts based on Treasury Bonds
exceeding in number 50% of the quotient of the Market Value of the Fund's total
assets divided by $100,000 ($200,000 in the case of the two-year United States
Treasury Note) or (ii) outstanding futures contracts based on Treasury Bonds
exceeding in number 10% of the average number of daily traded futures contracts
based on Treasury Bonds in the 30 days preceding the time of effecting such
transaction as reported by The Wall Street Journal; (C) the Fund will engage in
Closing Transactions to close out any outstanding futures contracts which the
Fund owns or has sold or any outstanding option thereon owned by the Fund in the
event (i) the Fund does not have S&P Eligible Assets or Moody's Eligible Assets,
as the case may be, with an aggregate Discounted Value equal or greater than the
Municipal Preferred Basic Maintenance Amount on two consecutive Valuation Dates
and (ii) the Fund is required to pay additional margin due to fluctuation in
contract price ("Variation Margin") on the second such Valuation Date; (D) the
Fund will engage in a Closing Transaction to close out any outstanding futures
contract or option thereon in the month prior to the delivery month under the
terms of such futures contract or option thereon unless the Fund hold the
securities deliverable under such terms; and (E) when the Fund writes a futures
contract or option thereon, it will either maintain an amount of cash, cash
equivalents or high grade (rated "A" or better by S&P or Moody's, as the case
may be), fixed-income securities in a segregated account with the Fund's
custodian, so that the amount so segregated plus the amount of margin paid on
such contract ("Initial Margin") and any Variation Margin held in the account of
or on behalf of the Fund's broker with respect to such futures contract or
option equals the Market Value of the futures contract or option,
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or, in the event the Fund writes a futures contract or option thereon which
requires delivery of an underlying security, it shall hold such underlying
security in its portfolio.
For purposes of determining whether the Fund has S&P Eligible Assets or
Moody's Eligible Assets, as the case may be, with a Discounted Value that equals
or exceeds the Municipal Preferred Basic Maintenance Amount, the Discounted
Value of cash or securities held for payment of Initial Margin or Variation
Margin shall be zero and the aggregate Discounted Value of S&P Eligible Assets
or Moody's Eligible Assets, as the case may be, shall be reduced by an amount
equal to (i) 30% of the aggregate settlement value, as marked to market, of any
outstanding futures contracts based on the Municipal Index which are owned by
the Fund plus (ii) 25% of the aggregate settlement value, as marked to market,
of any outstanding futures contracts based on Treasury Bonds which contracts are
owned by the Fund.
ASSET MAINTENANCE
1940 ACT MUNICIPAL PREFERRED ASSET COVERAGE. The Fund 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 Fund
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 Fund
will be required under certain circumstances to redeem certain of the shares of
Municipal Preferred. See "-- Redemption" below.
MUNICIPAL PREFERRED BASIC MAINTENANCE AMOUNT. The Fund 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 Fund 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 Fund will be required under certain circumstances
to redeem certain of the shares of Municipal Preferred. See "-- Redemption"
below.
The "Municipal Preferred Basic Maintenance Amount" as of any Valuation Date
is defined as the dollar amount equal to the sum of:
(A) (i) the product of the number of shares of Municipal Preferred
outstanding on such date multiplied by $25,000 (plus the product of the
number of shares of any other series of Preferred Shares outstanding on
such date multiplied by the liquidation preference of such shares), plus
any redemption premium applicable to shares of Municipal Preferred (or
other Preferred Shares) then subject to redemption;
(ii) the aggregate amount of dividends that will have accumulated
at the respective Applicable Rates (whether or not earned or declared)
to (but not including) the first respective Dividend Payment Dates for
shares of Municipal Preferred outstanding that follow such Valuation
Date (plus the aggregate amount of dividends, whether or not earned or
declared, that will have accumulated in respect of other outstanding
Preferred Shares to, but not including, the first respective dividend
payment dates for such other shares that follow such Valuation Date);
(iii) 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 of shares of such series to commence on such
Dividend Payment Date, assuming solely for purposes of the foregoing,
that if on such Valuation Date the Fund shall have
38
<PAGE> 86
delivered a Notice of Special Rate Period to the Auction Agent with
respect to shares of such series, such Maximum Rate shall be the higher
of (a) the Maximum Rate for the Special Rate Period of such shares to
commence on such Dividend Payment Date and (b) the Maximum Rate for a
Minimum Rate Period of shares of such series to commence on such
Dividend Payment Date, multiplied by the larger of the Moody's
Volatility Factor and the S&P Volatility Factor applicable to a Minimum
Rate Period, or, in the event the Fund shall have delivered a Notice of
Special Rate Period to the Auction Agent with respect to shares of such
series designating a Special Rate Period consisting of 49 Rate Period
Days or more, the larger of the Moody's Volatility Factor and the S&P
Volatility Factor applicable to a Special Rate Period of that length
(plus the aggregate amount of dividends that would accumulate at the
maximum dividend rate or rates on any other Preferred Shares outstanding
from such respective dividend payment rates through the 49th day after
such Valuation Date, as established by or pursuant to the respective
statements establishing and fixing the rights and preferences of such
other Preferred Shares) (except that (1) of such Valuation Date occurs
at a time when a Failure to Deposit (or, in the case of Preferred Shares
other than Municipal Preferred, a failure similar to a Failure to
Deposit) has occurred that has not been cured, the dividend for purposes
of calculation would accumulate at the current dividend rate then
applicable to the shares in respect of which failure has occurred and
(2) for those days during the period described in this subparagraph
(iii) in respect of which the Applicable Rate in effect immediately
prior to such Dividend Payment Date will remain in effect (or, in the
case of the Preferred Shares other than Municipal Preferred, in respect
of which the dividend rate or rates in effect immediately prior to such
respective dividend payment dates will remain in effect) the dividend
for purposes of calculation would accumulate at such Applicable Rate (or
other rate or rates, as the case may be) in respect of those days);
(iv) the amount of anticipated Fund expenses for the 90 days
subsequent to such Valuation Date;
(v) the amount of the Fund'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 Securities purchased as of such
Valuation Date and any liabilities incurred for the purpose of clearing
securities transactions) less
(B) the value of any Fund assets irrevocably deposited by the Fund 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 Fund 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
Fund, 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 Fund's portfolio, the Adviser will not alter the
composition of the Fund's portfolio if, in the reasonable belief of the Adviser,
the effect of any such alteration would be to cause the Fund to have Eligible
Assets with an aggregate Discounted Value, as of the Business Day 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 Business Day immediately preceding Valuation Date, the aggregate
Discounted Value of the Fund's Eligible Assets exceeded the Municipal Preferred
Basic Maintenance Amount by 5% or less, the Adviser will not alter the
composition of the Fund's portfolio in a manner reasonably expected to reduce
the aggregate Discounted Value of the Fund's Eligible Assets unless
39
<PAGE> 87
the Fund shall have confirmed that, after giving effect to such alteration, the
aggregate Discounted Value of the Fund's Eligible Assets would exceed the
Municipal Preferred Basic Maintenance Amount.
Upon any failure to maintain the required Discounted Value, the Fund 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 5:00 P.M., Eastern time, on the third Business Day after a
Valuation Date on which the Fund fails to satisfy the Municipal Preferred Basic
Maintenance Amount, and on the third Business Day after the Municipal Preferred
Basic Maintenance Cure Date with respect to such Valuation Date, the Fund shall
complete and deliver to S&P (if S&P is then rating the shares of Municipal
Preferred), Moody's (if Moody's is then rating the shares of Municipal
Preferred) a Municipal Preferred Basic Maintenance Report as of the date of such
failure or such Municipal Preferred Basic Maintenance Cure Date, as the case may
be, which will be deemed to have been delivered to the Auction Agent if the
Auction Agent receives a copy of telecopy, telex or other electronic
transcription thereof and on the same day the Fund mails to the Auction Agent
for delivery on the next Business Day the full Municipal Preferred Basic
Maintenance Report. The Fund shall also deliver a Municipal Preferred Basic
Maintenance Report to (i) the Auction Agent (if either Moody's or S&P is then
rating the shares of Municipal Preferred as of (A) the fifteenth of each month
(or, if such day is not a Business Day, the next succeeding Business Day) and
(B) the last Business Day of each month, (ii) Moody's (if Moody's is then rating
the shares of Municipal Preferred) and S&P (if S&P is then rating the shares of
Municipal Preferred) as of any Quarterly Valuation Date, in each case on or
before the third Business Day after such day, and (iii) S&P, if and when
requested for any Valuation Date, on or before the third Business Day after such
request. A failure by the Fund to deliver a Municipal Preferred Basic
Maintenance Report pursuant to the preceding sentence shall be deemed to be
delivery of a Municipal Preferred Basic Maintenance Report indicating the
Discounted Value for all assets of the Fund is less than the Municipal Preferred
Basic Maintenance Amount, as of the relevant Valuation Date. 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 November 30, 1999,
the Fund will deliver a letter prepared by the Fund's independent accountants
regarding the accuracy of the calculations made by the Fund in its most recent
Municipal Preferred Basic Maintenance Report. If any such letter prepared by the
Fund'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 Fund's independent accountants will be conclusive and binding on the
Fund.
The Discount Factors and guidelines for determining the market value of the
Fund'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.
S&P AAA RATING GUIDELINES. For purposes of calculating the Discounted
Value of the Fund's portfolio under current S&P guidelines, the fair market
value of Municipal Securities eligible for consideration under such guidelines
("S&P Eligible Assets") must be discounted by certain discount factors set forth
in the table below ("S&P Discount Factors"). The Discounted Value of a Municipal
Security under S&P guidelines is the fair market value thereof divided by the
S&P Discount Factor. The S&P Discount Factor used to discount a particular
Municipal Security will be determined by reference to
40
<PAGE> 88
the "S&P Exposure Period" (currently, ten Business Days) and the S&P rating on
such Municipal Security. S&P Discount Factors for a range of exposure periods
are set forth below:
<TABLE>
<CAPTION>
S&P DISCOUNT FACTORS
RATING CATEGORY
----------------------------------
EXPOSURE PERIOD AAA* AA* A* BBB* NR**
- --------------- ---- --- --- ---- ----
<S> <C> <C> <C> <C> <C>
45 Business Days........................................ 190% 195% 210% 250% 220%
25 Business Days........................................ 170 175 190 230 220
10 Business Days........................................ 155 160 175 215 220
7 Business Days......................................... 150 155 170 210 220
3 Business Days......................................... 130 135 150 190 220
</TABLE>
- ---------------
* S&P rating
** S&P Eligible Assets not rated by S&P or rated less than BBB by S&P or not
rated at least the equivalent of an "A" rating by another recognized credit
rating agency.
Since the S&P Exposure Period currently applicable to the Fund is ten
Business Days, the S&P Discount Factors currently applicable to S&P Eligible
Assets will be determined by reference to the factors set forth opposite the
line entitled "10 Business Days." Notwithstanding the foregoing, (i) the S&P
Discount Factor for short-term Municipal Securities will be 115%, so long as
such Municipal Securities are rated A-1+ or SP-1+ by S&P and mature or have a
demand feature exercisable within 30 days or less, 120% if such Municipal
Securities are rated A-1 or SP-1 by S&P and mature or have a demand feature
exercisable within 30 days or less, or 125% if such Municipal Securities are not
rated by S&P but are rated VMIG-1, P-1 or MIG-1 by Moody's; provided, however,
that any such Moody's-rated short-term Municipal Securities which have demand
features exercisable within 30 days or less must be backed by a letter of
credit, liquidity facility or guarantee from a bank or other financial
institution with a short-term rating of at least A-1+ from S&P; and further
provided that such Moody's-rated short-term Municipal Securities may comprise no
more than 50% of short-term Municipal Securities that qualify as S&P Eligible
Assets; (ii) no S&P Discount Factor will be applied to cash, options, and
similar instruments or to Receivables for Municipal Securities Sold; and (iii)
except as set forth in clause (i) above, in the case of any Municipal Security
that is not rated by S&P but qualifies as a S&P Eligible Asset pursuant to
clause (1)(c) of the following paragraph, such Municipal Security will be deemed
to have a S&P rating one full rating category lower than the S&P rating category
that is the equivalent of the rating category in which such Municipal Security
is placed by such other nationally recognized credit rating agency. For purposes
of the foregoing, Anticipation Notes rated SP-1+ or, if not rated by S&P, rated
MIG-1 or VMIG-1 by Moody's, which do not mature or have a demand feature at par
exercisable in 30 days and which do not have a long-term rating, will be
considered to be short-term Municipal Securities. An S&P Discount Factor of 426%
will be applied to Municipal Securities rated AAA by S&P which are not interest
bearing or do not pay interest at least semi-annually. "Receivables for
Municipal Securities Sold," for purposes of calculating S&P Eligible Assets as
of any Valuation Date, means the book value of receivables for Municipal
Securities sold as of or prior to such Valuation Date if such receivables are
due within five business days of such Valuation Date.
The S&P guidelines impose certain minimum issue size, issuer, geographical
diversification and other requirements for purposes of determining S&P Eligible
Assets:
(1) In order to be considered S&P Eligible Assets, cash (excluding any
cash irrevocably deposited by the Fund for payment of any liabilities
within the meaning of Municipal Preferred Basic Maintenance Amount),
Receivables for Municipal Securities Sold, futures, options, Inverse
Floaters and similar instruments or a Municipal Security owned by the Fund
shall:
(a) be interest bearing and pay interest at least semi-annually;
(b) be payable in U.S. dollars;
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<PAGE> 89
(c) be publicly rated BBB or higher by S&P or, except in the case
of Anticipation Notes that are Grant Anticipation Notes or Bond
Anticipation Notes which must be rated by S&P to be included in S&P
Eligible Assets, if not rated by S&P but rated by another nationally
recognized credit rating agency, be publicly rated A or higher by such
agency;
(d) not be subject to a covered call or covered put option written
by the Fund;
(e) except in the case of Inverse Floaters, not be part of a
private placement of Municipal Securities; and
(f) 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 Securities (excluding Escrowed Bonds) of any one issuer
or guarantor (excluding bond insurers) will be considered S&P Eligible
Assets only to the extent the fair market value of such Municipal
Securities does not exceed 10% of the aggregate fair market value of S&P
Eligible Assets, provided that 2% is added to the applicable S&P Discount
Factor for every 1% by which the fair market value of such Municipal
Securities exceeds 5% of the aggregate fair market value of S&P Eligible
Assets, and provided that Municipal Securities (excluding Escrowed Bonds)
not rated by S&P or rated less than BBB by S&P (or not rated at least "A"
by another nationally recognized credit rating agency) of any one issuer or
guarantor (excluding bond issuers) shall constitute S&P Eligible Assets
only to the extent the Market Value of such Municipal Securities does not
exceed 5% of the aggregate Market Value of S&P Eligible Assets.
(3) Municipal Securities not rated at least BBB by S&P or not rated by
S&P or not rated at least "A" by another nationally recognized credit
rating agency shall be considered S&P Eligible Assets only to the extent
the Market Value of such Municipal Securities, including unrated
securities, does not exceed 50% of the aggregate Market Value of S&P
Eligible Assets; provided however, that if the Market Value of such
Municipal Securities exceeds 50% of the aggregate Market Value of S&P
Eligible Assets, a portion of such Municipal Securities (selected by the
Fund) shall not be considered S&P Eligible Assets, so that the Market Value
of such Municipal Securities (excluding such portion) does not exceed 50%
of the aggregate Market Value of S&P Eligible Assets.
(4) Long-term Municipal Securities (excluding Escrowed Bonds) issued
by issuers in any one state or territory will be considered S&P Eligible
Assets only to the extent the fair market value of such Municipal
Securities does not exceed 25% of the aggregate fair market value of S&P
Eligible Assets.
(5) Inverse Floaters shall be considered S&P Eligible Assets if the
ratio of the aggregate dollar amount of floating rate instruments to
inverse floating rate instruments issued by the same issuer does not exceed
one to one at the time of original issuance. Leveraged floaters will
qualify as S&P Eligible Assets if the floater has only one reset remaining
before maturity.
(6) Municipal Securities which are not interest bearing or do not pay
interest at least semi-annually shall be considered S&P Eligible Assets if
rated AAA by S&P.
MOODY'S AAA RATING GUIDELINES. For purposes of calculating the Discounted
Value of the Fund's portfolio under current Moody's guidelines, Municipal
Securities 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
42
<PAGE> 90
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+*** NR****
- --------------- ---- --- --- ---- ------- ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
7 weeks.................... 151% 159% 168% 173% 187% 136% 148% 225%
8 weeks or less but greater
than 7 weeks............. 154 161 168 176 190 137 149 231
9 weeks or less but greater
than 8 weeks............. 156 163 170 177 192 138 150 240
</TABLE>
- ---------------
* Moody's rating.
** Municipal Securities not rated by Moody's but rated BBB by S&P.
*** Municipal Securities rated MIG-1 or VMIG-1 or, if not rated by Moody's,
rated SP-1+ by S&P, which do not mature or have a demand feature at par
exercisable in 30 days and which do not have a long-term rating.
**** Municipal Securities rated less than Baa3 by Moody's or less than BBB by
S&P or not rated by Moody's or S&P.
Since the Moody's Exposure Period currently applicable to the Fund 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 Securities will be 115%, so long as such
Municipal Securities 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% as
long as such Municipal Securities are rated at least A-1+/AA or SP-1+/AA by S&P
and mature or have a demand feature at par exercisable in 30 days or less and
(ii) no Moody's Discount Factor will be applied to cash or to Receivables for
Municipal Securities Sold or futures, options and similar instruments (to the
extent such securities are Moody's Eligible Assets); provided, however, that for
purposes of determining the Moody's Discount Factor applicable to a Municipal
Security, any Municipal Security (excluding any short-term Municipal Security)
not rated by Moody's but rated by S&P shall be deemed to have a Moody's rating
which is one full rating category lower than its S&P rating. "Receivables for
Municipal Securities 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 Securities 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 Fund 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 Securities sold as of or
43
<PAGE> 91
prior to such Valuation Date which generated receivables, if such receivables
are due within five business days of such Valuation Date but do not comply with
either of conditions (x) or (y).
The Moody's guidelines impose certain minimum issue size, issuer,
geographical diversification and other requirements for purposes of determining
Moody's Eligible Assets, as set forth in the table below:
<TABLE>
<CAPTION>
MAXIMUM
MINIMUM MAXIMUM STATE OR TERRITORY
ISSUE SIZE UNDERLYING CONCENTRATION
RATING ($ MILLIONS) OBLIGOR (%) (%)
- ------ ------------ ----------- ------------------
<S> <C> <C> <C>
Aaa................................. 10 100 100
Aa.................................. 10 20 60
A................................... 10 10 40
Baa................................. 10 6 20
Other*.............................. 10 4 12
Not Rated**......................... 10 4 12
</TABLE>
- ---------------
* Municipal Securities not rated by Moody's but rated BBB by S&P.
** Municipal Securities rated less than Baa3 by Moody's or less than BBB by S&P
or not rated by Moody's or S&P.
The percentages set forth in the preceding table are based upon Moody's
Eligible Assets calculated excluding cash. Current Moody's guidelines by,
Moody's Eligible Asset shall mean that cash, Receivables for Municipal
Securities Sold, futures, options and similar instruments (other than Inverse
Floaters) or a Municipal Security that (i) pays interest in cash, (ii) does not
have its Moody's rating, if applicable, suspended by Moody's, (iii) is part of
an issue of Municipal Securities of at least $10,000,000, and (iv) is not
subject to a covered call or a covered put option written by the Fund. Municipal
Securities which are not rated by Moody's or S&P may comprise no more than 40%
of the aggregate Market Value of Moody's Eligible Assets; provided however, that
if the Market Value of such Municipal Securities exceeds 40% of the aggregate
Market Value of Moody's Eligible Assets, a portion of such Municipal Securities
(selected by the Fund) shall not be considered Moody's Eligible Assets, so that
the Market Value of such Municipal Securities (excluding such portion) does not
exceed 40% of the aggregate Market Value of Moody's Eligible Assets; provided
however, that no such unrated Municipal Security shall be considered a Moody's
Eligible Asset if such Municipal Security shall be in "default", which term
shall mean for purposes of this definition, either (a) the nonpayment by the
issuer of interest or principal when due or (b) the notification of the Fund by
the trustee under the underlying indenture or other governing instrument for
such Municipal Security that the issuer will fail to pay when due principal or
interest on such Municipal Security. For purposes of determining the Moody's
Discount Factors applicable to such S&P-rated Municipal Securities, any such
Municipal Obligation (excluding short-term Municipal Securities) will be deemed
to have a Moody's rating which is one full rating category lower than its S&P
rating. For purposes of applying the foregoing requirements, Municipal
Securities rated MIG-1, VMIG-1, or P-1, or, if not rated by Moody's, rated
A-1+/AA or SP-1+/AA by S&P, will be considered to have a long-term rating of A.
REDEMPTION
Optional Redemption. Except as described below,
(i) shares of Municipal Preferred are redeemable, at the option of the
Fund, as a whole or from time to time in part, on the second Business Day
preceding any Dividend Payment Date therefor, out of funds legally available
therefor in accordance with the Declaration and the Certificate, 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
Certificate,
44
<PAGE> 92
shares of the series of Municipal Preferred are redeemable by the Fund 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 the series of Municipal Preferred, as delivered
to the Auction Agent and filed with the Secretary of the Fund, 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
Fund, as a whole but not in part, out of funds legally available therefor in
accordance with the Declaration and the Certificate, on the first day following
any Dividend Period thereof included in a Rate Period consisting of more than
364 Rate Period Days if, on the date of determination of the Applicable Rate for
shares of such series for such Rate Period, such Applicable Rate equaled or
exceeded on such date of determination the Treasury Note Rate for such Rate
Period, at a redemption price 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 Fund.
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 Fund may not mail a Notice of Redemption relating to an optional
redemption as described above on any date unless on such date (a) the Fund has
available Deposit Securities with maturity or tender dates not later than the
day preceding the applicable redemption date and having a value not less than
the amount (including any applicable premium) due to Holders of shares of
Municipal Preferred by reason of the redemption of such shares on such
redemption date and (b) the Discounted Value of Moody's Eligible Assets (if
Moody's is then rating the shares of Municipal Preferred) and the Discounted
Value of S&P Eligible Assets (if S&P is then rating the shares of Municipal
Preferred) each at least equal the Municipal Preferred Basic Maintenance Amount,
and would at least equal the Municipal Preferred Basic Maintenance Amount
immediately subsequent to such redemption if such redemption were to occur on
such date. For purposes of determining in clause (b) of the preceding sentence
whether the Discounted Value of Moody's Eligible Assets at least equals the
Municipal Preferred Basic Maintenance Amount, the Moody's Discount Factors
applicable to Moody's Eligible Assets will be determined by reference to the
first Moody's Exposure Period longer than the Moody's Exposure Period then
applicable to the Fund.
Mandatory Redemption. The Fund 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 Certificate and any
applicable law, if the Fund fails to maintain the Municipal
45
<PAGE> 93
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 Fund will allocate
the number of shares required to be redeemed to satisfy the Municipal Preferred
Basic Maintenance Amount or the 1940 Act Municipal Preferred Asset Coverage, as
the case may be, pro rata among shares of Municipal Preferred and any other
Preferred Shares subject to redemption or retirement.
The Fund is required to effect such a mandatory redemption on or prior to
30 days after such Cure Date, except that if the Fund does not have funds
legally available under the Declaration, the Certificate 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 Fund otherwise is unable to effect such redemption on or prior
to 30 days after such Cure Date, the Fund 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 of such series
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 more than 30 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 Fund ("Notice of Redemption"). Each
such Notice of Redemption shall state (i) the redemption date; (ii) the number
of shares of Municipal Preferred to be redeemed and the series thereof; (iii)
the CUSIP number for shares of such series; (iv) the Redemption Price; (v) the
place or places where certificate(s) for such shares (properly endorsed or
assigned for transfer, if the Board of Trustees shall so require and the Notice
of Redemption shall so state) are to be surrendered for payment of the
Redemption Price; (vi) that dividends on the shares to be redeemed will cease to
accumulate on such redemption date; and (vii) the provisions of the Certificate
under which such redemption is made. If fewer than all shares of Municipal
Preferred held by any Holder are to be redeemed, the Notice of Redemption mailed
to such Holder shall also specify the number of shares of such series to be
redeemed from such Holder. The Fund 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 Fund 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 in accordance with the Declaration, the
Certificate, and applicable law, 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 Fund shall have
failed, for any reason whatsoever, to deposit in trust with the Auction Agent
the
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Redemption Price with respect to any shares for which such Notice of Redemption
has been mailed. Notwithstanding the fact that the Fund 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 Fund 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 Fund will be entitled to receive from the Auction Agent, promptly
after the date fixed for redemption, any cash deposited with the Auction Agent
in excess of (i) the aggregate Redemption Price of the shares of Municipal
Preferred called for redemption on such date and (ii) all other amounts to which
Holders of shares of Municipal Preferred called for redemption may be entitled.
Any funds so deposited that are unclaimed at the end of 90 days from such
redemption date will, to the extent permitted by law, be repaid to the Fund,
after which time the Holders of shares of Municipal Preferred so called for
redemption may look only to the Fund for payment of the Redemption Price and all
other amounts to which they may be entitled. The Fund 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 the series of
Municipal Preferred (whether or not earned or declared) are in arrears, no
shares of such series shall be redeemed unless all outstanding shares of such
series are simultaneously redeemed, and the Fund shall not purchase or otherwise
acquire any shares of such series; provided, however, that the foregoing shall
not prevent the purchase or acquisition of all outstanding shares of such series
pursuant to the successful completion of an otherwise lawful purchase or
exchange offer made on the same terms to, and accepted by, Holders of all
outstanding shares of such series.
Except as described above with respect to redemptions and under "The
Auction -- Orders by Existing Holders and Potential Holders," the Declaration
and the Certificate do not prohibit the Fund or any affiliate of the Fund from
purchasing or otherwise acquiring any shares of Municipal Preferred.
The Fund 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 Fund,
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 Fund 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 Fund ranking junior to the Municipal Preferred upon dissolution,
liquidation or winding up, an amount equal to the liquidation preference with
respect to such shares. The liquidation preference for shares of Municipal
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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 Fund. After the payment to the Holders of the shares of
Municipal Preferred of the full preferential amounts provided for as described
herein, Holders of Municipal Preferred as such shall have no right or claim to
any of the remaining assets of the Fund. In the event the assets of the Fund
available for distribution to the Holders of shares of Municipal Preferred, upon
any dissolution, liquidation or winding up of the Fund, 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 with respect to the distribution of assets upon such
dissolution, liquidation or winding up unless proportionate distributive amounts
shall be paid on account of the shares of Municipal Preferred, ratably, in
proportion to the full distributable amounts for which holders of all such
parity shares are respectively entitled upon such dissolution, liquidation or
winding up. 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 Fund, 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 Fund, nor the merger or consolidation of the Fund 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 Fund shall be a
dissolution, liquidation or winding up, whether voluntary or involuntary, for
the purposes of the foregoing paragraph.
REPURCHASE OF COMMON SHARES
The Fund is a closed-end investment company and as such its shareholders
will not have the right to cause the Fund 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. Shares of closed-end management investment
companies frequently trade at a discount from net asset value but in some cases
trade at a premium. The Board of Trustees reviews, at least quarterly, the
advisability of taking action 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 Fund
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
Fund's ability to engage in certain transactions.
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 Fund'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 NYSE, or (b) impair the Fund's status as
a regulated investment company under the Code (which would make the Fund a
taxable entity, causing the Fund's income to be taxed at the corporate level in
addition to the taxation of shareholders who receive dividends from the Fund) or
as a registered closed-end investment company under the 1940 Act; (2) the Fund
would not be able to liquidate portfolio securities in an orderly manner and
consistent with the Fund'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
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adversely affecting the Fund, (b) general suspension of or limitation on prices
for trading securities on the NYSE, (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 Fund invests, (d) material limitation
affecting the Fund or the issuers of its portfolio securities by Federal or
state authorities on the extension of credit by lending institutions, (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 Fund 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,
such as the extent and duration of the discount, the liquidity of the Fund's
portfolio, the impact of any action that might be taken on the Fund or its
shareholders, and market considerations. Based on these considerations, even if
the Fund's Common Shares should trade at a discount, the Board may determine
that, in the interest of the Fund and its shareholders, no action should be
taken.
TAXES
Set forth below is a discussion of certain U.S. federal income tax issues
concerning the Fund and the purchase, ownership, and disposition of Municipal
Preferred. This discussion does not purport to be complete or to deal with all
aspects of federal income taxation that may be relevant to shareholders in light
of their particular circumstances. This discussion is based upon present
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the
regulations promulgated thereunder, and judicial and administrative ruling
authorities, all of which are subject to change, which change may be
retroactive. Prospective investors should consult their own tax advisers with
regard to the federal tax consequences of the purchase, ownership, or
disposition of Fund shares, as well as the tax consequences arising under the
laws of any state, foreign country, or other taxing jurisdiction.
TAX STATUS OF THE FUND
The Fund has elected to be, and intends to qualify for treatment each year,
as a regulated investment company under Subchapter M of the Code. Accordingly,
the Fund intends to satisfy certain requirements relating to sources of its
income and diversification of its assets and to distribute substantially all of
its net investment income and including tax-exempt income and net capital gain
in accordance with the timing requirements imposed by the Code, so as to
maintain its regulated investment company status. By doing so, the Fund will
avoid any federal income tax on any income and gain it distributes to its
shareholders. If the Fund failed to qualify for treatment as a regulated
investment company for any taxable year, it would be taxed on the full amount of
its taxable income for that year without being able to deduct the distributions
it makes to its shareholders and the shareholders would treat all distributions,
including those that otherwise would qualify as "exempt-interest dividends"
(described below), as dividends (that is, ordinary income) to the extent of the
Fund's' earnings and profits.
Accordingly, the Fund must, among other things, (a) derive in each taxable
year at least 90% of its gross income from dividends, interest, payments with
respect to certain securities loans, and gains from the sale or other
disposition of stock, securities or foreign currencies, or other income derived
with respect to its business of investing in such stock, securities or
currencies; and (b) diversify its holdings so that, at the end of each fiscal
quarter, (i) at least 50% of the value of the Fund's total assets is represented
by cash and cash items, U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other securities
limited, in respect of any one issuer, to an amount not greater than 5% of the
value of the Fund's total assets and 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. Government
securities and the securities of other regulated investment companies).
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax at
the Fund level. To avoid the tax, the Fund must distribute
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during each calendar year an amount equal to the sum of (1) at least 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year, (2) at least 98% of its capital gain (net income) for a one-year
period generally ending on October 31 of the calendar year, and (3) all ordinary
income and capital gain (net income) for previous years that were not
distributed during such years. To avoid application of the excise tax, the Fund
intends to make distributions in accordance with the calendar year distribution
requirement.
DISTRIBUTIONS
In general, distributions of net investment income and net capital gain are
taxable to a U.S. shareholder as ordinary income, whether paid in cash or
shares. See "Tax-Exempt Income" below.
The Fund will designate distributions made to holders of Common Shares and
to holders of Preferred Shares, including the Municipal Preferred, in accordance
with each class's proportionate share of each item of Fund income (such as
tax-exempt interest, net capital gain and other taxable income).
Shareholders will be notified annually as to the U.S. federal tax status of
distributions, and shareholders receiving distributions in the form of newly
issued shares will receive a report as to the net asset value of the shares
received.
TAX-EXEMPT INCOME
The Fund intends to invest a sufficient amount of its assets in Municipal
Securities to qualify to distribute "exempt-interest dividends" (as defined in
the Code) to shareholders. The Fund's dividends payable from net tax-exempt
interest earned from Municipal Securities will qualify as exempt-interest
dividends if, at the close of each quarter of the Fund's taxable year, at least
50% of the value of its total assets consists of securities the interest on
which is exempt from the regular federal income tax under Code section 103.
Exempt-interest dividends distributed to shareholders are not included in
shareholders' gross income for regular federal income tax purposes, but
shareholders are nonetheless required to report tax-exempt-interest dividends on
their federal income tax returns. As noted above, the portion of exempt-
interest dividends attributable to interest on certain Municipal Securities is
treated as a Preference Item. The Fund will determine periodically which
distributions will be designated as exempt-interest dividends. If the Fund earns
income which is not eligible to be so designated, the Fund intends to distribute
such income. Such distributions will be subject to federal, state and local
taxes, as applicable, in the hands of shareholders.
Interest on certain types of private activity bonds is not exempt from
federal income tax when received by "substantial users" (as defined in the
Code). A "substantial user" includes any "nonexempt person" who regularly uses
in trade or business part of a facility financed from the proceeds of private
activity bonds. The Fund may invest periodically in private activity bonds and,
therefore, may not be an appropriate investment for entities that are
substantial users of facilities financed by private activity bonds or "related
persons" of substantial users. Generally, an individual will not be a related
person of a substantial user under the Code unless he/she or his/her immediate
family owns indirectly in aggregate more than 50% of the equity value of the
substantial user.
Opinions relating to the tax status of interest derived from individual
Municipal Securities are rendered by bond counsel to the issuer. Although the
Fund's adviser attempts to determine that any security it contemplates
purchasing on behalf of the Fund is issued with an opinion indicating that
interest payments will be exempt from federal and (as applicable) state tax,
neither the Adviser nor the Fund's counsel makes any review of proceedings
relating to the issuance of Municipal Securities or the bases of such opinions.
Interest on indebtedness incurred or continued by a shareholder to purchase
or carry Municipal Preferred is not deductible for federal income tax purposes
to the extent that interest relates to exempt-interest dividends received from
the Fund.
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From time to time, proposals have been introduced in Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Securities, and similar proposals may be introduced in the
future. If such a proposal were enacted, the availability of Municipal
Securities for investment by the Fund could be adversely affected. Under these
circumstances, Fund management would re-evaluate the Fund's investment
objectives and policies and would consider either changes in the structure of
the Fund or its dissolution.
BACKUP WITHHOLDING
The Fund generally will be required to withhold federal income tax at a
rate of 31% ("backup withholding") from dividends paid (other than
exempt-interest dividends), and capital gain distributions to individuals and
certain other non-corporate shareholders if (1) the shareholder fails to furnish
the Fund with the shareholder's correct taxpayer identification number or social
security number, (2) the IRS notifies the shareholder or the Fund that the
shareholder has failed to report properly certain interest and dividend income
to the IRS and to respond to notices to that effect, or (3) when required to do
so, the shareholder fails to certify that he or she is not subject to backup
withholding. Any amounts withheld may be credited against the shareholder's
federal income tax liability.
OTHER TAXATION
An investment in Municipal Preferred is not appropriate for non-U.S.
investors or as a retirement plan investment. Non-U.S. shareholders may be
subject to U.S. tax rules that differ significantly from those summarized above,
including the likelihood that ordinary income dividends to them would be subject
to withholding of U.S. tax at a rate of 30% (or a lower treaty rate, if
applicable).
STATE AND LOCAL TAXES
The exemption of interest income for federal income tax purposes does not
necessarily result in exemption under the income or other tax laws of any state
or local taxing authority. Shareholders of the Fund may be exempt from state and
local taxes on distributions of tax-exempt interest income derived from
obligations of the state and/or municipalities of the state in which they are
resident, but taxable generally on income derived from obligations of other
jurisdictions. The Fund will report annually to shareholders the percentages
representing the proportionate ratio of its net tax-exempt income earned in each
state.
EXPERTS
Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606, experts
in accounting and auditing, are the independent auditors for the Fund. Ernst &
Young audits and reports on the Fund's annual financial statements, reviews
certain regulatory reports and the Fund's Federal income tax returns, and
performs other professional accounting, auditing, tax and advisory services when
engaged to do so by the Fund.
FINANCIAL STATEMENTS
The audited financial statements included in the Annual Report of the Fund
for the fiscal year ended November 30, 1998, together with the report of Ernst &
Young LLP thereon, are hereby incorporated by reference in this SAI. No other
part of the Annual Report of the Fund is incorporated by reference herein.
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GLOSSARY
" 'AA' Composite Commercial Paper Rate" has the meaning set forth on pages
19-20 of this SAI.
"Adviser" means Scudder Kemper Investments, Inc.
"Affected Series" has the meaning set forth on page 34 of this SAI.
"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 Fund; provided, however, that no Broker-Dealer
controlled by, in control of or under common control with the Fund 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 Fund be an Affiliate solely
because such director, trustee or executive officer is also a trustee of the
Fund.
"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), and Bond Anticipation Notes
(BANs).
"Applicable Rate" has the meaning set forth on page 15 of this SAI.
"Auction" means each periodic implementation of the Auction Procedures.
"Auction Agency Agreement" has the meaning set forth on page 16 of this
SAI.
"Auction Agent" means Bankers Trust Company or any successor 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 SAI, including Appendix D hereto.
"Available Municipal Preferred" has the meaning set forth on page 21 of
this SAI.
"Benchmark Rate" has the meaning set forth on page 22 of this SAI.
"Beneficial Owner" has the meaning set forth on page 15 of this SAI.
"Bid" has the meaning set forth on page 17 of this SAI.
"Bidder" and "Bidders" have the respective meanings set forth on page 17 of
this SAI.
"Board of Trustees" or "Board" means the Board of Trustees of the Fund 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 Fund and has entered into a
Broker-Dealer Agreement that remains effective.
"Broker-Dealer Agreement" means an agreement among the Fund, the Auction
Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow
the Auction Procedures.
"Business Day" has the meaning set forth on page 15 of this SAI.
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"Cede" means Cede & Co., the nominee of DTC, and in whose name the shares
of Municipal Preferred initially will be registered.
"Certificate" means the Certificate of Designation for Preferred Shares of
the Fund, dated September 16, 1999, specifying the powers, preferences and
rights of shares of Municipal Preferred.
"CFTC" has the meaning set forth on pages 6 to 7 of this SAI.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" has the meaning set forth on page 20 of this
SAI.
"Common Shares" means the common shares of beneficial interest, par value
of $0.01 per share, of the Fund.
"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 15 of this SAI.
"Declaration" means the Amended and Restated Agreement and Declaration of
Trust of the Fund dated February 27, 1989, as amended and supplemented.
"Deposit Securities" means cash and Municipal Securities rated at least
A-1+ or SP-1+ by Standard & Poor's, except that, for purposes of determining
whether the Fund may mail a Notice of Redemption, such Municipal Securities
shall be considered "Deposit Securities" only if they are rated P-1, MIG-1 or
VMIG-1 by Moody's.
"Discount Factor" means a Moody's Discount Factor or a S&P Discount Factor,
as the case may be.
"Discounted Value" means, as of any Valuation Date, (i) with respect to a
S&P Eligible Asset, the quotient of the market value thereof divided by the
applicable S&P Discount Factor and (ii)(a) with respect to a Moody's Eligible
Asset that is not currently callable as of such Valuation Date at the option of
the issuer thereof, the quotient of the market value thereof divided by the
applicable Moody's Discount Factor, or (b) with respect to a Moody's Eligible
Asset that is currently callable as of such Valuation Date at the option of the
issuer thereof, the quotient of (1) the lesser of the market value or call price
thereof, including any call premium, divided by (2) the applicable Moody's
Discount Factor.
"Dividend Payment Date" has the meaning set forth on page 15 of this SAI.
"Dividend Period" has the meaning set forth on page 15 of this SAI.
"DTC" means the Depository Trust Company.
"Eligible Assets" means Moody's Eligible Assets or S&P Eligible Assets, as
the case may be.
"Escrowed Bonds" means Municipal Securities that (i) have been determined
to be legally defeased in accordance with S&P legal defeasance criteria, (ii)
have been determined to be economically defeased in accordance with S&P's
economic defeasance criteria and assigned a rating of "AAA" by S&P, (iii) are
not rated by S&P but have been determined to be legally defeased by Moody's, or
(iv) have been determined to be economically defeased by Moody's and assigned a
rating no lower than the rating that is Moody's equivalent of "AAA" by S&P's
rating.
"Existing Holder" has the meaning set forth on page 50 of this SAI.
"Failure to Deposit," with respect to shares of Municipal Preferred, means
a failure by the Fund to pay to the Auction Agent, not later than 12:00 noon,
Eastern time, (A) on the Business Day next preceding any Dividend Payment Date
for such shares, in funds available on such Dividend Payment Date in The City of
New York, New York, the full amount of any dividend (whether or not earned or
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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 Certificate, the Prospectus or this
SAI; provided, however, that the foregoing clause (B) shall not apply to the
Fund'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.
"Fund" means Kemper Strategic Municipal Income Trust, a Massachusetts
business trust that is the issuer of the shares of Municipal Preferred.
"Gross-up Payment" has the meaning set forth on page 29 of this SAI.
"Hold Order" has the meaning set forth on page 17 of this SAI.
"Holder" means the registered holder of shares of Municipal Preferred as
the same appears on the record books of the Fund.
"Initial Margin" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a futures
contract.
"Initial Rate Period" has the meaning set forth on page 15 of this SAI.
"IRS" means the United States Internal Revenue Service.
"Kenny Index" has the meaning set forth on page 19 of this SAI.
"Late Charge" has the meaning set forth on page 28 of this SAI.
"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 37 of this SAI.
"Maximum Rate" has the meaning set forth on page 18 of this SAI.
"Minimum Rate Period" means any Rate Period consisting of 7 Rate Period
Days.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" has the meaning set forth on page 40 of this SAI.
"Moody's Eligible Assets" has the meaning set forth on pages 40 to 41 of
this SAI.
"Moody's Exposure Period" has the meaning set forth on pages 40 to 41 of
this SAI.
"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
54
<PAGE> 102
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 Municipal Auction Rate Cumulative Preferred
Shares with a par value of $0.01 per share and a liquidation preference of
$25,000 per share plus an amount equal to accumulated but unpaid dividends
thereon (whether or not earned or declared), of the Fund.
"Municipal Preferred Basic Maintenance Amount" has the meaning set forth on
page 36 of this SAI.
"Municipal Preferred Basic Maintenance Cure Date" has the meaning set forth
on page 36 of this SAI.
"Municipal Preferred Basic Maintenance Report" has the meaning set forth on
page 32 of this SAI.
"Municipal Securities" has the meaning set forth on pages 3 to 5 of this
SAI.
"1940 Act" means the Investment Company Act of 1940, as amended.
"1940 Act Cure Date" has the meaning set forth on page 36 of this SAI.
"1940 Act Municipal Preferred Asset Coverage" has the meaning set forth on
page 36 of this SAI.
"Notice of Redemption" has the meaning set forth on page 43 of this SAI.
"Notice of Special Rate Period" has the meaning set forth on page 32 of
this SAI.
"NYSE" means the New York Stock Exchange.
"Order" and "Orders" have the respective meanings set forth on page 17 of
this SAI.
"Outstanding" means, as of any Auction Date with respect to shares of
Municipal Preferred, the number of such shares theretofore issued by the Fund
except, without duplication, (i) any shares of Municipal Preferred theretofore
canceled or delivered to the Auction Agent for cancellation or redeemed by the
Fund, (ii) any shares of Municipal Preferred as to which the Fund 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 Fund.
"Person" means and includes an individual, a partnership, a corporation, a
Fund, 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 15 of this
SAI.
"Potential Holder" has the meaning set forth on page 15 of this SAI.
55
<PAGE> 103
"Preferred Shares" means the preferred shares of beneficial interest, par
value $0.01, of the Fund, and includes the Municipal Preferred shares.
"Rate Multiple" has the meaning set forth on page 21 of this SAI.
"Rate Period" has the meaning set forth on page 15 of this SAI.
"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 first 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 Securities Sold," for purposes of calculating
Moody's Eligible Assets or S&P Eligible Assets, as the case may be, has the
meaning set forth on pages 39 and 41 of this SAI, respectively.
"Redemption Price" has the meaning set forth on page 43 of this SAI.
"Reference Rate" has the meaning set forth on page 19 of this SAI.
"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 Fund
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 17 of this SAI.
"Special Rate Period" has the meaning set forth on page 15 of this SAI.
"Special Redemption Provisions" has the meaning set forth on page 42 of
this SAI.
"S&P" means Standard & Poor's Ratings Services, a division of the
McGraw-Hill Companies, Inc., or its successors.
"S&P Discount Factor" has the meaning set forth on page 38 of this SAI.
"S&P Eligible Assets" has the meaning set forth on page 38 of this SAI.
"S&P Exposure Period" has the meaning set forth on page 38 of this SAI.
"S&P Volatility Factor" means, as of any Valuation Date, a multiplicative
factor equal to (i) 277% in the case of any Minimum Rate Period or any Special
Rate Period of 28 Rate Period Days or fewer, (ii) 228% in the case of any
Special Rate Period of more than 28 Rate Period Days but fewer than 183 Rate
Period Days, and (iii) 198% in the case of any Special Rate Period of more than
182 Rate Period Days.
"Submission Deadline" means 1:00 P.M., Eastern time, on any Auction Date or
such other time on any Auction Date by which Broker-Dealers are required to
submit Orders to the Auction Agent as specified by the Auction Agent from time
to time.
"Submitted Bid" has the meaning set forth on page 23 of this SAI.
"Submitted Hold Order" has the meaning set forth on page 23 of this SAI.
"Submitted Order" has the meaning set forth on page 23 of this SAI.
"Submitted Sell Order" has the meaning set forth on page 23 of this SAI.
"Subsequent Rate Period" has the meaning set forth on page 15 of this SAI.
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<PAGE> 104
"Substitute Commercial Paper Dealer" has the meaning set forth on page 20
of this SAI.
"Substitute U.S. Government Securities Dealer" has the meaning set forth on
page 21 of this SAI.
"Sufficient Clearing Bids" has the meaning set forth on page 23 of this
SAI.
"Taxable Allocation" has the meaning set forth on page 29 of this SAI.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" has the meaning
set forth on page 19 of this SAI.
"Taxable Income" has the meaning set forth on page 23 of this SAI.
"Taxable Yield Rate" has the meaning set forth on page 23 of this SAI.
"Treasury Bill" has the meaning set forth on page 20 of this SAI.
"Treasury Bill Rate" has the meaning set forth on page 20 of this SAI.
"Treasury Note" has the meaning set forth on page 20 of this SAI.
"Treasury Note Rate" has the meaning set forth on page 20 of this SAI.
"U.S. Government Securities Dealer" has the meaning set forth on page 21 of
this SAI.
"Valuation Date" has the meaning set forth on page 36 of this SAI.
"Variation Margin" means, in connection with an outstanding futures
contract owned or sold by the Fund, the amount of cash or securities paid to or
received from a broker (subsequent to the Initial Margin payment) from time to
time as the price of such futures contract fluctuates.
"Volatility Factor" means, as of any Valuation Date, the larger of the
Moody's Volatility Factor and the S&P Volatility Factor.
"Winning Bid Rate" has the meaning set forth on page 23 of this SAI.
57
<PAGE> 105
APPENDIX A
RATINGS OF INVESTMENTS
STANDARD & POOR'S CORPORATION -- A brief description of the applicable
Standard & Poor's Corporation ("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 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.
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<PAGE> 106
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.
c The "c" subscript is used to provide additional information to investors
that the bank may terminate its obligation to purchase tendered bonds if
the long-term credit rating of the issuer is below an investment-grade
level and/or the issuer's bonds are deemed taxable.
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.
* 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.
59
<PAGE> 107
r The "r" highlights derivative, hybrid and certain other obligations that
Standard & Poor's believes may experience high volatility or variability
in expected returns as a result of noncredit risks. Examples of such
obligations are equities, commodities or currencies; certain swaps and
options; and interest-only and principal-only mortgage securities. The
absence of an 'r' symbol should not be taken as an indication that an
obligation will exhibit no volatility or variability in total return.
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.
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.
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<PAGE> 108
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:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payment and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note -- Those bonds in the Aa, A, Baa, Ba and B categories which Moody's
believes possess the strongest credit attributes within those categories are
designated by the symbols Aa1, A1, Baa1, Ba1 and B1.
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
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<PAGE> 109
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.
Short-term Notes -- The four ratings of Moody's for short-term notes are
MIG 1/VMIG1, MIG 2/ VMIG2, MIG 3/VMIG3 and MIG 4/VMIG4; MIG 1/VMIG1 denotes
"best quality . . . strong protection by established cash flows"; MIG 2/VMIG2
denotes "high quality" with ample margins of protection; MIG 3/VMIG3 notes are
of "favorable quality . . . but . . . lacking the undeniable strength of the
preceding grades"; MIG 4/VMIG4 notes are of "adequate quality . . . [p]rotection
commonly regarded as required of an investment security is present . . . there
is specific risk."
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment ability of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
ability for repayment of short-term promissory obligations. Prime-1 repayment
ability will often be evidenced by the following characteristics: leading market
positions in well established industries; high rates of return on Trusts
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed financial
charges and high internal cash generation; and well established access to a
range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
ability for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
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<PAGE> 110
APPENDIX B
TAX EQUIVALENT YIELD TABLE
The table below gives the approximate yield a taxable security must earn at
various income brackets to produce after-tax yields equivalent to those of
tax-exempt bonds yielding from 4% to 6% under the regular federal income tax law
and tax rates applicable to individuals for 1999.
<TABLE>
<CAPTION>
(TAXABLE INCOME*) A FEDERAL TAX EXEMPT YIELD OF:
- ---------------------------------------- ------------------------------------------
MARGINAL 4% 4.5% 5% 5.5% 6%
INCOME ------ ------ ------ ------ ------
SINGLE RETURN JOINT RETURN TAX BRACKET IS EQUIVALENT TO A FULLY TAXABLE YIELD OF:
- ------------------- ------------------- ----------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Up to $25,750 Up to $43,050 15.00% 4.71% 5.29% 5.88% 6.47% 7.06%
$25,751 - $62,450 $43,051 - $104,050 28.00% 5.56 6.25 6.94 7.64 8.33
$62,451 - $130,250 $104,051 - $158,550 31.00 5.80 6.52 7.25 7.97 8.70
$130,251 - $283,150 $158,551 - $283,150 36.00 6.25 7.03 7.81 8.59 9.38
Over $283,150 Over $283,150 39.60 6.62 7.45 8.28 9.11 9.93
</TABLE>
- ---------------
* Net amount subject to federal income tax after deductions and exemptions.
The above indicated federal income tax brackets do not take into account
the effect of a reduction in the deductibility of itemized deductions for
individual taxpayers with adjusted gross income in excess of $126,600. The tax
brackets also do not show the effects of phaseout of personal exemptions for
single filers with adjusted gross income in excess of $126,600 and joint filers
with adjusted gross income in excess of $189,950. The effective marginal tax
rates and equivalent taxable yields of those taxpayers will be higher than those
indicated above.
Yields shown are for illustration purposes only and are not meant to
represent the Fund's actual or expected yield. No assurance can be given that
the Fund will achieve any specific tax-exempt yield. While it is expected that
the Fund will invest principally in obligations the interest from which is
exempt from the regular federal income tax, other income received by the Fund
may be taxable. The table does not take into account state or local taxes, if
any, payable on Fund distributions. It should also be noted that the interest
earned on certain "private activity bonds", while exempt from the regular
federal income tax, is treated as a tax preference item which could subject the
recipient to the alternative minimum tax. The illustrations assume that the
alternative minimum tax is not applicable and do not take into account any tax
credits that may be available.
The information set forth above is as of the date of this SAI. Subsequent
tax law changes could result in prospective or retroactive changes in the tax
brackets, tax rates, and tax-equivalent yields set forth above. Investors should
consult their tax adviser for additional information.
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<PAGE> 111
APPENDIX C
SETTLEMENT PROCEDURES
Capitalized terms used herein have the respective meanings specified in the
forepart of the Prospectus or the Glossary included in the Prospectus, as the
case may be.
(a) On each Auction Date for shares of Municipal Preferred, the Auction
Agent shall notify by telephone the Broker-Dealers that participated in the
Auction held on such Auction Date and submitted an Order to the Auction Agent as
or on behalf of an Existing Holder or Potential Holder of:
(i) the Applicable Rate fixed for the next Rate Period;
(ii) whether Sufficient Clearing Bids existed for the determination of
the Applicable Rate;
(iii) if such Broker-Dealer submitted a Bid or a Sell Order to the
Auction Agent as or on behalf of an Existing Holder, whether such Bid or
Sell Order was accepted or rejected, in whole or in part, and the number of
shares, if any, of Municipal Preferred then outstanding to be sold by such
Existing Holder;
(iv) if such Broker-Dealer submitted a Bid to the Auction Agent as or
on behalf of a Potential Holder, whether such Bid was accepted or rejected,
in whole or in part, and the number of shares, if any, of Municipal
Preferred to be purchased by such Potential Holder;
(v) if the aggregate number of shares of Municipal Preferred to be
sold by all Existing Holders with respect to whom such Broker-Dealer
submitted Bids or Sell Orders to the Auction Agent is different than the
aggregate number of shares of Municipal Preferred to be purchased by all
Potential Holders with respect to whom such Broker-Dealer submitted Bids to
the Auction Agent, the name or names of one or more other Broker-Dealers
(and the Agent Member, if any, of each such other Broker-Dealer) and the
number of shares of Municipal Preferred to be (x) purchased from one or
more Existing Holders with respect to whom such other Broker-Dealers
submitted Bids or Sell Orders to the Auction Agent, or (y) sold to one or
more Potential Holders with respect to whom such other Broker-Dealers
submitted Bids to the Auction Agent; and
(vi) the scheduled Auction Date of the next succeeding Auction for
shares of Municipal Preferred.
(b) On each Auction Date for shares of Municipal Preferred, each
Broker-Dealer that submitted an Order to the Auction Agent as or on behalf of
any Existing Holder or Potential Holder shall:
(i) advise each Existing Holder and Potential Holder (and each
Beneficial Owner and Potential Beneficial Owner) with respect to whom such
Broker-Dealer submitted a Bid or Sell Order to the Auction Agent whether
such Bid or Sell Order was accepted or rejected, in whole or in part;
(ii) instruct each Potential Holder (and each Potential Beneficial
Owner) with respect to whom such Broker-Dealer submitted a Bid to the
Auction Agent that was accepted, in whole or in part, to instruct such
Bidder's Agent Member to pay to such Broker-Dealer (or its Agent Member)
through the Securities Depository the amount necessary to purchase the
number of shares of Municipal Preferred to be purchased pursuant to such
Bid against receipt of such shares;
(iii) instruct each Existing Holder (and each Beneficial Owner) with
respect to whom such Broker-Dealer submitted a Bid to the Auction Agent
that was accepted, in whole or in part, or a Sell Order that was accepted,
in whole or in part, to instruct such Bidder's Agent Member to deliver to
such Broker-Dealer (or its Agent Member) through the Securities Depository
the number of shares of Municipal Preferred to be sold pursuant to such Bid
or Sell Order against payment therefor;
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(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.
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APPENDIX D
AUCTION PROCEDURES
The following procedures will be set forth as Section 1 through 8 of Part
II of the Certificate. The terms not defined below are defined in the
Certificate, the Glossary of this SAI or in the Prospectus.
1. ORDERS.
(a) Prior to the Submission Deadline on each Auction Date for shares of the
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 the
series of Municipal Preferred subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified in such
Bid if the Applicable Rate for shares of such series determined on such
Auction Date shall be less than the rate specified therein;
(B) such number or a lesser number of Outstanding shares of such
series to be determined as set forth in clause (iv) of paragraph (a) of
Section 4 of this Appendix D if the Applicable Rate for shares of such
series determined on such Auction Date shall be equal to the rate specified
therein; or
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(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 Appendix D 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
the 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
Appendix D 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 the 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 Appendix D 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 Fund) with the provisions of Section 7 of this Appendix D 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 the 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
Appendix D 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 the series subject to an Auction on such Auction Date
obtained by such Broker-Dealer, designating itself (unless otherwise permitted
by the Fund) 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 Fund);
(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
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(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 the 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 the series subject to an Auction held by such Existing
Holder, such Orders shall be considered valid in the following order of
priority:
(i) all Hold Orders for shares of such series shall be considered
valid, but only up to and including in the aggregate the number of
Outstanding shares of such series held by such Existing Holder, and if the
number of shares of such series subject to such Hold Orders exceeds the
number of Outstanding shares of such series held by such Existing Holder,
the number of shares subject to each such Hold Order shall be reduced pro
rata to cover the number of Outstanding shares of such series held by such
Existing Holder;
(ii) (A) any Bid for shares of such series shall be considered valid
up to and including the excess of the number of Outstanding shares of such
series held by such Existing Holder over the number of shares of such
series subject to any Hold Orders referred to in clause (i) above;
(B) subject to subclause (A), if more than one Bid of an Existing
Holder for shares of such series is submitted to the Auction Agent with the
same rate and the number of Outstanding shares of such series subject to
such Bids is greater than such excess, such Bids shall be considered valid
up to and including the amount of such excess, and the number of shares of
such series subject to each Bid with the same rate shall be reduced pro
rata to cover the number of shares of such series equal to such excess;
(C) subject to subclauses (A) and (B), if more than one Bid of an
Existing Holder for shares of such series is submitted to the Auction Agent
with different rates, such Bids shall be considered valid in the ascending
order of their respective rates up to and including the amount of such
excess; and
(D) in any such event, the number, if any, of such Outstanding shares
of such series subject to any portion of Bids considered not valid in whole
or in part under this clause (ii) shall be treated as the subject of a Bid
for shares of such series by or on behalf of a Potential Holder at the rate
therein specified; and
(iii) all Sell Orders for shares of such series shall be considered
valid up to and including the excess of the number of Outstanding shares of
such series held by such Existing Holder over the sum 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.
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(e) If more than one Bid for one or more shares of the 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 the series of Municipal Preferred, the Auction Agent shall assemble
all valid Orders submitted or deemed submitted to it by the Broker-Dealers in
respect of shares of such series (each such Order as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to individually as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order" and collectively as "Submitted Hold
Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as
"Submitted Orders") and shall determine for such series:
(i) the excess of the number of Outstanding shares of such series over
the number of Outstanding shares of such series subject to Submitted Hold
Orders (such excess being hereinafter referred to as the "Available
Municipal Preferred" of such series);
(ii) from the Submitted Orders for shares of such series whether:
(A) the number of Outstanding shares of such series subject to
Submitted Bids of Potential Holders specifying one or more rates equal
to or lower than the Maximum Rate for shares of such series;
exceeds or is equal to the sum of:
(B) the number of Outstanding shares of such series subject to
Submitted Bids of Existing Holders specifying one or more rates higher
than the Maximum Rate for shares of such series; and
(C) the number of Outstanding shares of such series subject to
Submitted Sell Orders (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):
(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 Fund 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
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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.
(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 Fund 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 Appendix D,
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 the 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
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series shall be accepted or rejected as follows in the following order of
priority and all other Submitted Bids with respect to shares of such series
shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is higher than the Winning Bid Rate for shares
of such series shall be accepted, thus requiring each such Existing
Holder to sell the shares of Municipal Preferred subject to such
Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares
of such series shall be rejected, thus entitling each such Existing
Holder to continue to hold the shares of Municipal Preferred subject to
such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares
of such series shall be accepted;
(iv) each Existing Holders' Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate for shares of
such series shall be rejected, thus entitling such Existing Holder to
continue to hold shares 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 of Municipal Preferred subject to such Submitted Bids and the
denominator of which shall be the aggregate number of Outstanding shares
of Municipal Preferred subject to such Submitted Bids made by all such
Potential Holders that specified a rate equal to the Winning Bid Rate
for shares of such series.
(b) If Sufficient Clearing Bids for shares of the 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
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(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.
(c) If all of the Outstanding shares of the 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 clause (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
the 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 the series of
Municipal Preferred, the Auction Agent shall determine the aggregate number
of shares of such series to be purchased and the aggregate number of shares
of such series to be sold by Potential Holders and Existing Holders and,
with respect to each Potential Holder and Existing Holder, to the extent
that such aggregate number of shares to be purchased and such aggregate
number of shares to be sold differ, determine to which other Potential
Holder(s) or Existing Holder(s) they shall deliver, or from which other
Potential Holder(s) or Existing Holder(s) they shall receive, as the case
may be, shares of Municipal Preferred of such series. Notwithstanding any
provision of the Auction Procedures or the Settlement Procedures to the
contrary, in the event an Existing Holder or Beneficial Owner of shares of
the 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 Fund 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 Beneficial Owner, a Potential
Beneficial Owner or its respective Agent Member to deliver shares of
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Municipal Preferred of any series or to pay for shares of Municipal
Preferred of any series sold or purchased pursuant to the Auction
Procedures or otherwise.
5. NOTIFICATION OF ALLOCATIONS. Whenever the Fund 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 Fund 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 Fund,
it will be required in turn to notify each Broker-Dealer, who, on or prior to
such Auction Date, in accordance with its Broker-Dealer Agreement, will be
required to notify its Beneficial Owners and Potential Beneficial Owners of
shares of Municipal Preferred believed by it to be interested in submitting an
Order in the Auction to be held on such Auction Date.
6. AUCTION AGENT. For so long as any shares of Municipal Preferred are
outstanding, the Auction Agent, duly appointed by the Fund to so act, shall be
in each case a commercial bank, trust company or other financial institution
independent of the Fund and its affiliates (which however, may engage or have
engaged in business transactions with the Fund or its affiliates) and at no time
shall the Fund 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 the 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 the series of Municipal Preferred and 9:30 a.m. on the
Auction Date for such Auction to ascertain the number of shares of the series in
respect of which the Auction Agent has determined such Broker-Dealer to be an
Existing Holder. If such Broker-Dealer believes it is the Existing Holder of
fewer shares of such series than specified by the Auction Agent in response to
such Broker-Dealer's inquiry, such Broker-Dealer may so inform the Auction Agent
of that belief. Such Broker-Dealer shall not, in its capacity as Existing Holder
of shares of such series, submit Orders in such Auction in respect of shares of
such series covering in the aggregate more than the number of shares of such
series specified by the Auction Agent in response to such Broker-Dealer's
inquiry.
7. TRANSFER OF SHARES OF MUNICIPAL PREFERRED. Unless otherwise permitted
by the Fund, 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 Appendix D 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 Fund) 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 the series of Municipal Preferred outstanding from time to
time shall be represented by a global certificate registered in the name of the
Securities Depository or its nominee and (ii) no registration of transfer of
shares of the series of Municipal Preferred shall be made on the books of the
Fund to any Person other than the Securities Depository or its nominee.
73
<PAGE> 121
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
, 1999
------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Scudder Kemper Investments, Inc.
222 South Riverside Plaza
Chicago, Illinois 60606
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
TRANSFER AGENT
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
Bankers Trust Company
4 Albany Street
New York, New York 10006
SHAREHOLDER SERVICE AGENT
Kemper Service Company
P.O. Box 419066
Kansas City, Missouri 64141
LEGAL COUNSEL
Vedder, Price, Kaufmann & Kammholz
222 North LaSalle Street
Chicago, Illinois 60601
Dechert Price & Rhoads
1775 Eye Street, NW
Washington, DC 20006
INDEPENDENT AUDITORS
Ernst & Young LLP
233 South Wacker Drive
Chicago, Illinois 60606
<PAGE> 122
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements:
Included in Part A: Financial Highlights
Included in Part B: Annual Report for the fiscal year ended November 30,
1998 is incorporated by reference.
2. Exhibits
(a) (1) Amended and Restated Agreement and Declaration of Trust of the
Registrant.*
(2) Certificate of Designation for Preferred Shares is filed
herewith.
(b) By-Laws of the Registrant.*
(c) Not Applicable.
(d) Form of Specimen Certificate representing the Registrant's
Municipal Auction Rate Cumulative Preferred Shares of beneficial
interest ("Municipal Preferred") is filed herewith.
(e) Dividend Reinvestment Plan of the Registrant.*
(f) Not Applicable.
(g) Investment Management Agreement between the Registrant and Scudder
Kemper Investments, Inc.*
(h) Form of Underwriting Agreement between the Registrant and Salomon
Smith Barney is filed herewith.
(i) Not Applicable.
(j) Custody Agreement between the Registrant and State Street Bank and
Trust Company.*
(k) (1) Form of Auction Agent Agreement between the Registrant and
Bankers Trust Company as to the Registrant's Municipal
Preferred shares is filed herewith.
(2) Form of Broker-Dealer Agreement as to the Registrant's
Municipal Preferred shares is filed herewith.
(3) Agency Agreement between the Registrant and IFTC, appointing
IFTC as Transfer Agent and Dividend Disbursing Agent.*
(l) Opinion and Consent of Dechert Price & Rhoads is filed herewith.
(m) Not Applicable.
(n) (1) Consent of Ernst & Young LLP is filed herewith.
(2) Powers of Attorney are filed herewith.
(o) Not Applicable.
(p) Not Applicable.
(q) Not Applicable.
<PAGE> 123
(r) Not Applicable.
- ---------------
* Incorporated by reference to the Registration Statement filed with the
Commission via EDGAR on May 20, 1999.
ITEM 25. MARKETING AGREEMENTS
See Form of Underwriting Agreement filed as Exhibit (h) of Item 24 to this
Registration Statement.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*
<TABLE>
<S> <C>
Registration Fees........................................... $ 19,460
Printing and Engraving Expenses............................. $ 40,000
Rating Agency Fees and Expenses............................. $ 50,000
Legal Fees and Expenses..................................... $125,000
Blue Sky Fees and Expenses.................................. $ 5,000
Accounting Fees and Expenses................................ $ 10,000
Miscellaneous Expenses...................................... $ 15,000
--------
Total............................................. $264,460
</TABLE>
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
Not Applicable.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
<S> <C>
Municipal Auction Rate Cumulative Preferred Shares of 0
beneficial interest, par value $.01 per share as of
August 31, 1999
Common Shares of beneficial interest par value $.01 per 1,485
share as of
August 31, 1999
</TABLE>
ITEM 29. INDEMNIFICATION
Article VIII of the Registrant's Amended and Restated Agreement and
Declaration of Trust, dated February 27, 1989, provides in effect that the
Registrant will indemnify its officers and trustees under certain circumstances.
However, in accordance with Section 17(h) and 17(i) of the Investment Company
Act of 1940 and its own terms, said Article of the Amended and Restated
Agreement and Declaration of Trust does not protect any person against any
liability to the Registrant or its shareholders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office.
* * * * * * * *
Insofar as indemnification for liabilities 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 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
2
<PAGE> 124
as to whether such indemnification by itself is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The descriptions of the business of Scudder Kemper Investments, Inc. are
set forth under the caption "Management of the Fund" in the Prospectus and
"Investment Advisory and Other Services" in the SAI forming part of this
Registration Statement.
The information as to the Trustees and officers of Scudder Kemper
Investments, Inc. set forth in the Form ADV of Scudder Kemper Investments, Inc.,
filed with the Securities and Exchange Commission (File No. 801-252), as amended
through the date hereof, is incorporated herein by reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
Accounts and Records of the Fund are maintained at (i) the Fund's office at
222 South Riverside Plaza, Chicago, Illinois 60606, (ii) the offices of Scudder
Kemper Investments, Inc. at 345 Park Avenue, New York, New York, 10154-0010, and
(iii) the offices of Scudder Kemper Investments, Inc. at 2 International Place,
Boston, Massachusetts 02110-4103.
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, maintains all the records in its capacity as custodian of
the Registrant's assets. Kemper Service Company, P.O. 419066, Kansas City,
Missouri 64141, maintains all the required records in its capacity as sub-
transfer agent of the Registrant.
ITEM 32. MANAGEMENT SERVICES
Not Applicable.
ITEM 33. UNDERTAKINGS
1. Registrant undertakes to suspend offering of its Municipal Preferred
shares until it amends its prospectus if (a) subsequent to the effective date of
its Registration Statement, the net asset value declines more than 10 percent
from its net asset value as of the effective date of the Registration Statement,
or (b) the net asset value increases to an amount greater than its net proceeds
as stated in the prospectus.
2. Not Applicable.
3. Not Applicable.
4. Not Applicable.
5 (a) That, for the purpose of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant under Rule 497(h)
under the Securities Act of 1933 shall be deemed to be a part of this
Registration Statement as of the time it was declared effective; and
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of securities at that time shall be
deemed to be the initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of a written or oral request, any Statement of Additional Information.
3
<PAGE> 125
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Boston, Massachusetts on this 13th day of September, 1999.
KEMPER STRATEGIC MUNICIPAL
INCOME TRUST
By: *
------------------------------------
Mark S. Casady
President and Trustee
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
<TABLE>
<C> <S> <C>
* President and Trustee September 13, 1999
- --------------------------------------------------- (Principal Executive
Mark S. Casady Officer)
* Treasurer (Principal September 13, 1999
- --------------------------------------------------- Financial and Accounting
John R. Hebble Officer)
* Trustee September 13, 1999
- ---------------------------------------------------
James E. Akins
Trustee
- ---------------------------------------------------
James Edgar
* Trustee September 13, 1999
- ---------------------------------------------------
Arthur R. Gottschalk
* Trustee September 13, 1999
- ---------------------------------------------------
Thomas W. Littauer
* Trustee September 13, 1999
- ---------------------------------------------------
Frederick T. Kelsey
* Trustee September 13, 1999
- ---------------------------------------------------
Fred B. Renwick
* Trustee September 13, 1999
- ---------------------------------------------------
John G. Weithers
*By: /s/ ROBERT W. HELM
- ---------------------------------------------------
Robert W. Helm
As Attorney-In-Fact
</TABLE>
<PAGE> 126
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
EXHIBITS FILED WITH PRE-EFFECTIVE AMENDMENT NO. 1
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<S> <C>
2(a)(2) Certificate of Designation for Preferred Shares.
2(d) Form of Specimen Certificate representing the Registrant's
Municipal Auction Rate Cumulative Preferred Shares of
beneficial interest ("Municipal Preferred").
2(h) Form of Underwriting Agreement between the Registrant and
Salomon Smith Barney.
2(k)(1) Form of Auction Agent Agreement between the Registrant and
Bankers Trust Company.
2(k)(2) Form of Broker-Dealer Agreement as to the Registrant's
Municipal Preferred shares.
2(1) Opinion and Consent of Dechert Price & Rhoads.
2(n)(1) Consent of Ernst & Young.
2(n)(2) Powers of Attorney.
</TABLE>
<PAGE> 1
EXHIBIT 2(a)(2)
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
Certificate of Designation for Preferred Shares
creating one series of
Municipal Auction Rate Cumulative Preferred Shares
<PAGE> 2
EXHIBIT 2(a)(2)
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I ........................................................ 2
DESIGNATION ................................................... 2
1.Definitions ................................................. 2
"AA" Composite Commercial Paper Rate .......................... 2
Accountant's Confirmation ..................................... 3
Affiliate ..................................................... 3
Agent Member .................................................. 3
Anticipation Notes ............................................ 3
Applicable Rate ............................................... 3
Auction ....................................................... 3
Auction Agency Agreement ...................................... 3
Auction Agent ................................................. 4
Auction Date .................................................. 4
Auction Procedures ............................................ 4
Available Municipal Preferred ................................. 4
Benchmark Rate ................................................ 4
Beneficial Owner .............................................. 4
Bid and Bids .................................................. 4
Bidder and Bidders ............................................ 4
Board of Trustees ............................................. 4
Broker-Dealer ................................................. 4
Broker-Dealer Agreement ....................................... 4
Business Day .................................................. 4
By-laws ....................................................... 4
Code .......................................................... 5
Commercial Paper Dealers ...................................... 5
Common Shares ................................................. 5
Date of Original Issue ........................................ 5
Declaration ................................................... 5
Deposit Securities ............................................ 5
Discounted Value .............................................. 5
Dividend Payment Date ......................................... 5
Dividend Period ............................................... 5
Escrowed Bonds ................................................ 6
Existing Holder ............................................... 6
Failure to Deposit ............................................ 6
Federal Tax Rate Increase ..................................... 6
Gross-up Payment .............................................. 6
Holder ........................................................ 7
Hold Order and Hold Orders .................................... 7
Independent Accountant ........................................ 7
Initial Dividend Rate ......................................... 7
Initial Rate Period ........................................... 7
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
Interest Equivalent ........................................... 7
Inverse Floaters .............................................. 7
Late Charge ................................................... 7
Liquidation Preference ........................................ 7
Market Value .................................................. 7
Maximum Potential Gross-up Payment Liability .................. 8
Maximum Rate .................................................. 8
Minimum Rate Period ........................................... 9
Moody's ....................................................... 9
Moody's Discount Factor ....................................... 9
Moody's Eligible Asset ........................................ 10
Moody's Exposure Period ....................................... 11
Moody's Volatility Factor ..................................... 11
Municipal Preferred ........................................... 12
Municipal Preferred Basic Maintenance Amount .................. 12
Municipal Preferred Basic Maintenance Report .................. 14
Municipal Securities .......................................... 14
1940 Act ...................................................... 14
1940 Act Cure Date ............................................ 14
1940 Act Municipal Preferred Asset Coverage ................... 14
Notice of Redemption .......................................... 14
Notice of Special Rate Period ................................. 14
Order and Orders .............................................. 14
Outstanding ................................................... 14
Person ........................................................ 15
Potential Beneficial Owner .................................... 15
Potential Holder .............................................. 15
Pricing Service ............................................... 15
Preferred Shares .............................................. 15
Quarterly Valuation Date ...................................... 15
Rate Multiple ................................................. 15
Rate Period ................................................... 16
Rate Period Days .............................................. 16
Receivables for Municipal Securities Sold ..................... 16
Redemption Price .............................................. 17
Registration Statement ........................................ 17
S&P ........................................................... 17
S&P Discount Factor ........................................... 17
S&P Eligible Asset ............................................ 18
S&P Exposure Period ........................................... 19
S&P Volatility Factor ......................................... 19
Securities Depository ......................................... 19
Sell Order and Sell Orders .................................... 20
Special Rate Period ........................................... 20
Special Redemption Provisions ................................. 20
Submission Deadline ........................................... 20
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C>
Submitted Bid and Submitted Bids ................................................. 20
Submitted Hold Order and Submitted Hold Orders ................................... 20
Submitted Order and Submitted Orders ............................................. 20
Submitted Sell Order and Submitted Sell Orders ................................... 20
Subsequent Rate Period ........................................................... 20
Substitute Commercial Paper Dealer ............................................... 20
Substitute U.S. Government Securities Dealer ..................................... 20
Sufficient Clearing Bids ......................................................... 21
Taxable Allocation ............................................................... 21
Taxable Equivalent of the Short-Term Municipal Bond Rate ......................... 21
Taxable Income ................................................................... 21
Treasury Bill .................................................................... 21
Treasury Bill Rate ............................................................... 21
Treasury Note .................................................................... 22
Treasury Note Rate ............................................................... 22
U.S. Government Securities Dealer ................................................ 22
Valuation Date ................................................................... 22
Voting Period .................................................................... 22
Winning Bid Rate ................................................................. 22
2. Dividends .................................................................... 23
(a) Ranking ..................................................................... 23
(b) Cumulative Cash Dividends ................................................... 23
(c) Dividends Cumulative From Date of Original Issue ............................ 23
(d) Dividend Payment Dates and Adjustments Thereof .............................. 23
(e) Dividend Rates and Calculation of Dividends ................................. 24
(i) Dividend Rates ......................................................... 24
(ii) Calculation of Dividends .............................................. 26
(f) Curing a Failure to Deposit ................................................. 26
(g) Dividend Payments by Trust to Auction Agent ................................. 26
(h) Auction Agent as Trustee of Dividend Payments by Trust ...................... 26
(i) Dividends Paid to Holders ................................................... 27
(j) Dividends Credited Against Earliest Accumulated But Unpaid Dividends ........ 27
(k) Dividends Designated as Exempt-Interest Dividends ........................... 27
3. Gross-up Payments ............................................................ 27
(a) Minimum Rate Periods and Special Rate Periods of 28 Rate Period Days or Fewer 27
(b) Special Rate Periods of More Than 28 Rate Period Days ....................... 27
(c) No Gross-up Payments In the Event of a Reallocation ......................... 28
4. Designation of Special Rate Periods .......................................... 28
(a) Length of and Preconditions for Special Rate Period ......................... 28
(b) Adjustment of Length of Special Rate Period ................................. 28
(c) Notice of Proposed Special Rate Period ...................................... 28
(d) Notice of Special Rate Period ............................................... 29
(e) Failure to Deliver Notice of Special Rate Period ............................ 30
5. Voting Rights ................................................................ 30
(a) One Vote Per Share of Municipal Preferred ................................... 30
(b) Voting For Additional Trustees .............................................. 30
</TABLE>
-iii-
<PAGE> 5
<TABLE>
<S> <C>
(i) Voting Period .............................................................. 30
(ii) Notice of Special Meeting ................................................. 31
(iii) Terms of Office of Existing Trustees ..................................... 31
(iv) Terms of Office of Certain Trustees to Terminate Upon Termination of
Voting Period ............................................................ 32
(c) Holders of Municipal Preferred To Vote on Certain Other Matters ................. 32
(i) Increases in Capitalization ................................................ 32
(ii) 1940 Act Matters .......................................................... 33
(d) Board May Take Certain Actions Without Shareholder Approval ..................... 34
(e) Voting Rights Set Forth Herein Are Sole Voting Rights ........................... 34
(f) No Preemptive Rights or Cumulative Voting ....................................... 34
(g) Voting for Trustees Sole Remedy for Trust's Failure to Pay Dividends ............ 35
(h) Holders Entitled to Vote ........................................................ 35
6. 1940 Act Municipal Preferred Asset Coverage ...................................... 35
7. Municipal Preferred Basic Maintenance Amount ..................................... 35
8. [Reserved.] ....................................................................... 37
9. Restrictions on Dividends and Other Distributions ................................. 37
(a) Dividends on Preferred Shares Other Than Municipal Preferred .................... 37
(b) Dividends and Other Distributions With Respect to Common Shares Under the 1940
Act .................................................................................. 38
(c) Other Restrictions on Dividends and Other Distributions ......................... 38
10. Rating Agency Restrictions ...................................................... 39
11. Redemption ...................................................................... 41
(a) Optional Redemption ............................................................. 41
(b) Mandatory Redemption ............................................................ 42
(c) Notice of Redemption ............................................................ 43
(d) No Redemption Under Certain Circumstances ....................................... 43
(e) Absence of Funds Available for Redemption ....................................... 44
(f) Auction Agent as Trustee of Redemption Payments by Trust ........................ 44
(g) Shares for Which Notice of Redemption Has Been Given Are No Longer Outstanding .. 44
(h) Compliance With Applicable Law .................................................. 45
(i) Only Whole Shares of Municipal Preferred May Be Redeemed ........................ 45
12. Liquidation Rights ............................................................... 45
(a) Ranking ......................................................................... 45
(b) Distributions Upon Liquidation .................................................. 45
(c) Pro Rata Distributions .......................................................... 45
(d) Rights of Junior Shares ......................................................... 46
(e) Certain Events Not Constituting Liquidation ..................................... 46
13. Miscellaneous ................................................................... 46
(a) Amendment of this Certificate to Add Additional Series .......................... 46
(b) [Reserved.] ..................................................................... 46
(c) No Fractional Shares ............................................................ 46
(d) Status of Shares of Municipal Preferred Redeemed, Exchanged or Otherwise Acquired
by the Trust .................................................................... 46
(e) Board May Resolve Ambiguities ................................................... 47
</TABLE>
-iv-
<PAGE> 6
<TABLE>
<S> <C>
(f) Headings Not Determinative .......................................................... 47
(g) Notices ............................................................................. 47
PART II .................................................................................. 48
1. Orders ............................................................................... 48
2. Submission of Orders by Broker-Dealers to Auction Agent .............................. 50
3. Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate ...... 52
4. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation
of Shares ............................................................................ 54
5. Notification of Allocations .......................................................... 57
6. Auction Agent ........................................................................ 57
7. Transfer of Shares of Municipal Preferred ............................................ 58
8. Global Certificate ................................................................... 58
</TABLE>
-v-
<PAGE> 7
EXHIBIT 2(a)(2)
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
Certificate of Designation for Preferred Shares
creating one series of
Municipal Auction Rate Cumulative Preferred Shares
KEMPER STRATEGIC MUNICIPAL INCOME TRUST hereby certifies that its Board
of Trustees has adopted the following resolutions, creating a class and one
series within the class of preferred shares of beneficial interest as follows:
RESOLVED, that, pursuant to authority expressly granted to and vested
in the Board of Trustees of the Kemper Strategic Municipal Income Trust, a
Massachusetts business trust (the "Trust"), by the provisions of its Amended and
Restated Agreement and Declaration of Trust (the "Declaration"), the Board of
Trustees hereby authorizes the creation of a class of preferred shares, par
value $.01 per share, to be issued in one or more series; and
RESOLVED FURTHER, that the Board of Trustees of the Trust hereby
further authorizes the creation of one series of its class of preferred shares
of beneficial interest, designated Municipal Auction Rate Cumulative Preferred
Shares, Series T, authorizes the issuance of up to 5,000 shares of beneficial
interest of such series, and hereby fixes the designation and the powers,
rights, preferences and privileges and the qualifications, limitations and
restrictions of the shares of such series as follows:
<PAGE> 8
PART I
DESIGNATION
Municipal Auction Rate Cumulative Preferred Shares, Series T: 2,800
shares of beneficial interest of Preferred Shares, par value $.01 per share,
liquidation preference $25,000 per share plus an amount equal to accumulated but
unpaid dividends (whether or not earned or declared) thereon, is hereby
designated "Municipal Auction Rate Cumulative Preferred Shares, Series T." Each
share of Municipal Auction Rate Cumulative Preferred Shares, Series T (sometimes
referred to herein as "Series T Municipal Preferred") may be issued on a date to
be determined by the Board of Trustees of the Trust or pursuant to their
delegated authority; have an Initial Dividend Rate and an initial Dividend
Payment Date as shall be determined in advance of the issuance thereof by the
Board of Trustees of the Trust or pursuant to their delegated authority; and
have such other preferences, voting powers, limitations as to dividends,
qualifications and terms and conditions of redemption as are set forth in the
Declaration, By-laws and herein. The Series T Municipal Preferred shall
constitute a separate series of Preferred Shares of the Trust, and each share of
Series T Municipal Preferred shall be identical.
1. Definitions. Unless the context or use indicates another or
different meaning or intent, in this Certificate of Designation for Preferred
Shares (the "Certificate"), the following terms have the following meanings,
whether used in the singular or plural:
"'AA' Composite Commercial Paper Rate," on any date for any Rate
Period of shares of a series of Municipal Preferred, shall mean (i) (A) in the
case of any Minimum Rate Period or any Special Rate Period of fewer than 49 Rate
Period Days, the interest equivalent of the 30-day rate; provided, however, that
if such Rate Period is a Minimum Rate Period and the "AA" Composite Commercial
Paper Rate is being used to determine the Applicable Rate for shares of such
series when all of the Outstanding shares of such series are subject to
Submitted Hold Orders, then the interest equivalent of the seven-day rate, and
(B) in the case of any Special Rate Period of: (1) 49 or more but fewer than 70
Rate Period Days, the interest equivalent of the 60-day rate; (2) 70 or more but
fewer than 85 Rate Period Days, the arithmetic average of the interest
equivalent of the 60-day and 90-day rates; (3) 85 or more but fewer than 99 Rate
Period Days, the interest equivalent of the 90-day rate; (4) 99 or more but
fewer than 120 Rate Period Days, the arithmetic average of the interest
equivalent of the 90-day and 120-day rates; (5) 120 or more but fewer than 141
Rate Period Days, the interest equivalent of the 120-day rate; (6) 141 or more
but fewer than 162 Rate Period Days, the arithmetic average of the 120-day and
180-day rates; and (7) 162 or more but fewer than 183 Rate Period Days, the
interest equivalent of the 180-day rate, in each case on commercial paper placed
on behalf of issuers whose corporate bonds are rated "AA" by S&P or the
equivalent of such rating by S&P or another rating agency, as made available on
a discount basis or otherwise by the Federal Reserve Bank of New York for the
Business Day next preceding such date, or (ii) in the event that the Federal
Reserve Bank of New York does not make available any such rate, then the
arithmetic average of such rates, as quoted on a discount basis or otherwise, by
the Commercial Paper Dealers to the Auction Agent for the close of business on
the Business Day next preceding such date. If any Commercial Paper Dealer does
not quote a rate required to determine the "AA" Composite Commercial Paper Rate,
the "AA" Composite Commercial Paper Rate shall be determined on the basis of the
quotation or quotations furnished by the remaining Commercial Paper Dealer or
Commercial Paper Dealers
-2-
<PAGE> 9
and any Substitute Commercial Paper Dealer or Substitute Commercial Paper
Dealers selected by the Trust to provide such rate or rates not being supplied
by any Commercial Paper Dealer or Commercial Paper Dealers, as the case may be,
or, if the Trust does not select any such Substitute Commercial Paper Dealer or
Substitute Commercial Paper Dealers, by the remaining Commercial Paper Dealer or
Commercial Paper Dealers. For purposes of this definition, the "interest
equivalent" of a rate stated on a discount basis (a "discount rate") for
commercial paper of a given days' maturity shall be equal to the quotient
(rounded upwards to the next higher one-thousandth (.001) of 1%) of (A) the
discount rate divided by (B) the difference between (x) 1.00 and (y) a fraction
the numerator of which shall be the product of the discount rate times the
number of days in which such commercial paper matures and the denominator of
which shall be 360.
"Accountant's Confirmation" shall have the meaning specified in
paragraph (c) of Section 7 of Part I of this Certificate.
"Affiliate" shall mean, for purposes of the definition of
"Outstanding," any Person known to the Auction Agent to be controlled by, in
control of or under common control with the Trust; provided, however, that no
Broker-Dealer controlled by, in control of or under common control with the
Trust shall be deemed to be an Affiliate nor shall any corporation or any Person
controlled by, in control of or under common control with such corporation one
of the trustees, directors or executive officers of which is a trustee of the
Trust be deemed to be an Affiliate solely because such trustee, director or
executive officer is also a trustee of the Trust.
"Agent Member" shall mean a member of or participant in the Securities
Depository that will act on behalf of a Bidder.
"Anticipation Notes" shall mean Tax Anticipation Notes (TANs), Revenue
Anticipation Notes (RANs), Tax and Revenue Anticipation Notes (TRANs), Grant
Anticipation Notes (GANs), and Bond Anticipation Notes (BANs).
"Applicable Rate" shall have the meaning specified in paragraph (e)(i)
of Section 2 of Part I of this Certificate.
"Auction" shall mean each periodic implementation of the Auction
Procedures.
"Auction Agency Agreement" shall mean the agreement between the Trust
and the Auction Agent which provides, among other things, that the Auction Agent
will follow the Auction Procedures for purposes of determining the Applicable
Rate for shares of a series of Municipal Preferred so long as the Applicable
Rate for shares of such series is to be based on the results of an Auction.
"Auction Agent" shall mean the entity appointed as such by a
resolution of the Board of Trustees in accordance with Section 6 of Part II of
this Certificate.
"Auction Date," with respect to any Rate Period, shall mean the
Business Day next preceding the first day of such Rate Period.
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<PAGE> 10
"Auction Procedures" shall mean the procedures for conducting Auctions
set forth in Part II of this Certificate.
"Available Municipal Preferred" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Certificate.
"Benchmark Rate" shall have the meaning specified in paragraph (c) of
Section 3 of Part II of this Certificate.
"Beneficial Owner" with respect to shares of a series of Municipal
Preferred, means a customer of a Broker-Dealer who is listed on the records of
that Broker-Dealer (or, if applicable, the Auction Agent) as a holder of shares
of such series.
"Bid" and "Bids" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of this Certificate.
"Bidder" and "Bidders" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of this Certificate; provided, however,
that neither the Trust nor any affiliate thereof shall be permitted to be a
Bidder in an Auction, except that any Broker-Dealer that is an affiliate of the
Trust may be a Bidder in an Auction, but only if the Orders placed by such
Broker-Dealer are not for its own account.
"Board of Trustees" shall mean the Board of Trustees of the Trust or
any duly authorized committee thereof.
"Broker-Dealer" shall mean any broker-dealer, commercial bank or other
entity permitted by law to perform the functions required of a Broker-Dealer in
Part II of this Certificate, that is a member of, or a participant in, the
Securities Depository or is an affiliate of such member or participant, has been
selected by the Trust and has entered into a Broker-Dealer Agreement that
remains effective.
"Broker-Dealer Agreement" shall mean an agreement among the Trust, the
Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to
follow the procedures specified in Part II of this Certificate.
"Business Day" shall mean a day on which the New York Stock Exchange
is open for trading, and which is neither a Saturday, Sunday nor any other day
on which banks in The City of New York, New York are authorized by law to close.
"By-laws" shall mean the By-laws of the Trust, as amended from
time-to-time.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Commercial Paper Dealers" means Lehman Commercial Paper Incorporated,
Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith and such other
commercial paper dealer or dealers as the Trust may from time to time appoint,
or, in lieu of any thereof, their respective affiliates or successors, if such
entity is a commercial paper dealer.
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<PAGE> 11
"Common Shares" means the common shares of beneficial interest, par
value $.01 per share, of the Trust.
"Date of Original Issue" with respect to shares of a series of
Municipal Preferred, shall mean the date on which the Trust originally issued
such shares.
"Declaration" shall mean the Amended and Restated Agreement and
Declaration of Trust dated February 27, 1989 of the Trust on file with the
Secretary of State of the Commonwealth of Massachusetts, as may be restated or
amended from time to time.
"Deposit Securities" shall mean cash and Municipal Securities rated at
least A-1+ or SP-1+ by S&P, except that, for purposes of subparagraph (a)(v) of
Section 11 of Part I of this Certificate, such Municipal Securities shall be
considered "Deposit Securities" only if they are also rated P-1, MIG-1 or VMIG-1
by Moody's.
"Discounted Value," as of any Valuation Date, shall mean, (i) with
respect to an S&P Eligible Asset, the quotient of the Market Value thereof
divided by the applicable S&P Discount Factor and (ii) (a) with respect to a
Moody's Eligible Asset that is not currently callable as of such Valuation Date
at the option of the issuer thereof, the quotient of the Market Value thereof
divided by the applicable Moody's Discount Factor, or (b) with respect to a
Moody's Eligible Asset that is currently callable as of such Valuation Date at
the option of the issuer thereof, the quotient of (1) the lesser of the Market
Value or call price thereof, including any call premium, divided by (2) the
applicable Moody's Discount Factor.
"Dividend Payment Date," with respect to shares of a series of
Municipal Preferred, shall mean any date on which dividends are payable on
shares of such series pursuant to the provisions of paragraph (d) of Section 2
of Part I of this Certificate.
"Dividend Period," with respect to shares of a series of Municipal
Preferred, shall mean the period from and including the Date of Original Issue
of shares of such series to but excluding the initial Dividend Payment Date for
shares of such series and any period thereafter from and including one Dividend
Payment Date for shares of such series to but excluding the next succeeding
Dividend Payment Date for shares of such series.
"Escrowed Bonds" shall mean Municipal Securities that (i) have been
determined to be legally defeased in accordance with S&P's legal defeasance
criteria, (ii) have been determined to be economically defeased in accordance
with S&P's economic defeasance criteria and assigned a rating of "AAA" by S&P,
(iii) are not rated by S&P but have been determined to be legally defeased by
Moody's or (iv) have been determined to be economically defeased by Moody's and
assigned a rating no lower than the rating that is Moody's equivalent of "AAA"
by S&P's rating.
"Existing Holder," with respect to shares of a series of Municipal
Preferred, shall mean a Broker-Dealer (or any such other Person as may be
permitted by the Trust) that is listed on the records of the Auction Agent as a
holder of shares of such series.
"Failure to Deposit," with respect to shares of a series of Municipal
Preferred, shall mean a failure by the Trust to pay to the Auction Agent, not
later than 12:00 noon, New York City
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<PAGE> 12
time, (A) on the Business Day next preceding any Dividend Payment Date for
shares of such series, in funds available on such Dividend Payment Date in The
City of New York, New York, the full amount of any dividend (whether or not
earned or declared) to be paid on such Dividend Payment Date on any share of
such series or (B) on the Business Day next preceding any redemption date in
funds available on such redemption date for shares of such series in The City of
New York, New York, the Redemption Price to be paid on such redemption date for
any share of such series after notice of redemption is mailed pursuant to
paragraph (c) of Section 11 of Part I of this Certificate; provided, however,
that the foregoing clause (B) shall not apply to the Trust's failure to pay the
Redemption Price in respect of shares of Municipal Preferred when the related
Notice of Redemption provides that redemption of such shares is subject to one
or more conditions precedent and any such condition precedent shall not have
been satisfied at the time or times and in the manner specified in such Notice
of Redemption.
"Federal Tax Rate Increase" shall have the meaning specified in the
definition of "Moody's Volatility Factor."
"Gross-up Payment" in respect of any dividend means payment to a Holder
of shares of Municipal Preferred of an amount which, giving effect to the
Taxable Allocations made with respect to such dividend, would cause such
Holder's after-tax returns (taking into account both the Taxable Allocations and
the Gross-up Payment) to be equal to the after-tax return the Holder would have
received if no such Taxable Allocations had occurred. Such Gross-up Payment
shall be calculated: (i) without consideration being given to the time value of
money; (ii) assuming that no Holder of shares of Municipal Preferred is subject
to the Federal alternative minimum tax with respect to dividends received from
the Trust; and (iii) assuming that each Holder of shares of Municipal Preferred
is taxable at the maximum marginal regular Federal individual income tax rate
applicable to ordinary income or net capital gain, as applicable, or the maximum
marginal regular Federal corporate income tax rate applicable to ordinary income
or net capital gain, as applicable, whichever is greater, in effect at the time
such Gross-up Payment is made.
"Holder" with respect to shares of a series of Municipal Preferred,
shall mean the registered holder of such shares as the same appears on the
record books of the Trust.
"Hold Order" and "Hold Orders" shall have the respective meanings
specified in paragraph (a) of Section 1 of Part II of this Certificate.
"Independent Accountant" shall mean a nationally recognized
accountant, or firm of accountants, that is, with respect to the Trust, an
independent public accountant or firm of independent public accountants under
the Securities Act of 1933, as amended from time to time.
"Initial Dividend Rate" means the rate per annum applicable to the
initial Dividend Period for such series of Municipal Preferred.
"Initial Rate Period," with respect to shares of a series of Municipal
Preferred, shall mean the period commencing on the Date of Original Issue for
such series and ending on the initial Dividend Payment Date for such series.
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<PAGE> 13
"Interest Equivalent" means a yield on a 360-day basis of a discount
basis security which is equal to the yield on an equivalent interest-bearing
security.
"Inverse Floaters" means trust certificates or other instruments
evidencing interests in one or more Municipal Securities the interest rates on
which are adjusted at short term intervals on a basis that is inverse to the
simultaneous readjustment of the interest rates on corresponding floating rate
trust certificates or other instruments issued by the same issuer.
"Kenny Index" shall have the meaning set forth under the definition of
"Taxable Equivalent of the Short-Term Municipal Bond Rate."
"Late Charge" shall have the meaning specified in subparagraph
(e)(i)(B) of Section 2 of Part I of this Certificate.
"Liquidation Preference," with respect to a given number of shares of
Municipal Preferred, means $25,000 times that number.
"Market Value" of any asset of the Trust means the market value
thereof determined by the valuation methods, including the Pricing Service,
approved from time to time by the Board of Trustees. Market Value of any asset
shall include any interest accrued thereon. 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. The Pricing Service may employ
electronic data processing techniques or a matrix system, or both, to determine
valuations. Securities for which quotations are not readily available shall be
valued at fair value as determined by the Pricing Service using methods which
include consideration of: yields or prices of municipal bonds of comparable
quality, type of issue, coupon, maturity and rating; indications as to value
from dealers; and general market conditions. In the event the Pricing Service is
unable to value a security, the security shall be valued at the lower of two
dealer bids, one of which shall be in writing, obtained by the Trust from
nationally recognized market makers who are members of the National Association
of Securities Dealers, Inc. Futures contracts and options are valued at the most
recent traded price, as of the valuation time, or if market quotations are not
readily available, are valued at fair value on a consistent basis using methods
determined in good faith by the Trustees.
"Maximum Potential Gross-up Payment Liability," as of any Valuation
Date, shall mean the aggregate amount of Gross-up Payments that would be due if
the Trust were to make Taxable Allocations, with respect to any taxable year,
estimated based upon dividends paid and the amount of undistributed realized net
capital gains and other taxable income earned by the Trust, as of the end of the
calendar month immediately preceding such Valuation Date, and assuming such
Gross-up Payments are fully taxable.
"Maximum Rate," for shares of a series of Municipal Preferred on any
Auction Date for shares of such series, shall mean:
(i) in the case of any Auction Date which is not the Auction Date
immediately prior to the first day of any proposed Special Rate Period
designated by the Trust pursuant to Section 4 of Part I of this Certificate, the
product of (A) the Reference Rate on such Auction Date for the
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<PAGE> 14
next Rate Period of shares of such series and (B) the Rate Multiple on such
Auction Date, unless shares of such series have or had a Special Rate Period
(other than a Special Rate Period of 28 Rate Period Days or fewer) and an
Auction at which Sufficient Clearing Bids existed has not yet occurred for a
Minimum Rate Period of shares of such series after such Special Rate Period, in
which case the higher of:
(A) the dividend rate on shares of such series for the
then-ending Rate Period; and
(B) the product of (1) the higher of (x) the Reference Rate on
such Auction Date for a Rate Period equal in length to the
then-ending Rate Period of shares of such series, if such
then-ending Rate Period was 364 Rate Period Days or fewer, or
the Treasury Note Rate on such Auction Date for a Rate Period
equal in length to the then-ending Rate Period of shares of
such series, if such then-ending Rate Period was more than 364
Rate Period Days, and (y) the Reference Rate on such Auction
Date for a Rate Period equal in length to such Special Rate
Period of shares of such series, if such Special Rate Period
was 364 Rate Period Days or fewer, or the Treasury Note Rate
on such Auction Date for a Rate Period equal in length to such
Special Rate Period, if such Special Rate Period was more than
364 Rate Period Days and (2) the Rate Multiple on such Auction
Date; or
(ii) in the case of any Auction Date which is the Auction Date
immediately prior to the first day of any proposed Special Rate Period
designated by the Trust pursuant to Section 4 of Part I of this Certificate, the
product of (A) the highest of (1) the Reference Rate on such Auction Date for a
Rate Period equal in length to the then-ending Rate Period of shares of such
series, if such then-ending Rate Period was 364 Rate Period Dates or fewer, or
the Treasury Note Rate on such Auction Date for a Rate Period equal in length to
the then-ending Rate Period of shares of such series, if such then-ending Rate
Period was more than 364 Rate Period Days, (2) the Reference Rate on such
Auction Date for the Special Rate Period for which the Auction is being held if
such Special Rate Period is 364 Rate Period Days or fewer or the Treasury Note
Rate on such Auction Date for the Special Rate Period for which the Auction is
being held if such Special Rate Period is more than 364 Rate Period Days, and
(3) the Reference Rate on such Auction Date for Minimum Rate Periods and (B) the
Rate Multiple on such Auction Date.
"Minimum Rate Period" shall mean any Rate Period consisting of 7 Rate
Period Days.
"Moody's" shall mean Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" shall mean, for purposes of determining the
Discounted Value of any Moody's Eligible Asset, the percentage determined by
reference to the rating on such asset and the shortest Exposure Period set forth
opposite such rating that is the same length as or is longer than the Moody's
Exposure Period, in accordance with the table set forth below:
<TABLE>
<CAPTION>
RATING CATEGORY
- --------------------------------------------------------------------------------------------------------------------
Exposure Period Aaa* Aa* A* Baa* Other** (V)MIG-1*** SP-1+*** NR****
--- --- --- --- ----- ------ ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
7 weeks 151% 159% 168% 173% 187% 136% 148% 225%
</TABLE>
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<PAGE> 15
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
8 weeks or less but
greater than 7 weeks 154 161 168 176 190 137 149 231%
9 weeks or less but
greater than 8 weeks 156 163 170 177 192 138 150 240%
</TABLE>
- ---------------------
* Moody's rating.
** Municipal Securities not rated by Moody's but rated BBB by S&P.
*** Municipal Securities rated MIG-1 or VMIG-1 or, if not rated by Moody's,
rated SP-1+ by S&P, which do not mature or have a demand feature at par
exercisable in 30 days and which do not have a long-term rating.
**** Municipal Securities rated less than Baa3 by Moody's or less than BBB
by S&P or not rated by Moody's or S&P.
Notwithstanding the foregoing, (i) the Moody's Discount Factor for
short-term Municipal Securities will be 115%, so long as such Municipal
Securities 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% as long as such
Municipal Securities are rated at least A-1+/AA or SP-1+/AA by S&P and mature or
have a demand feature at par exercisable in 30 days or less and (ii) no Moody's
Discount Factor will be applied to cash or to Receivables for Municipal
Securities Sold or futures, options and similar instruments (to the extent such
securities are Moody's Eligible Assets); provided, however, that for purposes of
determining the Moody's Discount Factor applicable to a Municipal Security, any
Municipal Security (excluding any short-term Municipal Security) not rated by
Moody's but rated by S&P shall be deemed to have a Moody's rating which is one
full rating category lower than its S&P rating. A Moody's Discount Factor of
240% will be applied to Municipal Securities rated Aaa by Moody's which are not
interest bearing or do not pay interest at least semi-annually.
"Moody's Eligible Asset" shall mean cash, Receivables for Municipal
Securities Sold, futures, options and similar instruments (other than Inverse
Floaters) or a Municipal Security that (i) pays interest in cash, (ii) does not
have its Moody's rating, if applicable, suspended by Moody's, (iii) is part of
an issue of Municipal Securities of at least $10,000,000, and (iv) is not
subject to a covered call or a covered put option written by the Trust.
Municipal Securities issued by any one issuer and not rated by Moody's or rated
lower than Baa3 by Moody's and not rated by S&P or rated lower than BBB by S&P
("Unrated Moody's Municipal Securities") may comprise no more than 4% of total
Moody's Eligible Assets; such Unrated Moody's Municipal Securities, if any,
together with any Municipal Securities issued by the same issuer and rated BBB
by S&P may comprise no more than 4% of total Moody's Eligible Assets; such
BBB-rated Municipal Securities and Unrated Moody's Municipal Securities, if any,
together with any Municipal Securities issued by the same issuer and rated Baa
by Moody's or A by S&P may comprise no more than 6% of total Moody's Eligible
Assets; such BBB, Baa and A-rated Municipal Securities and Unrated Moody's
Municipal Securities, if any, together with any Municipal Securities issued by
the same issuer and rated A by Moody's or AA by S&P, may comprise no more than
10% of total Moody's Eligible Assets; and such BBB, Baa, A and AA-rated
Municipal Securities and Unrated Moody's Municipal Securities, if any, together
with any Municipal Securities issued by the same issuer and rated Aa by Moody's
or AAA by S&P, may comprise no more than 20% of total Moody's Eligible Assets.
For purposes of the foregoing sentence, any Municipal Security backed by the
guaranty, letter of credit or insurance issued by a third party shall be deemed
to be issued by such third party if the issuance of such third-party
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<PAGE> 16
credit is the sole determinant of the rating on such Municipal Security.
Municipal Securities issued by issuers located within a single state or
territory and not rated by Moody's or rated lower than Baa3 by Moody's and not
rated by S&P or rated lower than BBB by S&P may comprise no more than 12% of
total Moody's Eligible Assets; such Unrated Moody's Municipal Securities, if
any, together with any Municipal Securities issued by issuers located within the
same state or territory and rated BBB by S&P may comprise no more than 12% of
total Moody's Eligible Assets; such BBB-rated Municipal Securities and Unrated
Moody's Municipal Securities, if any, together with any Municipal Securities
issued by issuers located within the same state or territory and rated Baa by
Moody's or A by S&P, may comprise no more than 20% of total Moody's Eligible
Assets; such BBB, Baa and A-rated Municipal Securities and Unrated Moody's
Municipal Securities, if any, together with any Municipal Securities issued by
issuers located within the same state or territory and rated A by Moody's or AA
by S&P, may comprise no more than 40% of total Moody's Eligible Assets; and such
BBB, Baa, A and AA-rated Municipal Securities and Unrated Moody's Municipal
Securities, if any, together with any Municipal Securities issued by issuers
located with the same state or territory and rated Aa by Moody's or AAA by S&P,
may comprise no more than 60% of total Moody's Eligible Assets. Municipal
Securities which are not rated by Moody's or S&P may comprise no more than 40%
of the aggregate Market Value of Moody's Eligible Assets; provided however, that
if the Market Value of such Municipal Securities exceeds 40% of the aggregate
Market Value of Moody's Eligible Assets, a portion of such Municipal Securities
(selected by the Trust) shall not be considered Moody's Eligible Assets, so that
the Market Value of such Municipal Securities (excluding such portion) does not
exceed 40% of the aggregate Market Value of Moody's Eligible Assets; provided
however, that no such unrated Municipal Security shall be considered a Moody's
Eligible Asset if such Municipal Security shall be in "default", which term
shall mean for purposes of this definition, either (a) the nonpayment by the
issuer of interest or principal when due or (b) the notification of the Trust by
the trustee under the underlying indenture or other governing instrument for
such Municipal Security that the issuer will fail to pay when due principal or
interest on such Municipal Security. For purposes of applying the foregoing
requirements, a Municipal Security shall be deemed to be rated BBB by S&P if
rated BBB-, BBB or BBB+ by S&P, Moody's Eligible Assets shall be calculated
without including cash, and Municipal Securities rated MIG-1, VMIG-1 or P-1 or,
if not rated by Moody's, rated A-1+/Aa or SP-1+/AA by S&P, shall be considered
to have a long-term rating of A. When the Trust sells a Municipal Security and
agrees to repurchase such Municipal Security at a future date, such Municipal
Security shall be valued at its Discounted Value for purposes of determining
Moody's Eligible Assets, and the amount of the repurchase price of such
Municipal Security shall be included as a liability for purposes of calculating
the Municipal Preferred Basic Maintenance Amount. When the Trust purchases a
Moody's Eligible Asset and agrees to sell it at a future date, such Eligible
Asset shall be valued at the amount of cash to be received by the Trust upon
such future date, provided that the counterparty to the transaction has a
long-term debt rating of at least A2 and a short-term debt rating of at least
P-1 from Moody's and the transaction has a term of no more than 30 days;
otherwise such Eligible Asset shall be valued at the Discounted Value of such
Eligible Asset. Municipal Securities which are not interest bearing or do not
pay interest at least semi-annually shall be considered Moody's Eligible Assets
if rated Aaa by Moody's.
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<PAGE> 17
Notwithstanding the foregoing, an asset will not be considered a
Moody's Eligible Asset to the extent it is (i) subject to any material lien,
mortgage, pledge, security interest or security agreement of any kind
(collectively, "Liens"), except for (a) Liens which are being contested in good
faith by appropriate proceedings and which Moody's has indicated to the Trust
will not affect the status of such asset as a Moody's Eligible Asset, (b) Liens
for taxes that are not then due and payable or that can be paid thereafter
without penalty, (c) Liens to secure payment for services rendered or cash
advanced to the Trust by Scudder Kemper Investments, Inc. or the Auction Agent
and (d) Liens by virtue of any repurchase agreement or futures contract; or (ii)
deposited irrevocably for the payment of any liabilities for purposes of
determining the Municipal Preferred Basic Maintenance Amount.
For purposes of determining the aggregate Discounted Value of Moody's
Eligible Assets, such aggregate amount shall be reduced with respect to any
futures contracts as set forth in paragraph 10(a) of this Part I.
"Moody's Exposure Period" shall mean the period commencing on a given
Valuation Date and ending 49 days thereafter.
"Moody's Volatility Factor" shall mean, as of any Valuation Date, (i)
in the case of any Minimum Rate Period, any Special Rate period of 28 Rate
Period Days or fewer, or any Special Rate Period of 57 Rate Period Days or more,
a multiplicative factor equal to 275%, except as otherwise provided in the last
sentence of this definition; (ii) in the case of any Special Rate Period of more
than 28 but fewer than 36 Rate Period Days, a multiplicative factor equal to
203%; (iii) in the case of any Special Rate Period of more than 35 but fewer
than 43 Rate Period Days, a multiplicative factor equal to 217%; (iv) in the
case of any Special Rate Period of more than 42 but fewer than 50 Rate Period
Days, a multiplicative factor equal to 226%; and (v) in the case of any Special
Rate Period of more than 49 but fewer than 57 Rate Period Days, a multiplicative
factor equal to 235%. If, as a result of the enactment of changes to the Code,
the greater of the maximum marginal Federal individual income tax rate
applicable to ordinary income and the maximum marginal Federal corporate income
tax rate applicable to ordinary income will increase, such increase being
rounded up to the next five percentage points (the "Federal Tax Rate Increase"),
until the effective date of such increase, the Moody's Volatility Factor in the
case of any Rate Period described in (i) above in this definition instead shall
be determined by reference to the following table:
<TABLE>
<CAPTION>
Federal Tax
Rate Increase Volatility Factor
- ------------- -----------------
<S> <C>
5% 295%
10% 317%
15% 341%
20% 369%
25% 400%
30% 436%
35% 477%
40% 525%
</TABLE>
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<PAGE> 18
"Municipal Preferred" shall mean the Series T Municipal Auction Rate
Cumulative Preferred Shares and, where appropriate, any other series of the
Municipal Auction Rate Cumulative Preferred Shares of the Trust.
"Municipal Preferred Basic Maintenance Amount," as of any Valuation
Date, shall mean the dollar amount equal to the sum of (i) (A) the product of
the number of shares of Municipal Preferred outstanding on such date multiplied
by $25,000 (plus the product of the number of shares of any other series of
Preferred Shares outstanding on such date multiplied by the liquidation
preference of such shares), plus any redemption premium applicable to shares of
Municipal Preferred (or other Preferred Shares) then subject to redemption, (B)
the aggregate amount of dividends that will have accumulated at the respective
Applicable Rates (whether or not earned or declared) to (but not including) the
first respective Dividend Payment dates for shares of Municipal Preferred
outstanding that follow such Valuation Date (plus the aggregate amount of
dividends, whether or not earned or declared, that will have accumulated in
respect of other outstanding Preferred Shares to, but not including, the first
respective dividend payment dates for such other shares that follow such
Valuation Date), (C) the aggregate amount of dividends that would accumulate on
shares of each series of Municipal Preferred outstanding from such first
respective Dividend Payment Date therefor through the 49th day after such
Valuation Date, at the Maximum Rate (calculated as if such Valuation Date were
the Auction Date for the Rate Period commencing on such Dividend Payment Date)
for a Minimum Rate Period of shares of such series to commence on such Dividend
Payment Date, assuming solely for purposes of the foregoing, that if on such
Valuation Date the Trust shall have delivered a Notice of Special Rate Period to
the Auction Agent pursuant to Section 4(d)(i) of Part I of this Certificate with
respect to shares of such series, such Maximum Rate shall be the higher of (a)
the Maximum Rate for the Special Rate Period of shares of such series to
commence on such Dividend Payment Date and (b) the Maximum Rate for a Minimum
Rate Period of shares of such series to commence on such Dividend Payment Date,
multiplied by the larger of the Moody's Volatility Factor and the S&P Volatility
Factor applicable to a Minimum Rate Period, or, in the event the Trust shall
have delivered a Notice of Special Rate Period to the Auction Agent pursuant to
Section 4(d)(i) of Part I of this Certificate with respect to shares of such
series designating a Special Rate Period consisting of 49 Rate Period Days or
more, the larger of the Moody's Volatility Factor and the S&P Volatility Factor
applicable to a Special Rate Period of that length (plus the aggregate amount of
dividends that would accumulate at the maximum dividend rate or rates on any
other Preferred Shares outstanding from such respective dividend payment dates
through the 49th day after such Valuation Date, as established by or pursuant to
the respective statements establishing and fixing the rights and preferences of
such other Preferred Shares) (except that (1) if such Valuation Date occurs at a
time when a Failure to Deposit (or, in the case of Preferred Shares other than
Municipal Preferred, a failure similar to a Failure to Deposit) has occurred
that has not been cured, the dividend for purposes of calculation would
accumulate at the current dividend rate then applicable to the shares in respect
of which such failure has occurred and (2) for those days during the period
described in this subparagraph (C) in respect of which the Applicable Rate in
effect immediately prior to such Dividend Payment Date will remain in effect
(or, in the case of the Preferred Shares other than Municipal Preferred, in
respect of which the dividend rate or rates in effect immediately prior to such
respective dividend payment dates will remain in effect), the dividend for
purposes of calculation
-12-
<PAGE> 19
would accumulate at such Applicable Rate (or other rate or rates, as the case
may be) in respect of those days), (D) the amount of anticipated expenses of the
Trust for the 90 days subsequent to such Valuation Date, (E) the amount of the
Trust's Maximum Potential Gross-up Payment Liability in respect of shares of
Municipal Preferred (and similar amounts payable in respect of other Preferred
Shares pursuant to provisions similar to those contained in Section 3 of Part I
of this Certificate) as of such Valuation Date, and (F) any current liabilities
as of such Valuation Date to the extent not reflected in any of (i)(A) through
(i)(E) (including, without limitation, any payables for Municipal Securities
purchased as of such Valuation Date and any liabilities incurred for the purpose
of clearing securities transactions) less (ii) the value (i.e., for purposes of
current Moody's guidelines, the face value of cash, short-term Municipal
Securities rated MIG-1, VMIG-1 or P-1, and short-term securities that are the
direct obligation of the U.S. government, provided in each case that such
securities mature on or prior to the date upon which any of (i)(A) through
(i)(F) become payable, otherwise the Moody's Discounted Value, or for purposes
of current S&P guidelines, the face value of cash, short-term Municipal
Securities rated A-1+ or SP-1+ and mature or have a demand feature exercisable
in 30 days or less, and short-term securities that are the direct obligation of
the U.S. government, provided in each case that such securities mature on or
prior to the date upon which any of (i)(A) through (i)(F) become payable,
otherwise the S&P Discounted Value) of any of the Trust's assets irrevocably
deposited by the Trust for the payment of any of (i)(A) through (i)(F).
"Municipal Preferred Basic Maintenance Cure Date," with respect to the
failure by the Trust to satisfy the Municipal Preferred Basic Maintenance Amount
(as required by paragraph (a) of Section 7 of Part I of this Certificate) as a
given Valuation Date, shall mean the seventh Business Day following such
Valuation Date.
"Municipal Preferred Basic Maintenance Report" shall mean a report
signed by the President, Treasurer or any Vice President of the Trust which sets
forth, as of the related Valuation Date, the assets of the Trust, the Market
Value and the Discounted Value thereof (seriatim and in aggregate), and the
Municipal Preferred Basic Maintenance Amount.
"Municipal Securities" shall mean "Municipal Securities" as defined in
the Trust's registration statement on Form N-2 on file with the Securities and
Exchange Commission, as such registration statement may be amended from time to
time (the "Registration Statement").
"1940 Act" shall mean the Investment Company Act of 1940, as amended
from time to time.
"1940 Act Cure Date," with respect to the failure by the Trust to
maintain the 1940 Act Municipal Preferred Asset Coverage (as required by Section
6 of Part I of this Certificate) as of the last Business Day of each month,
shall mean the last Business Day of the following month.
"1940 Act Municipal Preferred Asset Coverage" shall mean asset
coverage, as defined in Section 18(h) of the 1940 Act, of at least 200% with
respect to all outstanding senior securities of the Trust which are shares of
beneficial interest, including all outstanding shares of Municipal Preferred (or
such other asset coverage as may in the future be specified in or under the 1940
Act as the minimum asset coverage for senior securities which are shares or
stock of a closed-end investment company as a condition of declaring dividends
on its common shares or stock).
-13-
<PAGE> 20
"Notice of Redemption" shall mean any notice with respect to the
redemption of shares of Municipal Preferred pursuant to paragraph (c) of Section
11 of Part I of this Certificate.
"Notice of Special Rate Period" shall mean any notice with respect to
a Special Rate Period of shares of Municipal Preferred pursuant to subparagraph
(d)(i) of Section 4 of Part I of this Certificate.
"Order" and "Orders" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of this Certificate.
"Outstanding" shall mean, as of any Auction Date with respect to
shares of any series of Municipal Preferred, the number of shares of such series
theretofore issued by the Trust except, without duplication, (i) any shares of
such series theretofore canceled or delivered to the Auction Agent for
cancellation or redeemed by the Trust, (ii) any shares of such series as to
which the Trust or any Affiliate thereof shall be an Existing Holder and (iii)
any shares of such series represented by any certificate in lieu of which a new
certificate has been executed and delivered by the Trust.
"Person" shall mean and include an individual, a partnership, a
corporation, a trust, an unincorporated association, a joint venture or other
entity or a government or any agency or political subdivision thereof.
"Potential Beneficial Owner," with respect to shares of a series of
Municipal Preferred, shall mean a customer of a Broker-Dealer that is not a
Beneficial Owner of shares of such series but that wishes to purchase shares of
such series, or that is a Beneficial Owner of shares of such series that wishes
to purchase additional shares of such series.
"Potential Holder," with respect to shares of a series of Municipal
Preferred, shall mean a Broker-Dealer (or any such other person as may be
permitted by the Trust) that is not an Existing Holder of shares of such series
or that is an Existing Holder of shares of such series that wishes to become the
Existing Holder of additional shares of such series.
"Pricing Service" shall mean S&P J.J. Kenny Evaluation Services,
Muller Data Corp., or any other pricing service approved by S&P or Moody's, or
both, if appropriate.
"Preferred Shares" shall mean the preferred shares of the Trust, and
includes the shares of Municipal Preferred.
"Quarterly Valuation Date" shall mean the last Business Day of each
February, May, August, and November of each year, commencing on November 30,
1999 with respect to Series T Municipal Preferred.
"Rate Multiple" for shares of a series of Municipal Preferred on any
Auction Date for shares of such series, shall mean the percentage, determined as
set forth below, based on the prevailing rating of shares of such series in
effect at the close of business on the Business Day next preceding such Auction
Date:
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<PAGE> 21
<TABLE>
<CAPTION>
Prevailing Rating Percentage
- ----------------- ----------
<S> <C>
Aa3/AA- or higher.................................................... 110%
A3/A-................................................................ 125%
Baa3/BBB-............................................................ 150%
Ba3/BB-.............................................................. 200%
Below Ba3/BB-........................................................ 250%
</TABLE>
provided, however, that in the event the Trust has notified the Auction Agent of
its intent to allocate income taxable for Federal income tax purposes to shares
of such series prior to the Auction establishing the Applicable Rate for shares
of such series, the applicable percentage in the foregoing table shall be
divided by the quantity 1 minus the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate applicable to ordinary income, whichever is
greater. 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 a
series of Municipal Preferred shall be (i) Aa3/AA- or higher if such shares have
a rating of Aa3 or better by Moody's and AA- or better by S&P or the equivalent
of such ratings by such agencies or a substitute rating agency or substitute
rating agencies selected as provided below, (ii) if not Aa3/AA- or higher, then
A3/A- if such shares have a rating of A3 or better by Moody's and A- or better
by S&P or the equivalent of such ratings by such agencies or a substitute rating
agency or substitute rating agencies selected as provided below, (iii) if not
Aa3/AA- or higher or A3/A-, then Baa3/BBB- if such shares have a rating of Baa3
or better by Moody's and BBB- or better by S&P or the equivalent of such ratings
by such agencies or a substitute rating agency or substitute rating agencies
selected as provided below, (iv) if not Aa3/AA- or higher, A3/A- or Baa3/BBB-,
then Ba3/BB- if such shares have a rating of Ba3 or better by Moody's and BB- or
better by S&P or the equivalent of such ratings by such agencies or a substitute
rating agency or substitute rating agencies selected as provided below, and (v)
if not Aa3/AA- or higher, A3/A-, Baa3/BBB-, or Ba3/BB-, then below Ba3/BB-;
provided, however, that if such shares are rated by only one rating agency, the
prevailing rating will be determined without reference to the rating of any
other rating agency. The Trust shall take all reasonable action necessary to
enable either S&P or Moody's to provide a rating for shares of Municipal
Preferred. If neither S&P nor Moody's shall make such a rating available,
Salomon Smith Barney Inc. or its successor shall select at least one nationally
recognized statistical rating organization (as that term is used in the rules
and regulations of the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended from time to time) to act as a substitute
rating agency in respect of shares of such series of Municipal Preferred, and
the Trust shall take all reasonable action to enable such rating agency to
provide a rating for such shares.
"Rate Period," with respect to shares of a series of Municipal
Preferred, shall mean the Initial Rate Period of shares of such series and any
Subsequent Rate Period, including any Special Rate Period, of shares of such
series.
"Rate Period Days," for any Rate Period or Dividend Period, means the
number of days that would constitute such Rate Period or Dividend Period but for
the application of paragraph
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<PAGE> 22
(d) of Section 2 of Part I of this Certificate or paragraph (b) of Section 4 of
Part I of this Certificate.
"Receivables for Municipal Securities Sold" shall mean (A) for
purposes of calculation of Moody's Eligible Assets as of any Valuation Date, no
more than the aggregate of the following: (i) the book value of receivables for
Municipal Securities 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 Securities
sold as of or prior to such Valuation Date which generated receivables, if such
receivables are due within five business days of such Valuation Date but do not
comply with either of the conditions specified in (i) above, and (B) for
purposes of calculation of S&P Eligible Assets as of any Valuation Date, the
book value of receivables for Municipal Securities sold as of or prior to such
Valuation Date if such receivables are due within five business days of such
Valuation date.
"Redemption Price" shall mean the applicable redemption price
specified in paragraph (a) or (b) of Section 11 of Part I of this Certificate.
"Reference Rate" shall mean (i) the higher of the Taxable Equivalent
of the Short-Term Municipal Bond Rate and the "AA" Composite Commercial Paper
Rate in the case of Minimum Rate Periods and Special Rate Periods of 28 Rate
Period Days or fewer; (ii) the "AA" Composite Commercial Paper Rate in the case
of Special Rate Periods of more than 28 Rate Period Days but fewer than 183 Rate
Period Days, and (iii) the Treasury Bill Rate in the case of Special Rate
Periods of more than 182 Rate Period Days but fewer than 365 Rate Period Days.
"Registration Statement" has the meaning specified in the definition
of "Municipal Securities."
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., or its successors.
"S&P Discount Factor" shall mean, for purposes of determining the
Discounted Value of any S&P Eligible Asset, the percentage determined by
reference to the rating on such asset and the shortest Exposure Period set forth
opposite such rating that is the same length as or is longer than the S&P
Exposure Period, in accordance with the table set forth below:
<TABLE>
<CAPTION>
Rating Category
------------------------------------------------------
Exposure Period AAA* AA* A* BBB* NR**
- --------------- ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
45 Business Days ... 190% 195% 210% 250% 220%
25 Business Days ... 170 175 190 230 220%
10 Business Days ... 155 160 175 215 220%
7 Business Days .... 150 155 170 210 220%
3 Business Days .... 130 135 150 190 220%
</TABLE>
- ------------------
* S&P rating.
** S&P Eligible Assets not rated by S&P or rated less than BBB by S&P or
not rated at least the equivalent of an "A" rating by another
recognized credit rating agency.
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<PAGE> 23
Notwithstanding the foregoing, (i) the S&P Discount Factor for
short-term Municipal Securities will be 115%, so long as such Municipal
Securities are rated A-1+ or SP-1+ by S&P and mature or have a demand feature
exercisable within 30 days or less, 120% if such Municipal Securities are rated
A-1 or SP-1 by S&P and mature or have a demand feature exercisable within 30
days or less, or 125% if such Municipal Securities are not rated by S&P but are
rated VMIG-1, P-1 or MIG-1 by Moody's; provided, however, that any such
Moody's-rated short-term Municipal Securities which have demand features
exercisable within 30 days or less must be backed by a letter of credit,
liquidity facility or guarantee from a bank or other financial institution with
a short-term rating of at least A-1+ from S&P; and further provided that such
Moody's-rated short-term Municipal Securities may comprise no more than 50% of
short-term Municipal Securities that qualify as S&P Eligible Assets; (ii) no S&P
Discount Factor will be applied to cash, options and similar instruments or to
Receivables for Municipal Securities Sold; and (iii) except as set forth in
clause (i) above, in the case of any Municipal Security that is not rated by S&P
but qualifies as an S&P Eligible Asset pursuant to clause (iii) of that
definition, such Municipal Security will be deemed to have an S&P rating one
full rating category lower than the S&P rating category that is the equivalent
of the rating category in which such Municipal Security is placed by such other
nationally recognized credit rating agency. For purposes of the foregoing,
Anticipation Notes rated SP-1+ or, if not rated by S&P, rated MIG-1 or VMIG-1 by
Moody's, which do not mature or have a demand feature at par exercisable in 30
days and which do not have a long-term rating, shall be considered to be
short-term Municipal Securities. An S&P Discount Factor of 426% will be applied
to Municipal Securities rated AAA by S&P which are not interest bearing or do
not pay interest at least semi-annually.
"S&P Eligible Asset" shall mean cash (excluding any cash irrevocably
deposited by the Trust for the payment of any liabilities within the meaning of
Municipal Preferred Basic Maintenance Amount), Receivables for Municipal
Securities Sold, futures, options, Inverse Floaters and similar instruments or a
Municipal Security owned by the Trust that (i) is interest bearing and pays
interest at least semi-annually; (ii) is payable with respect to principal and
interest in U.S. Dollars; (iii) is publicly rated BBB or higher by S&P or,
except in the case of Anticipation Notes that are Grant Anticipation Notes or
Bond Anticipation Notes which must be rated by S&P to be included in S&P
Eligible Assets, if not rated by S&P but rated by another nationally recognized
credit rating agency, is rated at least A by such agency; (iv) is not subject to
a covered call or covered put option written by the Trust; (v) except in the
case of Inverse Floaters, is not part of a private placement of Municipal
Securities; and (vi) is part of an issue of Municipal Securities with an
original issue size of at least $20 million or, if of an issue with an original
issue size below $20 million (but in no event below $10 million), is issued by
an issuer with a total of at least $50 million of securities outstanding. Solely
for purposes of this definition, the term "Municipal Security" means any
obligation the interest on which is exempt from regular Federal income taxation
and which is issued by any of the fifty United States, the District of Columbia
or any of the territories of the United States, their subdivisions, counties,
cities, towns, villages, school districts and agencies (including authorities
and special districts created by the states), and federally sponsored agencies
such as local housing authorities. Notwithstanding the foregoing limitations:
(1) Municipal Securities (excluding Escrowed Bonds) of any one issuer
or guarantor (excluding bond insurers) shall be considered S&P Eligible
Assets only to the extent the
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<PAGE> 24
Market Value of such Municipal Securities does not exceed 10% of the
aggregate Market Value of S&P Eligible Assets, provided that 2% is
added to the applicable S&P Discount Factor for every 1% by which the
Market Value of such Municipal Securities exceeds 5% of the aggregate
Market Value of S&P Eligible Assets, and provided that Municipal
Securities (excluding Escrowed Bonds) not rated by S&P or rated less
than BBB by S&P (or not rated at least "A" by another nationally
recognized credit rating agency) of any one issuer or guarantor
(excluding bond issuers) shall constitute S&P Eligible Assets only to
the extent the Market Value of such Municipal Securities does not
exceed 5% of the aggregate Market Value of S&P Eligible Assets;
(2) Municipal Securities not rated at least BBB by S&P or not rated by
S&P or not rated at least "A" by another nationally recognized credit
rating agency shall be considered S&P Eligible Assets only to the
extent the Market Value of such Municipal Securities, including unrated
securities, does not exceed 50% of the aggregate Market Value of S&P
Eligible Assets; provided however, that if the Market Value of such
Municipal Securities exceeds 50% of the aggregate Market Value of S&P
Eligible Assets, a portion of such Municipal Securities (selected by
the Trust) shall not be considered S&P Eligible Assets, so that the
Market Value of such Municipal Securities (excluding such portion) does
not exceed 50% of the aggregate Market Value of S&P Eligible Assets;
(3) Long-term Municipal Securities (excluding Escrowed Bonds) issued by
issuers in any one state or territory shall be considered S&P Eligible
Assets only to the extent that the Market Value of such Municipal
Securities does not exceed 25% of the aggregate Market Value of S&P
Eligible Assets; and
(4) Inverse Floaters shall be considered S&P Eligible Assets if the
ratio of the aggregate dollar amount of floating rate instruments to
inverse floating rate instruments issued by the same issuer does not
exceed one to one at their time of original issuance. Leveraged
floaters will qualify as S&P Eligible Assets if the floater has only
one reset remaining before maturity.
(5) Municipal Securities which are not interest bearing or do not pay
interest at least semi-annually shall be considered S&P Eligible Assets
if rated AAA by S&P.
For purposes of determining the aggregate Discounted Value of S&P's
Eligible Assets, such aggregate amount shall be reduced with respect to any
futures contracts as set forth in paragraph 10(a) of this Part I.
"S&P Exposure Period" shall mean the maximum period of time following
a Valuation Date, including the Valuation Date and the Municipal Preferred Basic
Maintenance Cure Date, that the Trust has under this Certificate to cure any
failure to maintain, as of such Valuation Date, the Discounted Value for its
portfolio at least equal to the Municipal Preferred Basic Maintenance Amount (as
described in paragraph (a) of Section 7 of Part I of this Certificate).
"S&P Volatility Factor" shall mean, as of any Valuation Date, a
multiplicative factor equal to (i) 277% in the case of any Minimum Rate Period
or any Special Rate Period of 28 Rate Period Days or fewer; (ii) 228% in the
case of any Special Rate Period of more than 28 Rate
-18-
<PAGE> 25
Period Days but fewer than 183 Rate Period Days; and (iii) 198% in the case of
any Special Rate Period of more than 182 Rate Period Days.
"Securities Depository" shall mean The Depository Trust Company and
its successors and assigns or any other securities depository selected by the
Trust which agrees to follow the procedures required to be followed by such
securities depository in connection with shares of Municipal Preferred.
"Sell Order" and "Sell Orders" shall have the respective meanings
specified in paragraph (a) of Section 1 of Part II of this Certificate.
"Special Rate Period," with respect to shares of a series of Municipal
Preferred, shall have the meaning specified in paragraph (a) of Section 4 of
Part I of this Certificate.
"Special Redemption Provisions" shall have the meaning specified in
subparagraph (a)(i) of Section 11 of Part I of this Certificate.
"Submission Deadline" shall mean 1:00 P.M., New York City time, on any
Auction Date or such other time on any Auction Date by which Broker-Dealers are
required to submit Orders to the Auction Agent as specified by the Auction Agent
from time to time.
"Submitted Bid" and "Submitted Bids" shall have the respective
meanings specified in paragraph (a) of Section 3 of Part II of this Certificate.
"Submitted Hold Order" and "Submitted Hold Orders" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II of this
Certificate.
"Submitted Order" and "Submitted Orders" shall have the respective
meanings specified in paragraph (a) of Section 3 of Part II of this Certificate.
"Submitted Sell Order" and "Submitted Sell Orders" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II of this
Certificate.
"Subsequent Rate Period," with respect to shares of a series of
Municipal Preferred, shall mean the period from and including the first day
following the Initial Rate Period of shares of such series to but excluding the
next Dividend Payment Date for shares of such series and any period thereafter
from and including one Dividend Payment Date for shares of such series to but
excluding the next succeeding Dividend Payment Date for shares of such series;
provided, however, that if any Subsequent Rate Period is also a Special Rate
Period, such term shall mean the period commencing on the first day of such
Special Rate Period and ending on the last day of the last Dividend Period
thereof.
"Substitute Commercial Paper Dealer" shall mean CS First Boston or
Morgan Stanley & Co. Incorporated or their respective affiliates or successors,
if such entity is a commercial paper dealer; provided, however, that none of
such entities shall be a Commercial Paper Dealer.
"Substitute U.S. Government Securities Dealer" shall mean CS First
Boston and Merrill Lynch, Pierce, Fenner & Smith Incorporated or their
respective affiliates or successors, if such
-19-
<PAGE> 26
entity is a U.S. Government securities dealer; provided, however, that none of
such entities shall be a U.S. Government Securities Dealer.
"Sufficient Clearing Bids" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Certificate.
"Taxable Allocation" shall have the meaning specified in Section 3 of
Part I of this Certificate.
"Taxable Equivalent of the Short-Term Municipal Bond Rate," on any date
for any Minimum Rate Period or Special Rate Period of 28 Rate Period Days or
fewer, shall mean 90% of the quotient of (A) the per annum rate expressed on an
interest equivalent basis equal to the S&P Kenny 30 day High Grade Index or any
successor index (the "Kenny Index") (provided, however, that any such successor
index must be approved by Moody's (if Moody's is then rating the shares of
Municipal Preferred) and S&P (if S&P is then rating the shares of Municipal
Preferred)), made available for the Business Day immediately preceding such date
but in any event not later than 8:30 A.M., New York City time, on such date by
S&P J.J. Kenny Evaluation Services or any successor thereto, based upon 30-day
yield evaluations at par of short-term bonds the interest on which is excludable
for regular Federal Income tax purposes under the Code of "high grade" component
issuers selected by S&P J.J. Kenny Evaluation Services or any such successor
from time to time in its discretion, which component issuers shall include,
without limitation, issuers of general obligation bonds, but shall exclude any
bonds the interest on which constitutes an item of tax preference under Section
57(a)(5) of the Code, or successor provisions, for purposes of the "alternative
minimum tax," divided by (B) 1.00 minus the maximum marginal regular Federal
individual income tax rate applicable to ordinary income or the maximum marginal
regular Federal corporate income tax rate applicable to ordinary income (in each
case expressed as a decimal), whichever is greater; provided, however, that if
the Kenny Index is not made so available by 8:30 A.M., New York City time, on
such date by S&P J.J. Kenny Evaluation Services or any successor, the Taxable
Equivalent of the Short-Term Municipal Bond Rate shall mean the quotient of (A)
the per annum rate expressed on an interest equivalent basis equal to the most
recent Kenny Index so made available for any preceding Business Day, divided by
(B) 1.00 minus the maximum marginal regular Federal individual income tax rate
applicable to ordinary income or the maximum marginal regular Federal corporate
income tax rate applicable to ordinary income (in each case expressed as a
decimal), whichever is greater.
"Taxable Income" shall have the meaning specified in paragraph (c) of
Section 3 of Part II of this Certificate.
"Treasury Bill" shall mean a direct obligation of the U.S. Government
having a maturity at the time of issuance of 364 days or less.
"Treasury Bill Rate," on any date for any Rate Period, shall mean (i)
the bond equivalent yield, calculated in accordance with prevailing industry
convention, of the rate on the most recently auctioned Treasury Bill with a
remaining maturity closest to the length of such Rate Period, as quoted in The
Wall Street Journal on such date for the Business Day next preceding such date,
or (ii) in the event that any such rate is not published in The Wall Street
Journal, then
-20-
<PAGE> 27
the bond equivalent yield, calculated in accordance with prevailing industry
convention, as calculated by reference to the arithmetic average of the bid
price quotations of the most recently auctioned Treasury Bill with a remaining
maturity closest to the length of such Rate Period, as determined by bid price
quotations as of the close of business on the Business Day immediately preceding
such date obtained from the U.S. Government Securities Dealers to the Auction
Agent.
"Treasury Note" shall mean a direct obligation of the U.S. Government
having a maturity at the time of issuance of five years or less but more than
364 days.
"Treasury Note Rate," on any date for any Rate Period, shall mean (i)
the yield on the most recently auctioned Treasury Note with a remaining maturity
closest to the length of such Rate Period, as quoted in The Wall Street Journal
on such date for the Business Day next preceding such date, or (ii) in the event
that any such rate is not published in The Wall Street Journal, then the yield
as calculated by reference to the arithmetic average of the bid price quotations
of the most recently auctioned Treasury Note with a remaining maturity closest
to the length of such Rate Period, as determined by bid price quotations as of
the close of business on the Business Day immediately preceding such date
obtained from the U.S. Government Securities Dealers to the Auction Agent. If
any U.S. Government Securities Dealer does not quote a rate required to
determine the Treasury Bill Rate of the Treasury Note Rate, the Treasury Bill
Rate or the Treasury Note Rate shall be determined on the basis of the quotation
or quotations furnished by the remaining U.S. Government Securities Dealer or
U.S. Government Securities Dealers and any Substitute U.S. Government Securities
Dealers selected by the Trust to provide such rate or rates not being supplied
by any U.S. Government Securities Dealer or U.S. Government Securities Dealers,
as the case may be, or, if the Trust does not select any such Substitute U.S.
Government Securities Dealer or Substitute U.S. Government Securities Dealers,
by the remaining U.S. Government Securities Dealer or U.S. Government Securities
Dealers.
"U.S. Government Securities Dealer" shall mean Lehman Government
Securities Incorporated, Goldman, Sachs & Co., Salomon Smith Barney Inc. and
Morgan Guaranty Trust Company of New York or their respective affiliates or
successors, if such entity is a U.S. government securities dealer.
"Valuation Date" shall mean, for purposes of determining whether the
Trust is maintaining the Municipal Preferred Basic Maintenance Amount, each
Business Day.
"Voting Period" shall have the meaning, specified in paragraph (b) of
Section 5 of Part I of this Certificate.
"Winning Bid Rate" shall have the meaning specified in paragraph (a) of
Section 3 of Part II of this Certificate.
2. Dividends.
(a) Ranking. The shares of a series of Municipal Preferred shall rank
on a parity with each other, with shares of any other series of Municipal
Preferred and with shares of any other series of Preferred Shares as to the
payment of dividends by the Trust.
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<PAGE> 28
(b) Cumulative Cash Dividends. The Holders of shares of Municipal
Preferred of any series shall be entitled to receive, when, as and if declared
by the Board of Trustees, out of funds legally available therefor in accordance
with the Declaration and applicable law, cumulative cash dividends at the
Applicable Rate for shares of such series, determined as set forth in paragraph
(e) of this Section 2, and no more (except to the extent set forth in Section 3
of Part I of this Certificate), payable on the Dividend Payment Dates with
respect to shares of such series determined pursuant to paragraph (d) of this
Section 2. Holders of shares of Municipal Preferred shall not be entitled to any
dividend, whether payable in cash, property or shares, in excess of full
cumulative dividends, as herein provided, on shares of Municipal Preferred. No
interest, or sum of money in lieu of interest, shall be payable in respect of
any dividend payment or payments on shares of Municipal Preferred which may be
in arrears, and, except to the extent set forth in subparagraph (e)(i) of this
Section 2, no additional sum of money shall be payable in respect of any such
arrearage.
(c) Dividends Cumulative From Date of Original Issue. Dividends on
shares of Municipal Preferred of any series shall accumulate at the Applicable
Rate for shares of such series from the Date of Original Issue thereof.
(d) Dividend Payment Dates and Adjustments Thereof. The Dividend
Payment Date with respect to shares of Series T Municipal Preferred shall be
September 29, 1999 and each Wednesday thereafter; provided, however, that
(i) (A) in the case of a series of Municipal Preferred
designated as "Series T Municipal Preferred" in Part I of this
Certificate, if the Wednesday on which dividends would otherwise be
payable on shares of such series is not a Business Day, then such
dividends shall be payable on such shares on the first Business Day
that falls after such Wednesday; and
(ii) notwithstanding the provisions of this Section 2(d), the
Trust in its discretion may establish the Dividend Payment Dates in
respect of any Special Rate Period of shares of a series of Municipal
Preferred consisting of more than 28 Rate Period Days; provided,
however, that such dates shall be set forth in the Notice of Special
Rate Period relating to such Special Rate Period, as delivered to the
Auction Agent, which Notice of Special Rate Period shall be filed with
the Secretary of the Trust; and further provided that (1) any such
Dividend Payment Date shall be a Business Day and (2) the last Dividend
Payment Date in respect of such Special Rate Period shall be the
Business Day immediately following the last day thereof, as such last
day is determined in accordance with paragraph (b) of Section 4 of Part
I of this Certificate.
(e) Dividend Rates and Calculation of Dividends.
(i) Dividend Rates. The dividend rate on shares of Municipal Preferred
of any series during the period from and after the Date of Original issue of
shares of such series to and including the last day of the Initial Rate Period
of shares of such series shall be equal to the rate per annum set forth with
respect to shares of such series under "Designation" in this Part I. For each
Subsequent Rate Period of shares of such series thereafter, the dividend rate on
shares of such series shall be equal to the rate per annum that results from an
Auction for shares of such
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series on the Auction Date next preceding such Subsequent Rate Period; provided,
however, that if:
(A) an Auction for any such Subsequent Rate Period is not held
for any reason other than as described below, the dividend rate on
shares of such series for such Subsequent Rate Period will be the
Maximum Rate for shares of such series on the Auction Date therefor;
(B) any Failure to Deposit shall have occurred with respect to
shares of such series during any Rate Period thereof (other than any
Special Rate Period consisting of more than 364 Rate Period Days or any
Rate Period succeeding any Special Rate Period consisting of more than
364 Rate Period Days during which a Failure to Deposit occurred that
has not been cured), but, prior to 12:00 Noon, New York City time, on
the third Business Day next succeeding the date on which such Failure
to Deposit occurred, such Failure to Deposit shall have been cured in
accordance with paragraph (f) of this Section 2 and the Trust shall
have paid to the Auction Agent a late charge ("Late Charge") equal to
the sum of (1) if such Failure to Deposit consisted of the failure
timely to pay to the Auction Agent the full amount of dividends with
respect to any Dividend Period of the shares of such series, an amount
computed by multiplying (x) 200% of the Reference Rate for the Rate
Period during which such Failure to Deposit occurs on the Dividend
Payment Date for such Dividend Period by (y) a fraction, the numerator
of which shall be the number of days for which such Failure to Deposit
has not been cured in accordance with paragraph (f) of this Section 2
(including the day such Failure to Deposit occurs and excluding the day
such Failure to Deposit is cured) and the denominator of which shall be
360, and applying the rate obtained against the aggregate Liquidation
Preference of the outstanding shares of such series and (2) if such
Failure to Deposit consisted of the failure timely to pay to the
Auction Agent the Redemption Price of the shares, if any, of such
series for which Notice of Redemption has been mailed by the Trust
pursuant to paragraph (c) of Section 11 of Part I of this Certificate,
an amount computed by multiplying (x) 200% of the Reference Rate of 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 paragraph (f) of this Section 2 (including the day such
Failure to Deposit occurs and excluding the day such Failure to Deposit
is cured) and the denominator of which shall be 360, and applying the
rate obtained against the aggregate Liquidation Preference of the
outstanding shares of such series to be redeemed, no Auction will be
held in respect of shares of such series for the Subsequent Rate Period
thereof and the dividend rate for shares of such series for such
Subsequent Rate Period will be the Maximum Rate for shares of such
series on the Auction Date for such Subsequent Rate Period (but with
the prevailing rating for shares of such series, for purposes of
determining such Maximum Rate, being deemed to be below Ba3/BB-);
(C) any Failure to Deposit shall have occurred with respect to
shares of such series during any Rate Period thereof (other than any
Special Rate Period consisting of more than 364 Rate Period Days or any
Rate Period succeeding any Special Rate Period consisting of more than
364 Rate Period Days during which a Failure to Deposit occurred that
has not been cured), and, prior to 12:00 Noon, New York City time, on
the third
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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 paragraph (f) of this Section 2 or the Trust shall not
have paid the applicable Late Charge to the Auction Agent, no Auction
will be held in respect of shares of such series for the first
Subsequent Rate Period thereof thereafter (or for any Rate Period
thereof thereafter to and including the Rate Period during which (1)
such Failure to Deposit is cured in accordance with paragraph (f) of
this Section 2 and (2) the Trust pays the applicable Late Charge to the
Auction Agent (the condition set forth in this clause (2) to apply only
in the event Moody's is rating such shares at the time the Trust cures
such Failure to Deposit), in each case no later than 12:00 Noon, New
York City time, on the fourth Business Day prior to the end of such
Rate Period), and the dividend rate for shares of such series for each
such Subsequent Rate Period shall be a rate per annum equal to the
Maximum Rate for shares of such series on the Auction Date for such
Subsequent Rate Period (but with the prevailing rating for shares of
such series, for purposes of determining such Maximum Rate, being
deemed to be below Ba3/BB-); or
(D) any Failure to Deposit shall have occurred with respect to
shares of such series during a Special Rate Period thereof consisting
of more than 364 Rate Period Days, or during any Rate Period thereof
succeeding any Special Rate Period consisting of more than 364 Rate
Period Days during which a Failure to Deposit occurred that has not
been cured, and, prior to 12:00 Noon, New York City time, on the fourth
Business Day preceding the Auction Date for the Rate Period subsequent
to such Rate Period, such Failure to Deposit shall not have been cured
in accordance with paragraph (f) of this Section 2 or, in the event
Moody's is then rating such shares, the Trust shall not have paid the
applicable Late Charge to the Auction Agent (such Late Charge, for
purposes of this subparagraph (D), to be calculated by using, as the
Reference Rate, the Reference Rate applicable to a Rate Period (x)
consisting of more than 182 Rate Period Days but fewer than 365 Rate
Period Days and (y) commencing on the date on which the Rate Period
during which Failure to Deposit occurs commenced), no Auction will be
held in respect of shares of such series for such Subsequent Rate
Period (or for any Rate Period thereof thereafter to and including the
Rate Period during which (1) such Failure to Deposit is cured in
accordance with paragraph (f) of this Section 2 and (2) the Trust pays
the applicable Late Charge to the Auction Agent (the condition set
forth in this clause (2) to apply only in the event Moody's is rating
such shares at the time the Trust cures such Failure to Deposit), in
each case no later than 12:00 Noon, New York City time, on the fourth
Business Day prior to the end of such Rate Period), and the dividend
rate for shares of such series for each such Subsequent Rate Period
shall be a rate per annum equal to the Maximum Rate for shares of such
series on the Auction Date for such Subsequent Rate Period (but with
the prevailing rating for shares of such series, for purposes of
determining such Maximum Rate, being deemed to be below Ba3/BB-) (the
rate per annum at which dividends are payable on shares of a series of
Municipal Preferred for any Rate Period thereof being herein referred
to as the "Applicable Rate" for shares of such series).
(ii) Calculation of Dividends. The amount of dividends per share
payable on shares of a series of Municipal Preferred on any date on which
dividends shall be payable on shares of such
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series shall be computed by multiplying the Applicable Rate for shares of such
series in effect for such Dividend Period or Dividend Periods or part thereof
for which dividends have not been paid by a fraction, the numerator of which
shall be the number of days in such Dividend Period or Dividend Periods or part
thereof and the denominator of which shall be 365 if such Dividend Period
consists of 7 Rate Period Days and 360 for all other Dividend Periods, and
applying the rate obtained against $25,000.
(f) Curing a Failure to Deposit. A Failure to Deposit with respect to
shares of a series of Municipal Preferred shall have been cured (if such Failure
to Deposit is not solely due to the willful failure of the Trust to make the
required payments to the Auction Agent) with respect to any Rate Period of
shares of such series if, within the respective time periods described in
subparagraph (e)(i) of this Section 2, the Trust shall have paid to the Auction
Agent (A) all accumulated and unpaid dividends on shares of such series and (B)
without duplication, the Redemption Price for shares, if any, of such series for
which Notice of Redemption has been mailed by the Trust pursuant to paragraph
(c) of Section 11 of Part I; 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.
(g) Dividend Payments by Trust to Auction Agent. The Trust shall pay to
the Auction Agent, not later than 12:00 Noon, New York City time, on the
Business Day next preceding each Dividend Payment Date for shares of a series of
Municipal Preferred, an aggregate amount of funds available on the next Business
Day in The City of New York, New York, equal to the dividends to be paid to all
Holders of shares of such series on such Dividend Payment Date.
(h) Auction Agent as Trustee of Dividend Payments by Trust. All moneys
paid to the Auction Agent for the payment of dividends (or for the payment of
any Late Charge) shall be held in trust for the payment of such dividends (and
any such Late Charge) by the Auction Agent for the benefit of the Holders
specified in paragraph (i) of this Section 2. Any moneys paid to the Auction
Agent in accordance with the foregoing but not applied by the Auction Agent to
the payment of dividends (and any such Late Charge) will, to the extent
permitted by law, be repaid to the Trust at the end of 90 days from the date on
which such moneys were so to have been applied.
(i) Dividends Paid to Holders. Each dividend on shares of Municipal
Preferred shall be paid on the Dividend Payment Date therefor to the Holders
thereof as their names appear on the record books of the Trust on the Business
Day next preceding such Dividend Payment Date.
(j) Dividends Credited Against Earliest Accumulated But Unpaid
Dividends. Any dividend payment made on shares of Municipal Preferred shall
first be credited against the earliest accumulated but unpaid dividends due with
respect to such shares. Dividends in arrears for any past Dividend Period may be
declared and paid at any time, without reference to any regular Dividend Payment
Date, to the Holders as their names appear on the record books of the Trust on
such date, not exceeding 15 days preceding the payment date thereof, as may be
fixed by the Board of Trustees.
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(k) Dividends Designated as Exempt-Interest Dividends. Dividends on
shares of Municipal Preferred shall be designated as exempt-interest dividends
up to the proportionate amount of tax-exempt income of the Trust allocable to
the Municipal Preferred, to the extent permitted by, and for purposes of,
Section 852 of the Code, the relevant Treasury Regulations, and any rulings,
cases, or other interpretations of the relevant Code provisions.
3. Gross-up Payments.
Holders of shares of Municipal Preferred shall be entitled to receive,
when, as and if declared by the Board of Trustees, out of funds legally
available therefor in accordance with the Declaration and applicable law,
dividends in an amount equal to the aggregate Gross-up Payments as follows:
(a) Minimum Rate Periods and Special Rate Periods of 28 Rate Period
Days or Fewer. If, in the case of any Minimum Rate Period or any Special Rate
Period of 28 Rate Period Days or fewer, the Trust allocates any net capital
gains or other income taxable for Federal income tax purposes to a dividend paid
on shares of Municipal Preferred without having given advance notice thereof to
the Auction Agent as provided in Section 5 of Part II of this Certificate (such
allocation being referred to herein as a "Taxable Allocation") solely by reason
of the fact that such allocation is made retroactively as a result of the
redemption of all or a portion of the outstanding shares of Municipal Preferred
or the liquidation of the Trust, the Trust shall, prior to the end of the
calendar year in which such dividend was paid, provide notice thereof to the
Auction Agent and direct the Trust's dividend disbursing agent to send such
notice with a Gross-up Payment to each Holder of such shares that was entitled
to such dividend payment during such calendar year at such Holder's address as
the same appears or last appeared on the record books of the Trust.
(b) Special Rate Periods of More Than 28 Rate Period Days. If, in the
case of any Special Rate Period of more than 28 Rate Period Days, the Trust
makes a Taxable Allocation to a dividend paid on shares of Municipal Preferred,
the Trust shall, prior to the end of the calendar year in which such dividend
was paid, provide notice thereof to the Auction Agent and direct the Trust's
dividend disbursing agent to send such notice with a Gross-up Payment to each
Holder of shares that was entitled to such dividend payment during such calendar
year at such Holder's address as the same appears or last appeared on the record
books of the Trust.
(c) No Gross-up Payments In the Event of a Reallocation. The Trust
shall not be required to make Gross-up Payments with respect to any net capital
gains or other taxable income determined by the Internal Revenue Service to be
allocable in a manner different from that allocated by the Trust.
4. Designation of Special Rate Periods.
(a) Length of and Preconditions for Special Rate Period. The Trust, at
its option, may designate any succeeding Subsequent Rate Period of shares of a
series of Municipal Preferred as a Special Rate Period consisting of a specified
number of Rate Period Days evenly divisible by seven and not more than 1,820,
subject to adjustment as provided in paragraph (b) of this Section 4. A
designation of a Special Rate Period shall be effective only if (A) notice
thereof shall have
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been given in accordance with paragraph (c) and subparagraph (d)(i) of this
Section 4, (B) an Auction for shares of such series shall have been held on the
Auction Date immediately preceding the first day of such proposed Special Rate
Period and Sufficient Clearing Bids for shares of such series shall have existed
in such Auction, and (C) if any Notice of Redemption shall have been mailed by
the Trust pursuant to paragraph (c) of Section 11 of Part I of this Certificate
with respect to any shares of such series, the Redemption Price with respect to
such shares shall have been deposited with the Auction Agent. In the event the
Trust wishes to designate any succeeding Subsequent Rate Period for shares of a
series of Municipal Preferred as a Special Rate Period consisting of more than
28 Rate Period Days, the Trust shall notify S&P (if S&P is then rating such
series) and Moody's (if Moody's is then rating such series) in advance of the
commencement of such Subsequent Rate Period that the Trust wishes to designate
such Subsequent Rate Period as a Special Rate Period and shall provide S&P (if
S&P is then rating such series) and Moody's (if Moody's is then rating such
series) with such documents as either may reasonably request.
(b) Adjustment of Length of Special Rate Period. In the event the Trust
wishes to designate a Subsequent Rate Period as a Special Rate Period, but the
day following what would otherwise be the last day of such Special Rate Period
is not a Wednesday that is a Business Day in the case of a series of Municipal
Preferred designated as "Series T Municipal Preferred" in Part I of this
Certificate, 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 Tuesday that is followed by a Wednesday that is a Business Day preceding
what would otherwise be such last day, in the case of Series T Municipal
Preferred.
(c) Notice of Proposed Special Rate Period. If the Trust proposes to
designate any succeeding Subsequent Rate Period of shares of a series of
Municipal Preferred as a Special Rate Period pursuant to paragraphs (a) of this
Section 4, not less than 20 (or such lesser number of days as may be agreed to
from time to time by the Auction Agent) nor more than 30 days prior to the date
the Trust proposes to designate as the first day of such Special Rate Period
(which shall be such day that would otherwise be the first day of a Minimum Rate
Period), notice shall be (i) published or caused to be published by the Trust in
a newspaper of general circulation to the financial community in The City of New
York, New York, which carries financial news, and (ii) mailed by the Trust by
first-class mail, postage prepaid, to the Holders of shares of such series. Each
such notice shall state (A) that the Trust may exercise its option to designate
a succeeding Subsequent Rate Period of shares of such series as a Special Rate
Period, specifying the first day thereof and (B) that the Trust will, by 11:00
A.M., New York City time, on the second Business Day next preceding such date
(or by such later time or date, or both, as may be agreed to by the Auction
Agent) notify the Auction Agent of either (x) its determination, subject to
certain conditions, to exercise such option, in which case the Trust shall
specify the Special Rate Period designated, or (y) its determination not to
exercise such option.
(d) Notice of Special Rate Period. No later than 11:00 A.M., New York
City time, on the second Business Day next preceding the first day of any
proposed Special Rate Period of shares of a series of Municipal Preferred as to
which notice has been given as set forth in paragraph (c) of this Section 4 (or
such later time or date, or both, as may be agreed to by the Auction Agent), the
Trust shall deliver to the Auction Agent either:
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(i) a notice ("Notice of Special Rate Period") stating (A) that the
Trust has determined to designate the next succeeding Rate Period of shares
of such series as a Special Rate Period, specifying the same and the first
day thereof, (B) the Auction Date immediately prior to the first day of
such Special Rate Period, (C) that such Special Rate Period shall not
commence if (1) an Auction for shares of such series shall not be held on
such Auction Date for any reason or (2) an Auction for shares of such
series shall be held on such Auction Date but Sufficient Clearing Bids for
shares of such series shall not exist in such Auction, (D) the scheduled
Dividend Payment Dates for shares of such series during such Special Rate
Period and (E) the Special Redemption Provisions, if any, applicable to
shares of such series in respect of such Special Rate Period; such notice
to be accompanied by a Municipal Preferred Basic Maintenance Report showing
that, as of the third Business Day next preceding such proposed Special
Rate Period, Moody's Eligible Assets (if Moody's is then rating such
series) and S&P Eligible Assets (if S&P is then rating such series) each
have an aggregate Discounted Value at least equal to the Municipal
Preferred Basic Maintenance Amount as of such Business Day (assuming for
purposes of the foregoing calculation that (a) the Maximum Rate is the
Maximum Rate on such Business Day as if such Business Day were the Auction
Date for the proposed Special Rate Period, and (b) the Moody's Discount
Factors applicable to Moody's Eligible Assets are determined by reference
to the first Exposure Period longer than the Exposure Period then
applicable to the Trust, as described in the definition of Moody's Discount
Factor herein); or
(ii) a notice stating that the Trust has determined not to exercise
its option to designate a Special Rate Period of shares of such series and
that the next succeeding Rate Period of shares of such series shall be a
Minimum Rate Period.
(e) Failure to Deliver Notice of Special Rate Period. If the Trust fails to
deliver either of the notices described in subparagraphs (d)(i) or (d)(ii) of
this Section 4 (and, in the case of the notice described in subparagraph (d)(i)
of this Section 4, a Municipal Preferred Basic Maintenance Report to the effect
set forth in such subparagraph (if either Moody's or S&P is then rating the
series in question)) with respect to any designation of any proposed Special
Rate Period to the Auction Agent by 11:00 A.M., New York City time, on the
second Business Day next preceding the first day of such proposed Special Rate
Period (or by such later time or date, or both, as may be agreed to by the
Auction Agent), the Trust shall be deemed to have delivered a notice to the
Auction Agent with respect to such Special Rate Period to the effect set forth
in subparagraph (d)(ii) of this Section 4. In the event the Trust delivers to
the Auction Agent a notice described in subparagraph (d)(i) of this Section 4,
it shall file a copy of such notice with the Secretary of the Trust, and the
contents of such notice shall be binding on the Trust. In the event the Trust
delivers to the Auction Agent a notice described in subparagraph (d)(ii) of this
Section 4, the Trust will provide Moody's (if Moody's is then rating the series
in question) and S&P (if S&P is then rating the series in question) a copy of
such notice.
5. Voting Rights.
(a) One Vote Per Share of Municipal Preferred. Except as otherwise provided
in the Declaration or as otherwise required by law, (i) each Holder of shares of
Municipal Preferred shall be entitled to one vote for each share of Municipal
Preferred held by such Holder on each
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matter submitted to a vote of shareholders the Trust, and (ii) the holders of
outstanding Preferred Shares, including each share of Municipal Preferred, and
of Common Shares shall vote together as a single class; provided, however, that,
at any meeting of the shareholders of the Trust held for the election of
trustees, the holders of outstanding Preferred Shares, including Municipal
Preferred, represented in person or by proxy at said meeting, shall be entitled,
as a class, to the exclusion of the holders of all other securities and classes
of shares of beneficial interest of the Trust, to elect two trustees of the
Trust, each Preferred Share, including each share of Municipal Preferred,
entitling the holder thereof to one vote. Subject to paragraph (b) of this
Section 5, the holders of outstanding Common Shares and Preferred Shares,
including Municipal Preferred, voting together as a single class, shall elect
the balance of the trustees.
(b) Voting For Additional Trustees.
(i) Voting Period. During any period in which any one or more of the
conditions described in subparagraphs (A) or (B) of this subparagraph
(b)(i) shall exist (such period being referred to herein as a "Voting
Period"), the number of trustees constituting the Board of Trustees shall
be automatically increased by the smallest number that, when added to the
two trustees elected exclusively by the holders of Preferred Shares,
including shares of Municipal Preferred, would constitute a majority of the
Board of Trustees as so increased by such smallest number; and the holders
of Preferred Shares, including Municipal Preferred, shall be entitled,
voting as a class on a one-vote-per-share basis (to the exclusion of the
holders of all other securities and classes of shares of beneficial
interest of the Trust), to elect such smallest number of additional
trustees, together with the two trustees that such holders are in any event
entitled to elect. A Voting Period shall commence:
(A) if at the close of business on any dividend payment date
accumulated dividends (whether or not earned or declared) on any
outstanding Preferred Shares, including Municipal Preferred, equal to
at least two full years' dividends shall be due and unpaid and
sufficient cash or specified securities shall not have been deposited
with the Auction Agent for the payment of such accumulated dividends;
or
(B) if at any time holders of Preferred Shares are entitled under
the 1940 Act to elect a majority of the trustees of the Trust.
Upon the termination of a Voting Period, the voting rights described in
this subparagraph (b)(i) shall cease, subject always, however, to the revesting
of such voting rights in the Holders upon the further occurrence of any of the
events described in this subparagraph (b)(i).
(ii) Notice of Special Meeting. As soon as practicable after the
accrual of any right of the holders of Preferred Shares to elect additional
trustees as described in subparagraph (b)(i) of this Section 5, the Trust
shall notify the Auction Agent and the Auction Agent shall call a special
meeting of such holders, by mailing a notice of such special meeting to
such holders, such meeting to be held not less than 10 nor more than 20
days after the date of mailing of such notice. If the Trust fails to send
such notice to the Auction Agent or if the Auction Agent does not call such
a special meeting, it may be
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called by any such holder on like notice. The record date for determining
the holders entitled to notice of and to vote at such special meeting shall
be the close of business on the fifth Business Day preceding the day on
which such notice is mailed. At any such special meeting and at each
meeting of holders of Preferred Shares held during a Voting Period at which
trustees are to be elected, such holders, voting together as a class (to
the exclusion of the holders of all other securities and classes of shares
of beneficial interest of the Trust), shall be entitled to elect the number
of trustees prescribed in subparagraph (b)(i) of this Section 5 on a
one-vote-per-share basis.
(iii) Terms of Office of Existing Trustees. The terms of office of all
persons who are trustees of the Trust at the time of a special meeting of
Holders and holders of other Preferred Shares to elect trustees shall
continue, notwithstanding the election at such meeting by the Holders and
such other holders of the number of trustees that they are entitled to
elect, and the persons so elected by the Holders and such other holders,
together with the two incumbent trustees elected by the Holders and such
other holders of Preferred Shares and the remaining incumbent trustees
elected by the Holders of the Common Shares and Preferred Shares, shall
constitute the duly elected trustees of the Trust.
(iv) Terms of Office of Certain Trustees to Terminate Upon Termination
of Voting Period. Simultaneously with the termination of a Voting Period,
the terms of office of the additional trustees elected by the Holders and
holders of other Preferred Shares pursuant to subparagraph (b)(i) of this
Section 5 shall terminate, the remaining trustees shall constitute the
trustees of the Trust and the voting rights of the Holders and such other
holders to elect additional trustees pursuant to subparagraph (b)(i) of
this Section 5 shall cease, subject to the provisions of the last sentence
of subparagraph (b)(i) of this Section 5.
(c) Holders of Municipal Preferred To Vote on Certain Other Matters.
(i) Increases in Capitalization. So long as any shares of Municipal
Preferred are outstanding, the Trust shall not, without the affirmative
vote or consent of the Holders of at least a majority of the shares of
Municipal Preferred outstanding at the time, in person or by proxy, either
in writing or at a meeting, voting as a separate class: (a) authorize,
create or issue any class or series of shares ranking prior to or on a
parity with shares of Municipal Preferred with respect to the payment of
dividends or the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Trust, or authorize, create or issue
additional shares of any series of Municipal Preferred (except that,
notwithstanding the foregoing, but subject to the provisions of paragraph
(c) of Section 10 of Part I of this Certificate, the Board of Trustees,
without the vote or consent of the Holders of Municipal Preferred, may from
time to time authorize and create, and the Trust may from time to time
issue, additional shares of any series of Municipal Preferred or classes or
series of Preferred Shares ranking on a parity with shares of Municipal
Preferred with respect to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up of the affairs of the
Trust; provided, however, that if Moody's or S&P is not then rating the
shares of Municipal Preferred, the aggregate liquidation preference of all
Preferred Shares of the Trust outstanding after any such
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issuance, exclusive of accumulated and unpaid dividends, may not exceed
$70,000,000; provided however, that (i) the Trust obtains written
confirmation from Moody's (if Moody's is then rating the shares of
Municipal Preferred) and S&P (if S&P is then rating the shares of Municipal
Preferred) that 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 S&P is rating the shares of Municipal Preferred,
the Trust may, without the vote of the Holders of the shares of Municipal
Preferred, authorize, create or issue additional shares of Municipal
Preferred or classes or series of Preferred Shares ranking on parity with
the 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 $70,000,000; or (b) amend,
alter or repeal the provisions of the Declaration or the By-laws, including
this Certificate, whether by merger, consolidation or otherwise, so as to
affect any preference, right or power of such shares of Municipal Preferred
or the Holders thereof; provided, however, that (i) none of the actions
permitted by the exception to (a) above will be deemed to affect such
preferences, rights or powers, (ii) a division of a share of Municipal
Preferred will be deemed to affect such preferences, rights or powers only
if the terms of such division adversely affect the Holders of shares of
Municipal Preferred and (iii) the authorization, creation and issuance of
classes or series of shares ranking junior to shares of Municipal Preferred
with respect to the payment of dividends and the distribution of assets
upon dissolution, liquidation or winding up of the affairs of the Trust,
will be deemed to affect such preferences, rights or powers only if Moody's
or S&P is then rating shares of Municipal Preferred and such issuance
would, at the time thereof, cause the Trust not to satisfy the 1940 Act
Municipal Preferred Asset Coverage or the Municipal Preferred Basic
Maintenance Amount. So long as any shares of Municipal Preferred are
outstanding, the Trust shall not, without the affirmative vote or consent
of the Holders of at least 66 2/3% of the shares of Municipal Preferred
outstanding at the time, in person or by proxy, either in writing or at a
meeting, voting as a separate class, file a voluntary application for
relief under Federal bankruptcy law or any similar application under state
law for so long as the Trust is solvent and does not foresee becoming
insolvent. If any action 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 or consent of the Holders of
at least a majority of the shares of each such Affected Series outstanding
at the time, in person or by proxy, either in writing or at a meeting (each
such Affected Series voting as a separate class).
(ii) 1940 Act Matters. Unless a higher percentage is provided for in
the Declaration, (A) the affirmative vote of the Holders of at least a
majority of the Preferred Shares, including Municipal Preferred outstanding
at the time, voting as a separate class, shall be required to approve any
conversion of the Trust from a closed-end to an open-
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<PAGE> 38
end investment company and (B) the affirmative vote of the Holders of a
"majority of the outstanding Preferred Shares," including Municipal
Preferred, voting as a separate class, shall be required to approve any
plan of reorganization (as such term is used in the 1940 Act) adversely
affecting such shares. The affirmative vote of the Holders of a "majority
of the outstanding Preferred Shares," including Municipal Preferred, voting
as a separate class, shall be required to approve any action not described
in the first sentence of this Section 5(c)(ii) requiring a vote of security
holders of the Trust under Section 13(a) of the 1940 Act. For purposes of
the foregoing, "majority of the outstanding Preferred Shares" means (i) 67%
or more of such shares present at a meeting, if the Holders of more than
50% of such shares are present or represented by proxy, or (ii) more than
50% of such shares, whichever is less. In the event a vote of Holders of
Municipal Preferred is required pursuant to the provisions of Section 13(a)
of the 1940 Act, the Trust shall, not later than ten business Days prior to
the date on which such vote is to be taken, notify Moody's (if Moody's is
then rating the shares of Municipal Preferred) and S&P (if S&P is then
rating the shares of Municipal Preferred) that such vote is to be taken and
the nature of the action with respect to which such vote is to be taken.
The Trust shall, not later than ten Business Days after the date on which
such vote is taken, notify Moody's (if Moody's is then rating the shares of
Municipal Preferred) of the results of such vote.
(d) Board May Take Certain Actions Without Shareholder Approval. The Board
of Trustees, without the vote or consent of the shareholders of the Trust, may
from time to time amend, alter or repeal any or all of the definitions of the
terms listed below, or any provision of this Certificate viewed by Moody's or
S&P as a predicate for any such definition, and any such amendment, alteration
or repeal will not be deemed to affect the preferences, rights or powers of
shares of Municipal Preferred or the Holders thereof; provided, however, that
the Board of Trustees receives written confirmation from Moody's (such
confirmation being required to be obtained only in the event Moody's is rating
the shares of Municipal Preferred and in no event being required to be obtained
in the case of the definitions of (x) Deposit Securities, Discounted Value and
Receivables for Municipal Securities Sold as such terms apply to S&P Eligible
Assets and (y) S&P Discount Factor, S&P Eligible Assets, S&P Exposure Period and
S&P Volatility Factor) and S&P (such confirmation being required to be obtained
only in the event S&P is rating the shares of Municipal Preferred and in no
event being required to be obtained in the case of the definitions of (x)
Discounted Value and Receivables for Municipal Securities Sold as such terms
apply to Moody's Eligible Assets, and (y) Moody's Discount Factor, Moody's
Eligible Assets, Moody's Exposure Period and Moody's Volatility Factor) that any
such amendment, alteration or repeal would not impair the ratings then assigned
by Moody's or S&P, as the case may be, to shares of Municipal Preferred:
<TABLE>
<S> <C>
Deposit Securities Moody's Volatility Factor
Discounted Value 1940 Act Cure Date
Escrowed Bonds 1940 Act Municipal Preferred Asset Coverage
Market Value Quarterly Valuation Date
Maximum Potential Gross-up Payment Liability Receivables for Municipal Securities Sold
Municipal Preferred Basic Maintenance Amount S&P Discount Factor
Municipal Preferred Basic Maintenance Cure Date S&P Eligible Assets
Municipal Preferred Basic Maintenance Report S&P Exposure Period
</TABLE>
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<PAGE> 39
<TABLE>
<S> <C>
Moody's Discount Factor S&P Volatility Factor
Moody's Eligible Assets Valuation Date
Moody's Exposure Period
</TABLE>
(e) Voting Rights Set Forth Herein Are Sole Voting Rights. Unless otherwise
required by law or by the Declaration, the Holders of shares of Municipal
Preferred shall not have any relative rights or preferences or other special
rights other than those specifically set forth herein.
(f) No Preemptive Rights or Cumulative Voting. The Holders of shares of
Municipal Preferred shall have no preemptive rights or rights to cumulative
voting.
(g) Voting for Trustees Sole Remedy for Trust's Failure to Pay Dividends.
In the event that the Trust fails to pay any dividends on the shares of
Municipal Preferred, the exclusive remedy of the Holders shall be the right to
vote for trustees pursuant to the provisions of this Section 5.
(h) Holders Entitled to Vote. For purposes of determining any rights of the
Holders to vote on any matter, whether such right is created by this
Certificate, by the other provisions of the Declaration, by statute or
otherwise, no Holder shall be entitled to vote any share of Municipal Preferred
and no share of Municipal Preferred shall be deemed to be "outstanding" for the
purpose of voting or determining the number of shares required to constitute a
quorum if, prior to or concurrently with the time of determination of shares
entitled to vote or shares deemed outstanding for quorum purposes, as the case
may be, the requisite Notice of Redemption with respect to such shares shall
have been mailed as provided in paragraph (c) of Section 11 of Part I of this
Certificate and the Redemption Price for the redemption of such shares shall
have been deposited in trust with the Auction Agent for that purpose. No shares
of Municipal Preferred held by the Trust or any affiliate of the Trust (except
for shares held by a Broker-Dealer that is an affiliate of the Trust for the
account of its customers) shall have any voting rights or be deemed to be
outstanding for voting or other purposes.
6. 1940 Act Municipal Preferred Asset Coverage.
The Trust shall maintain, as of the last Business Day of each month in
which any share of Municipal Preferred is outstanding, the 1940 Act Municipal
Preferred Asset Coverage.
7. Municipal Preferred Basic Maintenance Amount.
(a) So long as shares of Municipal Preferred are outstanding, the Trust
shall maintain, on each Valuation Date, and shall verify to its satisfaction
that it is maintaining on such Valuation Date, (i) S&P Eligible Assets having an
aggregate Discounted Value equal to or greater than the Municipal Preferred
Basic Maintenance Amount (if S&P is then rating the shares of Municipal
Preferred) and (ii) Moody's Eligible Assets having an aggregate Discounted Value
equal to or greater than the Municipal Preferred Basic Maintenance Amount (if
Moody's is then rating the shares of Municipal Preferred).
(b) On or before 5:00 P.M., New York City time, on the third Business Day
after a Valuation Date on which the Trust fails to satisfy the Municipal
Preferred Basic Maintenance
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<PAGE> 40
Amount, and on the third Business Day after the Municipal Preferred Basic
Maintenance Cure Date with respect to such Valuation Date, the Trust shall
complete and deliver to S&P (if S&P is then rating the shares of Municipal
Preferred), Moody's (if Moody's is then rating the shares of Municipal
Preferred) and the Auction Agent (if either S&P or Moody's is then rating the
shares of Municipal Preferred) a Municipal Preferred Basic Maintenance Report as
of the date of such failure or such Municipal Preferred Basic Maintenance Cure
Date, as the case may be, which will be deemed to have been delivered to the
Auction Agent if the Auction Agent receives a copy of telecopy, telex or other
electronic transcription thereof and on the same day the Trust mails to the
Auction Agent for delivery on the next Business Day the full Municipal Preferred
Basic Maintenance Report. The Trust shall also deliver a Municipal Preferred
Basic Maintenance Report to (i) the Auction Agent (if either Moody's or S&P is
then rating the shares of Municipal Preferred as of (A) the fifteenth day of
each month (or, if such day is not a Business Day, the next succeeding Business
Day) and (B) the last Business Day of each month, (ii) Moody's (if Moody's is
then rating the shares of Municipal Preferred) and S&P (if S&P is then rating
the shares of Municipal Preferred) as of any Quarterly Valuation Date, in each
case on or before the third Business Day after such day, and (iii) S&P, if and
when requested for any Valuation Date, on or before the third Business Day after
such request. A failure by the Trust to deliver a Municipal Preferred Basic
Maintenance Report pursuant to the preceding sentence shall be deemed to be
delivery of a Municipal Preferred Basic Maintenance Report indicating the
Discounted Value for all assets of the Trust is less than the Municipal
Preferred Basic Maintenance Amount, as of the relevant Valuation Date.
(c) Within ten Business Days after the date of delivery of a Municipal
Preferred Basic Maintenance Report in accordance with paragraph (b) of this
Section 7 relating to a Quarterly Valuation Date, the Trust shall cause the
Independent Accountant to confirm in writing to S&P (if S&P is then rating the
shares of Municipal Preferred), Moody's (if Moody's is then rating the shares of
Municipal Preferred) and the Auction Agent (if either S&P or Moody's is then
rating the shares of Municipal Preferred) (i) the mathematical accuracy of the
calculations reflected in such Report (and in any other Municipal Preferred
Basic Maintenance Report, randomly selected by the Independent Accountant, that
was delivered by the Trust during the quarter ending on such Quarterly Valuation
Date) and (ii) that, in such Report (and in such randomly selected Report), the
Trust determined in accordance with this Section whether the Trust had, at such
Quarterly Valuation Date (and at the Valuation Date addressed in such randomly
selected Report), S&P Eligible Assets (if S&P is then rating the shares of
Municipal Preferred) of an aggregate Discounted Value at least equal to the
Municipal Preferred Basic Maintenance Amount and Moody's Eligible Assets (if
Moody's is then rating the shares of Municipal Preferred) of an aggregate
Discounted Value at least equal to the Municipal Preferred Basic Maintenance
Amount (such confirmation being herein called the "Accountant's Confirmation").
(d) Within ten Business Days after the date of delivery of a Municipal
Preferred Basic Maintenance Report in accordance with paragraph (b) of this
Section 7 relating to any Valuation Date on which the Trust failed to satisfy
the Municipal Preferred Basic Maintenance Amount, and relating to the Municipal
Preferred Basic Maintenance Cure Date with respect to such failure to satisfy
the Municipal Preferred Basic Maintenance Amount, the Trust shall cause the
Independent Accountant to provide to S&P (if S&P is then rating the shares of
Municipal Preferred), Moody's (if Moody's is then rating the shares of Municipal
Preferred) and the
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<PAGE> 41
Auction Agent (if either S&P or Moody's is then rating the shares of Municipal
Preferred) an Accountant's Confirmation as to such Municipal Preferred Basic
Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to paragraph (c) or
(d) of this Section 7 shows that an error was made in the Municipal Preferred
Basic Maintenance Report for a particular Valuation Date for which such
Accountant's Confirmation was required to be delivered, or shows that a lower
aggregate Discounted Value for the aggregate of all S&P Eligible Assets (if S&P
is then rating the shares of Municipal Preferred) or Moody's Eligible Assets (if
Moody's is then rating the shares of Municipal Preferred), as the case may be,
of the Trust was determined by the Independent Accountant, the calculation or
determination made by such Independent Accountant shall be final and conclusive
and shall be binding on the Trust, and the Trust shall accordingly amend and
deliver the Municipal Preferred Basic Maintenance Report to S&P (if S&P is then
rating the shares of Municipal Preferred), Moody's (if Moody's is then rating
the shares of Municipal Preferred) and the Auction Agent (if either S&P or
Moody's is then rating the shares of Municipal Preferred) promptly following
receipt by the Trust of such Accountant's Confirmation.
(f) On or before 5:00 p.m., New York City time, on the first Business Day
after the Date of Original Issue of any shares of Municipal Preferred, the Trust
shall complete and deliver to S&P (if S&P is then rating the shares of Municipal
Preferred) and Moody's (if Moody's is then rating the shares of Municipal
Preferred) a Municipal Preferred Basic Maintenance Report as of the close of
business on such Date of Original Issue. Within five Business Days of such Date
of Original Issue, the Trust shall cause the Independent Accountant to confirm
in writing to S&P (if S&P is then rating the shares of Municipal Preferred) (i)
the mathematical accuracy of the calculations reflected in such Report and (ii)
that the Discounted Value of S&P Eligible Assets reflected thereon equals or
exceeds the Municipal Preferred Basic Maintenance Amount reflected thereon.
(g) On or before 5:00 p.m., New York City time, on the third Business Day
after either (i) the Trust shall have redeemed Common Shares or (ii) the ratio
of the Discounted Value of S&P Eligible Assets or the Discounted Value of
Moody's Eligible Assets to the Municipal Preferred Basic Maintenance Amount is
less than or equal to 105%, the Trust shall complete and deliver to S&P (if S&P
is then rating the shares of Municipal Preferred) or Moody's (if Moody's is then
rating the shares of Municipal Preferred) as the case may be, a Municipal
Preferred Basic Maintenance Report as of the date of either such event.
8. [Reserved.]
9. Restrictions on Dividends and Other Distributions.
(a) Dividends on Preferred Shares Other Than Municipal Preferred. Except as
set forth in the next sentence, no dividends shall be declared or paid or set
apart for payment on the shares of any class or series of shares of beneficial
interest of the Trust ranking, as to the payment of dividends, on a parity with
shares of Municipal Preferred for any period unless full cumulative dividends
have been or contemporaneously are declared and paid on the shares of each
series of Municipal Preferred through its most recent
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<PAGE> 42
Dividend Payment Date. When dividends are not paid in full upon the shares of
each series of Municipal Preferred through its most recent Dividend Payment Date
or upon the shares of any other class or series of shares of beneficial interest
of the Trust ranking on a parity as to the payment of dividends with shares of
Municipal Preferred through their most recent respective dividend payment dates,
all dividends declared upon shares of Municipal Preferred and any other such
class or series of shares of beneficial interest ranking on a parity as to the
payment of dividends with shares of Municipal Preferred shall be declared pro
rata so that the amount of dividends declared per share on shares of Municipal
Preferred and such other class or series of shares of beneficial interest shall
in all cases bear to each other the same ratio that accumulated dividends per
share on the shares of Municipal Preferred and such other class or series of
shares of beneficial interest bear to each other (for purposes of this sentence,
the amount of dividends declared per share of Municipal Preferred shall be based
on the Applicable Rate for such shares for the Dividend Periods during which
dividends were not paid in full).
(b) Dividends and Other Distributions With Respect to Common Shares Under
the 1940 Act. The Board of Trustees shall not declare any dividend (except a
dividend payable in Common Shares), or declare any other distribution, upon the
Common Shares, or purchase Common Shares, unless in every such case the
Preferred Shares have, at the time of any such declaration or purchase, an asset
coverage (as defined in and determined pursuant to the 1940 Act) of at least
200% (or such other asset coverage as may in the future be specified in or under
the 1940 Act as the minimum asset coverage for senior securities which are
shares or stock of a closed-end investment company as a condition of declaring
dividends on its common shares or stock) after deducting the amount of such
dividend, distribution or purchase price, as the case may be.
(c) Other Restrictions on Dividends and Other Distributions. For so long as
any share of Municipal Preferred is outstanding, and except as set forth in
paragraph (a) of this Section 9 and paragraph (c) of Section 12 of Part I of
this Certificate, (A) the Trust shall not declare, pay or set apart for payment
any dividend or other distribution (other than a dividend or distribution paid
in shares of, or in options, warrants or rights to subscribe for or purchase,
Common Shares or other shares, if any, ranking junior to the shares of Municipal
Preferred as to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up) in respect of the Common Shares or any
other shares of the Trust ranking junior to or on a parity with the shares of
Municipal Preferred as to the payment of dividends or the distribution of assets
upon dissolution, liquidation or winding up, or call for redemption, redeem,
purchase or otherwise acquire for consideration any Common Shares or any other
such junior shares (except by conversion into or exchange for shares of the
Trust ranking junior to the shares of Municipal Preferred as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up), or any such parity shares (except by conversion into or exchange
for shares of the Trust ranking junior to or on a parity with Municipal
Preferred as to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up), unless (i) full cumulative dividends on
shares of each series of Municipal Preferred through its most recently ended
Dividend Period shall have been paid or shall have been declared and sufficient
funds for the payment thereof deposited with the Auction Agent and (ii) the
Trust has redeemed the full number of shares of Municipal Preferred required to
be redeemed by any provision for mandatory redemption pertaining thereto, and
(B) the Trust shall not declare, pay or set apart for payment any dividend or
other distribution (other than a dividend or distribution paid in shares
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<PAGE> 43
of, or in options, warrants or rights to subscribe for or purchase, Common
Shares or other shares, if any, ranking junior to shares of Municipal Preferred
as to the payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up) in respect of Common Shares or any other shares of
the Trust ranking junior to shares of Municipal Preferred as to the payment of
dividends or the distribution of assets upon dissolution, liquidation or winding
up, or call for redemption, redeem, purchase or otherwise acquire for
consideration any Common Shares or any other such junior shares (except by
conversion into or exchange for shares of the Trust ranking junior to shares of
Municipal Preferred as to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up), unless immediately after
such transaction the Discounted Value of Moody's Eligible Assets (if Moody's is
then rating the shares of Municipal Preferred) and S&P Eligible Assets (if S&P
is then rating the shares of Municipal Preferred) would each at least equal the
Municipal Preferred Basic Maintenance Amount.
10. Rating Agency Restrictions.
For so long as any shares of Municipal Preferred are outstanding and
Moody's or S&P, or both, are rating such shares, the Trust will not, unless it
has received written confirmation from Moody's or S&P, or both, as appropriate,
that any such action would not impair the ratings then assigned by such rating
agency to such shares, engage in any one or more of the following transactions:
(a) purchase or sell futures contracts, write, purchase or sell options on
futures contracts or write put options (except covered put options) or call
options (except covered call options) on portfolio securities, except that the
Trust may purchase or sell futures contracts based on the Bond Buyer Municipal
Bond Index (the "Municipal Index") or United States Treasury Bonds or Notes
("Treasury Bonds") and write, purchase or sell put and call options on such
contracts (collectively, "Hedging Transactions"), subject to the following
limitations:
(i) the Trust will not engage in any Hedging Transaction based on the
Municipal Index (other than transactions which terminate a futures contract
or option held by the Trust by the Trust's taking an opposite position
thereto ("Closing Transactions")), which would cause the Trust at the time
of such transaction to own or have sold the least of (i) more than 1,000
outstanding futures contracts based on the Municipal Index, (ii)
outstanding futures contracts based on the Municipal Index exceeding in
number 25% of the quotient of the Market Value of the Trust's total assets
divided by $1,000 or (iii) outstanding futures contracts based on the
Municipal Index exceeding in number 10% of the average number of daily
traded futures contracts based on the Municipal Index in the 30 days
preceding the time of effecting such transactions as reported by The Wall
Street Journal;
(ii) the Trust will not engage in any Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) which would cause the
Trust at the time of such transaction to own or have sold the lesser of (i)
outstanding futures contracts based on Treasury Bonds exceeding in number
50% of the quotient of the Market Value of the Trust's total assets divided
by $100,000 ($200,000 in the case of the two-year United States Treasury
Note) or (ii) outstanding futures contracts based on Treasury Bonds
exceeding in number 10% of the average number of daily traded futures
contracts based on Treasury Bonds in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street Journal;
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<PAGE> 44
(iii) the Trust will engage in Closing Transactions to close out any
outstanding futures contract which the Trust owns or has sold or any
outstanding option thereon owned by the Trust in the event (i) the Trust
does not have S&P Eligible Assets or Moody's Eligible Assets, as the case
may be, with an aggregate Discounted Value equal to or greater than the
Municipal Preferred Basic Maintenance Amount on two consecutive Valuation
Dates and (ii) the Trust is required to pay additional margin due to
fluctuation in contract price ("Variation Margin") on the second such
Valuation Date;
(iv) the Trust will engage in a Closing Transaction to close out any
outstanding futures contract or option thereon in the month prior to the
delivery month under the terms of such futures contract or option thereon
unless the Trust hold the securities deliverable under such terms; and
(v) when the Trust writes a futures contract or option thereon, it
will either maintain an amount of cash, cash equivalents or high grade
(rated "A" or better by S&P or Moody's, as the case may be), fixed-income
securities in a segregated account with the Trust's custodian, so that the
amount so segregated plus the amount of margin paid on such contract
("Initial Margin") and any Variation Margin held in the account of or on
behalf of the Trust's broker with respect to such futures contract or
option equals the Market Value of the futures contract or option, or, in
the event the Trust writes a futures contract or option thereon which
requires delivery of an underlying security, it shall hold such underlying
security in its portfolio;
For purposes of determining whether the Trust has S&P Eligible Assets or
Moody's Eligible Assets, as the case may be, with a Discounted Value that equals
or exceeds the Municipal Preferred Basic Maintenance Amount, the Discounted
Value of cash or securities held for the payment of Initial Margin or Variation
Margin shall be zero and the aggregate Discounted Value of S&P Eligible Assets
or Moody's Eligible Assets, as the case may be, shall be reduced by an amount
equal to (i) 30% of the aggregate settlement value, as marked to market, of any
outstanding futures contracts based on the Municipal Index which are owned by
the Trust plus (ii) 25% of the aggregate settlement value, as marked to market,
of any outstanding futures contracts based on Treasury Bonds which contracts are
owned by the Trust;
(b) borrow money, except that the Trust may, without obtaining the written
confirmation described above, borrow money for the purpose of clearing
securities transactions if (i) the Municipal Preferred Basic Maintenance Amount
would continue to be satisfied after giving effect to such borrowing and (ii)
such borrowing (A) is privately arranged with a bank or other person and is
evidenced by a promissory note or other evidence of indebtedness that is not
intended to be publicly distributed or (B) is for "temporary purposes," is
evidenced by a promissory note or other evidence of indebtedness and is an
amount not exceeding 5 per centum of the value of the total assets of the Trust
at the time of the borrowing; for purposes of the foregoing, "temporary purpose"
means that the borrowing is to be repaid within sixty days and is not to be
extended or renewed;
(c) issue additional shares of any series of Municipal Preferred or any
class or series of shares ranking prior to shares of Municipal Preferred with
respect to the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up of the Trust, or reissue any shares of
Municipal Preferred previously purchased or redeemed by the Trust;
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<PAGE> 45
(d) engage in any short sales of securities;
(e) lend securities;
(f) merge or consolidate into or with any corporation;
(g) use a Pricing Service not approved by S&P or Moody's, or both, as
applicable; or
(h) enter into reverse repurchase agreements.
11. Redemption.
(a) Optional Redemption.
(i) Subject to the provisions of subparagraph (v) of this paragraph
(a), shares of Municipal Preferred of any series may be redeemed, at the
option of the Trust, as a whole or from time to time in part, on the second
Business Day preceding any Dividend Payment Date for shares of such series,
out of funds legally available therefor, at a redemption price per share
equal to the sum of $25,000 plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption; provided, however, that (1)
shares of a series of Municipal Preferred may not be redeemed in part if
after such partial redemption fewer than 500 shares of such series remain
outstanding; (2) unless otherwise provided herein, shares of a series of
Municipal Preferred are redeemable by the Trust during the Initial Rate
Period thereof only on the second Business Day next preceding the last
Dividend Payment Date for such Initial Rate Period; and (3) subject to
subparagraph (ii) of this paragraph (a), the Notice of Special Rate Period
relating to a Special Rate Period of shares of a series of Municipal
Preferred, as delivered to the Auction Agent and filed with the Secretary
of the Trust, may provide that shares of such series shall not be
redeemable during the whole or any part of such Special Rate Period (except
as provided in subparagraph (iv) of this paragraph (a)) or shall be
redeemable during the whole or any part of such Special Rate Period only
upon payment of such redemption premium or premiums as shall be specified
therein ("Special Redemption Provisions").
(ii) A Notice of Special Rate Period relating to shares of a series of
Municipal Preferred for a Special Rate Period thereof may contain Special
Redemption Provisions only if the Trust's Board of Trustees, after
consultation with the Broker-Dealer or Broker-Dealers for such Special Rate
Period of shares of such series, determines that such Special Redemption
Provisions are in the best interest of the Trust.
(iii) If fewer than all of the outstanding shares of Municipal
Preferred are to be redeemed pursuant to subparagraph (i) of this paragraph
(a), the number of shares of such series to be redeemed shall be determined
by the Board of Trustees, and such shares shall be redeemed pro rata from
the Holders of shares of such series in proportion to the number of shares
of such series held by such Holders.
(iv) Subject to the provisions of subparagraph (v) of this paragraph
(a), shares of any series of Municipal Preferred may be redeemed, at the
option of the Trust, as a whole
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<PAGE> 46
but not in part, out of funds legally available therefor, on the first day
following any Dividend Period thereof included in a Rate Period consisting
of more than 364 Rate Period Days if, on the date of determination of the
Applicable Rate for shares of such series for such Rate Period, such
Applicable Rate equaled or exceeded on such date of determination the
Treasury Note Rate for such Rate Period, at a redemption price per share
equal to the sum of $25,000 plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) to (but not
including) to the date fixed for redemption.
(v) The Trust may not on any date mail a Notice of Redemption pursuant
to paragraph (c) of this Section 11 in respect of a redemption contemplated
to be effected pursuant to this paragraph (a) unless on such date (a) the
Trust has available Deposit Securities with maturity or tender dates not
later than the day preceding the applicable redemption date and having a
value not less than the amount (including any applicable premium) due to
Holders of shares of Municipal Preferred by reason of the redemption of
such shares on such redemption date and (b) the Discounted Value of Moody's
Eligible Assets (if Moody's is then rating the shares of Municipal
Preferred) and the Discounted Value of S&P Eligible Assets (if S&P is then
rating the shares of Municipal Preferred) each at least equal the Municipal
Preferred Basic Maintenance Amount, and would at least equal the Municipal
Preferred Basic Maintenance Amount immediately subsequent to such
redemption if such redemption were to occur on such date. For purposes of
determining in clause (b) of the preceding sentence whether the Discounted
Value of Moody's Eligible Assets at least equals the Municipal Preferred
Basic Maintenance Amount, the Moody's Discount Factors applicable to
Moody's Eligible Assets shall be determined by reference to the first
Exposure Period longer than the Exposure Period then applicable to the
Trust, as described in the definition of Moody's Discount Factor herein.
(b) Mandatory Redemption. The Trust shall redeem, at a redemption price
equal to $25,000 per share plus accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date fixed by the
Board of Trustees for redemption, certain of the shares of Municipal Preferred,
if the Trust fails to have either Moody's Eligible Assets with a Discounted
Value or S&P Eligible Assets with a Discounted Value greater than or equal to
the Municipal Preferred Basic Maintenance Amount or fails to maintain the 1940
Act Municipal Preferred Asset Coverage, in accordance with the requirements of
the rating agency or agencies then rating the shares of Municipal Preferred, and
such failure is not cured on or before the Municipal Preferred Basic Maintenance
Cure Date or the 1940 Act Cure Date, as the case may be. The number of shares of
Municipal Preferred to be redeemed shall be equal to the lesser of (i) the
minimum number of shares of Municipal Preferred, together with all other
Preferred Shares subject to redemption or retirement, the redemption of which,
if deemed to have occurred immediately prior to the opening of business on the
Cure Date, would have resulted in the Trust's having both Moody's Eligible
Assets with a Discounted Value and S&P Eligible Assets with a Discounted Value
greater than or equal to the Municipal Preferred Basic Maintenance Amount or
maintaining the 1940 Act Municipal Preferred Asset Coverage, as the case may be,
on such Cure Date (provided, however, that if there is no such minimum number of
shares of Municipal Preferred and other Preferred Shares the redemption or
retirement of which would
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have had such result, all shares of Municipal Preferred and Preferred Shares
then outstanding shall be redeemed), and (ii) the maximum number of shares of
Municipal Preferred, together with all other Preferred Shares subject to
redemption or retirement, that can be redeemed out of funds expected to be
legally available therefor in accordance with the Declaration and applicable
law. In determining the shares of Municipal Preferred required to be redeemed in
accordance with the foregoing, the Trust shall allocate the number required to
be redeemed to satisfy the Municipal Preferred Basic Maintenance Amount or the
1940 Act Municipal Preferred Asset Coverage, as the case may be, pro rata among
shares of Municipal Preferred and other Preferred Shares (and, then, pro rata
among each series of Municipal Preferred) subject to redemption or retirement.
The Trust shall effect such redemption on the date fixed by the Trust therefor,
which date shall not be later than 30 days after such Cure Date, except that if
the Trust does not have funds legally available for the redemption of all of the
required number of shares of Municipal Preferred and other Preferred Shares
which are subject to redemption or retirement or the Trust otherwise is unable
to effect such redemption on or prior to 30 days after such Cure Date, the Trust
shall redeem those shares of Municipal Preferred and other Preferred Shares
which it was unable to redeem on the earliest practicable date on which it is
able to effect such redemption. If fewer than all of the outstanding shares of a
series of Municipal Preferred are to be redeemed pursuant to this paragraph (b),
the number of shares of such series to be redeemed shall be redeemed pro rata
from the Holders of shares of such series in proportion to the number of shares
of such series held by such Holders.
(c) Notice of Redemption . If the Trust shall determine or be required to
redeem shares of a series of Municipal Preferred pursuant to paragraph (a) or
(b) of this Section 11, it shall mail a Notice of Redemption with respect to
such redemption by first class mail, postage prepaid, to each Holder of the
shares of such series to be redeemed, at such Holder's address as the same
appears on the record books of the Trust on the record date established by the
Board of Trustees. Such Notice of Redemption shall be so mailed not more than 30
days prior to the date fixed for redemption. Each such Notice of Redemption
shall state: (i) the redemption date; (ii) the number of shares of Municipal
Preferred to be redeemed and the series thereof; (iii) the CUSIP number for
shares of such series; (iv) the Redemption Price; (v) the place or places where
the certificate(s) for such shares (properly endorsed or assigned for transfer,
if the Board of Trustees shall so require and the Notice of Redemption shall so
state) are to be surrendered for payment of the Redemption Price; (vi) that
dividends on the shares to be redeemed will cease to accumulate on such
redemption date; and (vii) the provisions of this Section 11 under which such
redemption is made. If fewer than all shares of a series of Municipal Preferred
held by any Holder are to be redeemed, the Notice of Redemption mailed to such
Holder shall also specify the number of shares of such series to be redeemed
from such Holder. The Trust may provide in any Notice of Redemption relating to
a redemption contemplated to be effected pursuant to paragraph (a) of this
Section 11 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.
(d) No Redemption Under Certain Circumstances. Notwithstanding the
provisions of paragraphs (a) or (b) of this Section 11, if any dividends on
shares of a series of Municipal Preferred (whether or not earned or declared)
are in arrears, no shares of such series shall be
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redeemed unless all outstanding shares of such series are simultaneously
redeemed, and the Trust shall not purchase or otherwise acquire any shares of
such series; provided, however, that the foregoing shall not prevent the
purchase or acquisition of all outstanding shares of such series pursuant to the
successful completion of an otherwise lawful purchase or exchange offer made on
the same terms to, and accepted by, Holders of all outstanding shares of such
series.
(e) Absence of Funds Available for Redemption. To the extent that any
redemption for which Notice of Redemption has been mailed is not made by reason
of the absence of legally available funds therefor in accordance with the
Declaration and applicable law, such redemption shall be made as soon as
practicable to the extent such funds become available. Failure to redeem shares
of Municipal Preferred shall be deemed to exist at any time after the date
specified for redemption in a Notice of Redemption when the Trust shall have
failed, for any reason whatsoever, to deposit in trust with the Auction Agent
the Redemption Price with respect to any shares of which such Notice of
Redemption has been mailed; provided, however, that the foregoing shall not
apply in the case of the Trust's failure to deposit in trust with the Auction
Agent the Redemption Price with respect to any shares where (1) the Notice of
Redemption relating to such redemption provided that such redemption was subject
to one or more conditions precedent and (2) any such condition precedent shall
not have been satisfied at the time or times and in the manner specified in such
Notice of Redemption. Notwithstanding the fact that the Trust may not have
redeemed shares of Municipal Preferred for which a Notice of Redemption has been
mailed, dividends may be declared and paid on shares of Municipal Preferred and
shall include those shares of Municipal Preferred for which a Notice of
Redemption has been mailed.
(f) Auction Agent as Trustee of Redemption Payments by Trust. All moneys
paid to the Auction Agent for payment of the Redemption Price of shares of
Municipal Preferred called for redemption shall be held in trust by the Auction
Agent for the benefit of Holders of shares so to be redeemed.
(g) Shares for Which Notice of Redemption Has Been Given Are No Longer
Outstanding. Provided a Notice of Redemption has been mailed pursuant to
paragraph (c) of this Section 11, upon the deposit with the Auction Agent (on
the Business Day next preceding the date fixed for redemption thereby, in funds
available on the next Business Day in The City of New York, New York) of funds
sufficient to redeem the shares of Municipal Preferred that are the subject of
such notice, dividends on such shares shall cease to accumulate and such shares
shall no longer be deemed to be outstanding for any purpose, and all rights of
the Holders of the shares so called for redemption shall cease and terminate,
except the right of such Holders to receive the Redemption Price, but without
any interest or other additional amount, except as provided in subparagraph
(e)(i) of Section 2 of Part I of this Certificate and in Section 3 of Part I of
this Certificate. Upon surrender in accordance with the Notice of Redemption of
the certificates for any shares so redeemed (properly endorsed or assigned for
transfer, if the Board of Trustees shall so require and the Notice of Redemption
shall so state), the Redemption Price shall be paid by the Auction Agent to the
Holders of shares of Municipal Preferred subject to redemption. In the case that
fewer than all of the shares represented by any such certificate are redeemed, a
new certificate shall be issued, representing the unredeemed shares, without
cost to the Holder thereof. The Trust shall be entitled to receive from the
Auction Agent, promptly after the date fixed for redemption, any cash deposited
with the Auction Agent in excess of (i) the aggregate Redemption Price of the
shares of Municipal Preferred called for redemption on such
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date and (ii) all other amounts to which Holders of shares of Municipal
Preferred called for redemption may be entitled. Any funds so deposited that are
unclaimed at the end of 90 days from such redemption date shall, to the extent
permitted by law, be repaid to the Trust, after which time the Holders of shares
of Municipal Preferred so called for redemption may look only to the Trust for
payment of the Redemption Price and all other amounts to which they may be
entitled. The Trust shall be entitled to receive, from time to time after the
date fixed for redemption, any interest on the funds so deposited.
(h) Compliance With Applicable Law. In effecting any redemption pursuant to
this Section 11, the Trust shall use its best efforts to comply with all
applicable conditions precedent to effecting such redemption under the 1940 Act
and any applicable Massachusetts law, but shall effect no redemption except in
accordance with the 1940 Act and any applicable Massachusetts law.
(i) Only Whole Shares of Municipal Preferred May Be Redeemed. In the case
of any redemption pursuant to this Section 11, only whole shares of Municipal
Preferred shall be redeemed, and in the event that any provision of the
Declaration would require redemption of a fractional share, the Auction Agent
shall be authorized to round up so that only whole shares are redeemed.
12. Liquidation Rights.
(a) Ranking. The shares of a series of Municipal Preferred shall rank on a
parity with each other, with shares of any other series of Municipal Preferred
and with shares of any other series of Preferred Shares as to the distribution
of assets upon dissolution, liquidation or winding up of the affairs of the
Trust.
(b) Distributions Upon Liquidation. Upon the dissolution, liquidation or
winding up of the affairs of the Trust, whether voluntary or involuntary, the
Holders of shares of Municipal Preferred then outstanding shall be entitled to
receive and to be paid out of the assets of the Trust available for distribution
to its shareholders, before any payment or distribution shall be made on the
Common Shares or on any other class of shares of the Trust ranking junior to the
Municipal Preferred upon dissolution, liquidation or winding up, an amount equal
to the Liquidation Preference with respect to such shares plus an amount equal
to all dividends thereon (whether or not earned or declared) accumulated but
unpaid to (but not including) the date of final distribution in same-day funds,
together with any payments required to be made pursuant to Section 3 of this
Part I in connection with the liquidation of the Trust. After the payment to the
Holders of the shares of Municipal Preferred of the full preferential amounts
provided for in this paragraph (b), the Holders of Municipal Preferred as such
shall have no right or claim to any of the remaining assets of the Trust.
(c) Pro Rata Distributions. In the event the assets of the Trust available
for distribution to the Holders of shares of Municipal Preferred upon any
dissolution, liquidation, or winding up of the affairs of the Trust, whether
voluntary or involuntary, shall be insufficient to pay in full all amounts to
which such Holders are entitled pursuant to paragraph (b) of this Section 12, no
such distribution shall be made on account of any shares of any other class or
series of Preferred Shares ranking on a parity with the shares of Municipal
Preferred with respect to the distribution
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of assets upon such dissolution, liquidation or winding up unless proportionate
distributive amounts shall be paid on account of the shares of Municipal
Preferred, ratably, in proportion to the full distributable amounts for which
holders of all such parity shares are respectively entitled upon such
dissolution, liquidation or winding up.
(d) Rights of Junior Shares. Subject to the rights of the holders of shares
of any series or class or classes of shares ranking on a parity with the shares
of Municipal Preferred with respect to the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Trust, after
payment shall have been made in full to the Holders of the shares of Municipal
Preferred as provided in paragraph (b) of this Section 12, but not prior
thereto, any other series or class or classes of shares ranking junior to the
shares of Municipal Preferred with respect to the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Trust shall,
subject to the respective terms and provisions (if any) applying thereto, be
entitled to receive any and all assets remaining to be paid or distributed, and
the Holders of the shares of Municipal Preferred shall not be entitled to share
therein.
(e) Certain Events Not Constituting Liquidation. Neither the sale of all or
substantially all of the property or business of the Trust, nor the merger or
consolidation of the Trust into or with any Massachusetts business trust or
corporation nor the merger or consolidation of any Massachusetts business trust
or corporation into or with the Trust shall be a dissolution, liquidation or
winding up, whether voluntary or involuntary, for the purposes of this Section
12.
13. Miscellaneous.
(a) Amendment of this Certificate to Add Additional Series. Subject to the
provisions of paragraph (c) of Section 10 of Part I of this Certificate, the
Board of Trustees may, by resolution duly adopted, without shareholder approval
(except as otherwise provided by this Certificate or required by applicable
law), amend this Certificate to (1) reflect any amendment hereto which the Board
of Trustees is entitled to adopt pursuant to the terms of this Certificate
without shareholder approval or (2) add additional series of Municipal Preferred
or additional shares of a series of Municipal Preferred (and terms relating
thereto) to the series and shares of Municipal Preferred theretofore described
thereon. Each such additional series and all such additional shares shall be
governed by the terms of this Certificate.
(b) [Reserved.]
(c) No Fractional Shares. No fractional shares of Municipal Preferred shall
be issued.
(d) Status of Shares of Municipal Preferred Redeemed, Exchanged or
Otherwise Acquired by the Trust. Shares of Municipal Preferred which are
redeemed, exchanged or otherwise acquired by the Trust shall return to the
status of authorized and unissued Preferred Shares without designation as to
series.
(e) Board May Resolve Ambiguities. To the extent permitted by applicable
law, the Board of Trustees may interpret or adjust the provisions of this
Certificate to resolve any inconsistency or ambiguity or to remedy any formal
defect, and may amend this Certificate with respect to any series of Municipal
Preferred prior to the issuance of shares of such series.
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(f) Headings Not Determinative. The headings contained in this Certificate
are for convenience of reference only and shall not affect the meaning or
interpretation of this Certificate.
(g) Notices. All notices or communications, unless otherwise specified in
the By-laws of the Trust or this Certificate, shall be sufficiently given if in
writing and delivered in person or mailed by first-class mail, postage prepaid.
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PART II
1. Orders.
(a) Prior to the Submission Deadline on each Auction Date for shares of a
series of Municipal Preferred:
(i) each Beneficial Owner of shares of such series may submit to its
Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares, if any, of such series held
by such Beneficial Owner which such Beneficial Owner desires to
continue to hold without regard to the Applicable Rate for shares of
such series for the next succeeding Rate Period of such shares;
(B) the number of Outstanding shares, if any, of such series held
by such Beneficial Owner which such Beneficial Owner offers to sell if
the Applicable Rate for shares of such series for the next succeeding
Rate Period of shares of such series shall be less than the rate per
annum specified by such Beneficial Owner; and/or
(C) the number of Outstanding shares, if any, of such series held
by such Beneficial Owner which such Beneficial Owner offers to sell
without regard to the Applicable Rate for shares of such series for
the next 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
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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:
(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
Part II of this Certificate 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 Part II of this Certificate 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 Part II of this Certificate 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.
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(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
Part II of this Certificate if the Applicable Rate for shares of such
series determined on such Auction Date shall be equal to the rate
specified therein.
(c) No Order for any number of shares of Municipal Preferred other than
whole shares shall be valid.
2. Submission of Orders by Broker-Dealers to Auction Agent.
(a) Each Broker-Dealer shall submit in writing to the Auction Agent prior
to the Submission Deadline on each Auction Date all Orders for shares of
Municipal Preferred of a series subject to an Auction on such Auction Date
obtained by such Broker-Dealer, designating itself (unless otherwise permitted
by the Trust) as an Existing Holder in respect of shares subject to Orders
submitted or deemed submitted to it by Beneficial Owners and as a Potential
Holder in respect of shares subject to Orders submitted to it by Potential
Beneficial Owners, and shall specify with respect to each Order for such shares:
(i) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Trust);
(ii) the aggregate number of shares of such series that are the
subject of such Order;
(iii) to the extent that such Bidder is an Existing Holder of shares
of such series:
(A) the number of shares, if any, of such series subject to any
Hold Order of such Existing Holder;
(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.
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(b) If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent shall round such rate up to
the next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding shares of
Municipal Preferred of a series held by any Existing Holder is not submitted to
the Auction Agent prior to the Submission Deadline, the Auction Agent shall deem
a Hold Order to have been submitted by or on behalf of such Existing Holder
covering the number of Outstanding shares of such series held by such Existing
Holder and not subject to Orders submitted to the Auction Agent; provided,
however, that if an Order or Orders covering all of the Outstanding shares of
such series held by any Existing Holder is not submitted to the Auction Agent
prior to the Submission Deadline for an Auction relating to a Special Rate
Period consisting of more than 28 Rate Period Days, the Auction Agent shall deem
a Sell Order to have been submitted by or on behalf of such Existing Holder
covering the number of outstanding shares of such series held by such Existing
Holder and not subject to Orders submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted to the Auction
Agent covering in the aggregate more than the number of Outstanding shares of
Municipal Preferred of a series subject to an Auction held by such Existing
Holder, such Orders shall be considered valid in the following order of
priority:
(i) all Hold Orders for shares of such series shall be considered
valid, but only up to and including in the aggregate the number of
Outstanding shares of such series held by such Existing Holder, and if the
number of shares of such series subject to such Hold Orders exceeds the
number of Outstanding shares of such series held by such Existing Holder,
the number of shares subject to each such Hold Order shall be reduced pro
rata to cover the number of Outstanding shares of such series held by such
Existing Holder;
(ii) (A) any Bid for shares of such series shall be considered
valid up to and including the excess of the number of Outstanding
shares of such series held by such Existing Holder over the number of
shares of such series subject to any Hold Orders referred to in clause
(i) above;
(B) subject to subclause (A), if more than one Bid of an Existing
Holder for shares of such series is submitted to the Auction Agent
with the same rate and the number of Outstanding shares of such series
subject to such Bids is greater than such excess, such Bids shall be
considered valid up to and including the amount of such excess, and
the number of shares of such series subject to each Bid with the same
rate shall be reduced pro rata to cover the number of shares of such
series equal to such excess;
(C) subject to subclauses (A) and (B), if more than one Bid of an
Existing Holder for shares of such series is submitted to the Auction
Agent with different rates, such Bids shall be considered valid in the
ascending order of their respective rates up to and including the
amount of such excess; and
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(D) in any such event, the number, if any, of such Outstanding
shares of such series subject to any portion of Bids considered not
valid in whole or in part under this clause (ii) shall be treated as
the subject of a Bid for shares of such series by or on behalf of a
Potential Holder at the rate therein specified; and
(iii) all Sell Orders for shares of such series shall be considered
valid up to and including the excess of the number of Outstanding shares of
such series held by such Existing Holder over the sum of shares of such
series subject to valid Hold Orders referred to in clause (i) above and
valid Bids referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of a series of Municipal
Preferred is submitted to the Auction Agent by or on behalf of any Potential
Holder, each such Bid submitted shall be a separate Bid with the rate and number
of shares therein specified.
(f) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date, shall be irrevocable.
3. Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate.
(a) Not earlier than the Submission Deadline on each Auction Date for
shares of a series of Municipal Preferred, the Auction Agent shall assemble all
valid Orders submitted or deemed submitted to it by the Broker-Dealers in
respect of shares of such series (each such Order as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to individually as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order" and collectively as "Submitted Hold
Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as
"Submitted Orders") and shall determine for such series:
(i) the excess of the number of Outstanding shares of such series over
the number of Outstanding shares of such series subject to Submitted Hold
Orders (such excess being hereinafter referred to as the "Available
Municipal Preferred" of such series);
(ii) from the Submitted Orders for shares of such series whether:
(A) the number of Outstanding shares of such series subject to
Submitted Bids of Potential Holders specifying one or more rates equal
to or lower than the Maximum Rate for shares of such series;
exceeds or is equal to the sum of:
(B) the number of Outstanding shares of such series subject to
Submitted Bids of Existing Holders specifying one or more rates higher
than the Maximum Rate for shares of such series; and
(C) the number of Outstanding shares of such series subject to
Submitted Sell Orders;
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(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.
(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
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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 Part II of this
Certificate, 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;
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(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 shares 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
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 and the denominator of which shall
be the aggregate number of Outstanding shares of Municipal Preferred
subject to such Submitted Bids made by all such Potential Holders that
specified a rate equal to the Winning Bid Rate for shares of such series.
(b) If Sufficient Clearing Bids for shares of a series of Municipal
Preferred have not been made (other than because all of the Outstanding shares
of such series are subject to Submitted Hold Orders), subject to the provisions
of 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
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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.
(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
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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 Beneficial Owner, a Potential Beneficial
Owner or its respective Agent Member to deliver shares of Municipal Preferred of
any series or to pay for shares of Municipal Preferred of any series sold or
purchased pursuant to the Auction Procedures or otherwise.
5. Notification of Allocations. Whenever the Trust intends to include any
net capital gain or other income taxable for Federal income tax purposes in any
dividend on shares of Municipal Preferred, the Trust shall, in the case of a
Minimum Rate Period or a Special Rate Period of 28 Rate Period Days or fewer,
and may, in the case of any other Special Rate Period, notify the Auction Agent
of the amount to be so included not later than the Dividend Payment Date next
preceding the Auction Date on which the Applicable Rate for such dividend is to
be established. Whenever the Auction Agent receives such notice from the Trust,
it will be required in turn to notify each Broker-Dealer, who, on or prior to
such Auction Date, in accordance with its Broker-Dealer Agreement, will be
required to notify its Beneficial Owners and Potential Beneficial Owners of
shares of Municipal Preferred believed by it to be interested in submitting an
Order in the Auction to be held on such Auction Date.
6. Auction Agent. For so long as any shares of Municipal Preferred are
outstanding, the Auction Agent, duly appointed by the Trust to so act, shall be
in each case a commercial bank, trust company or other financial institution
independent of the Trust and its affiliates (which, however, may engage or have
engaged in business transactions with the Trust or its affiliates) and at no
time shall the Trust or any of its affiliates act as the Auction Agent in
connection with the Auction Procedures. If the Auction Agent resigns or for any
reason its appointment is terminated during any period that any shares of
Municipal Preferred are outstanding, the Board of Trustees shall use its best
efforts promptly thereafter to appoint another qualified commercial bank, trust
company or financial institution to act as the Auction Agent. The Auction
Agent's registry of Existing Holders of shares of a series of Municipal
Preferred shall be conclusive and binding on the Broker-Dealers. A Broker-Dealer
may inquire of the Auction Agent between 3:00 p.m. on the Business Day preceding
an Auction for shares of a series of Municipal Preferred and 9:30 a.m. on the
Auction Date for such Auction to ascertain the number of shares of a series in
respect of which the Auction Agent has determined such Broker-Dealer to be an
Existing Holder. If such Broker-Dealer believes it is the Existing Holder of
fewer shares of such series than specified by the Auction Agent in response to
such Broker-Dealer's inquiry, such Broker-Dealer may so inform the Auction Agent
of that belief. Such Broker-Dealer shall not, in its capacity as Existing Holder
of shares of such series, submit Orders in such Auction in respect of shares of
such series covering in the aggregate more than the number of shares of such
series specified by the Auction Agent in response to such Broker-Dealer's
inquiry.
7. Transfer of Shares of Municipal Preferred. Unless otherwise permitted by
the Trust, a Beneficial Owner or an Existing Holder may sell, transfer or
otherwise dispose of shares of Municipal Preferred only in whole shares and only
pursuant to a Bid or Sell Order placed with the Auction Agent in accordance with
the procedures described in this Part II or to a Broker-Dealer; provided,
however, that (a) a sale, transfer or other disposition of shares of Municipal
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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) no registration of transfer of
shares of a series of Municipal Preferred shall be made on the books of the
Trust to any Person other than the Securities Depository or its nominee.
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IN WITNESS WHEREOF, this instrument has been executed for and on behalf and
in the name of the Trust by its officers thereto duly authorized on ________,
1999.
KEMPER STRATEGIC MUNICIPAL
INCOME TRUST
Attest: By: *
----------------------------- ----------------------------------
Secretary Mark S. Casady, President
* By: /s/ Robert W. Helm
-----------------------------
Robert W. Helm
As Attorney-In-Fact
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<PAGE> 1
EXHIBIT 2(d)
SHARE CERTIFICATE CUSIP No._______________
NUMBER
______
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
Organized Under the Laws of the Commonwealth of Massachusetts
Municipal Auction Rate Cumulative Preferred Shares
of Beneficial Interest, Series T
$.01 Par Value Per Share
$25,000 Liquidation Preference Per Share
SHARE CERTIFICATE SPECIMEN
This certifies that _____________________________________ is
the owner of _________________________________ fully paid and non-assessable
Municipal Auction Rate Cumulative Preferred Shares of beneficial interest,
Series T, $.01 par value per share, $25,000 liquidation preference per share, of
Kemper Strategic Municipal Income Trust (the "Trust"), the said shares being
issued, received and held under and subject to the terms and provisions of the
Amended and Restated Agreement and Declaration of Trust dated as of February 27,
1989, and all amendments thereto, and to the terms and provisions of the
Certificate of Designation of the Preferred Shares of the Trust, copies of which
are on file with the Secretary of the Commonwealth of Massachusetts. The said
owner by accepting this certificate agrees to and is bound by all of the said
terms and provisions. The shares represented hereby are only transferable in
writing by the owner thereof in person or by attorney upon surrender of this
certificate to the Trustees properly endorsed for transfer. This certificate is
executed on behalf of the Trustees of the Trust as Trustees and not individually
and the obligations hereof are not binding upon any of the Trustees, officers or
shareholders of the Trust individually but are binding only upon the assets and
property of the Trust. This certificate is not valid until countersigned and
registered by the Transfer Agent and Registrar.
IN WITNESS WHEREOF, the Trust has caused this Certificate to
be signed by its duly authorized officers and its Seal to be hereunto affixed
this _____________ day of ________________, _____.
BANKERS TRUST COMPANY KEMPER STRATEGIC MUNICIPAL INCOME TRUST
As Transfer Agent and Registrar
By:____________________________________
By:_____________________________ President
Authorized Signature
Attest:________________________________
Secretary
<PAGE> 2
TRANSFER FORM
FOR VALUE RECEIVED, _____________________________ hereby
sells, assigns and transfers unto ____________________________________ Shares
represented by this Certificate, and do hereby irrevocably constitute and
appoint ________________________________ Attorney, to transfer said shares on
the books of the within named Trust with full power of substitution in the
premises.
Dated: _________________ ___, _____
Signature(s): ________________________________
(The signature to this assignment must correspond with the name as written upon
the face of this Certificate in every particular, without alteration or
enlargement or any change whatsoever. If more than one owner, all must sign.)
Signature Guaranteed By: _______________________________________
(Signature(s) must be guaranteed by a commercial bank or trust company or member
firm of any national stock exchange.)
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<PAGE> 1
EXHIBIT 2(h)
Municipal Auction Rate Cumulative Preferred Shares
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
________ Shares, Series T
Liquidation Preference $25,000 Per Share
UNDERWRITING AGREEMENT
September __, 1999
SALOMON SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Kemper Strategic Municipal Income Trust, a Massachusetts
business trust (the "Trust"), proposes, upon the terms and conditions set forth
herein, to issue and sell an aggregate of ______ shares of its Municipal Auction
Rate Cumulative Preferred Shares, Series T (the "Municipal Preferred"), each
with a liquidation preference of $25,000 per share (the shares of Municipal
Preferred to be sold hereby are referred to herein, collectively, as the
"Shares"). The Shares will be authorized by, and subject to the terms and
conditions of, the Amended and Restated Certificate of Designation for Preferred
Shares of the Trust (the "Certificate") in the form filed as an exhibit to the
Registration Statement referred to in Section 1 of this agreement. The Trust and
its investment adviser, Scudder Kemper Investments, Inc. (the "Adviser"), wish
to confirm as follows their agreement with Salomon Smith Barney Inc. (the
"Underwriter") in connection with the purchase of the Shares by the Underwriter.
Collectively, the Investment Management Agreement dated as of
September 7, 1998 between the Trust and the Adviser ("the "Investment Management
Agreement"), the Custodian Agreement dated as of March 15, 1999 between the
Trust and State Street Bank and Trust Company ("SSBT") (the "Custodian
Agreement"), the Agency Agreement dated as of March 15, 1989 between the Trust
and Investors Fiduciary Trust Company (the "Agency Agreement"), the Auction
Agency Agreement dated as of _____, 1999 between the Trust and Bankers Trust
<PAGE> 2
Company (the "Auction Agency Agreement") and the Broker-Dealer Agreement dated
as of September __, 1999 between the Trust and Salomon Smith Barney Inc. are
hereinafter referred to as the "Trust Agreements." This Underwriting Agreement
is hereinafter referred to as the "Agreement."
1.Registration Statement and Prospectus. The Trust has prepared
in conformity with the provisions of the Securities Act of 1933, as amended (the
"1933 Act"), the Investment Company Act of 1940, as amended (the "1940 Act"),
and the rules and regulations of the Securities and Exchange Commission (the
"Commission") promulgated under the 1933 Act (the "1933 Act Rules and
Regulations") and the 1940 Act (the "1940 Act Rules and Regulations" and,
together with the 1933 Act Rules and Regulations, the "Rules and Regulations"),
a registration statement on Form N-2, as amended by Pre-Effective Amendment No.
1 and _________ (File Nos. 333-78945 and 811-5467), under the 1933 Act and the
1940 Act (the "registration statement"), including a prospectus relating to the
Shares, and has filed the registration statement and prospectus in accordance
with the 1933 Act and the 1940 Act. The Trust also has filed a notification of
registration of the Trust as an investment company under the 1940 Act on Form
N-8A (the "1940 Act Notification"). The term "Registration Statement" as used in
this Agreement means the registration statement (including all financial
schedules and exhibits), as amended at the time it becomes effective under the
1933 Act or, if the registration statement became effective under the 1933 Act
prior to the execution of this Agreement, as amended or supplemented at the time
it became effective prior to the execution of this Agreement, and includes any
information deemed to be included by Rule 430A under the 1933 Act Rules and
Regulations. If it is contemplated, at the time this Agreement is executed, that
a post-effective amendment to the registration statement will be filed under the
1933 Act and must be declared effective before the offering of the Shares may
commence, the term "Registration Statement" as used in this Agreement means the
registration statement as amended by said post-effective amendment. If the Trust
has filed an abbreviated registration statement to register an additional amount
of Shares pursuant to Rule 462(b) under the 1933 Act (the "Rule 462 Registration
Statement"), then any reference herein to the term "Registration Statement"
shall include such Rule 462 Registration Statement. The term "Prospectus" as
used in this Agreement means the prospectus and statement of additional
information in the forms included in the Registration Statement or any amendment
or supplement thereto. Specifically, if the prospectus and statement of
additional information included in the Registration Statement omit information
in reliance on Rule 430A under the 1933 Act Rules and Regulations and such
information is included in a prospectus and statement of additional information
filed with the Commission pursuant to Rule 497(h) under the 1933 Act, the term
"Prospectus" as used in this Agreement means the prospectus and statement of
additional information in the forms included in the Registration Statement as
supplemented by the addition of the information contained in the prospectus
filed with the Commission pursuant to Rule 497(h). The term "Prepricing
Prospectus" as used in this Agreement means the prospectus and statement of
additional information subject to completion in the forms included in the
registration statement at the time of filing of amendment no. 1 to the
registration statement with the Commission on September __, 1999, and as such
prospectus and statement of additional information shall have been amended from
time to time
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<PAGE> 3
prior to the date of the Prospectus, together with any other prospectus and
statement of additional information relating to the Trust other than the
Prospectus approved in writing by or directly or indirectly prepared by the
Trust or the Adviser; it being understood that the definition of Prepricing
Prospectus above shall not include any Prepricing Prospectus prepared by the
Underwriter unless approved in writing by the Trust or Adviser. The terms
"Registration Statement," "Prospectus" and "Prepricing Prospectus" shall also
include any financial statements and other information incorporated by reference
therein.
The Trust has furnished the Underwriter with copies of such
registration statement, each amendment to such registration statement filed with
the Commission and each Prepricing Prospectus.
2. Agreements to Sell and Purchase. The Trust hereby agrees,
subject to all the terms and conditions set forth herein, to issue and sell to
the Underwriter and, upon the basis of the representations, warranties and
agreements of the Trust and the Adviser herein contained and subject to all the
terms and conditions set forth herein, the Underwriter agrees to purchase from
the Trust, at a purchase price of $_______ per Share, the number of shares of
Municipal Preferred set forth opposite the name of the Underwriter in Schedule I
hereto.
3. Terms of Public Offering. The Trust and the Adviser have been
advised by the Underwriter that the Underwriter proposes to make a public
offering of the Shares as soon after the Registration Statement and this
Agreement have become effective as in the Underwriter's judgment is advisable
and initially to offer the Shares upon the terms set forth in the Prospectus.
4. Delivery of the Shares and Payment Therefor. Delivery to the
Underwriter of and payment for the Shares shall be made at the office of Simpson
Thacher & Bartlett, 425 Lexington Avenue, New York, NY 10017, or through the
facilities of The Depository Trust Company or another mutually agreeable
facility, at 9:30 A.M., New York City time, on September __, 1999 (the "Closing
Date"). The place of closing for the Shares and the Closing Date may be varied
by agreement between the Underwriter and the Trust.
Certificates for the Shares shall be registered in such names
and in such denominations as the Underwriter shall request prior to 9:30 A.M.,
New York City time, on the second business day preceding the Closing Date. Such
certificates shall be made available to the Underwriter in New York City for
inspection not later than 9:30 A.M., New York City time, on the business day
next preceding the Closing Date. The certificates evidencing the Shares shall be
delivered to the Underwriter on the Closing Date, through the facilities of The
Depository Trust Company, against payment of the purchase price therefor in
immediately available funds.
5. Agreements of the Trust and the Adviser. The Trust and the
Adviser, jointly and severally, agree with the Underwriter as follows:
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<PAGE> 4
(a) If, at the time this Agreement is executed and delivered, it
is necessary for the Registration Statement or a post-effective amendment
thereto to be declared effective under the 1933 Act before the offering of the
Shares may commence, the Trust will endeavor to cause the Registration Statement
or such post-effective amendment to become effective under the 1933 Act as soon
as possible and will advise the Underwriter promptly and, if requested by the
Underwriter, will confirm such advice in writing when the Registration Statement
or such post-effective amendment has become effective.
(b) The Trust will advise the Underwriter promptly and, if
requested by the Underwriter, will confirm such advice in writing: (i) of any
request made by the Commission for amendment of or a supplement to the
Registration Statement, any Prepricing Prospectus or the Prospectus (or any
amendment or supplement to any of the foregoing) or for additional information,
(ii) of the issuance by the Commission, the National Association of Securities
Dealers, Inc. (the "NASD"), any state securities commission, any national
securities exchange, any arbitrator, any court or any other governmental,
regulatory, self-regulatory or administrative agency or any official of any
order suspending the effectiveness of the Registration Statement, prohibiting or
suspending the use of the Prospectus or any Prepricing Prospectus, or any sales
material (as hereinafter defined), of any notice pursuant to Section 8(e) of the
1940 Act, of the suspension of qualification of the Shares for offering or sale
in any jurisdiction, or the initiation of any proceeding for any such purposes,
(iii) of receipt by the Trust, the Adviser, any affiliate of the Trust or the
Adviser or any representative or attorney of the Trust or the Adviser of any
other material communication from the Commission, the NASD, any state securities
commission, any national securities exchange, any arbitrator, any court or any
other governmental, regulatory, self-regulatory or administrative agency or any
official relating to the Trust (if such communication relating to the Trust is
received by such person within three years after the date of this Agreement),
the Registration Statement, the 1940 Act Notification, the Prospectus, any
Prepricing Prospectus, any sales material (as herein defined) (or any amendment
or supplement to any of the foregoing) or this Agreement or any of the Trust
Agreements and (iv) within the period of time referred to in paragraph (f)
below, of any material adverse change in the condition (financial or other),
business, prospects, properties, net assets or results of operations of the
Trust or the Adviser or of the happening of any other event which makes any
statement of a material fact made in the Registration Statement or the
Prospectus, or any Prepricing Prospectus or any sales materials (as herein
defined) (or any amendment or supplement to any of the foregoing) untrue or
which requires the making of any additions to or changes in the Registration
Statement or the Prospectus, or any Prepricing Prospectus or any sales materials
(as herein defined) (or any amendment or supplement to any of the foregoing) in
order to state a material fact required by the 1933 Act, the 1940 Act or the
Rules and Regulations to be stated therein or necessary in order to make the
statements therein (in the case of a prospectus, in light of the circumstances
under which they were made) not misleading or of the necessity to amend or
supplement the Registration Statement, the Prospectus, or any Prepricing
Prospectus or any sales material (as herein defined) (or any amendment or
supplement to any of the foregoing) to comply with the 1933 Act, the 1940 Act,
the Rules and Regulations or any other law or order of any court or regulatory
body. If at any time the Commission, the NASD, any state securities commission,
any national securities
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<PAGE> 5
exchange, any arbitrator, any court or any other governmental, regulatory,
self-regulatory or administrative agency or any official shall issue any order
suspending the effectiveness of the Registration Statement, prohibiting or
suspending the use of the Prospectus or any sales material (as herein defined)
(or any amendment or supplement to any of the foregoing) or suspending the
qualification of the Shares for offering or sale in any jurisdiction, the Trust
will make every reasonable effort to obtain the withdrawal of such order at the
earliest possible time.
(c) The Trust will furnish to the Underwriter, without charge,
three signed copies of the Registration Statement as originally filed with the
Commission and of each amendment thereto, including financial statements and all
exhibits thereto, and will also furnish to the Underwriter, without charge, such
number of conformed copies of the Registration Statement as originally filed and
of each amendment thereto, but without exhibits, as the Underwriter may request.
(d) The Trust will not (i) file any amendment to the
Registration Statement or make any amendment or supplement to the Prospectus, or
any sales material (as herein defined), of which the Underwriter shall not
previously have been advised or to which the Underwriter shall reasonably object
after being so advised or (ii) so long as, in the opinion of counsel for the
Underwriter, a Prospectus is required by the 1933 Act to be delivered in
connection with sales by the Underwriter or any dealer, file any information,
documents or reports pursuant to the Securities Exchange Act of 1934, as amended
(the "1934 Act"), without delivering a copy of such information, documents or
reports to the Underwriter prior to or concurrently with such filing.
(e) Prior to the execution and delivery of this Agreement, the
Trust has delivered to the Underwriter, without charge, in such quantities as
the Underwriter has requested, copies of each form of the Prepricing Prospectus.
The Trust consents to the use, in accordance with the provisions of the 1933 Act
and with the state securities or blue sky laws of the jurisdictions in which the
Shares are offered by the Underwriter and by dealers, prior to the date of the
Prospectus, of each Prepricing Prospectus so furnished by the Trust.
(f) As soon after the execution and delivery of this Agreement
as possible and thereafter from time to time for such period as in the opinion
of counsel for the Underwriter a prospectus is required by the 1933 Act to be
delivered in connection with sales by the Underwriter or any dealer, the Trust
will expeditiously deliver to the Underwriter and each dealer, without charge,
as many copies of the Prospectus as the Underwriter may request. The Trust
consents to the use of the Prospectus in accordance with the provisions of the
1933 Act and with the state securities or blue sky laws of the jurisdictions in
which the Shares are offered by the Underwriter and by all dealers to whom
Shares may be sold, both in connection with the offering and sale of the Shares
and for such period of time thereafter as the Prospectus is required by the 1933
Act to be delivered in connection with sales by the Underwriter or any dealer.
If during such period of time any event shall occur that in the judgment of the
Trust or in the opinion of counsel for the Underwriter is required to be set
forth in the Registration Statement or the Prospectus (as then amended or
supplemented) or should be set forth therein in order to make the
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<PAGE> 6
statements therein (in the case of the Prospectus, in light of the circumstances
under which they were made) not misleading, or if it is necessary to supplement
or amend the Registration Statement or the Prospectus to comply with the 1933
Act, the 1940 Act, the Rules and Regulations or any other federal law, rule or
regulation, or any state securities or blue sky disclosure laws, rules or
regulations, the Trust will forthwith prepare and, subject to the provisions of
paragraph (d) above, promptly file with the Commission an appropriate supplement
or amendment thereto, and will expeditiously furnish to the Underwriter and
dealers, without charge, a reasonable number of copies thereof. In the event
that the Trust and the Underwriter agree that the Registration Statement or the
Prospectus should be amended or supplemented, the Trust, if requested by the
Underwriter, will promptly issue a press release announcing or disclosing the
matters to be covered by the proposed amendment or supplement.
(g) The Trust will make generally available to its security
holders an earnings statement, which need not be audited, covering a
twelve-month period ending not later than 15 months after the effective date of
the Registration Statement as soon as practicable after the end of such period,
which earnings statement shall satisfy the provisions of Section 11(a) of the
1933 Act and Rule 158 of the 1933 Act Rules and Regulations.
(h) During the period of five years hereafter, the Trust will
furnish to the Underwriter (i) as soon as available, a copy of each report of
the Trust mailed to stockholders or filed with the Commission or furnished to
the New York Stock Exchange (the "NYSE") other than reports on Form N-SAR, and
(ii) from time to time such other information concerning the Trust as the
Underwriter may reasonably request.
(i) If this Agreement shall terminate or shall be terminated
after execution pursuant to any provisions hereof (otherwise than by notice
given by the Underwriter terminating this Agreement pursuant to Section 12
hereof) or if this Agreement shall be terminated by the Underwriter because of
any failure or refusal on the part of the Trust or the Adviser to comply with
the terms or fulfill any of the conditions of this Agreement, the Trust and the
Adviser, jointly and severally, agree to reimburse the Underwriter for all
out-of-pocket expenses (including reasonable fees and expenses of counsel for
the Underwriter) incurred by the Underwriter in connection herewith.
(j) The Trust will apply the net proceeds from the sale of the
Shares in accordance with the description set forth in the Prospectus and in
such a manner as to comply with the investment objectives, policies and
restrictions of the Trust as described in the Prospectus.
(k) The Trust will timely file the Prospectus with the
Commission pursuant to Rule 497(c) or Rule 497(h) of the 1933 Act Rules and
Regulations, whichever is applicable or, if applicable, will timely file the
certification permitted by Rule 497(j) of the 1933 Act Rules and Regulations and
will advise the Underwriter of the time and manner of such filing.
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<PAGE> 7
(l) Except as provided in this Agreement, or as described in the
Prospectus, the Trust will not sell, contract to sell, or otherwise dispose of
any senior securities (as defined in the 1940 Act) of the Trust, or grant any
options or warrants to purchase senior securities of the Trust, for a period of
180 days after the date of the Prospectus, without the prior written consent of
the Underwriter.
(m) Except as stated in this Agreement and in the Prepricing
Prospectus and Prospectus, neither the Trust nor the Adviser has taken, nor will
it take, directly or indirectly, any action designed to or that might reasonably
be expected to cause or result in stabilization or manipulation of the price of
any securities issued by the Trust to facilitate the sale or resale of the
Shares.
(n) The Trust will use its best efforts to cause the Municipal
Preferred, prior to the Closing Date, to be assigned a rating of 'Aaa' by
Moody's Investors Service, Inc. ("Moody's") and AAA by Standard & Poor's Rating
Group ("S&P" and, together with Moody's, the "Rating Agencies").
(o) The Trust and the Adviser will use their best efforts to
perform all of the agreements required of them and discharge all conditions to
closing as set forth in this Agreement.
6. Representations and Warranties of the Trust and the Adviser
with respect to the Trust.
(i) The Trust represents and warrants to the Underwriter that:
(a) Each Prepricing Prospectus included as part of the
registration statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 497 of the 1933 Act Rules and
Regulations, complied when so filed in all material respects with the provisions
of the 1933 Act, the 1940 Act and the Rules and Regulations. The Commission has
not issued any order preventing or suspending the use of any Prepricing
Prospectus or the Prospectus.
(b) The registration statement in the form in which it became or
becomes effective and also in such form as it may be when any post-effective
amendment thereto shall become effective and the Prospectus and any supplement
or amendment thereto when filed with the Commission under Rule 497 of the 1933
Act Rules and Regulations and the 1940 Act Notification when originally filed
with the Commission and any amendment or supplement thereto when filed with the
Commission, complied or will comply in all material respects with the
requirements of the 1933 Act, the 1940 Act and the Rules and Regulations and did
not or will not at any such times contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein (in the case of the Prospectus, in light of the
circumstances under which they were made) not misleading, except that this
representation and warranty does not apply to statements in or omissions from
the
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<PAGE> 8
registration statement or the Prospectus made in reliance upon and in conformity
with information relating to the Underwriter furnished to the Trust in writing
by or on behalf of the Underwriter expressly for use therein.
(c) All the outstanding Common Shares (as defined in the
Prospectus) of the Trust have been duly authorized and validly issued, are fully
paid and nonassessable by the Trust and are free of any preemptive or similar
rights; the Shares have been duly authorized and, when issued and delivered to
the Underwriter against payment therefor in accordance with the terms hereof,
will be validly issued, fully paid and nonassessable by the Trust and free of
any preemptive or similar rights that entitle or will entitle any person to
acquire any Shares upon the issuance thereof by the Trust, and will conform to
the description thereof in the Registration Statement and the Prospectus; and
the capitalization of the Trust conforms to the description thereof in the
Registration Statement and the Prospectus.
(d) Except as described in the Prospectus, there are no
outstanding options, warrants or other rights calling for the issuance of, or
any commitment, plan or arrangement to issue, any shares of beneficial interest
of the Trust or any security convertible into or exchangeable or exercisable for
shares of beneficial interest of the Trust.
(e) The Trust is a business trust duly organized and validly
existing under the laws of the Commonwealth of Massachusetts with full business
trust power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus, and is duly registered and qualified to conduct its business in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
to so register or qualify does not have a material adverse effect on the
condition (financial or other), business, prospects, properties, net assets or
results of operations of the Trust; and the Trust has no subsidiaries.
(f) There are no legal or governmental proceedings pending or,
to the knowledge of the Trust, threatened, against the Trust, or to which the
Trust or any of its properties is subject, that are required to be described in
the Registration Statement or the Prospectus but are not described as required,
and there are no agreements, contracts, indentures, leases or other instruments
that are required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement that are
not described or filed as required by the 1933 Act, the 1940 Act or the Rules
and Regulations.
(g) The Trust is not in violation of its Agreement and
Declaration of Trust (the "Declaration"), including the Certificate, or bylaws
(the "Bylaws"), or other organizational documents or of any law, ordinance,
administrative or governmental rule or regulation applicable to the Trust or of
any decree of the Commission, the NASD, any state securities commission, any
national securities exchange, any arbitrator, any court or governmental agency,
body or official having jurisdiction over the Trust, or in default in the
performance of any material obligation, agreement or condition contained in any
bond, debenture, note or any other evidence of
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<PAGE> 9
indebtedness or in any material agreement, indenture, lease or other instrument
to which the Trust is a party or by which it or any of its properties may be
bound.
(h) Neither the issuance and sale of the Shares, the execution,
delivery or performance of this Agreement or any of the Trust Agreements by the
Trust, nor the consummation by the Trust of the transactions contemplated hereby
or thereby (A) requires any consent, approval, authorization or other order of,
or registration or filing with, the Commission, the NASD, any state securities
commission, any national securities exchange, any arbitrator, any court,
regulatory body, administrative agency or other governmental body, agency or
official (except such as may have been obtained prior to the date hereof and
such as may be required for compliance with the state securities or blue sky
laws of various jurisdictions which have been or will be effected in accordance
with this Agreement) or conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the Declaration, including the
Certificate, the Bylaws or other organizational documents of the Trust or (B)
conflicts or will conflict with or constitutes or will constitute a breach of,
or a default under, any agreement, indenture, lease or other instrument to which
the Trust is a party or by which it or any of its properties may be bound, or
violates or will violate any statute, law, regulation or judgment, injunction,
order or decree applicable to the Trust or any of its properties, or will result
in the creation or imposition of any material lien, charge or encumbrance upon
any property or assets of the Trust pursuant to the terms of any agreement or
instrument to which it is a party or by which it may be bound or to which any of
its properties or assets is subject. The Trust is not subject to any order of
any court or of any arbitrator, governmental authority or administrative agency.
(i) The financial statements, together with related schedules
and notes, included or incorporated by reference in the Registration Statement
and the Prospectus, present fairly the financial position, results of operations
and changes in financial position of the Trust on the basis stated or
incorporated by reference in the Registration Statement at the respective dates
or for the respective periods to which they apply; such statements and related
schedules and notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved,
except as disclosed therein; and the other financial and statistical information
and data included in the Registration Statement and the Prospectus are
accurately presented and prepared on a basis consistent with such financial
statements and the books and records of the Trust.
(j) The execution and delivery of, and the performance by the
Trust of its obligations under, this Agreement and the Trust Agreements have
been duly and validly authorized by the Trust, and this Agreement and the Trust
Agreements have been duly executed and delivered by the Trust and each
constitutes the valid and legally binding agreement of the Trust, enforceable
against the Trust in accordance with its terms, except as rights to indemnity
and contribution hereunder and thereunder may be limited by federal or state
securities laws and subject to the qualification that the enforceability of the
Trust's obligations hereunder and thereunder may be limited by bankruptcy,
fraudulent conveyance, insolvency, reorganization,
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<PAGE> 10
moratorium, and other laws relating to or affecting creditors' rights generally
and by general equitable principles.
(k) Except as disclosed in the Registration Statement and the
Prospectus, subsequent to the respective dates as of which such information is
given in the Registration Statement and the Prospectus (or any amendment or
supplement to either of them), the Trust has not incurred any liability or
obligation, direct or contingent, or entered into any transaction, not in the
ordinary course of business, that is material to the Trust, and there has not
been any change in the capitalization, or material increase in the short-term
debt or long-term debt, of the Trust, or any material adverse change, or any
development involving or which may reasonably be expected to involve, a
prospective material adverse change, in the condition (financial or other),
business, prospects, properties, net assets or results of operations of the
Trust, whether or not arising in the ordinary course of business.
(l) The Trust has not distributed and, prior to the later to
occur of (i) the Closing Date and (ii) completion of the distribution of the
Shares, will not distribute any offering material in connection with the
offering and sale of the Shares other than the Registration Statement, the
Prepricing Prospectus, the Prospectus or other materials, if any, permitted by
the 1933 Act, the 1940 Act or the Rules and Regulations.
(m) The Trust has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits") as are
necessary to own its properties and to conduct its business in the manner
described in the Prospectus, subject to such qualifications as may be set forth
in the Prospectus; the Trust has fulfilled and performed all its material
obligations with respect to such permits and no event has occurred which allows,
or after notice or lapse of time would allow, revocation or termination thereof
or results in any other material impairment of the rights of the Trust under any
such permit, subject in each case to such qualification as may be set forth in
the Prospectus; and, except as described in the Prospectus, none of such permits
contains any restriction that is materially burdensome to the Trust.
(n) The Trust maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization and with the
applicable requirements of the 1940 Act, the 1940 Act Rules and Regulations and
the Internal Revenue Code of 1986, as amended (the "Code"); (ii) transactions
are recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets and to maintain compliance with the books and records
requirements under the 1940 Act and the 1940 Act Rules and Regulations; (iii)
access to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
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<PAGE> 11
(o) The Trust has filed all tax returns required to be filed,
which returns are complete and correct in all material respects, and the Trust
is not in material default in the payment of any taxes which were payable
pursuant to said returns or any assessments with respect thereto.
(p) No holder of any security of the Trust has any right to
require registration of shares of beneficial interest, shares of Municipal
Preferred or any other security of the Trust because of the filing of the
registration statement or consummation of the transactions contemplated by this
Agreement.
(q) The Trust, subject to the registration statement having been
declared effective and the filing of the Prospectus under Rule 497 under the
1933 Act Rules and Regulations, has taken all required action under the 1933
Act, the 1940 Act and the Rules and Regulations to make the public offering and
consummate the sale of the Shares as contemplated by this Agreement.
(r) The Trust is registered under the 1940 Act and the 1940 Act
Rules and Regulations as a closed-end, non-diversified management investment
company and the 1940 Act. Notification has been duly filed with the Commission
and, at the time of filing thereof and any amendment or supplement thereto,
conformed in all material respects with all applicable provisions of the 1940
Act and the 1940 Act Rules and Regulations; no order of suspension or revocation
of such registration under the 1940 Act and the 1940 Act Rules and Regulations
has been issued or proceedings therefor initiated or threatened by the
Commission. The provisions of the Declaration, including the Certificate, and
Bylaws, and the investment policies and restrictions described in the
Registration Statement and the Prospectus under the captions "Prospectus
Summary," "Investment Objective, Policies and Risks," "Additional Information
About Investments and Investment Techniques" and "Investment Restrictions" (in
the prospectus and the statement of additional information) comply in all
material respects with the requirements of the 1940 Act and the 1940 Act Rules
and Regulations. The Trust is, and at all times through the completion of the
transactions contemplated hereby, will be, in compliance in all material
respects with the terms and conditions of the 1933 Act and the 1940 Act. No
person is serving or acting as an officer, director or investment adviser of the
Trust except in accordance with the provisions of the 1940 Act and the 1940 Act
Rules and Regulations and the Investment Advisers Act of 1940, as amended (the
"Advisers Act"), and the rules and regulations of the Commission promulgated
under the Advisers Act (the "Advisers Act Rules and Regulations").
(s) Except as stated in this Agreement and in the Prospectus,
the Trust has not taken, nor will it take, directly or indirectly, any action
designed to or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any securities issued by the Trust
to facilitate the sale or resale of the Shares, and the Trust is not aware of
any such action taken or to be taken by any affiliates of the Trust.
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<PAGE> 12
(t) The Trust has filed in a timely manner each document or
report required to be filed by it pursuant to the 1934 Act and the rules and
regulations of the Commission promulgated thereunder (the "1934 Act Rules and
Regulations"); each such document or report at the time it was filed conformed
to the requirements of the 1934 Act and the 1934 Act Rules and Regulations; and
none of such documents or reports contained an untrue statement of any material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
(u) All advertising, sales literature or other promotional
material (including "prospectus wrappers," "broker kits," "road show slides" and
"road show scripts") authorized in writing by or prepared by the Trust or the
Adviser for use in connection with the offering and sale of the Shares
(collectively, "sales material") complied and comply in all material respects
with the applicable requirements of the 1933 Act, the 1940 Act, the Rules and
Regulations and the rules and interpretations of the NASD and no such sales
material contained or contains an untrue statement of a material fact or omitted
or omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
(v) Each of the Trust Agreements complies in all material
respects with all applicable provisions of the 1933 Act, the 1940 Act, the Rules
and Regulations, the Advisers Act and the Advisers Act Rules and Regulations.
(w) As required by Subchapter M of the Code, the Trust is
currently in compliance with the requirements to qualify as a regulated
investment company under the Code.
(x) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement to either of them), no trustee of the
Trust is an "interested person" (as defined in the 1940 Act) of the Trust or an
"affiliated person" (as defined in the 1940 Act) of the Underwriter.
(y) The Trust's Common Shares (as defined in the Prospectus) are
duly listed on the NYSE.
(z) The Trust is in compliance with the Commission's Release No.
33-7558 dated July 29, 1998 related to Year 2000 compliance.
(ii) The Adviser represents and warrants to the Underwriter
that, with respect to the Trust:
(a) Each Prepricing Prospectus included as part of the
registration statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 497 of the 1933 Act Rules and
Regulations, complied when so filed in all material respects with the provisions
of the 1933 Act, the 1940 Act and the Rules and Regulations. The Commission has
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<PAGE> 13
not issued any order preventing or suspending the use of any Prepricing
Prospectus or the Prospectus.
(b) The registration statement in the form in which it became or
becomes effective and also in such form as it may be when any post-effective
amendment thereto shall become effective and the Prospectus and any supplement
or amendment thereto when filed with the Commission under Rule 497 of the 1933
Act Rules and Regulations and the 1940 Act Notification when originally filed
with the Commission and any amendment or supplement thereto when filed with the
Commission, complied or will comply in all material respects with the
requirements of the 1933 Act, the 1940 Act and the Rules and Regulations and did
not or will not at any such times contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein (in the case of the Prospectus, in light of the
circumstances under which they were made) not misleading, except that this
representation and warranty does not apply to statements in or omissions from
the registration statement or the Prospectus made in reliance upon and in
conformity with information relating to the Underwriter furnished to the Trust
in writing by or on behalf of the Underwriter expressly for use therein.
(c) To the best knowledge of the Adviser, after reasonable
inquiry, there are no legal or governmental proceedings pending or, to the
knowledge of the Adviser, threatened, against the Trust, or to which the Trust
or any of its properties is subject, that are required to be described in the
Registration Statement or the Prospectus but are not described as required, and
there are no agreements, contracts, indentures, leases or other instruments that
are required to be described in the Registration Statement or the Prospectus or
to be filed as an exhibit to the Registration Statement that are not described
or filed as required by the 1933 Act, the 1940 Act or the Rules and Regulations.
(d) To the best knowledge of the Adviser, after reasonable
inquiry, the Trust is not in violation of the Declaration, including the
Certificate, or Bylaws, or other organizational documents or of any law,
ordinance, administrative or governmental rule or regulation applicable to the
Trust or of any decree of the Commission, the NASD, any state securities
commission, any national securities exchange, any arbitrator, any court or
governmental agency, body or official having jurisdiction over the Trust, or in
default in the performance of any material obligation, agreement or condition
contained in any bond, debenture, note or any other evidence of indebtedness or
in any material agreement, indenture, lease or other instrument to which the
Trust is a party or by which it or any of its properties may be bound.
(e) Except as disclosed in the Registration Statement and the
Prospectus, subsequent to the respective dates as of which such information is
given in the Registration Statement and the Prospectus, the Trust has not
incurred any liability or obligation, direct or contingent, or entered into any
transaction, not in the ordinary course of business, that is material to the
Trust, and there has not been any change in the capitalization, or material
increase in the short-term debt or long-term debt, of the Trust, or any material
adverse change, or any
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<PAGE> 14
development involving or which may reasonably be expected to involve, a
prospective material adverse change, in the condition (financial or other),
business, prospects, properties, net assets or results of operations of the
Trust, whether or not arising in the ordinary course of business.
(f) The Trust maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization and with the
applicable requirements of the 1940 Act, the 1940 Act Rules and Regulations and
the Code; (ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting principles
and to maintain accountability for assets and to maintain compliance with the
books and records requirements under the 1940 Act and the 1940 Act Rules and
Regulations; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(g) The Trust has filed all tax returns required to be filed,
which returns are complete and correct in all material respects, and the Trust
is not in material default in the payment of any taxes which were payable
pursuant to said returns or any assessments with respect thereto.
(h) The Trust, subject to the registration statement having been
declared effective and the filing of the Prospectus under Rule 497 under the
1933 Act Rules and Regulations, has taken all required action under the 1933
Act, the 1940 Act and the Rules and Regulations to make the public offering and
consummate the sale of the Shares as contemplated by this Agreement.
(i) The Trust has not distributed and, prior to the later to
occur of (i) the Closing Date and (ii) completion of the distribution of the
Shares, will not distribute any offering material in connection with the
offering and sale of the Shares other than the Registration Statement, the
Prepricing Prospectus, the Prospectus or other materials, if any, permitted by
the 1933 Act, the 1940 Act or the Rules and Regulations.
(j) Except as stated in this Agreement and in the Prospectus,
the Trust has not taken, nor will it take, directly or indirectly, any action
designed to or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any securities issued by the Trust
to facilitate the sale or resale of the Shares to the extent such action is
within the control of the Adviser, and the Adviser is not aware of any such
action taken or to be taken by any affiliates of the Trust.
(k) To the best knowledge of the Adviser, after reasonable
inquiry, the Trust has filed in a timely manner each document or report required
to be filed by it pursuant to the 1934 Act and the 1934 Act Rules and
Regulations; to the extent the Adviser has participated in the preparation of
such documents or reports, each such document or report at the time it was
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<PAGE> 15
filed conformed to the requirements of the 1934 Act and the 1934 Act Rules and
Regulations; and to the extent the Adviser has participated in the preparation
of such documents or reports, none of such documents or reports contained an
untrue statement of any material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading.
(l) Each of the Trust Agreements complies in all material
respects with all applicable provisions of the 1933 Act, the 1940 Act, the Rules
and Regulations, the Advisers Act and the Advisers Act Rules and Regulations.
(m) To the best knowledge of the Adviser, after reasonable
inquiry, except as disclosed in the Registration Statement and the Prospectus,
no trustee of the Trust is an "interested person" (as defined in the 1940 Act)
of the Trust or an "affiliated person" (as defined in the 1940 Act) of the
Underwriter.
(n) To the best knowledge of the Adviser, after reasonable
inquiry, the Trust is in compliance with the Commission's Release No. 33-7558,
dated July 29, 1998 related to Year 2000 compliance.
7. Representations and Warranties of the Adviser. The Adviser
represents and warrants to the Underwriter that:
(a) The Adviser is a corporation duly incorporated and validly
existing in good standing under the laws of the State of Delaware, with full
corporate power and authority to conduct its business as described in the
Registration Statement and the Prospectus, and is duly registered and qualified
to conduct its business and is in good standing in each jurisdiction or place
where the nature of its properties or the conduct of its business requires such
registration or qualification, except where the failure to so register or to
qualify does not have a material adverse effect on the condition (financial or
other), business, prospects, properties, net assets or results of operations of
the Adviser or on the ability of the Adviser to perform its obligations under
this Agreement and the Investment Management Agreement.
(b) The Adviser is duly registered with the Commission as an
investment adviser under the Advisers Act and is not prohibited by the Advisers
Act, the Advisers Act Rules and Regulations, the 1940 Act or the 1940 Act Rules
and Regulations from acting under the Investment Management Agreement for the
Trust as contemplated by the Prospectus. To the best knowledge of the Adviser,
after reasonable inquiry, there does not exist any proceeding or any facts or
circumstances the existence of which could lead to any proceeding which might
adversely affect the registration of the Adviser with the Commission.
(c) To the best knowledge of the Adviser, after reasonable
inquiry, there are no legal or governmental proceedings pending or, to the
knowledge of the Adviser, threatened against the Adviser, or to which the
Adviser or any of its properties is subject, that are required to
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<PAGE> 16
be described in the Registration Statement or the Prospectus but are not
described as required or that may reasonably be expected to involve a
prospective material adverse change, in the condition (financial or other),
business, prospects, properties, net assets or results of operations of the
Adviser or on the ability of the Adviser to perform its obligations under this
Agreement and the Investment Management Agreement.
(d) To the best knowledge of the Adviser after reasonable
inquiry, neither the execution, delivery or performance of this Agreement or the
Investment Management Agreement by the Adviser, nor the consummation by the
Adviser of the transactions contemplated hereby or thereby (A) requires the
Adviser to obtain any consent, approval, authorization or other order of, or
registration or filing with, the Commission, the NASD, any state securities
commission, any national securities exchange, any arbitrator, any court,
regulatory body, administrative agency or other governmental body, agency or
official or conflicts or will conflict with or constitutes or will constitute a
breach of or a default under, the certificate of incorporation or bylaws, or
other organizational documents, of the Adviser, except where the failure to
obtain such consent, approval, authorization or other order of, or make such
registration or filing, or such conflict, breach or default, would not have a
material adverse effect on the condition (financial or other), business,
prospects, properties, net assets or results of operations of the Adviser or on
the ability of the Adviser to perform its obligations under this Agreement and
the Investment Management Agreement or (B) conflicts or will conflict with or
constitutes or will constitute a breach of or a default under, any agreement,
indenture, lease or other instrument to which the Adviser is a party or by which
it or any of its properties may be bound, or violates or will violate any
statute, law, regulation or judgment, injunction, order or decree applicable to
the Adviser or any of its properties or will result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Adviser pursuant to the terms of any agreement or instrument to which it is a
party or by which it may be bound or to which any of the property or assets of
the Adviser is subject, except where such conflict, breach, default or violation
would not have a material adverse effect on the condition (financial or other),
business, prospects, properties, net assets or results of operations of the
Adviser or on the ability of the Adviser to perform its obligations under this
Agreement and the Investment Management Agreement. The Adviser is not subject to
any order of any court or of any arbitrator, governmental authority or
administrative agency, except such orders which do not have a material adverse
effect on the condition (financial or other), business, prospects, properties,
net assets or results of operations of the Adviser or on the ability of the
Adviser to perform its obligations under this Agreement and the Investment
Management Agreement.
(e) The execution and delivery of, and the performance by the
Adviser of its obligations under, this Agreement and the Investment Management
Agreement have been duly and validly authorized by the Adviser, and this
Agreement and the Investment Management Agreement have been duly executed and
delivered by the Adviser and each constitutes the valid and legally binding
agreement of the Adviser, enforceable against the Adviser in accordance with its
terms, except as rights to indemnity and contribution hereunder may be limited
by federal or state securities laws.
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<PAGE> 17
(f) The description of the Adviser in the Registration Statement
and the Prospectus complied and comply in all material respects with the
provisions of the 1933 Act, the 1940 Act, the Advisers Act, the Rules and
Regulations and the Advisers Act Rules and Regulations and did not and will not
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
(g) Except as disclosed in the Registration Statement and the
Prospectus, subsequent to the respective dates as of which such information is
given in the Registration Statement and the Prospectus, the Adviser has not
incurred any liability or obligation, direct or contingent, or entered into any
transaction, not in the ordinary course of business, that is material to the
Adviser or the Trust, and there has not been any material adverse change, or any
development involving or which may reasonably be expected to involve, a
prospective material adverse change, in the condition (financial or other),
business, prospects, properties, net assets or results of operations of the
Adviser, whether or not arising in the ordinary course of business, or which, in
each case, could have a material adverse effect on the ability of the Adviser to
perform its obligations under this Agreement and the Investment Management
Agreement.
(h) The Adviser has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits") as are
necessary to own its properties and to conduct its business in the manner
described in the Prospectus, except such permits the lack of which would not
have a material adverse effect on the condition (financial or other), business,
prospects, properties, net assets or results of operations of the Adviser or on
the ability of the Adviser to perform its obligations under this Agreement and
the Investment Management Agreement; the Adviser has fulfilled and performed all
its material obligations with respect to such permits and no event has occurred
which allows, or after notice or lapse of time would allow, revocation or
termination thereof or results in any other material impairment of the rights of
the Adviser under any such permit; and, except as described in the Prospectus,
none of such permits contains any restriction that is materially burdensome to
the Adviser.
(i) Except as stated in this Agreement and in the Prospectus,
the Adviser has not taken, nor will it take, directly or indirectly, any action
designed to or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any securities issued by the Trust
to facilitate the sale or resale of the Shares, and the Adviser is not aware of
any such action taken or to be taken by any affiliates of the Adviser.
8. Indemnification and Contribution.
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(a)(i) The Trust agrees to indemnify and hold harmless each of
the Underwriter and each person, if any, who controls the Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act from and
against any and all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation), joint or several, arising out of or based
upon any untrue statement or alleged untrue statement of a material fact
contained in any Prepricing Prospectus or in the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or arising out of or based
upon any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities or expenses arise
out of or are based upon any untrue statement or omission or alleged untrue
statement or omission which has been made therein or omitted therefrom in
reliance upon and in conformity with the information relating to the Underwriter
furnished in writing to the Trust by or on behalf of the Underwriter expressly
for use in connection therewith; provided, however, that the indemnification
contained in this paragraph (a)(i) with respect to any Prepricing Prospectus
shall not inure to the benefit of the Underwriter (or to the benefit of any
person controlling the Underwriter) on account of any such loss, claim, damage,
liability or expense arising from the sale of the Shares by the Underwriter to
any person if a copy of the Prospectus shall not have been delivered or sent to
such person within the time required by the 1933 Act and the 1933 Act Rules and
Regulations, and the untrue statement or alleged untrue statement or omission or
alleged omission of a material fact contained in such Prepricing Prospectus was
corrected in the Prospectus, provided that the Trust has delivered the
Prospectus to the Underwriter in requisite quantity on a timely basis to permit
such delivery or sending. The foregoing indemnity agreement shall be in addition
to any liability which the Trust may otherwise have.
(ii) The Adviser agrees to indemnify and hold harmless each of
the Underwriter and each person, if any, who controls the Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act from and
against any and all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation), joint or several, arising out of or based
upon any untrue statement or alleged untrue statement of a material fact
contained in any Prepricing Prospectus or in the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or arising out of or based
upon any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities or expenses arise
out of or are based upon any untrue statement or omission or alleged untrue
statement or omission which has been made therein or omitted therefrom in
reliance upon and in conformity with the information relating to the Underwriter
furnished in writing to the Trust by or on behalf of the Underwriter expressly
for use in connection therewith; provided, however, that the indemnification
contained in this paragraph (a)(ii) with respect to any Prepricing Prospectus
shall not inure to the benefit of the Underwriter (or to the benefit of any
person controlling the Underwriter) on account of any such loss, claim, damage,
liability or expense arising from the sale of the Shares by the Underwriter to
any person if a copy of the Prospectus shall not have been delivered or sent to
such person within the time required by the 1933 Act and the 1933 Act Rules and
Regulations, and the untrue statement or alleged untrue statement or omission or
alleged
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<PAGE> 19
omission of a material fact contained in such Prepricing Prospectus was
corrected in the Prospectus, provided that the Trust has delivered the
Prospectus to the Underwriter in requisite quantity on a timely basis to permit
such delivery or sending; and provided further, that (i) the Adviser will not be
liable to any such indemnified party in any such case except to the extent that
the Trust has failed to indemnify and hold harmless such indemnified party
pursuant to paragraph (a)(i) in respect of any such loss, claim, damage,
liability or expense after such indemnified party has made a claim of the Trust
as required below; and (ii) the amount of the Adviser's liability hereunder
shall be limited to the amount of the net proceeds from the sale of the Shares.
This indemnity agreement shall be in addition to any liability which the Adviser
may otherwise have.
(b) If any action, suit or proceeding shall be brought against
the Underwriter or any person controlling the Underwriter in respect of which
indemnity may be sought against the Trust or the Adviser, the Underwriter or
such controlling person shall promptly notify the Trust or the Adviser, and the
Trust or the Adviser shall assume the defense thereof, including the employment
of counsel and payment of all fees and expenses. The Underwriter or any such
controlling person shall have the right to employ separate counsel in any such
action, suit or proceeding and to participate in the defense thereof, but the
fees and expenses of such counsel shall be at the expense of the Underwriter or
such controlling person unless (i) the Trust or the Adviser has agreed in
writing to pay such fees and expenses, (ii) the Trust and the Adviser have
failed to assume the defense and employ counsel, or (iii) the named parties to
any such action, suit or proceeding (including any impleaded parties) include
both the Underwriter or such controlling person and the Trust or the Adviser and
the Underwriter or such controlling person shall have been advised by its
counsel that representation of such indemnified party and the Trust or the
Adviser by the same counsel would be inappropriate under applicable standards of
professional conduct (whether or not such representation by the same counsel has
been proposed) due to actual or potential differing interests between them (in
which case the Trust and the Adviser shall not have the right to assume the
defense of such action, suit or proceeding on behalf of the Underwriter or such
controlling person). It is understood, however, that the Trust and the Adviser
shall, in connection with any one such action, suit or proceeding or separate
but substantially similar or related actions, suits or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of only one separate firm of
attorneys (in addition to any local counsel) at any time for the Underwriter and
controlling persons not having actual or potential differing interests with you
or among themselves, which firm shall be designated in writing by the
Underwriter, and that all such fees and expenses shall be reimbursed as they are
incurred. The Trust and the Adviser shall not be liable for any settlement of
any such action, suit or proceeding effected without their written consent, but
if settled with such written consent, or if there be a final judgment for the
plaintiff in any such action, suit or proceeding, the Trust and the Adviser
agree to indemnify and hold harmless the Underwriter, to the extent provided in
the preceding paragraph, and any such controlling person from and against any
loss, claim, damage, liability or expense by reason of such settlement or
judgment.
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<PAGE> 20
(c) The Underwriter agrees to indemnify and hold harmless the
Trust and the Adviser, their directors and trustees, any officers who sign the
Registration Statement, and any person who controls the Trust or the Adviser
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act,
to the same extent as the foregoing indemnity from the Trust and the Adviser to
the Underwriter, but only with respect to information relating to the
Underwriter furnished in writing by or on behalf of the Underwriter expressly
for use in the Registration Statement, the Prospectus or any Prepricing
Prospectus, or any amendment or supplement thereto. If any action, suit or
proceeding shall be brought against the Trust or the Adviser, any of their
directors or trustees, any such officer, or any such controlling person based on
the Registration Statement, the Prospectus or any Prepricing Prospectus, or any
amendment or supplement thereto, and in respect of which indemnity may be sought
against the Underwriter pursuant to this paragraph (c), the Underwriter shall
have the rights and duties given to the Trust and the Adviser by paragraph (b)
above (except that if the Trust or the Adviser shall have assumed the defense
thereof the Underwriter shall not be required to do so, but may employ separate
counsel therein and participate in the defense thereof, but the fees and
expenses of such counsel shall be at the Underwriter's expense), and the Trust
and the Adviser, their directors and trustees, any such officer, and any such
controlling person shall have the rights and duties given to the Underwriter by
paragraph (b) above. The foregoing indemnity agreement shall be in addition to
any liability which the Underwriter may otherwise have.
(d) If the indemnification provided for in this Section 8 is
unavailable to an indemnified party under paragraphs (a) or (c) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Trust and the Adviser on the one hand (treated jointly for this purpose as one
person) and the Underwriter on the other hand from the offering of the Shares,
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Trust and the Adviser on the one hand (treated jointly for this purpose as
one person) and the Underwriter on the other in connection with the statements
or omissions that resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Trust and the Adviser on the one hand (treated jointly
for this purpose as one person) and the Underwriter on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Trust bear to the total underwriting
discounts and commissions received by the Underwriter, in each case as set forth
in the table on the cover page of the Prospectus. The relative fault of the
Trust and the Adviser on the one hand (treated jointly for this purpose as one
person) and the Underwriter on the other hand shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Trust and the Adviser on the one hand
(treated jointly for this purpose as one
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<PAGE> 21
person) or by the Underwriter on the other hand and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
(e) The Trust, the Adviser and the Underwriter agree that it
would not be just and equitable if contribution pursuant to this Section 8 were
determined by a pro rata allocation or by any other method of allocation that
does not take account of the equitable considerations referred to in paragraph
(d) above. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities and expenses referred to in paragraph (d)
above shall be deemed to include, subject to the limitations set forth above,
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating any claim or defending any such action, suit or
proceeding. Notwithstanding the provisions of this Section 8, the Underwriter
shall not be required to contribute any amount in excess of the amount by which
the total price of the Shares underwritten by it and distributed to the public
exceeds the amount of any damages which the Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation.
(f) No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity could have been sought hereunder by
such indemnified party, unless such settlement includes an unconditional release
of such indemnified party from all liability on claims that are the subject
matter of such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution under
this Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Trust and the Adviser set forth in this
Agreement shall remain operative and in full force and effect, regardless of (i)
any investigation made by or on behalf of the Underwriter or any person
controlling the Underwriter, the Trust, the Adviser, their directors, trustees
or officers, or any person controlling the Trust or the Adviser, (ii) acceptance
of any Shares and payment therefor hereunder, and (iii) any termination of this
Agreement. A successor to the Underwriter or any person controlling the
Underwriter, or to the Trust, the Adviser, their directors, trustees or
officers, or any person controlling the Trust or the Adviser, shall be entitled
to the benefits of the indemnity, contribution, and reimbursement agreements
contained in this Section 8.
9. Conditions of Underwriter's Obligations. The obligation of
the Underwriter to purchase the Shares hereunder are subject to the following
conditions:
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(a) If, at the time this Agreement is executed and delivered, it
is necessary for the registration statement or a post-effective amendment
thereto to be declared effective before the offering of the Shares may commence,
the registration statement or such post-effective amendment shall have become
effective not later than 5:30 P.M., New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by the
Underwriter, and all filings, if any, required by Rules 497 and 430A under the
1933 Act and the 1933 Act Rules and Regulations shall have been timely made; no
stop order suspending the effectiveness of the Registration Statement or order
pursuant to Section 8(e) of the 1940 Act shall have been issued and no
proceeding for those purposes shall have been instituted or, to the knowledge of
the Trust, the Adviser or the Underwriter, threatened by the Commission, and any
request of the Commission for additional information (to be included in the
registration statement or the prospectus or otherwise) shall have been complied
with to the Underwriter's satisfaction.
(b) Subsequent to the effective date of this Agreement, there
shall not have occurred (i) any change or any development involving a
prospective change in or affecting the condition (financial or other), business,
prospects, properties, net assets, or results of operations of the Trust or the
Adviser not contemplated by the Prospectus, which in the Underwriter's opinion
would materially, adversely affect the market for the Shares, or (ii) any event
or development relating to or involving the Trust or the Adviser or any officer
or director of the Trust or the Adviser which makes any statement made in the
Prospectus untrue or which, in the opinion of the Trust and its counsel or the
Underwriter and its counsel, requires the making of any addition to or change in
the Prospectus in order to state a material fact required by the 1933 Act, the
1940 Act or the Rules and Regulations or any other law to be stated therein or
necessary in order to make the statements therein not misleading, if amending or
supplementing the Prospectus to reflect such event or development would, in the
Underwriter's opinion, materially adversely affect the market for the Shares.
(c) The Trust shall have furnished to you a report showing
compliance with the asset coverage requirements of the 1940 Act and a Municipal
Preferred Basic Maintenance Report (as defined in the Certificate), each dated
the Closing Date and in form and substance satisfactory to you. Each such report
may use portfolio holdings and valuations as of the close of business of any day
not more than six business days preceding the Closing Date, provided, however,
that the Trust represents in such report that its total net assets as of the
Closing Date have not declined by 5% or more from such valuation date.
(d) The Underwriter shall have received on the Closing Date an
opinion of Dechert Price & Rhoads, special counsel for the Trust, dated the
Closing Date and addressed to the Underwriter, in form and substance
satisfactory to the Underwriter and to the effect that:
(i) The Trust is a business trust duly organized and validly existing under
the laws of the Commonwealth of Massachusetts with full business trust power and
authority to own, lease and operate its properties and to conduct its business
as described in the Registration Statement and the Prospectus, and is duly
registered and qualified to conduct its business in each jurisdiction or
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<PAGE> 23
place where the nature of its properties or the conduct of its business requires
such registration or qualification, except where the failure to so register or
qualify does not have a material adverse effect on the condition (financial or
other), business, prospects, properties, net assets or results of operations of
the Trust;
(ii) The Trust has no subsidiaries;
(iii) The authorized and outstanding capitalization of the Trust is as set
forth under the caption "Capitalization" in the Prospectus; and the authorized
capitalization of the Trust conforms in all material respects as to legal
matters to the description thereof contained in the Prospectus under the caption
"Description of Capital Structure";
(iv) All the shares of beneficial interest of the Trust outstanding prior
to the issuance of the Shares have been duly authorized and validly issued, and
are fully paid and nonassessable;
(v) The Shares have been duly authorized and, when issued and delivered to
the Underwriter against payment therefor in accordance with the terms hereof,
will be validly issued, fully paid and nonassessable and free of any preemptive,
or to the best knowledge of such counsel after reasonable inquiry, similar
rights that entitle or will entitle any person to acquire any Shares upon the
issuance thereof by the Trust, and will conform to the description thereof
contained in the Prospectus under the caption "Description of Municipal
Preferred";
(vi) The form of certificates for the Shares conforms to the requirements
of Massachusetts law;
(vii) The Registration Statement and all post-effective amendments, if any,
have become effective under the 1933 Act and the 1933 Act Rules and Regulations
and, to the best knowledge of such counsel after reasonable inquiry, no stop
order suspending the effectiveness of the Registration Statement or order
pursuant to Section 8(e) of the 1940 Act has been issued and no proceedings for
that purpose are pending before or contemplated by the Commission; and any
required filing of the Prospectus pursuant to Rule 497 of the 1933 Act Rules and
Regulations has been made in accordance with Rule 497;
(viii) The Trust has business trust power and authority to enter into this
Agreement and each of the Trust Agreements and to issue, sell and deliver the
Shares to the Underwriter as provided herein, and this Agreement and each of the
Trust Agreements have been duly authorized, executed and delivered by the Trust
and, assuming due authorization, execution and delivery by the other parties
thereto, each is a valid and legally binding agreement of the Trust, enforceable
against the Trust in accordance with its terms, except as rights to indemnity
and contribution hereunder and thereunder may be limited by Federal or state
securities laws or principles of public policy and subject to the qualification
that the enforceability of the Trust's obligations hereunder and thereunder may
be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization,
moratorium, and other laws relating to or affecting creditors' rights generally
and by general equitable principles;
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(ix) To the best knowledge of such counsel, after reasonable inquiry, the
Trust is not in violation of the Declaration, including the Certificate, or
Bylaws, or other organizational documents, and is not in default in the
performance of any material obligation, agreement or condition contained in any
bond, debenture, note or other evidence of indebtedness, or in any material
agreement, indenture, lease or other instrument to which the Trust is a party or
by which it or any of its properties may be bound, except as may be disclosed in
the Prospectus;
(x) Neither the offer, sale or delivery of the Shares, the execution,
delivery or performance of this Agreement and the Trust Agreements by the Trust,
nor the consummation by the Trust of the transactions contemplated hereby and
thereby conflicts or will conflict with or constitutes or will constitute a
breach of, or a default under, the Declaration, including the Certificate, or
Bylaws, or other organizational documents, of the Trust or any agreement,
indenture, lease or other instrument to which the Trust is a party or by which
it or any of its properties is bound, nor will any such action result in any
violation of any statute, law, regulation or judgement (assuming compliance with
all applicable state securities or blue sky laws), injunction, order or decree
applicable to the Trust or any of its properties;
(xi) No consent, approval, authorization or other order of, or registration
or filing with, the Commission, the NASD, or, to the best of such counsel's
knowledge after reasonable inquiry, any state securities commission, any
arbitrator, any court, regulatory body, administrative agency or other
governmental body, agency, or official is required on the part of the Trust
(except such as may have been obtained prior to the date hereof and such as may
be required by the New York Stock Exchange, or for compliance with the state
securities or blue sky laws of various jurisdictions) for the valid issuance and
sale of the Shares to the Underwriter as contemplated by this Agreement, the
execution, delivery and performance by the Trust of this Agreement and the Trust
Agreements or the consummation of the transactions contemplated hereby and
thereby;
(xii) The 1940 Act Notification, the Registration Statement, the Prospectus
and any supplements or amendments thereto (except for the financial statements
and the notes thereto and the schedules and other financial and statistical data
included therein, as to which such counsel need not express any opinion) comply
in all material respects with the requirements of the 1933 Act, the 1940 Act and
the Rules and Regulations;
(xiii) To the best knowledge of such counsel after reasonable inquiry, (A)
other than as described in the Registration Statement or Prospectus, there are
no legal or governmental proceedings pending or threatened against the Trust, or
to which the Trust or any of its properties is subject, which are required to be
described in the Registration Statement or Prospectus and (B) there are no
agreements, contracts, indentures, leases or other instruments that are required
to be described in the Registration Statement or the Prospectus or to be filed
as an exhibit to the Registration Statement that are not described or filed as
required, as the case may be;
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(xiv) To the best knowledge of such counsel after reasonable inquiry, the
Trust is not in violation of any law, ordinance, administrative or governmental
rule or regulation applicable to the Trust or of any decree of the Commission,
the NASD, any state securities commission, any national securities exchange, any
arbitrator, any court or governmental agency, body or official having
jurisdiction over the Trust; (xv) The statements in the Registration Statement
and Prospectus, insofar as they are descriptions of contracts, agreements or
other legal documents, or refer to statements of law or legal conclusions, are
accurate and present fairly the information required to be shown;
(xvi) Each of this Agreement and the Trust Agreements complies in all
material respects with all applicable provisions of the 1933 Act, the 1940 Act,
the Advisers Act, the Rules and Regulations and the Advisers Act Rules and
Regulations;
(xvii) The Trust is duly registered with the Commission under the 1940 Act
and the 1940 Act Rules and Regulations as a closed-end, non-diversified
management investment company and, to the best knowledge of such counsel after
reasonable inquiry, no order of suspension or revocation of such registration
under the 1940 Act and the 1940 Act Rules and Regulations has been issued or
proceedings therefor initiated or threatened by the Commission; and the Trust
has taken all required action under the 1933 Act and the 1940 Act and the Rules
and Regulations to make the public offering and consummate the sale of the
Shares as contemplated by this Agreement;
(xviii) Except as described in the Prospectus, there are no outstanding
options, warrants or other rights calling for the issuance of, and such counsel
does not know of any commitment, plan or arrangement to issue, any shares of
beneficial interest of the Trust or any security convertible into or
exchangeable or exercisable for shares of beneficial interest of the Trust; and
no holder of any security of the Trust has any right to require registration of
shares of beneficial interest, shares of Municipal Preferred or any other
security of the Trust because of the filing of the registration statement or
consummation of the transactions contemplated by this Agreement; and
(xix) Such counsel shall also state that, while they have not themselves
checked the accuracy and completeness of or otherwise verified, and are not
passing upon and assume no responsibility for the accuracy or completeness of,
the statements contained in the Registration Statement or the Prospectus, except
to the limited extent stated in paragraphs (iii) and (xv) above, in the course
of their review and discussion of the contents of the Registration Statement and
Prospectus with certain officers and employees of the Trust and its independent
accountants, no facts have come to their attention which cause them to believe
that the Registration Statement or any amendment or supplement thereto (except
as to any financial statements or other financial data included in the
Registration Statement as to which they express no belief), as of its effective
date, contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
contained therein not misleading or that the Prospectus (except as to any
financial statements or other financial data included in the
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<PAGE> 26
Prospectus, as to which they express no belief), as of its issue date and as of
the Closing Date, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading.
(e) The Underwriter shall have received on the Closing Date an
opinion of Debevoise & Plimpton, counsel for the Adviser, dated the Closing Date
and addressed to the Underwriter, in form and substance satisfactory to the
Underwriter and to the effect that:
(i) The Adviser is a corporation duly incorporated and validly
existing in good standing under the laws of the State of Delaware with full
corporate power and authority to conduct its business as described in the
Registration Statement and the Prospectus, and is duly registered and
qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of
its business requires such registration or qualification, except where the
failure to so register or qualify does not have a material adverse effect
on the condition (financial or other), business, prospects, properties, net
assets or results of operations of the Adviser, or on the ability of the
Adviser to perform its obligations under this Agreement and the Investment
Management Agreement;
(ii) The Adviser is duly registered with the Commission as an
investment adviser under the Advisers Act and is not prohibited by the
Advisers Act, the Advisers Act Rules and Regulations, the 1940 Act or the
1940 Act Rules and Regulations from acting under the Investment Management
Agreement for the Trust as contemplated by the Prospectus (or any amendment
or supplement thereto); and, to the best knowledge of such counsel after
reasonable inquiry, there does not exist any proceeding or any facts or
circumstances the existence of which could lead to any proceeding which
might adversely affect the registration of the Adviser with the Commission;
(iii) The Adviser has corporate power and authority to enter into this
Agreement and the Investment Management Agreement, and this Agreement and
the Investment Management Agreement have been duly authorized, executed and
delivered by the Adviser and assuming due authorization, execution and
delivery by the other parties thereto, each is a valid and legally binding
agreement of the Adviser, enforceable against the Adviser in accordance
with its terms except as rights to indemnity and contribution hereunder and
thereunder may be limited by Federal or state securities laws or principles
of public policy and subject to the qualification that the enforceability
of the Adviser's obligations hereunder and thereunder may be limited by
bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium,
and other laws relating to or affecting creditors' rights generally and by
general equitable principles;
(iv) To the best knowledge of such counsel after reasonable inquiry,
neither the execution, delivery or performance of this Agreement or the
Investment Management
-26-
<PAGE> 27
Agreement by the Adviser nor the consummation by the Adviser of the
transactions contemplated hereby and thereby conflicts or will conflict
with, or constitutes or will constitute a breach of or default under, the
certificate of incorporation or bylaws, or other organizational documents,
of the Adviser or any agreement, indenture, lease or other instrument to
which the Adviser is a party or by which it or any of its properties is
bound, or will result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Adviser, nor will any such
action result in any violation of any existing statute, law, regulation or
judgment, injunction, order or decree applicable to the Adviser or any of
its properties;
(v) To the best knowledge of such counsel after reasonable inquiry, no
consent, approval, authorization or other order of, or registration or
filing with, the Commission, the NASD, any state securities commission, any
arbitrator, any court, regulatory body, administrative agency or other
governmental body, agency, or official is required on the part of the
Adviser for the execution, delivery and performance by it of this Agreement
and the Investment Management Agreement or the consummation by it of the
transactions contemplated hereby and thereby;
(vi) To the best knowledge of such counsel after reasonable inquiry,
there are no legal or governmental proceedings pending or threatened
against the Adviser or to which the Adviser or any of its properties is
subject, which are required to be described in the Registration Statement
or the Prospectus but are not described as required or which may reasonably
be expected to involve a prospective material adverse change in the
condition (financial or other), business, prospects, properties, net assets
or results of operations of the Adviser or on the ability of the Adviser to
perform its obligations under this Agreement and the Investment Management
Agreement;
(vii) The obligations of the Adviser under this Agreement and the
Investment Management Agreement comply in all material respects with all
applicable provisions of the 1940 Act, the 1940 Act Rules and Regulations,
the Advisers Act and the Advisers Act Rules and Regulations;
(viii) The Adviser has full corporate power and authority, and such
permits, licenses, franchises and authorizations of governmental or
regulatory authorities as are necessary to own its properties and to
conduct its business in the manner described in the Prospectus, and to
perform its obligations under the Investment Management Agreement; and
(ix) Such counsel shall also state that the description of the Adviser
contained in the Registration Statement does not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements contained therein not
misleading or that the description of the Adviser contained in the
Prospectus, as of its issue date and as of the Closing Date, does not
contain an untrue
-27-
<PAGE> 28
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements contained therein, in
light of the circumstances under which they were made, not misleading.
(f) The Underwriter shall have received on the Closing Date an
opinion of Simpson Thacher & Bartlett, counsel for the Underwriter, dated the
Closing Date and addressed to the Underwriter, with respect to such matters as
the Underwriter may reasonably request.
(g) The Underwriter shall have received letters addressed to the
Underwriter and dated the date hereof and the Closing Date from Ernst & Young
LLP, independent certified public accountants, substantially in the forms
heretofore approved by the Underwriter. The Underwriter shall also have received
a certification, in form satisfactory to the Underwriter, of Ernst & Young LLP's
status as independent certified public accountants.
(h)(i) No order suspending the effectiveness of the registration
statement or the Registration Statement or prohibiting or suspending the use of
the Prospectus (or any amendment or supplement thereto) or any Prepricing
Prospectus or any sales material shall have been issued and no proceedings for
such purpose or for the purpose of commencing an enforcement action against the
Trust, the Adviser or, with respect to the transactions contemplated by the
Prospectus (or any amendment or supplement thereto) and this Agreement, the
Underwriter, may be pending before or, to the knowledge of the Trust, the
Adviser or the Underwriter or in the reasonable view of counsel to the
Underwriter, shall be threatened or contemplated by the Commission at or prior
to the Closing Date and that any request for additional information on the part
of the Commission (to be included in the Registration Statement, the Prospectus
or otherwise) be complied with to the satisfaction of the Underwriter; (ii)
there shall not have been any change in the capital stock of the Trust nor any
material increase in the short-term or long-term debt of the Trust (other than
in the ordinary course of business) from that set forth or contemplated in the
Registration Statement or the Prospectus (or any amendment or supplement
thereto); (iii) there shall not have been, subsequent to the respective dates as
of which information is given in the Registration Statement and the Prospectus
(or any amendment or supplement thereto), except as may otherwise be stated in
the Registration Statement and Prospectus (or any amendment or supplement
thereto), any material adverse change in the condition (financial or other),
business, prospects, properties, net assets or results of operations of the
Trust or the Adviser; (iv) the Trust shall not have any liabilities or
obligations, direct or contingent (whether or not in the ordinary course of
business), that are material to the Trust, other than those reflected in the
Registration Statement or the Prospectus (or any amendment or supplement to
either of them); and (v) all the representations and warranties of the Trust and
the Adviser contained in this Agreement shall be true and correct on and as of
the date hereof and on and as of the Closing Date as if made on and as of the
Closing Date, and the Underwriter shall have received a certificate of the Trust
and the Adviser, dated the Closing Date and signed by the chief executive
officer and the chief financial officer of each of the Trust and the Adviser (or
such other officers as are acceptable to the Underwriter), to the effect set
forth in this Section 9(h) and in Section 9(i) hereof.
-28-
<PAGE> 29
(i) That neither the Trust nor the Adviser shall have failed at
or prior to the Closing Date to have performed or complied in all material
respects with any of its agreements herein contained and required to be
performed or complied with by it hereunder at or prior to the Closing Date.
(j) The Trust shall have delivered and the Underwriter shall
have received evidence satisfactory to the Underwriter that the shares of each
series of Municipal Preferred are rated 'Aaa' by Moody's and AAA by S&P as of
the Closing Date, and there shall not have been given any notice of any intended
or potential downgrading, or of any review for a potential downgrading, in the
rating accorded to the shares of Municipal Preferred by any Rating Agency.
(k) The Trust shall have furnished, in form satisfactory to the
Underwriter, certification that the Trust maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization and with the applicable requirements of the 1940 Act, the 1940 Act
Rules and Regulations and the Code; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets and to
maintain compliance with the books and records requirements under the 1940 Act
and the 1940 Act Rules and Regulations; (iii) access to assets is permitted only
in accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(l) The Trust shall have furnished, in form satisfactory to the
Underwriter, certification that, as of the Closing Date, the Trust is in
compliance with the requirements to qualify as a regulated investment company
under Subchapter M of the Code.
(m) The Trust and the Adviser shall have furnished or caused to
be furnished to the Underwriter such further certificates and documents as the
Underwriter shall have reasonably requested.
All such opinions, certificates, letters and other documents
will be in compliance with the provisions hereof only if they are satisfactory
in form and substance to the Underwriter and the Underwriter's counsel.
Any certificate or document signed by any officer of the Trust
or the Adviser and delivered to the Underwriter, or to counsel for the
Underwriter, shall be deemed a representation and warranty by the Trust or the
Adviser to the Underwriter as to the statements made therein.
10 Expenses. The Trust agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by it of
its obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the 1940 Act
Notification, the Prospectus and each amendment or supplement to any of them
(including,
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<PAGE> 30
without limitation, the filing fees prescribed by the 1933 Act, the 1940 Act and
the Rules and Regulations); (ii) the printing (or reproduction) and delivery
(including postage, air freight charges and charges for counting and packaging)
of such copies of the Registration Statement, each Prepricing Prospectus, the
Prospectus, any sales material and all amendments or supplements to any of them
as may be reasonably requested for use in connection with the offering and sale
of the Shares; (iii) the preparation, printing, authentication, issuance and
delivery of certificates for the Shares, including any stamp taxes in connection
with the original issuance and sale of the Shares; (iv) the reproduction and
delivery of this Agreement, any dealer agreements, the preliminary blue sky
memorandum and all other agreements or documents reproduced and delivered in
connection with the offering of the Shares; (v) the reasonable fees, expenses
and disbursements of counsel for the Underwriter relating to the preparation,
reproduction, and delivery of the preliminary blue sky memorandum; (vi) fees
paid to the Rating Agencies; (vii) the transportation and other expenses
incurred by or on behalf of Trust representatives in connection with
presentations to prospective purchasers of the Shares; and (viii) the fees and
expenses of the Trust's accountants and the fees and expenses of counsel
(including local and special counsel) for the Trust and of the transfer agent.
11. Effective Date of Agreement. This Agreement shall become
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the registration statement or a post-effective amendment thereto to be
declared effective before the offering of the Shares may commence, when
notification of the effectiveness of the registration statement or such
post-effective amendment has been released by the Commission. Until such time as
this Agreement shall have become effective, it may be terminated by the Trust,
by notifying the Underwriter, or by the Underwriter, by notifying the Trust. Any
notice under this Section 11 may be given by telegram, telecopy or telephone but
shall be subsequently confirmed by letter.
12. Termination of Agreement. This Agreement shall be subject to
termination in the Underwriter's absolute discretion, without liability on the
part of the Underwriter to the Trust or the Adviser, by notice to the Trust or
the Adviser, if prior to the Closing Date (i) trading in securities generally on
the New York Stock Exchange, the American Stock Exchange or the Nasdaq National
Market shall have been suspended or materially limited, (ii) a general
moratorium on commercial banking activities in New York shall have been declared
by either federal or state authorities, or (iii) there shall have occurred any
outbreak or escalation of hostilities or other international or domestic
calamity, crisis or change in political, financial or economic conditions, the
effect of which on the financial markets of the United States is to make it, in
the Underwriter's judgment, impracticable or inadvisable to commence or continue
the offering of the Shares at the offering price to the public set forth on the
cover page of the Prospectus or to enforce contracts for the resale of the
Shares by the Underwriter. Notice of such termination may be given to the Trust
by telegram, telecopy or telephone and shall be subsequently confirmed by
letter.
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<PAGE> 31
13. Information Furnished by the Underwriter. The statements set
forth in the last paragraph on the cover page, and the statements in the first
and third sentences of the third paragraph and the fifth paragraph under the
caption "Underwriting" in any Prepricing Prospectus and in the Prospectus,
constitute the only information furnished by or on behalf of the Underwriter as
such information is referred to in Sections 6(b) and 8 hereof.
14. Miscellaneous. Except as otherwise provided in Sections 5,
11 and 12 hereof, notice given pursuant to any provision of this Agreement shall
be in writing and shall be delivered (i) if to the Trust or the Adviser, at the
office of the Adviser at 222 South Riverside Plaza, Chicago, Illinois 60606,
Attention: Philip J. Collora; or (ii) if to the Underwriter, to Salomon Smith
Barney Inc., 388 Greenwich Street, New York, New York 10013, Attention: Manager,
Investment Banking Division.
This Agreement has been and is made solely for the benefit of
the Underwriter, the Trust, the Adviser, their directors and officers, and the
other controlling persons referred to in Section 8 hereof and their respective
successors and assigns, to the extent provided herein, and no other person shall
acquire or have any right under or by virtue of this Agreement. Neither the term
"successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from the Underwriter of any of the Shares in his
status as such purchaser.
Consistent with the Trust's Declaration, notice is hereby given
and the parties hereto acknowledge and agree that this Agreement is executed on
behalf of the Trustees of the Trust as Trustees and not individually and that
obligations of this Agreement are not binding upon any of the Trustees or
shareholders of the Trust individually but are binding only against the assets
and property of the Trust.
15. Applicable Law; Counterparts. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York.
This Agreement may be signed in various counterparts which
together constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
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<PAGE> 32
Please confirm that the foregoing correctly sets forth the
agreement among the Trust, the Adviser and the Underwriter.
Very truly yours,
KEMPER STRATEGIC MUNICIPAL
INCOME TRUST
By:_____________________________
SCUDDER KEMPER INVESTMENTS,
INC.
By:_____________________________
Confirmed as of the date first
above mentioned.
SALOMON SMITH BARNEY INC.
By:_______________________________
Managing Director
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<PAGE> 33
SCHEDULE I
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
<TABLE>
<CAPTION>
Underwriter Number of Shares
----------- ----------------
<S> <C>
Salomon Smith Barney Inc. ...................................... --
--
--
Total...........................................................
</TABLE>
-33-
<PAGE> 1
EXHIBIT 2(k)(1)
AUCTION AGENT AGREEMENT
between
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
and
BANKERS TRUST COMPANY
Dated as of _________, 1999
Relating to
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
of
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
I. DEFINITIONS AND RULES OF CONSTRUCTION................................................................... 1
1.1 Terms Defined by Reference to the Certificate......................................................... 1
1.2 Terms Defined Herein.................................................................................. 1
1.3 Rules of Construction................................................................................. 2
II. THE AUCTION............................................................................................. 2
2.1 Purpose; Incorporation by Reference of Auction Procedures
and Settlement Procedures............................................................................. 2
2.2 Preparation for Each Auction; Maintenance of Registry of Existing Holders............................. 3
2.3 Auction Schedule...................................................................................... 6
2.4 Notice of Auction Results............................................................................. 6
2.5 Broker-Dealers........................................................................................ 6
2.6 Ownership of Shares of Municipal Preferred and Submission of Bids by the Trust and its Affiliates..... 7
2.7 Access to and Maintenance of Auction Records.......................................................... 7
III. THE AUCTION AGENT AS PAYING AGENT....................................................................... 8
3.1 The Paying Agent...................................................................................... 8
3.2 The Trust's Notices to the Paying Agent............................................................... 8
3.3 The Trust to Provide Funds for Dividends, Redemptions and Additional Dividends........................ 8
3.4 Disbursing Dividends, Redemption Price and Additional Dividends....................................... 9
IV. THE PAYING AGENT AS TRANSFER AGENT AND REGISTRAR........................................................ 9
4.1 Original Issue of Stock Certificates.................................................................. 9
4.2 Registration of Transfer or Exchange of Shares........................................................ 9
4.3 Removal of Legend..................................................................................... 10
4.4 Lost, Stolen or Destroyed Stock Certificates.......................................................... 10
4.5 Disposition of Canceled Certificates; Record Retention................................................ 10
4.6 Stock Register........................................................................................ 11
4.7 Return of Funds....................................................................................... 11
V. REPRESENTATIONS AND WARRANTIES.......................................................................... 11
5.1 Representations and Warranties of the Trust........................................................... 11
5.2 Representations and Warranties of the Auction Agent................................................... 12
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
VI. THE AUCTION AGENT....................................................................................... 12
6.1 Duties and Responsibilities........................................................................... 12
6.2 Rights of the Auction Agent........................................................................... 13
6.3 Compensation, Expenses and Indemnification............................................................ 13
VII. MISCELLANEOUS........................................................................................... 14
7.1 Term of Agreement..................................................................................... 14
7.2 Communications........................................................................................ 14
7.3 Entire Agreement...................................................................................... 15
7.4 Benefits.............................................................................................. 15
7.5 Amendment; Waiver..................................................................................... 15
7.6 Successors and Assigns................................................................................ 15
7.7 Severability.......................................................................................... 16
7.8 Execution in Counterparts............................................................................. 16
7.9 Governing Law......................................................................................... 16
7.10 Limitation of Liability............................................................................... 16
</TABLE>
ii
<PAGE> 4
THIS AUCTION AGENT AGREEMENT, dated as of ________, 1999, is
between KEMPER STRATEGIC MUNICIPAL INCOME TRUST (the "Trust") and BANKERS TRUST
COMPANY, a New York banking corporation.
The Trust proposes to issue one series of preferred shares of
beneficial interest (2,800 shares of Series T), par value $.01 per share,
liquidation preference $25,000 per share, designated Municipal Auction Rate
Cumulative Preferred Shares (the "Municipal Preferred"), pursuant to the Trust's
Certificate. The Trust desires that Bankers Trust Company perform certain duties
as agent in connection with each Auction of shares of Municipal Preferred (in
such capacity, the "Auction Agent"), and as the transfer agent, registrar,
dividend disbursing agent and redemption agent with respect to the shares of
Municipal Preferred (in such capacity, the "Paying Agent"), upon the terms and
conditions of this Agreement, and the Trust hereby appoints Bankers Trust
Company as said Auction Agent and Paying Agent in accordance with those terms
and conditions (hereinafter generally referred to as the "Auction Agent," except
in Sections 3 and 4 below).
NOW, THEREFORE, in consideration of the premises and the
mutual covenants contained herein, the Trust and the Auction Agent agree as
follows:
I. DEFINITIONS AND RULES OF CONSTRUCTION.
1.1 Terms Defined by Reference to the Certificate.
Capitalized terms not defined herein shall have the respective meanings
specified in the Certificate.
1.1 Terms Defined Herein.
As used herein and in the Settlement Procedures (as defined below), the
following terms shall have the following meanings, unless the context otherwise
requires:
(a) "Affiliate" shall mean any Person made known to the Auction Agent to
be controlled by, in control of, or under common control with, the Trust or its
successors.
(b) "Agent Member" of any Person shall mean such Person's agent member of
the Securities Depository that will act on behalf of a Bidder.
(c) "Auction" shall have the meaning specified in Section 2.1 hereof.
(d) "Auction Procedures" shall mean the Auction Procedures that are set
forth in Part II of the Certificate.
(e) "Authorized Officer" shall mean each Managing Director, Vice
President, Assistant Vice President, Assistant Treasurer and Assistant Secretary
of the Auction Agent and every other officer or employee of the Auction Agent
designated as an "Authorized Officer" for purposes hereof in a written
communication from the Auction Agent to the Trust.
<PAGE> 5
(f) "Broker-Dealer Agreement" shall mean each agreement between the
Auction Agent and a Broker-Dealer substantially in the form attached hereto as
Exhibit A.
(g) "Certificate" shall mean the Certificate of Designation for Preferred
Shares of the Trust dated _______ ____, 1999 specifying the powers, preferences
and rights of the shares of Municipal Preferred.
(h) "Holder" shall be a holder of record of one or more shares of
Municipal Preferred, listed as such in the share register maintained by the
Paying Agent pursuant to Section 4.6 hereof.
(i) "Settlement Procedures" shall mean the Settlement Procedures attached
as Exhibit C to the Trust's Statement of Additional Information.
(j) "Trust Officer" shall mean the Chairman, the President, each Vice
President (whether or not designated by a number or word or words added before
or after the title "Vice President"), the Secretary, the Treasurer, each
Assistant Secretary and each Assistant Treasurer of the Trust and every other
officer or employee of the Trust designated as a "Trust Officer" for purposes
hereof in a notice from the Trust to the Auction Agent.
1.2 Rules of Construction.
Unless the context or use indicates another or different meaning or
intent, the following rules shall apply to the construction of this Agreement:
(a) Words importing the singular number shall include the plural number
and vice versa.
(b) The captions and headings herein are solely for convenience of
reference and shall not constitute a part of this Agreement nor shall they
affect its meaning, construction or effect.
(c) The words "hereof," "herein," "hereto," and other words of similar
import refer to this Agreement as a whole.
(d) All references herein to a particular time of day shall be to New
York City time.
II. THE AUCTION.
2.1 Purpose; Incorporation by Reference of Auction Procedures and Settlement
Procedures.
(a) The Certificate provides that the Applicable Rate on shares of each
series of Municipal Preferred, as the case may be, for each Dividend Period
therefor after the initial Dividend Period shall be the rate per annum that a
commercial bank, trust company or other financial institution appointed by the
Trust advises results from implementation of the Auction Procedures. The Board
of Trustees of the Trust has adopted a resolution appointing Bankers Trust
Company as Auction Agent for purposes of the Auction Procedures. The Auction
Agent hereby accepts such appointment and agrees that, on each Auction Date, it
shall follow the
2
<PAGE> 6
procedures set forth in this Section 2 and the Auction Procedures for the
purpose of determining the Applicable Rate for the Municipal Preferred for the
next Dividend Period therefor. Each periodic operation of such procedures is
hereinafter referred to as an "Auction."
(b) All of the provisions contained in the Auction Procedures and in the
Settlement Procedures are incorporated herein by reference in their entirety and
shall be deemed to be a part hereof to the same extent as if such provisions
were set forth fully herein.
2.2 Preparation for Each Auction; Maintenance of Registry of Existing Holders.
(a) Pursuant to Section 2.5 hereof, the Trust shall not designate any
Person to act as a Broker-Dealer without the prior written approval of the
Auction Agent (which approval shall not be withheld unreasonably). As of the
date hereof, the Trust shall provide the Auction Agent with a list of the
Broker-Dealers previously approved by the Auction Agent and shall cause to be
delivered to the Auction Agent for execution by the Auction Agent a
Broker-Dealer Agreement signed by each such Broker-Dealer. The Auction Agent
shall keep such list current and accurate and shall indicate thereon, or on a
separate list, the identity of each Existing Holder, if any, whose most recent
Order was submitted by a Broker-Dealer on such list and resulted in such
Existing Holder continuing to hold or purchase shares of Municipal Preferred.
Not later than five Business Days prior to any Auction Date for which any change
in such list of Broker-Dealers is to be effective, the Trust shall notify the
Auction Agent in writing of such change and, if any such change is the addition
of a Broker-Dealer to such list, the Trust shall cause to be delivered to the
Auction Agent for execution by the Auction Agent a Broker-Dealer Agreement
signed by such Broker-Dealer. The Auction Agent shall have entered into a
Broker-Dealer Agreement with each Broker-Dealer prior to the participation of
any such Broker-Dealer in any Auction.
(b) In the event that the Auction Date for any Auction shall be changed
after the Auction Agent shall have given the notice referred to in clause (vi)
of Paragraph (a) of the Settlement Procedures, the Auction Agent, by such means
as the Auction Agent deems practicable, shall give notice of such change to the
Broker-Dealers not later than the earlier of 9:15 A.M. on the new Auction Date
or 9:15 A.M. on the old Auction Date.
(c) The provisions contained in Section 4 of Part I of the Certificate
concerning Special Rate Periods and the notification of a Special Rate Period
will be followed by the Trust and, to the extent applicable, the Auction Agent,
and the provisions contained therein are incorporated herein by reference in
their entirety and shall be deemed to be a part of this Agreement to the same
extent as if such provisions were set forth fully herein.
(d) (i) Except as otherwise provided in Section 4 of Part I of the
Certificate, 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 will 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 in turn
notify each Broker-Dealer, who, on or prior to such Auction Date, in accordance
with its Broker-Dealer Agreement, will notify its Beneficial Owners and
Potential Beneficial Owners of shares of
3
<PAGE> 7
Municipal Preferred believed by it to be interested in submitting an Order in
the Auction to be held on such Auction Date.
(ii) If the Trust makes a retroactive Taxable Allocation, the
Trust, within 90 days (and generally within 60 days) after the end of its fiscal
year for which a retroactive Taxable Allocation is made, will provide notice
thereof to the Auction Agent and to each Holder (initially the Securities
Depository) during such fiscal year at such Holder's address as the same appears
or last appeared on the stock books of the Trust. The Trust, within 30 days
after such notice is given to the Auction Agent, will pay to the Auction Agent
(who then will distribute to such Holders), out of funds legally available
therefor, a cash amount equal to the aggregate additional dividend with respect
to all retroactive Taxable Allocations made to such Holders during the fiscal
year in question.
(e) (i) On each Auction Date, the Auction Agent shall determine the
Reference Rate and the Maximum Rate. If the Reference Rate is not quoted on an
interest basis but is quoted on a discount basis, the Auction Agent shall
convert the quoted rate to an Interest Equivalent, as set forth in Section 1 of
Part I of the Certificate; or, if the rate obtained by the Auction Agent is not
quoted on an interest or discount basis, the Auction Agent shall convert the
quoted rate to an interest rate after consultation with the Trust as to the
method of such conversion. Not later than 9:30 A.M. on each Auction Date, the
Auction Agent shall notify the Trust and the Broker-Dealers of the Reference
Rate so determined and of the Maximum Rate.
(ii) If the Reference Rate is the applicable "AA" Composite
Commercial Paper Rate and such rate is to be based on rates supplied by
Commercial Paper Dealers and one or more of the Commercial Paper Dealers shall
not provide a quotation for the determination of the applicable "AA" Composite
Commercial Paper Rate, the Auction Agent immediately shall notify the Trust so
that the Trust can determine whether to select a Substitute Commercial Paper
Dealer or Substitute Commercial Paper Dealers to provide the quotation or
quotations not being supplied by any Commercial Paper Dealer or Commercial Paper
Dealers. The Trust promptly shall advise the Auction Agent of any such
selection. If the Trust does not select any such Substitute Commercial Paper
Dealer or Substitute Commercial Paper Dealers, then the rates shall be supplied
by the remaining Commercial Paper Dealer or Commercial Paper Dealers.
(iii) If, after the date of this Agreement, there is any
change in the prevailing rating of Municipal Preferred by S&P or Moody's (or
substitute or successor rating agencies), thereby resulting in any change in the
corresponding applicable percentage for the Municipal Preferred, as set forth in
the definition of Maximum Rate (the "Percentage"), the Trust shall notify the
Auction Agent in writing, of such change in the Percentage prior to 9:00 A.M. on
the Auction Date for Municipal Preferred next succeeding such change. The
Percentage for the Municipal Preferred on the date of this Agreement is ______%.
The Auction Agent shall be entitled to rely on the last Percentage of which it
has received notice from the Trust (or, in the absence of such notice, the
Percentage set forth in the preceding sentence) in determining the Maximum Rate
as set forth in Section 2.2(e)(i) hereof.
(f) (i) The Auction Agent shall maintain a current registry of
the Existing Holders of the shares of Municipal Preferred for purposes of each
Auction. The Trust shall use its best
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<PAGE> 8
efforts to provide or cause to be provided to the Auction Agent within ten
Business Days following the date of the Closing a list of the initial Existing
Holders of Municipal Preferred, and the Broker-Dealer of each such Existing
Holder through which such Existing Holder purchased such shares. The Auction
Agent may rely upon, as evidence of the identities of the Existing Holders, such
list, the results of each Auction and notices from any Existing Holder, the
Agent Member of any Existing Holder or the Broker-Dealer of any Existing Holder
with respect to such Existing or Holder's transfer of any shares of Municipal
Preferred to another Person.
(ii) In the event of any partial redemption of Municipal
Preferred, upon notice by the Trust to the Auction Agent of such partial
redemption, the Auction Agent promptly shall request the Securities Depository
to notify the Auction Agent of the identities of the Agent Members (and the
respective numbers of shares) from the accounts of which shares have been called
for redemption and the person or department at such Agent Member to contact
regarding such redemption, and at least two Business Days prior to the Auction
preceding the date of redemption, the Auction Agent shall request each Agent
Member so identified to disclose to the Auction Agent (upon selection by such
Agent Member of the Existing Holders whose shares are to be redeemed) the number
of shares of Municipal Preferred of each such Existing Holder, if any, to be
redeemed by the Trust provided that the Auction Agent has been furnished with
the name and telephone number of a person or department at such Agent Member
from which it is to request such information. In the absence of receiving any
such information with respect to an Existing Holder, from such Existing Holder's
Agent Member or otherwise, the Auction Agent may continue to treat such Existing
Holder as having ownership of the number of shares of Municipal Preferred shown
in the Auction Agent's registry of Existing Holders.
(iii) The Auction Agent shall register a transfer of the
ownership of shares of Municipal Preferred from an Existing Holder to another
Existing Holder, or to another Person if permitted by the Trust, only if (A)
such transfer is made pursuant to an Auction or (B) if such transfer is made
other than pursuant to an Auction, the Auction Agent has been notified of such
transfer in writing in a notice substantially in the form of Exhibit C to the
Broker-Dealer Agreements, by such Existing Holder or by the Agent Member of such
Existing Holder. The Auction Agent is not required to accept any notice of
transfer delivered for an Auction unless it is received by the Auction Agent by
3:00 P.M. on the Business Day next preceding the applicable Auction Date. The
Auction Agent shall rescind a transfer made on the registry of the Existing
Holders of any shares of Municipal Preferred if the Auction Agent has been
notified in writing, in a notice substantially in the form of Exhibit D to the
Broker-Dealer Agreement, by the Agent Member or the Broker-Dealer of any Person
that (i) purchased any shares of Municipal Preferred and the seller failed to
deliver such shares or (ii) sold any shares of Municipal Preferred and the
purchaser failed to make payment to such Person upon delivery to the purchaser
of such shares.
(g) The Auction Agent may request that the Broker Dealers, as set forth
in Section 3.2(b) of the Broker-Dealer Agreements, provide the Auction Agent
with a list of their respective customers that such Broker-Dealers believe are
Beneficial Owners of shares of Municipal Preferred. The Auction Agent shall keep
confidential any such information and shall not disclose any such information so
provided to any Person other than the relevant Broker-Dealer and the Trust,
provided that the Auction Agent reserves the right to disclose any such
information if it is advised by its counsel that its failure to do so would be
unlawful.
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<PAGE> 9
2.3 Auction Schedule.
The Auction Agent shall conduct Auctions in accordance with the
schedule set forth below. Such schedule may be changed by the Auction Agent with
the consent of the Trust, which consent shall not be withheld unreasonably. The
Auction Agent shall give notice of any such change to each Broker-Dealer. Such
notice shall be received prior to the first Auction Date on which any such
change shall be effective.
<TABLE>
<CAPTION>
Time Event
---- -----
<S> <C>
By 9:30 A.M. Auction Agent advises the Trust and the
Broker-Dealers of the Reference Rate and the
Maximum Rate as set forth in Section
2.2(e)(i) hereof.
9:30 A.M. - 1:30 P.M. Auction Agent assembles information
communicated to it by Broker-Dealers as
provided in Section 2(a) of Part II of the
Certificate. Submission deadline is 1:00
P.M.
Not earlier than 1:30 P.M. Auction Agent makes determinations pursuant
to Section 3(a) of Part II of the
Certificate.
By approximately 3:00 P.M. Auction Agent advises the Trust of the
results of the Auction as provided in
Section 3(b) of Part II of the Certificate.
Submitted Bids and Submitted Sell Orders are
accepted and rejected in whole or in part
and shares of Municipal Preferred allocated
as provided in Section 4 of Part II of the
Certificate.
Auction Agent gives notice of the Auction
results as set forth in Section 2.4 hereof.
</TABLE>
2.4 Notice of Auction Results.
On each Auction Date, the Auction Agent shall notify Broker-Dealers of
the results of the Auction held on such date by telephone or through the Auction
Agent's Auction Processing System as set forth in Paragraph (a) of the
Settlement Procedures.
2.5 Broker-Dealers.
(a) Not later than 12:00 noon on each Auction Date, the Trust shall pay
to the Auction Agent in Federal Funds or similar same-day funds an amount in
cash equal to (i) in the case of any Auction Date immediately preceding a 7-day
Dividend Period, the product of (A) a fraction the numerator of which is the
number of days in such Dividend Period (calculated by counting the first day of
such Dividend Period but excluding the last day thereof) and the denominator of
which is 360, times (B) -1/4 of 1%, times (C) $25,000 times (D) the sum of the
aggregate number of outstanding shares of Municipal Preferred for which the
Auction is conducted and (ii) in the case of any Special Rate Period, the amount
determined by mutual consent of the Trust and the Broker-Dealers pursuant to
Section 3.5 of the Broker-Dealer Agreements. The Auction Agent shall apply such
moneys as set forth in Section 3.5 of the
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<PAGE> 10
Broker-Dealer Agreements and shall thereafter remit to the Trust any remaining
funds paid to the Auction Agent pursuant to this Section 2.5(a).
(b) The Trust shall not designate any Person to act as a Broker-Dealer,
or permit an Existing Holder or a Potential Beneficial Owner to participate in
Auctions through any Person other than a Broker-Dealer, without the prior
written approval of the Auction Agent, which approval shall not be withheld
unreasonably. The Trust may designate an Affiliate or ________________ to act as
a Broker-Dealer.
(c) The Auction Agent shall terminate any Broker-Dealer Agreement as
set forth therein if so directed by the Trust.
(d) Subject to Section 2.5(b) hereof, the Auction Agent from time to
time shall enter into such Broker-Dealer Agreements as the Trust shall request.
(e) The Auction Agent shall maintain a list of Broker-Dealers.
2.6 Ownership of Shares of Municipal Preferred and Submission of Bids by
the Trust and its Affiliates.
Neither the Trust nor any Affiliate of the Trust may submit any Sell
Order or Bid, directly or indirectly, in any Auction, except that an Affiliate
of the Trust that is a Broker-Dealer may submit a Sell Order or Bid on behalf of
a Beneficial Owner or a Potential Beneficial Owner. The Trust shall notify the
Auction Agent if the Trust or, to the best of the Trust's knowledge, any
Affiliate of the Trust becomes a Beneficial Owner of any shares of Municipal
Preferred. Any shares of Municipal Preferred redeemed, purchased or otherwise
acquired (i) by the Trust shall not be reissued, except in accordance with the
requirements of the Securities Act of 1933, as amended, or (ii) by its
Affiliates shall not be transferred (other than to the Trust). The Auction Agent
shall have no duty or liability with respect to enforcement of this Section 2.6.
2.7 Access to and Maintenance of Auction Records.
The Auction Agent shall afford to the Trust, its agents, independent
public accountants and counsel, access at reasonable times during normal
business hours to review and make extracts or copies (at the Trust's sole cost
and expense) of all books, records, documents and other information concerning
the conduct and results of Auctions, provided that any such agent, accountant or
counsel shall furnish the Auction Agent with a letter from the Trust requesting
that the Auction Agent afford such person access. The Auction Agent shall
maintain records relating to any Auction for a period of at least two years
after such Auction (unless requested by the Trust to maintain such records for
such longer period not in excess of four years, then for such longer period),
and such records, in reasonable detail, shall accurately and fairly reflect the
actions taken by the Auction Agent hereunder. The Trust agrees to keep
confidential any information regarding the customers of any Broker-Dealer
received from the Auction Agent in connection with this Agreement or any
Auction, and shall not disclose such information or permit the disclosure of
such information without the prior written consent of the applicable
Broker-Dealer to anyone except such agent, accountant or counsel engaged to
audit or review the results of Auctions as
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<PAGE> 11
permitted by this Section 2.7, provided that the Trust reserves the right to
disclose any such information if it is advised by its counsel that its failure
to do so would (i) be unlawful or (ii) expose it to liability, unless the
Broker-Dealer shall have offered indemnification satisfactory to the Trust. Any
such agent, accountant or counsel, before having access to such information,
shall agree to keep such information confidential and not to disclose such
information or permit disclosure of such information without the prior written
consent of the applicable Broker-Dealer, provided that such agent, accountant or
counsel may reserve the right to disclose any such information if it is advised
by its counsel that its failure to do so would (i) be unlawful or (ii) expose it
to liability, unless the Broker-Dealer shall have offered indemnification
satisfactory to such agent, accountant or counsel.
III. THE AUCTION AGENT AS PAYING AGENT.
3.1 The Paying Agent.
The Board of Trustees of the Trust has adopted a resolution appointing
Bankers Trust Company as transfer agent, registrar, dividend disbursing agent
and redemption agent for the Trust in connection with any shares of Municipal
Preferred (in such capacity, the "Paying Agent"). The Paying Agent hereby
accepts such appointment and agrees to act in accordance with its standard
procedures and the provisions of the Certificate which are specified herein with
respect to the shares of Municipal Preferred and as set forth in this Section 3.
3.2 The Trust's Notices to the Paying Agent.
Whenever any shares of Municipal Preferred are to be redeemed, the
Trust promptly shall deliver to the Paying Agent a Notice of Redemption, which
will be mailed by the Paying Agent to each Holder at least five Business Days
prior to the date such Notice of Redemption is required to be mailed pursuant to
the Certificate. The Paying Agent shall have no responsibility to confirm or
verify the accuracy of any such Notice.
3.3 The Trust to Provide Funds for Dividends, Redemptions and Additional
Dividends.
(a) Not later than noon on each Dividend Payment Date, the Trust shall
deposit with the Paying Agent an aggregate amount of Federal Funds or similar
same-day funds equal to the declared dividends to be paid to Holders on such
Dividend Payment Date, and shall give the Paying Agent irrevocable instructions
to apply such funds to the payment of such dividends on such Dividend Payment
Date.
(b) If the Trust shall give a Notice of Redemption, then by noon of the
date fixed for redemption, the Trust shall deposit in trust with the Paying
Agent an aggregate amount of Federal Funds or similar same-day funds sufficient
to redeem such shares of Municipal Preferred called for redemption and shall
give the Paying Agent irrevocable instructions and authority to pay the
redemption price to the Holders of shares of Municipal Preferred called for
redemption upon surrender of the certificate or certificates therefor.
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<PAGE> 12
3.4 Disbursing Dividends, Redemption Price and Additional Dividends.
After receipt of the Federal Funds or similar same-day funds and
instructions from the Trust described in Section 3.3 above, the Paying Agent
shall pay to the Holders (or former Holders) entitled thereto (i) on each
corresponding Dividend Payment Date, dividends on the shares of Municipal
Preferred, (ii) on any date fixed for redemption, the redemption price of any
shares of Municipal Preferred called for redemption and (iii) on the date fixed
for payment of an additional dividend, such additional dividend. The amount of
dividends for any Dividend Period to be paid by the Paying Agent to Holders will
be determined by the Trust as set forth in Section 2 of Part I of the
Certificate. The redemption price to be paid by the Paying Agent to the Holders
of any shares of Municipal Preferred called for redemption will be determined as
set forth in Section 11 of Part I of the Certificate. The amount of additional
dividends to be paid by the Paying Agent in the event of a retroactive Taxable
Allocation to Holders will be determined by the Trust pursuant to Section 3 of
Part I of the Certificate. The Trust shall notify the Paying Agent in writing of
a decision to redeem any shares of Municipal Preferred on or prior to the date
specified in Section 3.2 above, and such notice by the Trust to the Paying Agent
shall contain the information required to be stated in a Notice of Redemption
required to be mailed by the Paying Agent to such Holders. The Paying Agent
shall have no duty to determine the redemption price and may rely on the amount
thereof set forth in a Notice of Redemption.
IV. THE PAYING AGENT AS TRANSFER AGENT AND REGISTRAR.
4.1 Original Issue of Stock Certificates.
On the Date of Original Issue for any share of Municipal Preferred, one
certificate for each series, if any, of Municipal Preferred shall be issued by
the Trust and registered in the name of Cede & Co., as nominee of the Securities
Depository, and countersigned by the Paying Agent. The Trust will give the
Auction Agent prior written notice and instruction as to the issuance and
redemption of Municipal Preferred.
4.2 Registration of Transfer or Exchange of Shares.
Except as provided in this Section 4.2, the shares of each series of
Municipal Preferred, if any, shall be registered solely in the name of the
Securities Depository or its nominee. If the Securities Depository shall give
notice of its intention to resign as such, and if the Trust shall not have
selected a substitute Securities Depository acceptable to the Paying Agent prior
to such resignation, then upon such resignation, the shares of each series of
Municipal Preferred, if any, at the Trust's request, may be registered for
transfer or exchange, and new certificates thereupon shall be issued in the name
of the designated transferee or transferees, upon surrender of the old
certificate in form deemed by the Paying Agent properly endorsed for transfer
with (a) all necessary endorsers' signatures guaranteed in such manner and form
and by such guarantor as the Paying Agent may reasonably require, (b) such
assurances as the Paying Agent shall deem necessary or appropriate to evidence
the genuineness and effectiveness of each necessary endorsement and (c)
satisfactory evidence of compliance with all applicable laws relating to the
collection of taxes in connection with any registration of transfer or exchange
or funds necessary for the payment of such taxes. If the certificate or
certificates for shares of Municipal Preferred
9
<PAGE> 13
are not held by the Securities Depository or its nominee, payments upon transfer
of shares in an Auction shall be made in Federal Funds or similar same-day funds
to the Auction Agent against delivery of certificates therefor.
4.3 Removal of Legend.
Any request for removal of a legend indicating a restriction on
transfer from a certificate evidencing shares of Municipal Preferred shall be
accompanied by an opinion of counsel stating that such legend may be removed and
such shares may be transferred free of the restriction described in such legend,
said opinion to be delivered under cover of a letter from a Trust Officer
authorizing the Paying Agent to remove the legend on the basis of said opinion.
4.4 Lost, Stolen or Destroyed Stock Certificates.
The Paying Agent shall issue and register replacement certificates for
certificates represented to have been lost, stolen or destroyed, upon the
fulfillment of such requirements as shall be deemed appropriate by the Trust and
by the Paying Agent, subject at all times to provisions of law, the Certificate
governing such matters and resolutions adopted by the Trust with respect to
lost, stolen or destroyed securities. The Paying Agent may issue new
certificates in exchange for and upon the cancellation of mutilated
certificates. Any request by the Trust to the Paying Agent to issue a
replacement or new certificate pursuant to this Section 4.4 shall be deemed to
be a representation and warranty by the Trust to the Paying Agent that such
issuance will comply with provisions of applicable law and the Certificate and
resolutions of the Trust.
4.5 Disposition of Canceled Certificates; Record Retention.
The Paying Agent shall retain stock certificates which have been
canceled in transfer or in exchange and accompanying documentation in accordance
with applicable rules and regulations of the Securities and Exchange Commission
(the "SEC") for at least two calendar years from the date of such cancellation.
The Paying Agent, upon written request by the Trust, shall afford to the Trust,
its agents and counsel access at reasonable times during normal business hours
to review and make extracts or copies (at the Trust's sole cost and expense) of
such certificates and accompanying documentation. Upon request by the Trust at
any time after the expiration of this two-year period, the Paying Agent shall
deliver to the Trust the canceled certificates and accompanying documentation.
The Trust, at its expense, shall retain such records for a minimum additional
period of at least four calendar years from the date of delivery of the records
to the Trust and shall make such records available during this period at any
time, or from time to time, for reasonable periodic, special, or other
examinations by representatives of the SEC. The Trust also shall undertake to
furnish to the SEC, upon demand, either at its principal office or at any
regional office, complete, correct and current hard copies of any and all such
records. Thereafter, such records shall not be destroyed by the Trust without
the approval of the Paying Agent, which approval shall not be withheld
unreasonably, but will be safely stored for possible future reference.
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<PAGE> 14
4.6 Stock Register.
The Paying Agent shall maintain the stock register, which shall contain
a list of the Holders, the number of shares held by each Holder and the address
of each Holder. The Paying, Agent shall record in the stock register any change
of address of a Holder upon notice by such Holder. In case of any written
request or demand for the inspection of the stock register or any other books of
the Trust in the possession of the Paying Agent, the Paying Agent will notify
the Trust and secure instructions as to permitting or refusing such inspection.
The Paying Agent reserves the right, however, to exhibit the stock register or
other records to any person in case it is advised by its counsel that its
failure to do so would (i) be unlawful or (ii) expose it to liability, unless
the Trust shall have offered indemnification satisfactory to the Paying Agent.
4.7 Return of Funds.
Any funds deposited with the Paying Agent by the Trust for any reason
under this Agreement, including for the payment of dividends or the redemption
of Municipal Preferred, that remain with the Paying Agent after 12 months shall
be repaid to the Trust upon written request by the Trust.
V. REPRESENTATIONS AND WARRANTIES.
5.1 Representations and Warranties of the Trust.
The Trust represents and warrants to the Auction Agent that:
(i) the Trust is duly organized and is validly existing as a
business trust under the laws of the Commonwealth of Massachusetts, and has full
power to execute and deliver this Agreement and to authorize, create and issue
the shares of Municipal Preferred;
(ii) the Trust is registered with the SEC under the Investment
Company Act of 1940, as amended, as a closed-end, non-diversified, management
investment company;
(iii) this Agreement has been duly and validly authorized,
executed and delivered by the Trust and constitutes the legal, valid and binding
obligation of the Trust, enforceable against the Trust in accordance with its
terms, subject as to such enforceability to bankruptcy, insolvency,
reorganization and other laws of general applicability relating to or affecting
creditors' rights and to general equitable principles;
(iv) the form of the certificates evidencing the shares of
Municipal Preferred comply with all applicable laws of the Commonwealth of
Massachusetts;
(v) the shares of Municipal Preferred have been duly and
validly authorized by the Trust and, upon completion of the initial sale of the
shares of Municipal Preferred and receipt of payment therefor, will be validly
issued, fully paid and nonassessable by the Trust;
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<PAGE> 15
(vi) at the time of the offering of the shares of Municipal
Preferred, the shares offered will be registered under the Securities Act of
1933, as amended, and no further action by or before any governmental body or
authority of the United States or of any state thereof is required in connection
with the execution and delivery of this Agreement or will be required in
connection with the issuance of the shares of Municipal Preferred, except such
action as required by applicable state securities laws;
(vii) the execution and delivery of this Agreement and the
issuance and delivery of the shares of Municipal Preferred do not and will not
conflict with, violate, or result in a breach of the terms, conditions or
provisions of, or constitute a default under, the Amended and Restated Agreement
and Declaration of Trust or the Certificate, any order or decree of any court or
public authority having jurisdiction over the Trust, or any mortgage, indenture,
contract, agreement or undertaking to which the Trust is a party or by which it
is bound; and
(viii) no taxes are payable upon or in respect of the
execution of this Agreement or will be payable upon or in respect of the
issuance of the shares of Municipal Preferred.
5.2 Representations and Warranties of the Auction Agent.
The Auction Agent represents and warrants to the Trust that:
(i) the Auction Agent is duly organized and is validly
existing as a banking corporation in good standing under the laws of the State
of New York, and has the corporate power to enter into and perform its
obligations under this Agreement; and
(ii) this Agreement has been duly and validly authorized,
executed and delivered by the Auction Agent and constitutes the legal, valid and
binding obligation of the Auction Agent, enforceable against the Auction Agent
in accordance with its terms, subject as to such enforceability to bankruptcy,
insolvency, reorganization and other laws of general applicability relating to
or affecting creditors' rights and to general equitable principles.
VI. THE AUCTION AGENT.
6.1 Duties and Responsibilities.
(a) The Auction Agent is acting solely as agent for the Trust hereunder
and owes no fiduciary duties to any Person except as provided by this Agreement.
(b) The Auction Agent undertakes to perform such duties and only such
duties as are set forth specifically in this Agreement, and no implied covenants
or obligations shall be read into this Agreement against the Auction Agent.
(c) In the absence of bad faith or negligence on its part, the Auction
Agent shall not be liable for any action taken, suffered or omitted by it or for
any error of judgment made by it in the performance of its duties under this
Agreement.
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<PAGE> 16
6.2 Rights of the Auction Agent
(a) The Auction Agent may rely upon, and shall be protected in acting
or refraining from acting upon, any communication authorized hereby and any
written instruction, notice, request, direction, consent, report, certificate,
share certificate or other instrument, paper or document reasonably believed by
it to be genuine. The Auction Agent shall not be liable for acting upon any
telephone communication authorized hereby which the Auction Agent reasonably
believes in good faith to have been given by the Trust or by a Broker-Dealer.
The Auction Agent may record telephone communications with the Trust or with the
Broker-Dealers or with both.
(b) The Auction Agent may consult with counsel of its choice, and the
written advice of such counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it hereunder
in good faith and in reasonable reliance thereon.
(c) The Auction Agent shall not be required to advance, expend or risk
its own funds or otherwise incur or become exposed to financial liability in the
performance of its duties hereunder. The Auction Agent shall be under no
liability for interest on any money received by it hereunder except as otherwise
agreed in writing with the Trust.
(d) The Auction Agent may perform its duties and exercise its rights
hereunder either directly or by or through agents or attorneys.
6.3 Compensation, Expenses and Indemnification.
(a) The Trust shall pay to the Auction Agent from time to time
reasonable compensation for all services rendered by it under this Agreement and
under the Broker-Dealer Agreements as shall be set forth in a separate writing
signed by the Trust and the Auction Agent, subject to adjustments if the
Municipal Preferred no longer are held of record by the Securities Depository or
its nominee or if there shall be such other change as shall increase materially
the Auction Agent's obligations hereunder or under the Broker-Dealer Agreements.
(b) The Trust shall reimburse the Auction Agent upon its request for
all reasonable expenses, disbursements and advances incurred or made by the
Auction Agent in accordance with any provision of this Agreement and of the
Broker-Dealer Agreements (including the reasonable compensation, expenses and
disbursements of its agents and counsel), except any expense, disbursement or
advance attributable to its negligence or bad faith.
(c) The Trust shall indemnify the Auction Agent for, and hold it
harmless against, any loss, liability or expense incurred without negligence or
bad faith on the part of the Auction Agent arising out of or in connection with
its agency under this Agreement and under the Broker-Dealer Agreements,
including the costs and expenses of defending itself against any claim of
liability in connection with its exercise or performance of any of its duties
hereunder and thereunder, except such as may result from its negligence or bad
faith.
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<PAGE> 17
VII. MISCELLANEOUS.
7.1 Term of Agreement.
(a) The term of this Agreement is unlimited unless it shall be
terminated as provided in this Section 7.1. The Trust may terminate this
Agreement at any time by so notifying the Auction Agent, provided that if any
Municipal Preferred remain outstanding the Trust shall have entered into an
agreement with a successor auction agent. The Auction Agent may terminate this
Agreement upon prior notice to the Trust on the date specified in such notice,
which date shall be no earlier than 60 days after delivery of such notice. If
the Auction Agent resigns while any shares of Municipal Preferred remain
outstanding, the Trust shall use its best efforts to enter into an agreement
with a successor auction agent.
(b) Except as otherwise provided in this Section 7.1(b), the respective
rights and duties of the Trust and the Auction Agent under this Agreement shall
cease upon termination of this Agreement. The Trusts representations,
warranties, covenants and obligations to the Auction Agent under Sections 5 and
6.3 hereof shall survive the termination hereof. Upon termination of this
Agreement, the Auction Agent shall (i) resign as Auction Agent under the
Broker-Dealer Agreements, (ii) at the Trust's request, deliver promptly to the
Trust copies of all books and records maintained by it in connection with its
duties hereunder, and (iii) at the request of the Trust, transfer promptly to
the Trust or to any successor auction agent any funds deposited by the Trust
with the Auction Agent (whether in its capacity as Auction Agent or as Paying
Agent) pursuant to this Agreement which have not been distributed previously by
the Auction Agent in accordance with this Agreement.
7.2 Communications.
Except for (i) communications authorized to be made by telephone
pursuant to this Agreement or the Auction Procedures and (ii) communications in
connection with Auctions (other than those expressly required to be in writing),
all notices, requests and other communications to any party hereunder shall be
in writing (including telecopy or similar writing) and shall be Given to such
party at its address or telecopier number set forth below:
If to the Trust, Kemper Strategic Municipal Income Trust
addressed to: 222 South Riverside Plaza
Chicago, IL 60606
Attention: _________________________
Telephone No.: _____________________
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If to the Auction Agent, Bankers Trust Company
addressed to: Corporate Trust and Agency Group
Four Albany Street
New York, NY 10006
Attention: Auction Rate Securities
Telecopier No.: (212) 250-6215
Telephone No.: (212) 250-6850
or such other address or telecopier number as such party hereafter may specify
for such purpose by notice to the other party. Each such notice, request or
communication shall be effective when delivered at the address specified herein.
Communications shall be given on behalf of the Trust by a Trust Officer and on
behalf of the Auction Agent by an Authorized Officer.
7.3 Entire Agreement.
This Agreement contains the entire agreement between the parties
relating to the subject matter hereof, and there are no other representations,
endorsements, promises, agreements or understandings, oral, written or inferred,
between the parties relating to the subject matter hereof, except for agreements
relating to the compensation of the Auction Agent.
7.4 Benefits.
Nothing herein, express or implied, shall give to any Person, other
than the Trust, the Auction Agent and their respective successors and assigns,
any benefit of any legal or equitable right, remedy or claim hereunder.
7.5 Amendment; Waiver.
(a) This Agreement shall not be deemed or construed to be modified, amended,
rescinded, canceled or waived, in whole or in part, except by a written
instrument signed by a duly authorized representative of the party to be
charged. The Trust shall notify the Auction Agent of any change in the
Certificate prior to the effective date of any such change. If any such change
in the Certificate materially increases the Auction Agent's obligations
hereunder, the Trust shall obtain the written consent to the Auction Agent prior
to the effective date of such change.
(b) Failure of either party hereto to exercise any right or remedy hereunder in
the event of a breach hereof by the other party shall not constitute a waiver of
any such right or remedy with respect to any subsequent breach.
7.6 Successors and Assigns.
This Agreement shall be binding upon, inure to the benefit of, and be
enforceable by, the respective successors and permitted assigns of each of the
Trust and the Auction Agent. This Agreement may not be assigned by either party
hereto absent the prior written consent of the other party, which consent shall
not be withheld unreasonably.
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7.7 Severability.
If any clause, provision or section hereof shall be ruled invalid or
unenforceable by any court of competent jurisdiction, the invalidity or
unenforceability of such clause, provision or section shall not affect any of
the remaining clauses, provisions or sections hereof.
7.8 Execution in Counterparts.
This Agreement may be executed in several counterparts, each of which
shall be an original and all of which shall constitute but one and the same
instrument.
7.9 Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York applicable to agreements made and to be
performed in said state.
7.10 Limitation of Liability.
The name Kemper Strategic Municipal Income Trust refers to the
Trust and the Trustees of the Trust, as trustees but not individually or
personally, acting from time to time under the Trust's Amended and Restated
Agreement and Declaration of Trust dated February 27, 1989, as amended, which is
hereby referred to and a copy of which is on file at the office of the Secretary
of the Commonwealth of Massachusetts and the principal office of the Trust. The
obligations of the Trust entered into in the name or on behalf thereof by any of
the Trustees, representatives or agents of the Trust are made not individually,
but in such capacities, and are not binding upon any of the Trustees, officers,
holders of shares of beneficial interest of the Trust or representatives of the
Trustees personally, but bind only the Trust assets, and all persons dealing
with the Trust must look solely to the Trust property for the enforcement of any
claims against the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered by their proper and duly authorized
officers as of the date first above written.
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
By: _______________________________
Title:
BANKERS TRUST COMPANY
By: _______________________________
Title:
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<PAGE> 1
EXHIBIT 2(k)(2)
BROKER-DEALER AGREEMENT
between
BANKERS TRUST COMPANY
and
-------------------------------------
Dated as of _________, 1999
Relating to
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
of
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
I. DEFINITIONS AND RULES OF CONSTRUCTION................................................................... 3
1.1. Terms Defined by Reference to the Certificate......................................................... 3
1.2. Terms Defined Herein.................................................................................. 3
1.3. Rules of Construction ................................................................................ 4
II. NOTIFICATION OF DIVIDEND PERIOD AND ADVANCE NOTICE OF ALLOCATION OF TAXABLE INCOME ..................... 4
III. THE AUCTION ............................................................................................ 5
3.1. Purpose; Incorporation by Reference of Auction Procedures
and Settlement Procedures..................................................................................... 5
3.2. Preparation for Each Auction.......................................................................... 5
3.3. Auction Schedule; Method of Submission of Orders ..................................................... 6
3.4. Notice of Auction Results ............................................................................ 7
3.5. Service Charge to Be Paid to BD....................................................................... 7
IV. THE AUCTION AGENT ...................................................................................... 8
4.1. Duties and Responsibilities........................................................................... 8
4.2. Rights of the Auction Agent........................................................................... 8
4.3. Auction Agent's Disclaimer............................................................................ 9
V. MISCELLANEOUS .......................................................................................... 9
5.1. Termination........................................................................................... 9
5.2. Participant in Securities Depository; Payment of Dividends in Same-Day Funds.......................... 9
5.3. Agent Member ......................................................................................... 9
5.4. Communications........................................................................................ 9
5.5. Entire Agreement...................................................................................... 10
5.6. Benefits.............................................................................................. 10
5.7. Amendment; Waiver .................................................................................... 10
5.8. Successors and Assigns................................................................................ 10
5.9. Severability ......................................................................................... 11
5.10. Execution in Counterparts ............................................................................ 11
5.11. Governing Law......................................................................................... 11
</TABLE>
<PAGE> 3
BROKER-DEALER AGREEMENT dated as of ______________ 1999,
between BANKERS TRUST COMPANY, a New York banking corporation (the "Auction
Agent") (not in its individual capacity, but solely as agent of Kemper Strategic
Municipal Income Trust (the "Trust"), pursuant to authority granted to it in the
Auction Agency Agreement dated as of ________, 1999, between the Trust and the
Auction Agent (the "Auction Agency Agreement") and
___________________________________ (together with its successors and assigns,
"BD").
The Trust proposes to issue one series of preferred shares of
beneficial interest (2,800 shares of Series T), par value $.01 per share,
liquidation preference $25,000 per share, designated Municipal Auction Rate
Cumulative Preferred Shares (the "Municipal Preferred"), pursuant to the Trust's
Certificate of Designation for Preferred Shares (the "Certificate").
The Trust's Certificate provides that the Applicable Rate on
shares of the series of Municipal Preferred, as the case may be, for each
Dividend Period therefor after the initial Dividend Period shall be the rate per
annum that a commercial bank, trust company or other financial institution
appointed by the Trust advises results from implementation of the Auction
Procedures. The Board of Trustees of the Trust has adopted a resolution
appointing Bankers Trust Company as Auction Agent for purposes of the Auction
Procedures, and pursuant to Section 2.5 of the Auction Agency Agreement, the
Trust has requested and directed the Auction Agent to execute and deliver this
Agreement.
The Auction Procedures require the participation of one or
more Broker-Dealers.
NOW, THEREFORE, in consideration of the mutual covenants
contained herein, the Auction Agent and BD agree as follows:
I. DEFINITIONS AND RULES OF CONSTRUCTION.
1.1. Terms Defined by Reference to the Certificate.
Capitalized terms not defined herein shall have the respective meanings
specified in the Certificate.
1.2. Terms Defined Herein.
As used herein and in the Settlement Procedures, the following terms
shall have the following meanings, unless the context otherwise requires:
(a) "Auction" shall have the meaning specified in Section 3.1
hereof.
(b) "Auction Procedures" shall mean the Auction Procedures
that are set forth in Part II of the Certificate.
(c) "Authorized Officer" shall mean each Managing Director,
Vice President, Assistant Vice President, Assistant Treasurer and Assistant
Secretary of the Auction Agent and every other officer or employee of the
Auction Agent designated as an "Authorized Officer" for purposes of this
Agreement in a communication to BD.
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<PAGE> 4
(d) "BD Officer" shall mean each officer or employee of BD
designated as a "BD Officer" for purposes of this Agreement in a communication
to the Auction Agent.
(e) "Broker-Dealer Agreement" shall mean this Agreement and
any substantially similar agreement between the Auction Agent and a
Broker-Dealer.
(f) "Certificate" shall mean the Certificate of Designation
for Preferred Shares of the Trust dated ___________ __, 1999 specifying the
powers, preferences and rights of the shares of Municipal Preferred.
(g) "Settlement Procedures" shall mean the Settlement
Procedures attached hereto as Exhibit A.
1.3. Rules of Construction.
Unless the context or use indicates another or different meaning or
intent, the following rules shall apply to the construction of this Agreement:
(a) Words importing the singular number shall include the
plural number and vice versa.
(b) The captions and headings herein are solely for
convenience of reference and shall not constitute a part of this Agreement, nor
shall they affect its meaning, construction or effect.
(c) The words "hereof," "herein," "hereto," and other words of
similar import refer to this Agreement as a whole.
(d) All references herein to a particular time of day shall be
to New York City time.
II. NOTIFICATION OF DIVIDEND PERIOD AND ADVANCE NOTICE OF ALLOCATION
OF TAXABLE INCOME.
2.1. The provisions contained in Section 4 of Part I of the Certificate
concerning the notification of a Special Rate Period will be followed by the
Auction Agent and BD, and the provisions contained therein are incorporated
herein by reference in their entirety and shall be deemed to be a part of this
Agreement to the same extent as if such provisions were set forth fully herein.
2.2. Except as otherwise provided in Section 4 of Part I of the
Certificate, 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 will 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 BD, who, on or prior to such Auction Date, will
notify its Beneficial Owners and Potential Beneficial Owners believed to be
interested in submitting an Order in the Auction to be held on such
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<PAGE> 5
Auction Date. Whenever the Trust intends to include any additional amounts in a
dividend as provided in Section 3 of Part I of the Certificate, the Trust will
notify the Auction Agent of such additional amounts to be so included in such
dividend at least five Business Days prior to the applicable Dividend Payment
Date. Whenever the Auction Agent receives such notice from the Trust, in turn it
will notify the Securities Depository and BD, who, on or prior to the applicable
Dividend Payment Date, will notify its Beneficial Owners.
III. THE AUCTION.
3.1. Purpose; Incorporation by Reference of Auction Procedures and
Settlement Procedures.
(a) On each Auction Date, the provisions of the Auction
Procedures will be followed by the Auction Agent for the purpose of determining
the Applicable Rate for the Municipal Preferred, for the next Dividend Period
therefor. Each periodic operation of such procedures is hereinafter referred to
as an "Auction."
(b) All of the provisions contained in the Auction Procedures
and the Settlement Procedures are incorporated herein by reference in their
entirety and shall be deemed to be a part of this Agreement to the same extent
as if such provisions were set forth fully herein.
(c) BD agrees to act as, and assumes the obligations of and
limitations and restrictions placed upon, a Broker-Dealer under this Agreement.
BD understands that other Persons meeting the requirements specified in the
definition of "Broker-Dealer" contained in Section 1 of Part I of the
Certificate may execute a Broker-Dealer Agreement and participate as
Broker-Dealers in Auctions.
(d) BD and other Broker-Dealers may participate in Auctions
for their own accounts. However, the Trust, by notice to BD and all other Broker
Dealers, may prohibit all Broker-Dealers from submitting Bids in Auctions for
their own accounts, provided that Broker-Dealers may continue to submit Hold
Orders and Sell Orders.
3.2. Preparation for Each Auction.
(a) Not later than 9:30 A.M. on each Auction Date for the
Municipal Preferred, the Auction Agent shall advise BD by telephone of the
Reference Rate and the Maximum Rate in effect on such Auction Date.
(b) The Auction Agent from time to time may request BD to
provide it with a list of the respective customers BD believes are Beneficial
Owners of shares of Municipal Preferred. BD shall comply with any such request,
and the Auction Agent shall keep confidential any such information, including
information received as to the identity of Bidders in any Auction, and shall not
disclose any such information so provided to any Person other than the Trust;
and such information shall not be used by the Auction Agent or its officers,
employees, agents or representatives for any purpose other than such purposes as
are described herein. The Auction Agent shall transmit any list of customers BD
believes are Beneficial Owners of shares of Municipal Preferred and information
related thereto only to its officers, employees, agents or representatives who
need to know such information for the purposes of acting in accordance with
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<PAGE> 6
this Agreement, and the Auction Agent shall prevent the transmission of such
information to others and shall cause its officers, employees, agents and
representatives to abide by the foregoing confidentiality restrictions;
provided, however, that the Auction Agent shall have no responsibility or
liability for the actions of any of its officers, employees, agents or
representatives after they have left the employ of the Auction Agent.
3.3. Auction Schedule; Method of Submission of Orders.
(a) The Trust and the Auction Agent shall conduct Auctions for
Municipal Preferred in accordance with the schedule set forth below. Such
schedule may be changed at any time by the Auction Agent with the consent of the
Trust, which consent shall not be withheld unreasonably. The Auction Agent shall
give notice of any such change to BD. Such notice shall be received prior to the
first Auction Date on which any such change shall be effective.
Time Event
- ---- -----
By 9:30 A.M. Auction Agent advises the Trust and the
Broker-Dealers of the Reference Rate and the
Maximum Rate as set forth in Section 3.2(a)
hereof.
9:30 A.M. - 1:30 P.M. Auction Agent assembles information
communicated to it by Broker-Dealers as
provided in Section 2(a) of Part II of the
Certificate. Submission Deadline is 1:00
P.M.
Not earlier than 1:30 P.M. Auction Agent makes determinations pursuant
to Section 3(a) of Part II of the
Certificate.
By approximately 3:00 P.M. Auction Agent advises the Trust of the
results of the Auction as provided in
Section 3(b) of Part II of the Certificate.
Submitted Bids and Submitted Sell Orders are
accepted and rejected in whole or in part
and shares of Municipal Preferred are
allocated as provided in Section 4 of Part
II of the Certificate.
Auction Agent gives notice of the Auction
results as set forth in Section 3.4(a)
hereof.
(b) BD agrees to maintain a list of Potential Beneficial
Owners and to contact the Potential Beneficial Owners on such list on or prior
to each Auction Date for the purposes set forth in Section 1 of Part II of the
Certificate.
(c) BD shall submit Orders to the Auction Agent in writing in
substantially the form attached hereto as Exhibit B. BD shall submit separate
Orders to the Auction Agent for each Potential Beneficial Owner or Beneficial
Owner on whose behalf BD is submitting an
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<PAGE> 7
Order and shall not net or aggregate the Orders of Potential Beneficial Owners
or Beneficial Owners on whose behalf BD is submitting Orders.
(d) BD shall deliver to the Auction Agent (i) a written
notice, substantially in the form attached hereto as Exhibit C, of transfers of
shares of Municipal Preferred, made through BD by an Existing Holder to another
Person other than pursuant to an Auction, and (ii) a written notice,
substantially in the form attached hereto as Exhibit D, of the failure of shares
of Municipal Preferred to be transferred to or by any Person that purchased or
sold shares of Municipal Preferred through BD pursuant to an Auction. The
Auction Agent is not required to accept any notice delivered pursuant to the
terms of the foregoing sentence with respect to an Auction unless it is received
by the Auction Agent by 3:00 P.M. on the Business Day next succeeding the
applicable Auction Date.
3.4. Notice of Auction Results.
(a) On each Auction Date, the Auction Agent shall notify BD by
telephone as set forth in paragraph (a) of the Settlement Procedures. On the
Business Day next succeeding such Auction Date, the Auction Agent shall notify
BD in writing of the disposition of all Orders submitted by BD in the Auction
held on such Auction Date.
(b) BD shall notify each Beneficial Owner, Potential
Beneficial Owner, Existing Holder or Potential Holder on whose behalf BD has
submitted an Order as set forth in paragraph (b) of the Settlement Procedures,
and take such other action as is required of BD pursuant to the Settlement
Procedures.
If any Beneficial Owner or Existing Holder selling shares of
Municipal Preferred in an Auction fails to deliver such shares, the BD of any
Person that was to have purchased shares of Municipal Preferred in such Auction
may deliver to such Person a number of whole shares of Municipal Preferred that
is less than the number of shares that otherwise was to be purchased by such
Person. In such event, the number of shares of Municipal Preferred to be so
delivered shall be determined by such BD. Delivery of such lesser number of
shares shall constitute good delivery. Upon the occurrence of any such failure
to deliver shares, such BD shall deliver to the Auction Agent the notice
required by Section 3.3(d)(ii) hereof. Notwithstanding the foregoing terms of
this Section 3.4(b), any delivery or non-delivery of shares of Municipal
Preferred which represents any departure from the results of an Auction, as
determined by the Auction Agent, shall be of no effect unless and until the
Auction Agent shall have been notified of such delivery or non-delivery in
accordance with the terms of Section 3.3(d) hereof. The Auction Agent shall have
no duty or liability with respect to enforcement of this Section 3.4(b).
3.5. Service Charge to Be Paid to BD.
On the Business Day next succeeding each Auction Date, the
Auction Agent shall pay to BD from moneys received from the Trust an amount
equal to: (a) in the case of any Auction Date immediately preceding a Dividend
Period of 7 days or less, the product of (i) a fraction the numerator of which
is the number of days in such Dividend Period (calculated by counting the first
day of such Dividend Period but excluding the last day thereof) and the
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<PAGE> 8
denominator of which is 360, times (ii) 1/4 of 1%, times (iii) $25,000, times
(iv) the sum of (A) the aggregate number of Municipal Preferred placed by BD in
the applicable Auction that were (x) the subject of a Submitted Bid of a
Beneficial Owner submitted by BD and continued to be held as a result of such
submission and (y) the subject of a Submitted Bid of a Potential Beneficial
Owner submitted by BD and were purchased as a result of such submission plus (B)
the aggregate number of Municipal Preferred subject to valid Hold Orders
(determined in accordance with Section 2 of Part II of the Certificate)
submitted to the Auction Agent by BD plus (C) the number of Municipal Preferred
deemed to be subject to Hold Orders by Beneficial Owners pursuant to Section 2
of Part II of the Certificate that were acquired by such Beneficial Owners
through BD; and (b) in the case of any Auction Date immediately preceding a
Special Rate Period, that amount as mutually agreed upon by the Trust and BD,
based on the selling concession that would be applicable to an underwriting of
fixed or variable rate preferred shares with a similar final maturity or
variable rate dividend period, at the commencement of such Special Rate Period.
For purposes of subclause (a)(iv)(C) of the foregoing
sentence, if any Beneficial Owner who acquired shares of Municipal Preferred
through BD transfers those shares to another Person other than pursuant to an
Auction, then the Broker-Dealer for the shares so transferred shall continue to
be BD, provided, however, that if the transfer was effected by, or if the
transferee is, a Broker-Dealer other than BD, then such Broker-Dealer shall be
the Broker-Dealer for such shares.
IV. THE AUCTION AGENT.
4.1. Duties and Responsibilities.
(a) The Auction Agent is acting solely as agent for the Trust
hereunder and owes no fiduciary duties to any other Person by reason of this
Agreement.
(b) The Auction Agent undertakes to perform such duties and
only such duties as are set forth specifically in this Agreement, and no implied
covenants or obligations shall be read into this Agreement against the Auction
Agent.
(c) In the absence of bad faith or negligence on its part, the
Auction Agent shall not be liable for any action taken, suffered or, omitted by
it, or for any error of judgment made by it in the performance of its duties
under this Agreement. The Auction Agent shall not be liable for any error of
judgment made in good faith unless the Auction Agent shall have been negligent
in ascertaining (or failing to ascertain) the pertinent facts.
4.2. Rights of the Auction Agent.
(a) The Auction Agent may rely upon, and shall be protected in
acting or refraining from acting upon, any communication authorized by this
Agreement and any written instruction, notice, request, direction, consent,
report, certificate, share certificate or other instrument, paper or document
believed by it to be genuine. The Auction Agent shall not be liable for acting
upon any telephone communication authorized by this Agreement which the Auction
Agent believes in good faith to have been given by the Trust or by BD. The
Auction Agent may record telephone communications with BD.
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<PAGE> 9
(b) The Auction Agent may consult with counsel of its own
choice, and the advice of such counsel shall be full and complete authorization
and protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in reliance thereon.
(c) The Auction Agent shall not be required to advance, expend
or risk its own funds or otherwise incur or become exposed to financial
liability in the performance of its duties hereunder.
(d) The Auction Agent may perform its duties and exercise its
rights hereunder either directly or by or through agents or attorneys.
4.3. Auction Agent's Disclaimer.
The Auction Agent makes no representation as to the validity or
adequacy of this Agreement or the Municipal Preferred.
V. MISCELLANEOUS.
5.1. Termination.
Any party may terminate this Agreement at any time upon five days'
prior written notice to the other party; provided, however, that if BD is
Salomon Smith Barney Inc. neither BD nor the Auction Agent may terminate this
Agreement without first obtaining the prior written consent of the Trust to such
termination, which consent shall not be withheld unreasonably.
5.2. Participant in Securities Depository; Payment of Dividends in
Same-Day Funds.
(a) BD is, and shall remain for the term of this Agreement, a
member of, or a participant in, the Securities Depository (or an affiliate of
such a member or participant).
(b) BD represents that it (or if BD does not act as Agent
Member, one of its affiliates) shall make all dividend payments on the Municipal
Preferred available in same-day funds on each Dividend Payment Date to customers
that use BD (or its affiliate) as Agent Member.
5.3. Agent Member.
At the date hereof, BD is a participant of the Securities Depository.
5.4. Communications.
Except for (i) communications authorized to be made by telephone
pursuant to this Agreement or the Auction Procedures and (ii) communications in
connection with the Auctions (other than those expressly required to be in
writing), all notices, requests and other communications to any party hereunder
shall be in writing (including telecopy or similar writing) and shall be given
to such party at its address or telecopier number set forth below:
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If to the Auction
Agent, addressed to: Bankers Trust Company
Corporate Trust and Agency Group
Four Albany Street
New, York, NY 10006
Attention: Auction Rate Securities
Telecopier No.: (212) 250-6215
Telephone No.: (212) 250-6850
or such other address or telecopier number as such party hereafter may specify
for such purpose by notice to the other party. Each such notice, request or
communication shall be effective when delivered at the address specified herein.
Communications shall be given on behalf of BD by a BD Officer and on behalf of
the Auction Agent by an Authorized Officer. BD may record telephone
communications with the Auction Agent.
5.5. Entire Agreement.
This Agreement contains the entire agreement between the parties
relating to the subject matter hereof, and there are no other representations,
endorsements, promises, agreements or understandings, oral, written or inferred,
between the parties relating to the subject matter hereof.
5.6. Benefits.
Nothing in this Agreement, express or implied, shall give to any
person, other than the Trust, the Auction Agent and BD and their respective
successors and assigns, any benefit of any legal or equitable right, remedy or
claim under this Agreement.
5.7. Amendment; Waiver.
(a) This Agreement shall not be deemed or construed to be
modified, amended, rescinded, canceled or waived, in whole or in part, except by
a written instrument signed by a duly authorized representative of the party to
be charged.
(b) Failure of either party to this Agreement to exercise any
right or remedy hereunder in the event of a breach of this Agreement by the
other party shall not constitute a waiver of any such right or remedy with
respect to any subsequent breach.
5.8. Successors and Assigns.
This Agreement shall be binding upon, inure to the benefit of, and be
enforceable by, the respective successors and permitted assigns of each of BD
and the Auction Agent. This Agreement may not be assigned by either party hereto
absent the prior written consent of the other party; provided, however, that
this Agreement may be assigned by the Auction Agent to a successor Auction Agent
selected by the Trust without the consent of BD.
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5.9. Severability.
If any clause, provision or section of this Agreement shall be ruled
invalid or unenforceable by any court of competent jurisdiction, the invalidity
or unenforceability of such clause, provision or section shall not affect any
remaining clause, provision or section hereof.
5.10. Execution in Counterparts.
This Agreement may be executed in several counterparts, each of which
shall be an original and all of which shall constitute but one and the same
instrument.
5.11. Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York applicable to agreements made and to be
performed in said state.
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered by their proper and duly authorized
officers as of the date first above written.
BANKERS TRUST COMPANY
By:_______________________________
Title:
By:_______________________________
Title:
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<PAGE> 13
EXHIBIT A
SETTLEMENT PROCEDURES
[Included as Appendix C to the Statement of Additional Information of the Trust]
13
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EXHIBIT B
BANKERS TRUST COMPANY
AUCTION BID FORM
Submit To: Issue:
Bankers Trust Company Kemper Strategic Municipal Income Trust
Corporate Trust and Agency Group Municipal Auction Rate Cumulative
Shares ("Municipal Preferred") Preferred Four Albany Street
New York, NY 10006
Attention: Auction Rate Securities
Telecopier No.: (212) 250-6215
Telephone No.: (212) 250-6850
The undersigned Broker-Dealer submits the following Order on behalf of the
Bidder listed below:
Name of Bidder:___________________________
BENEFICIAL OWNER
Shares of Series T now held _______________ HOLD_________________________
BID at rate of_______________
SELL_________________________
POTENTIAL BENEFICIAL OWNER
# of shares of Series T bid____
BID at rate of _________________ Notes:
(1) If submitting more than one Bid for one Bidder, use additional
Auction Bid Forms.
(2) If one or more Bids covering in the aggregate more than the number
of outstanding shares held by any Beneficial Owner are submitted, such bid shall
be considered valid in the order of priority set forth in the Auction Procedures
on the above issue.
(3) A Hold or Sell Order may be placed only by a Beneficial Owner
covering a number of shares not greater than the number of shares currently
held.
(4) Potential Beneficial Owners may make only Bids, each of which must
specify a rate. If more than one Bid is submitted on behalf of any Potential
Beneficial Owner, each Bid submitted shall be a separate Bid with the rate
specified.
(5) Bids may contain no more than three figures to the right of the
decimal point (.001 of 1%). Fractions will not be accepted.
NAME OF BROKER-DEALER__________________________
Authorized Signature___________________________
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EXHIBIT C
(Note: To be used only for transfers made
other than pursuant to an Auction)
TRANSFER FORM
Re: Kemper Strategic Municipal Income Trust
Municipal Auction Rate Cumulative Preferred Shares
("Municipal Preferred")
We are (check one):
[ ] the Existing Holder named below;
[ ] the Broker-Dealer for such Existing Holder; or
[ ] the Agent Member for such Existing Holder.
We hereby notify you that such Beneficial Owner has
transferred shares of Series T Municipal Preferred to
____________________________________.
_____________________________________
(Name of Existing Holder)
_____________________________________
(Name of Broker-Dealer)
_____________________________________
(Name of Agent Member)
By:___________________
Printed Name:
Title:
<PAGE> 16
EXHIBIT D
(Note: To be used only for failures to deliver or to pay for
Municipal Preferred sold pursuant to an Auction)
NOTICE OF A FAILURE TO DELIVER
Complete either I or II.
I. We are a Broker-Dealer for ___________________ (the
"Purchaser"), which purchased ________ shares of Series T Municipal Preferred of
Kemper Strategic Municipal Income Trust in the Auction held on
____________________ from the seller of such shares.
We hereby notify you that (check one):
__________ the Seller failed to deliver such shares to the
Purchaser.
__________ the Purchaser failed to make payment to the Seller
upon delivery of such shares.
Name:______________________________
(Name of Broker-Dealer)
By:________________________________
Printed Name:
Title:
<PAGE> 1
EXHIBIT 2(l)
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 20006-2401
September 13, 1999
Kemper Strategic Municipal Income Trust
222 South Riverside Plaza
Chicago, IL 60606
Ladies and Gentlemen:
We have acted as counsel to Kemper Strategic Municipal Income Trust
(the "Fund") in connection with the Registration Statement of the Fund on Form
N-2 (File Nos. 333-78945 and 811-5767) (the "Registration Statement"), under the
Securities Act of 1933, as amended (the "Act"), and the Investment Company Act
of 1940, as amended, relating to the proposed issuance of 2800 Municipal Auction
Rate Cumulative Preferred Shares of the Fund designated as Series T (the
"Municipal Preferred Shares"). The Municipal Preferred Shares are to be sold
pursuant to an underwriting agreement to be entered into by the Fund and Salomon
Smith Barney Inc., as principal underwriter (the "Underwriting Agreement").
We have examined the Fund's Agreement and Declaration of Trust, as
amended, and Certificate of Designation with respect to the Municipal Preferred
Shares, and are familiar with the actions taken by the Fund's Trustees in
connection with the issuance and the sale of the Municipal Preferred Shares. We
have also examined the form of underwriting agreement filed as an exhibit to the
Registration Statement and such other documents and records as we have deemed
necessary for the purpose of this opinion.
For purposes of this opinion, we have assumed that the Underwriting
Agreement in the form filed as an exhibit to the Registration Statement will
have been duly executed and delivered by and on behalf of each of the parties
thereto, and that the Fund or its agent receives consideration for the Municipal
Preferred Shares as set forth in the Registration Statement.
<PAGE> 2
Kemper Strategic Municipal Income Trust
September 13, 1999
Page 2
Based on the foregoing, we are of the opinion that the issuance and the
sale of the Municipal Preferred Shares have been duly authorized; when issued in
accordance with the Underwriting Agreement, the Municipal Preferred Shares will
be validly issued and fully paid and nonassessable by the Fund.
We consent to the filing of this opinion with and as part of the
Registration Statement and to the use of our name in such Registration Statement
and in the related Prospectus under the caption "Legal Matters."
Very truly yours,
/s/ Dechert Price & Rhoads
<PAGE> 1
EXHIBIT 2(n)(1)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights," "Experts" and "Financial Statements" and to the incorporation by
reference of our report dated January 19, 1999 in the Registration Statement on
Form N-2 and related Prospectus and Statement of Additional Information of
Kemper Strategic Municipal Income Trust filed with the Securities and Exchange
Commission in this Pre-Effective Amendment No. 1 to the Registration Statement
under the Securities Act of 1933 (File No. 333-78945) and in this Amendment No.
6 to the Registration Statement under the Investment Company Act of 1940 (File
No. 811-5767).
ERNST & YOUNG LLP
Chicago, Illinois
September 13, 1999
<PAGE> 1
' EXHIBIT 2(n)(2)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Philip J. Collora, Bruce H. Goldfarb, Robert W.
Helm, and William J. Kotapish his true and lawful attorneys-in-fact and agents,
each with full power of substitution and resubstitution, for him in his name,
place, and stead, in any and all capacities, to sign the Registration Statement
applicable to the Kemper Strategic Municipal Income Trust and any amendments or
supplements thereto, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto each said attorney-in-fact and agent full power and authority to
do and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: May, 19, 1999 /s/ Mark S. Casady
Mark S. Casady, President and Trustee
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Philip J. Collora, Bruce H. Goldfarb, Robert W.
Helm, and William J. Kotapish his true and lawful attorneys-in-fact and agents,
each with full power of substitution and resubstitution, for him in his name,
place, and stead, in any and all capacities, to sign the Registration Statement
applicable to the Kemper Strategic Municipal Income Trust and any amendments or
supplements thereto, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto each said attorney-in-fact and agent full power and authority to
do and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: May, 19, 1999 /s/ John R. Hebble
John R. Hebble, Treasurer
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Philip J. Collora, Bruce H. Goldfarb, Robert W.
Helm, and William J. Kotapish his true and lawful attorneys-in-fact and agents,
each with full power of substitution and resubstitution, for him in his name,
place, and stead, in any and all capacities, to sign the Registration Statement
applicable to the Kemper Strategic Municipal Income Trust and any amendments or
supplements thereto, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto each said attorney-in-fact and agent full power and authority to
do and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: May, 19, 1999 /s/ James E. Akins
James E. Akins, Trustee
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Philip J. Collora, Bruce H. Goldfarb, Robert W.
Helm, and William J. Kotapish his true and lawful attorneys-in-fact and agents,
each with full power of substitution and resubstitution, for him in his name,
place, and stead, in any and all capacities, to sign the Registration Statement
applicable to the Kemper Strategic Municipal Income Trust and any amendments or
supplements thereto, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto each said attorney-in-fact and agent full power and authority to
do and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: May, 19, 1999 /s/ Arthur R. Gottschalk
Arthur R. Gottschalk, Trustee
<PAGE> 5
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Philip J. Collora, Bruce H. Goldfarb, Robert W.
Helm, and William J. Kotapish his true and lawful attorneys-in-fact and agents,
each with full power of substitution and resubstitution, for him in his name,
place, and stead, in any and all capacities, to sign the Registration Statement
applicable to the Kemper Strategic Municipal Income Trust and any amendments or
supplements thereto, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto each said attorney-in-fact and agent full power and authority to
do and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: May, 19, 1999 /s/ Thomas W. Littauer
Thomas W. Littauer, Trustee
<PAGE> 6
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Philip J. Collora, Bruce H. Goldfarb, Robert W.
Helm, and William J. Kotapish his true and lawful attorneys-in-fact and agents,
each with full power of substitution and resubstitution, for him in his name,
place, and stead, in any and all capacities, to sign the Registration Statement
applicable to the Kemper Strategic Municipal Income Trust and any amendments or
supplements thereto, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto each said attorney-in-fact and agent full power and authority to
do and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: May, 19, 1999 /s/ Frederick T. Kelsey
Frederick T. Kelsey, Trustee
<PAGE> 7
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Philip J. Collora, Bruce H. Goldfarb, Robert W.
Helm, and William J. Kotapish his true and lawful attorneys-in-fact and agents,
each with full power of substitution and resubstitution, for him in his name,
place, and stead, in any and all capacities, to sign the Registration Statement
applicable to the Kemper Strategic Municipal Income Trust and any amendments or
supplements thereto, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto each said attorney-in-fact and agent full power and authority to
do and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: May, 19, 1999 /s/ Fred B. Renwick
Fred B. Renwick, Trustee
<PAGE> 8
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Philip J. Collora, Bruce H. Goldfarb, Robert W.
Helm, and William J. Kotapish his true and lawful attorneys-in-fact and agents,
each with full power of substitution and resubstitution, for him in his name,
place, and stead, in any and all capacities, to sign the Registration Statement
applicable to the Kemper Strategic Municipal Income Trust and any amendments or
supplements thereto, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto each said attorney-in-fact and agent full power and authority to
do and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: May, 19, 1999 /s/ John G. Weithers
John G. Weithers, Trustee
